Study Text A

Table of Contents
1- IAS 36 - Class notes 5

2- IAS 36 - Class Practice (questions) 15
3- IAS 36 - Class Practice (solutions) 20
4-Q-1 Dec-07 (Solution) 30
5-Q-2 Dec-16 SOLUTION 31
6- IFRIC 1 - Class notes 34
7- IFRIC 1 - Class practice (Questions) 35
8-IFRIC 1 - Class practice (Solutions) 37
9-IFRS 5 - Class notes 42
10-IFRS 5 - Class practice (Questions) 47
11-IFRS 5 - Class practice (Solutions) 49
12-Discontinued operations (disclosure practice) 53
13-IAS 40 - Class notes 58
14-IAS 40 - Class practice [Questions] 63
15-IAS 40 - Class practice [Solutions] 65
16-Q-6 (a) Jun-12 (SOLUTION) 68
18- IAS 19 - Class practice (Questions) 82
19- IAS 19 - Class practice (Solutions) 85
20- Tanzeem Ltd Q-3(a) [Jun-15] 89
21- IFRIC 14 - Class notes 92
22- IFRIC 14 - Class practice [Questions] 94
23- IFRIC 14 - Class practice [Solutions] 97
24- IFRS 2 - Class notes 101
25- IFRS 2 - Correct Solutions of Past paper questions 112
26- IFRS 2 - Questions 115
27- IFRS 2 - Solutions 121
28- IAS 21 (separate FS) - Class notes 130
29- IAS 21 (separate FS) - Class practice [Questions] 133
30- IAS 21 (separate FS) - Class practice [Solutions] 136
31- IFRS 9 (Recognition, Classification and Measurement) - Class notes 140
32- IFRS 9 (Recognition, Classification and Measurement) - Class practice [Questions] 145
33- IFRS 9 (Recognition, Classification and Measurement) - Class practice [Solutions] 149
34- IFRS 9 (Regular way transactions and Impairment) - Class notes 161
35- IFRS 9 (Regular way transactions and Impairment) - Class practice [Questions] 169
36- IFRS 9 (Regular way transactions and Impairment) - Class practice [Solutions] 172
37- Global Investment (Q-2 Dec-11) Correct solution 183
38- French Ltd Q-5 Jun-19 184
39- IFRS 9 (Re-classification and De-recognition) - Class notes 186
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40- IFRS 9 (Re-classification and De-recognition) - Class practice [Questions] 193
41- IFRS 9 (Re-classification and De-recognition) - Class practice [Solutions] 197
42- IFRS 9 (Re-classification and De-recognition) - Class practice [Solutions] (1) 207
44- IAS 32 - Class practice [Questions] 223
45- IAS 32 - Class practice [Solutions] 224
46- LSL Q-4 Dec-17 SOLUTION 227
47- Basic Consolidation [SOFP with one subsidiary] - Class notes 229
48- Basic Consolidation [SOFP with one subsidiary] - Class practice [Questions] 243
49- Basic Consolidation [SOFP with one subsidiary] - Class practice [Solutions] 258
50- Master question [Consolidation SOFP] 281
51- Basic consolidation [SOCI with one subsidiary] - Class notes 283
52- Basic consolidation [SOCI with one subsidiary] - Class practice [Questions] 290
53- Basic consolidation [SOCI with one subsidiary] - Class practice [Solutions] 299
54- Master question [Consolidation SOFP] SOLUTION 316
55- Master question [Consolidation SOCI SOCIE] 319
56- Master question [Consolidation SOCI] SOLUTION 321
57- Master question [Consolidation SOCIE] SOLUTION 324
58- Master question [Consolidation SOCIE] SOLUTION (Workings) 325
59- Associate [SOFP SOCI] - Class notes 327
60- Associate [SOFP SOCI] - Class practice [Questions] 336
61- Associate [SOFP SOCI] - Class practice [Solutions] 344
63-Q-1 Jun-10 SOLUTION 359
65-Complex groups - Class notes 363
68- Master question Complex groups 371
69- Step acquisition - Class notes 373
70- SOFP Master question (Step acquisition) 376
71- SOCI Master question (Step acquisition) 377
76- Replacement awards 387
77- Disposal - Class notes 389
78- Master question DISPOSAL [SOFP] 394
81- Master question DISPOSAL [SOCI] 399
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82- SOCIE format (final) 400
84- Cashflow (revision) - Class notes 404
85- Cashflow (revision) - Practice QA 411
86- Cashflow [consolidated] - Class notes 417
92- Foreign operations - Class notes 437
93- Master question (Foreign) SOFP SOCI 440
99- IFRS 16 (Lessor) - Class notes 451
100- IFRS 16 (Lessor) - Class practice (Questions) 459
101- IFRS 16 (Lessor) - Class practice (Solutions) 462
102- IFRS 16 (Lessee) - Class notes 469
103- IFRS 16 (Lessee) - Class practice [Questions] 475
104- IFRS 16 (Lessee) - Class practice [Solutions] 477
106- IFRS 16 (Sale and leaseback) - Class notes 489
107- IFRS 16 (Sale and leaseback) - Class practice [Questions] 493
108- IFRS 16 (Sale and leaseback) - Class practice [Solutions] 495
109-Q-6(a) Dec-17 SOLUTION 502
111- IFRS 15 - Class practice [Questions] 511
112- IFRS 15 - Class practice [Solutions] 517
113- IFRS 15 - Illustrative examples [1 - 40] 530
114- IFRS 15 - Illustrative examples [44 - 63] 551
117- IAS 33 [Diluted EPS] - Class practice [Questions] 567
118- IAS 33 [Basic EPS] - Class practice [Solutions] 569
119- IAS 33 [Basic EPS] - Class notes 576
120- IAS 33 [Diluted EPS] - Class practice [Solutions] 579
121- IAS 33 [Diluted EPS] - Class notes 582
122- IAS 33 [Basic EPS] - Class practice [Questions] 585
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133- IFRIC 16 - Hedges of a Net Investment in a Foreign Operation 635
134- IFRS 9 (Hedging) - Class notes 663
135- IFRS 9 (Hedging) - Class practice [Questions] 667
136- IFRS 9 (Hedging) - Class practice [Solutions] 669
137- NBP Fund 674
138- SOCIE (IAS 1) 678
139- SOCI (IAS 1) 680
140- EFU Life (Notes to SOCI) 682
141- EFU Life (SOFP SOCI) 688
142- EFU General (Notes to SOCI) 691
143- BAL (Notes to SOFP) 694
144- Meezan Fund 710
145- EFU General (SOFP SOCI) 714
146- EOBI (Net assets available for benefits) 716
147- EOBI (Changes in net assets) 717
148- IFRIC 7 illustrative example 718
149- BAL (SOFP SOCI) 723
150- IFRS 13 - ACCA notes 726
151- ACCA practice question (Question) 730
152- ACCA practice question (Answer) 732
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IAS 36 – Class notes
SCOPE
This standard shall not apply to:

(a) inventories (IAS 2);
(b) contract assets and assets arising from costs to obtain or fulfil a contract (IFRS 15);
(c) deferred tax assets (IAS 12);
(d) assets arising from employee benefits (IAS 19);
(e) financial assets (IFRS 9);
(f) investment property measured at fair value (IAS 40);
(g) biological assets measured at fair value less costs to sell (IAS 41);
(h) contracts within the scope of IFRS 17; and
(i) non‑current assets classified as held for sale (IFRS 5).
Exam notes:
For assets carried at revaluation model, following should be considered:
1. The only difference between “fair value” and “fair value less cost of disposal” is the direct
incremental costs attributable to the disposal of asset.
2. If cost of disposal is negligible then recoverable amount of asset must be equal to or greater than
fair value. Therefore, when both fair value and value in use are known, then asset is only revalued
to “fair value” and there is no need for impairment.
3. If cost of disposal is not negligible then “fair value less cost of disposal” is necessarily less than “fair
value”. Therefore, such asset is first revalued to “fair value” an3d then it is tested for impairment.
4. If fair value is not known and only value in use is known then asset is impaired if value in use is less
than carrying amount.
5. Although charging of impairment loss as per IAS 36 and revaluation loss as IAS 16/38 are same, but
accumulated depreciation is eliminated only at the time of revaluation as per IAS 16/38 and not at
the time of impairment as per IAS 36.
IDENTIFYING AN ASSET THAT MAY BE IMPAIRED
1. Impairment test is the comparison of “carrying amount determined as per relevant IAS” with
“recoverable amount”
2. Carrying amount is the amount at which an asset is recognised after deducting any accumulated
epreciation (amortisation) and accumulated impairment losses thereon.
3. The recoverable amount of an asset or a cash‑generating unit is the higher of:

its fair value less costs of disposal
its value in use.
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Timing of impairment testing:
- For intangible assets not yet available for use - For all other assets
- For intangible assets with indefinite life
- For Goodwill acquired in business combination
Impairment is tested annually An entity shall assess at the end of each reporting
period whether there is any indication that an
asset may be impaired. If any such indication
exists, the entity shall estimate the recoverable
amount of the asset.
Indications of impairment
External sources of information

(a) the asset’s value has declined during the period significantly.
(b) significant changes with an adverse effect on the entity, in the technological, market, economic or
legal environment.
(c) market interest rates or other market rates of return on investments have increased and those
increases are likely to affect the discount rate used in calculating an asset’s value in use.
(d) the carrying amount of the net assets of the entity is more than its market capitalisation.
Internal sources of information

(e) Obsolescence or physical damage of an asset.
(f) significant changes with an adverse effect on the entity, in the extent to which, or manner in which,
an asset is used
(g) economic performance of an asset is, or will be, worse than expected.
Dividend from a subsidiary, joint venture or associate

(h) for an investment in a subsidiary, joint venture or associate, the investor recognises a dividend from
the investment and evidence is available that:
(i) the carrying amount of the investment in the separate financial statements exceeds the carrying
amounts in the consolidated financial statements of the investee’s net assets, including associated
goodwill; or
(ii) the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate
in the period the dividend is declared.
MEASURING RECOVERABLE AMOUNT
1. It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in
use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it
is not necessary to estimate the other amount.
2. Sometimes it will not be possible to measure fair value less costs of disposal, In this case, the entity
may use the asset’s value in use as its recoverable amount.
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3. If an asset’s value in use is not expected to exceed its fair value less costs of disposal, the asset’s fair
value less costs of disposal may be used as its recoverable amount. This will often be the case for an
asset that is held for disposal.
4. If recoverable amount cannot be determined for an individual asset because it does not generate cash
inflows that are largely independent of those from other assets or groups of assets, then recoverable
amount is determined for the cash‑generating unit to which the asset belongs unless either:
(a) the asset’s fair value less costs of disposal is higher than its carrying amount; or
(b) the asset’s value in use can be estimated to be close to its fair value less costs of disposal and fair
value less costs of disposal can be measured.
Fair value less cost to sell

1. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. (See IFRS 13 Fair Value
Measurement.)
2. Costs of disposal are incremental costs directly attributable to the disposal of an asset or
cash‑generating unit, excluding finance costs and income tax expense.
3. Costs of disposal, other than those that have been recognised as liabilities, are deducted in
measuring fair value less costs of disposal.
Examples
legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct
incremental costs to bring an asset into condition for its sale.
However, termination benefits (as defined in IAS 19) and costs associated with reducing or
reorganising a business following the disposal of an asset are not direct incremental costs to dispose
of the asset.
Value in use
1. Value in use is the present value of the future cash flows expected to be derived from an asset or
cash‑generating unit.
2. Estimating the value in use of an asset involves the following steps:

(a) estimating the future cash inflows and outflows to be derived from continuing use of the asset
and from its ultimate disposal; and
(b) applying the appropriate discount rate to those future cash flows.
Future cash flows

1. cash flows should reflect all possible variations in the amount or timing of future cash flows, the result
shall be to reflect the expected present value of the future cash flows, i.e. the weighted average of all
possible outcomes [Ʃpx].
2. Base cash flow projections on budgets/forecasts which shall cover a maximum period of five years,
unless a longer period can be justified. Extrapolate the projections based on the budgets/forecasts
using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.
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3. Estimates of future cash flows shall include:

(a) projections of cash inflows from the continuing use of the asset;
(b) projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset and can be directly attributed, or allocated on a reasonable and
consistent basis, to the asset; and
(c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful
life.
Net disposal value at the end of its useful life is determined in a similar way to fair value less
costs of disposal, except that, it now also includes adjustments for future price increases.
4. To avoid double‑counting, estimates of future cash flows do not include:

(a) cash inflows from other recognized assets (for example, financial assets such as receivables); and
(b) cash outflows for recognized liabilities (for example, payables, pensions or provisions).
5. Future cash flows shall be estimated for the asset in its current condition. Therefore, future cash flows
shall not include estimated future cash inflows or outflows that are expected to arise from:
(a) a future restructuring to which an entity is not yet committed; or
Once the entity is committed to the restructuring:
its estimates of future cashflows reflect the cost savings and other benefits from the
restructuring; and
its estimates of future cash outflows for the restructuring are included in a restructuring
provision in accordance with IAS 37.
(b) improving or enhancing the asset’s performance.

Projections of cash outflows include those for the day‑to‑day servicing of the asset as well
as future cash outflows (e.g. future part replacements to be accounted for as capital
expenditure) necessary to maintain the level of economic benefits expected to arise from
the asset in its current condition.
In case of capital work-in-progress, the future cash flows shall also include necessary capital
expenditure to get the asset ready for use or sale.
6. Estimates of future cash flows shall not include:

(a) cash inflows or outflows from financing activities; or
(b) income tax receipts or payments.
7. Future cash flows are estimated in the currency in which they will be generated and then discounted
using a discount rate appropriate for that currency. An entity translates the present value using the
spot exchange rate at the date of the value in use calculation.
Discount rate
The discount rate (rates) shall be a pre‑tax rate (rates) that reflect(s) current market assessments of:
(a) the time value of money; and
(b) the risks specific to the asset for which the future cash flow estimates have not been adjusted.
RECOGNITION AND MEASUREMENT OF IMPAIRMENT LOSS
Impairment loss = Carrying amount – Recoverable amount
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Accounting for impairment loss:
If asset is carried at cost model If asset is carried at revaluation model
Impairment loss shall be recognized in profit and Impairment loss shall be treated as a revaluation
loss immediately. decrease in accordance with relevant IAS (e.g. IAS
16, 38)
Dr. Impairment loss (P&L) Dr. Revaluation surplus

Cr. Accumulated impairment loss Dr. P&L
Cr. Accumulated impairment loss
After charging impairment loss, depreciation shall be charged on revised carrying amount over
remaining life.
When impairment loss is greater than carrying amount (i.e. when recoverable amount is negative),
then entity shall recognize a liability if and only if required by another IAS.
CASH GENERATING UNITS [CGU]
A cash‑generating unit is the smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups of assets.
Identifying the CGU to which asset belongs
Example
A mining entity owns a private railway to support its mining activities. The private railway could be sold
only for scrap value and it does not generate cash inflows that are largely independent of the cash
inflows from the other assets of the mine.
It is not possible to estimate the recoverable amount of the private railway because its value in use
cannot be determined and is probably different from scrap value. Therefore, the entity estimates the
recoverable amount of the cash‑generating unit to which the private railway belongs, ie the mine as a
whole.
1. Identification of an asset’s cash‑generating unit involves judgement. If recoverable amount cannot be

determined for an individual asset, an entity identifies the lowest aggregation of assets that generate
largely independent cash inflows.
Example
A bus company provides services under contract with a municipality that requires minimum service on
each of five separate routes. Assets devoted to each route and the cash flows from each route can be
identified separately. One of the routes operates at a significant loss.
Because the entity does not have the option to curtail any one bus route, the lowest level of identifiable
cash inflows that are largely independent of the cash inflows from other assets or groups of assets is
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the cash inflows generated by the five routes together. The cash‑generating unit for each route is the
bus company as a whole.
2 In identifying whether cash inflows from an asset (or group of assets) are largely independent, an
entity considers various factors including how management monitors the entity’s operations (such as
by product lines, businesses, individual locations, districts or regional areas) or how management
makes decisions about continuing or disposing of the entity’s assets and operations. Illustrative
Example 1 gives examples of identification of a cash‑generating unit.
3. If an active market exists for the output produced by an asset or group of assets, that asset or group
of assets shall be identified as a cash‑generating unit, even if some or all of the output is used
internally. If such cash inflows are affected by internal transfer pricing, an entity shall use
management’s best estimate of future price(s) that could be achieved in arm’s length transactions in
estimating:
(a) the future cash inflows of giving asset or CGU; and
(b) the future cash outflows of receiving asset or CGU.
Recoverable amount and carrying amount of CGU
1. Recoverable amount of a CGU is determined using the same guidance as studied earlier for a single
asset.
2. Carrying amount of a CGU shall be determined on a basis consistent with the way recoverable amount
is determined.
3. The carrying amount of CGU should include carrying amounts of only those assets that can be
attributed directly or allocated on a reasonable basis to that CGU and does not include the carrying
amount of any recognized liability unless recoverable amount of the CGU cannot be determined
without consideration of this liability (for example inclusion of provision for dismantling will reduce
the carrying amount CGU for fair comparison with recoverable amount).
4. For practical reasons, the recoverable amount of a CGU is sometimes determined after consideration
of assets that are not part of the CGU (for example, receivables or other financial assets) or liabilities
that have been recognised (for example, payables, pensions and other provisions). In such cases, the
carrying amount of the CGU shall also include such assets and liabilities only for calculating
impairment loss.
Goodwill
Allocating goodwill to cash‑generating units

1. For the purpose of impairment testing, goodwill acquired in a business combination shall, from the
acquisition date, be allocated to each of the acquirer’s cash‑generating units, or groups of
cash‑generating units, that is expected to benefit from the synergies of the combination, irrespective
of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.
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2. Goodwill sometimes cannot be allocated on a non-arbitrary basis to individual CGU, but only to groups
of CGUs.
Testing cash‑generating units with goodwill for impairment

1. When goodwill relates to a cash‑generating unit but has not been allocated to that unit, the unit shall
be tested for impairment, whenever there is an indication that the unit may be impaired, by
comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount.
2. A cash‑generating unit to which goodwill has been allocated shall be tested for impairment annually,
and whenever there is an indication that the unit may be impaired, by comparing the carrying amount
of the unit, including the goodwill, with the recoverable amount of the unit. If the recoverable amount
of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit
shall be regarded as not impaired.
Timing of impairment tests

1. If the assets constituting the cash‑generating unit to which goodwill has been allocated are tested for
impairment at the same time as the unit containing the goodwill, they shall be tested for impairment
before the unit containing the goodwill.
2. Similarly, if the cash‑generating units constituting a group of cash‑generating units to which goodwill
has been allocated are tested for impairment at the same time as the group of units containing the
goodwill, the individual units shall be tested for impairment before the group of units containing the
goodwill.
3. At the time of impairment testing a cash‑generating unit to which goodwill has been allocated, there
may be an indication of an impairment of an asset within the unit containing the goodwill. In such
circumstances, the entity tests the asset for impairment first, and recognises any impairment loss for
that asset before testing for impairment the cash‑generating unit containing the goodwill.
4. Similarly, there may be an indication of an impairment of a cash‑generating unit within a group of

units containing the goodwill. In such circumstances, the entity tests the cash‑generating unit for
impairment first, and recognises any impairment loss for that unit, before testing for impairment the
group of units to which the goodwill is allocated.
Corporate assets
1. Corporate assets are assets other than goodwill that contribute to the future cash flows of both the
cash‑generating unit under review and other cash‑generating units.
2. Corporate assets include group or divisional assets such as the building of a headquarters or a division
of the entity, EDP equipment or a research centre. The distinctive characteristics of corporate assets
are that they do not generate cash inflows independently of other assets or groups of assets and their
carrying amount cannot be fully attributed to the cash‑generating unit under review.
3. In testing a cash‑generating unit for impairment, an entity shall identify all the corporate assets that
relate to the cash‑generating unit under review. If a portion of the carrying amount of a corporate
asset:
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(a) can be allocated on a reasonable and consistent basis to that unit, the entity shall compare the
carrying amount of the unit, including the portion of the carrying amount of the corporate asset
allocated to the unit, with its recoverable amount and recognize any impairment loss.
(b) cannot be allocated on a reasonable and consistent basis to that unit, the entity shall:
(i) compare the carrying amount of the unit, excluding the corporate asset, with its recoverable
amount and recognize any impairment loss;
(ii) identify the smallest group of cash‑generating units that includes the cash‑generating unit
under review and to which a portion of the carrying amount of the corporate asset can be
allocated on a reasonable and consistent basis; and
(iii) compare the carrying amount of that group of cash‑generating units, including the portion of
the carrying amount of the corporate asset allocated to that group of units, with the
recoverable amount of the group of units and recognize any impairment loss.
Exam note
Recoverable amount of the group of CGUs should be given separately, however, if not given
separately then recoverable amounts of individual CGUs are added.
Impairment loss for a CGU
1. The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group
of units) in the following order:
(a) first, to reduce the carrying amount of any goodwill allocated to the cash‑generating unit (group
of units); and
(b) then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount
of each asset in the unit (group of units).
2. These reductions in carrying amounts shall be treated as impairment losses on individual assets.
3. In allocating an impairment loss as above, an entity shall not reduce the carrying amount of an asset
below the highest of:
(a) its fair value less costs of disposal (if measurable);
(b) its value in use (if determinable); and
(c) zero.
The amount of the impairment loss that would otherwise have been allocated to the asset shall be
allocated pro rata to the other assets of the unit (group of units).
4. After allocating impairment loss as above, a liability shall be recognised for any remaining amount of
an impairment loss for a cash‑generating unit if, and only if, that is required by another IFRS.
REVERSING AN IMPAIRMENT LOSS
An entity shall assess at the end of each reporting period whether there is any indication that an
impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may
have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that
asset.
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Indications of impairment loss reversal
External sources of information

(a) there are observable indications that the asset’s value has increased significantly during the period.
(b) significant changes with a favourable effect on the entity in the technological, market, economic or
legal environment.
(c) market interest rates or other market rates of return on investments have decreased during the
period to affect the discount rate used in calculating the asset’s value in use.
Internal sources of information

(d) significant changes with a favourable effect on the entity in the extent to which, or manner in which,
the asset is used or is expected to be used.
(e) evidence is available from internal reporting that indicates that the economic performance of the
asset is, or will be, better than expected.
An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if, and
only if, there has been a change in the estimates used to determine the asset’s recoverable amount since
the last impairment loss was recognised.
Reversal an impairment loss for an individual asset
Upper limit for reversal for individual asset

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment
loss shall not exceed the carrying amount that would have been determined (net of amortisation or
depreciation) had no impairment loss been recognised for the asset in prior years.
Accounting for impairment loss reversal:
If asset is carried at cost model If asset is carried at revaluation model
Impairment loss reversal shall be recognized in Impairment loss shall be treated as a revaluation
profit and loss immediately. increase in accordance with relevant IAS (e.g. IAS
16, 38)
Dr. Acc. depreciation & impairment loss Dr. Acc. depreciation & impairment loss
Cr. P&L Cr. P&L
Cr. Revaluation surplus
After reversing impairment loss, depreciation shall be charged on revised carrying amount over
remaining life.
Reversing an impairment loss for a CGU
1. A reversal of impairment loss for a CGU shall be allocated the assets of the unit, except for goodwill,
pro rate with the carrying amounts of the assets
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2. These increases in carrying amounts shall be treated as reversals of impairment losses for individual
assets.
3. In allocating a reversal of impairment loss as above, an entity shall not increase the carrying amount
of an asset above the lowest of:
(a) its recoverable amount (if measurable); and
(b) the carrying amount that would have been determined (net of amortization or depreciation) had
no impairment loss been recognized for the asset in prior periods.
The amount of the reversal of impairment loss that would otherwise have been allocated to the asset
shall be allocated pro rata to the other assets of the unit (group of units), except for goodwill.
4. An impairment loss recognized for goodwill shall not be reversed in a subsequent period.
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IMPAIRMENT OF ASSETS (IAS-36) - QUESTIONS
PRACTICE QUESTIONS
Question 1
Property, plant and equipment as disclosed in the draft financial statements of Apricot Pakistan Limited (APL)
for the year ended 30 June 2018 include a plant having a carrying value of Rs. 610 million. The performance of
the plant has been deteriorating since last year which is affecting APL’s sales.
Following information/estimates relate to the plant for the year ending 30 June 2019:
Rs. in million
Inflows from sale of product under existing condition of the plant 250
Operational cost other than depreciation 25
Depreciation 170
Expenses to be paid in respect of 30 June 2018 accruals 8
Cost of increasing the plant’s capacity 60
Additional inflows (net) expected from the upgrade 40
Interest on loan 30
Maintenance cost 15
Tax payment on profits 18
Cash flows from the plant are expected to decrease by 15% each year from 2020 and onward. The plant’s
residual value after its remaining useful life of 3 years is estimated at Rs. 100 million.
An offer has been received to buy the plant immediately for Rs. 570 million but APL has to incur the following
costs.
Rs. in million
Cost of delivery to the customer 45
Legal cost 10
Costs to re-organize the production process after disposal of plant 50
Applicable discount rate is 9%.
Required:
Calculate the amount of impairment loss (if any) on plant, for the year ended 30 June 2018. (07)
{FAR II Autumn 2018, Q # 6(b)}
Question No. 2
Engro Limited (EL) has various factory units, each of which is categorized as cash generating unit. Following
information relates one factory in respect of impairment test:
(i) EL follows cost model for all property, plant and equipment.
(ii) Carrying amount of assets in CGU as at June 30, 2017 are as follows:
Rs. in million
Land 150
Building 200
Plant and machinery 700
Equipment 180
Furniture and fixtures 120
(iii) Goodwill allocated to this CGU amounts to Rs. 50 million.
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(iv) Fair value less cost to sell of entire CGU amounts to Rs. 1,200 million. Fair value less cost to sell of land
amounts to Rs. 170 million.
(v) Remaining life of this CGU is 8 years over which following cash flows are expected:
Rs. in million
Net pre-tax cash flows:
Annual (for 5 years) 250
Year 6 180
Year 7 140
Year 8 110
Net disposal proceeds at end of year 210
(vi) Pre-tax discount rate of EL is 10% and post-tax discount rate is 7%. Tax rate applicable to EL is 30%.
Required:
Determine the carrying amount of each asset to be included in EL’s financial statements for the year ended
June 30, 2017.
Question 3
Carrying amounts of assets in a CGU as on June 30, 2020 are as follows:
Rs. in million
Land 1,000
Building 1,200
Plant and machinery 1,800
Software 300
Goodwill 100
Other information:
(i) Fair value less cost to sell of land is Rs. 950 million.
(ii) Recoverable amount of CGU is Rs. 4,100 million.
(iii) Software is outdated and management has decided to replace shortly. In this respect a party has offered
to purchase existing software for Rs. 100 million.
Required:
Calculate revised carrying amounts of assets after charging impairment loss.
Question 4
Carrying amounts of assets in a CGU as on June 30, 2020 are as follows:
Rs. in million
Land 900
Building 1,000
Equipment 400
Goodwill 100
Inventory 100
Other information:
16
NASIR ABBAS FCA
(i) Fair value less cost to sell of land is Rs. 950 million.
(ii) Recoverable amount of CGU is Rs. 3,200 million.
(iii) An item of plant & machinery having book value of Rs. 120 million was severely damaged as result of
recent short circuit. It has been assessed as beyond repairs. It will be disposed off shortly.
(iv) Fair value less cost to sell of inventory (i.e. NRV) is Rs. 95 million.
Required:
Calculate revised carrying amounts of assets after charging impairment loss.
Question No. 5
BB Limited (BBL) produces a single product in two factories A and B. Factory A produces the required
components which are assembled in factory B. The finished product is then sent to distributors for sale.
Following information is available for the purpose of impairment testing:
(i) BBL uses cost model for subsequent measurement of property, plant and equipment.
(ii) The book value and fair value less cost to sell of BBL’s tangible assets as on 31 December 2016 were as
follows:
Book value Fair value less cost to sell

Factory A Factory B Factory A Factory B
------------------------- Rs. in million -----------------------
Building 1,850 3,600 1,800 4,200
Plant 1,125 2,700 1,300 1,600
Equipment 690 1,350 460 1,480
Other assets 240 510 130 280
(iii) Goodwill appearing in the books is Rs. 100 million.

(iv) Expected cash flows of BBL in next three years are as follows:
2017 2018 2019

------------ Rs. in million ---------
Net operating cash inflows 1,650 2,450 2,900
Estimated sale proceeds of all assets - - 8,200
Costs of disposing the above assets - - 283
(v) Pre-tax discount rate of BBL is 9%.
Required:
(a) Identify the cash generating unit for BB Limited. (02)
(b) Determine the carrying amount of each asset to be included in BBL’s financial statements for the year
ended 31 December 2016 in accordance with International Financial Reporting Standards. (Ignore tax
implications) 10)
{Spring 2017, Q#3}
17
NASIR ABBAS FCA
Question No. 6
Dream Limited (DL) is a manufacturing concern engaged in export sales. Following information relating to its
assets as on June 30, 2020:
Carrying Fair value Remaining

amounts useful life
CGUs: ----------- Rs. million ----------- (years)
CGU 1 1,200 800 5
CGU 2 2,500 2,300 10
CGU 3 300 150 4
Corporate assets:
Vehicles 100 - 10
Head office building 300 - 20
Equipment 150 - 15
Other details:
Following cashflows are estimated to determine value in use as on June 30, 2020:
CGU 1 CGU 2 CGU 3

-------------------------- USD in million --------------------
Net annual cashflows 2.20 2.80 0.80
Appropriate discount rate is 12%.

Cost to sell is negligible.
Exchange rates for year 2020:
01-07-19 Average 30-06-20

Rs. per USD 150 155 160
Required:
Carrying amounts of assets after charging impairment loss, if corporate assets can be allocated to each CGU on a
reasonable basis.
Question No. 7
A plant was purchased and installed on July 1, 2015 at a total cost of Rs. 40 million. Initial estimate of useful
life was made at 8 years. It was tested for impairment as follows:
Date Value in use Fair value less cost

to sell
June 30, 2017 Rs. 24 million Rs. 22 million
June 30, 2019 Rs. 19.5 million Rs. 18 million
During 2018, estimate of useful life was reduced by 2 years. Accounting year ends on June 30th.
Required:
Journal entries to record both impairment tests. (depreciation entries are not required)
18
NASIR ABBAS FCA
Question No. 8
Decent Limited (DL) acquired a machine on July 1, 2016 at a cost of Rs. 24 million. Useful life of machine was
estimated at 10 years. Management of DL decided to follow revaluation model for this machine. Following
values were determined for impairment testing in respect of this machine:
Date Value in use Fair value Cost to sell

June 30, 2018 Rs. 15 million Rs. 17.5 million Rs. 1.1 million
June 30, 2020 Rs. 18 million Not available Not available
It is DL’s policy to transfer required amount from revaluation surplus to retained earnings.
Required:
Journalize all the transactions upto June 30, 2020.
Question 9
Carrying amounts of assets in a CGU as on June 30, 2018 were as follows:
Rs. in million Remaining

useful lives
Land 1,000 -
Building 1,200 15
Plant and machinery 1,800 10
Software 300 4
Goodwill 100 -
Equipment 500 5
Recoverable amount of CGU was Rs. 4,100 million on June 30, 2018. On June 30, 2020, Recoverable amount of
CGU moved to Rs. 3,850 million whereas recoverable amount of Software was Rs. 130 million.
Required:
Calculate revised carrying amounts of assets after each impairment testing.
19
NASIR ABBAS FCA
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
SOLUTIONS
Solution No. 1
Value in use
2019 2020 2021
----------- Rs. million ---------
Net operating cash flow (W-1) [LY x 0.85] 210.00 178.50 151.73
RV - - 100.00
210.00 178.50 251.73
factor @ 9% 0.917 0.841 0.772
192.57 150.12 194.33
Value in use 537.02 [A]
Fair value less cost to sell

Rs. million
Fair value 570.00
Cost to sell:
delivery cost (45.00)
legal cost (10.00)
515.00 [B]
Carrying value 610.00

Recoverable amount [higher of A and B] 537.02
Impairment loss 72.98
W-1 Net operating cash flow

Inflows 250.00
Operational cost (25.00)
Maint. Cost (15.00)
210.00
Solution No. 2
Existing carrying amount of each asset:
Rs. in million
Land 150
Building 200
Plant & machinery 700
Equipment 180
Goodwill 50
1,400 [A]
Total fair value less cost to sell of CGU:

Rs. in million
Fair value less cost to sell 1,200 [B]
20
NASIR ABBAS FCA
Total value in use of CGU

Cash flow Factor Present value
Rs. million Rs. million
Net operating for Year 1 250.00 0.909 227
Net disposal proceeds 210.00 0.467 98
1,271 [C]
Recoverable amount [higher of B or C] 1,271

Total carrying amount [A] 1,400
Impairment loss 129
Revised carrying amount

Assets NBV Loss Revised NBV
Land 150.00 - 150.00
Building 200.00 13.17 186.83
Plant & machinery 700.00 46.08 653.92
Equipment 180.00 11.85 168.15
Furniture and fixtures 120.00 7.90 112.10
Goodwill 50.00 50.00 -
1,400.00 129.00 1,271.00
W-1
Since fair value less cost to sell of land exceeds carrying amount therefore impairment loss is not
allocated to land
Loss in excess of Rs. 50 million (i.e. relating to goodwill) is allocated as follows:

Assets NBV Loss
Building 200.00 13.17
Plant & machinery 700.00 46.08
Equipment 180.00 11.85
Furniture and fixtures 120.00 7.90
1,200.00 79.00
Solution No. 3
Revised
Carrying Impairment
Assets carrying
amount loss (W-1)
amount
---------- Rs. million --------
Land 1,000 50 950
Building 1,200 154 1,046
21
NASIR ABBAS FCA
P&M 1,800 231 1,569

Software 300 200 100
Goodwill 100 100 -
Furniture & fittings 500 64 436
4,900 800 4,100
Recoverable amount 4,100
Impairment loss 800
W-1 Loss allocation

Since software is clearly impaired therefore it will be impaired first, then loss will be charged to GW
Limit check for assets other than GW and software:
[800 - GW(100) - Software(200) = 500]
Carrying Impairment
Assets
amount loss
------ Rs. million -----
Land 1,000 111 Exceeding limit
Building 1,200 133
P&M 1,800 200
Furniture & fittings 500 56
4,500 500
Revised allocation of remaining loss

[800 - GW(100) - Software(200) - 50(building) = 450]
Carrying Impairment
Assets
amount loss
------ Rs. million -----
Building 1,200 154
P&M 1,800 231
Furniture & fittings 500 64
3,500 450
Solution No. 4
Revised
Carrying Adjusted Impairment
Assets Adjustments carrying
amount NBV loss (W-1)
amount
----------------------------- Rs. million -------------------------
Land 900 900 - 900
Building 1,000 1,000 198 802
P&M 1,500 (120) 1,380 297 1,083
Equipment 400 400 79 321
Goodwill 100 100 100 -
Inventory 100 (5) 95 - 95
4,000 3,875 675 3,200
Impairment loss 675
22
NASIR ABBAS FCA
W-1 Loss allocation

Fair value less cost to sell of land is already higher than carrying amount
[675 - GW(100) = 575]
Carrying Impairment
Assets
amount loss
--- Rs. million ---
Building 1,000 198
P&M 1,500 297
Equipment 400 79
2,900 575
Solution No. 5
(a)
Financial statements for year ending June 30, 2015
A cash generating unit is the smallest identifiable group of assets that generates cash flows that are largely
independent of other assets or groups. Since both factories are engaged in production of single product,
therefore, both factories of BBL is a cash generating unit.
(b)
Carrying amount of each asset:
A B Total
--------------- Rs. million --------------
Building 1,850 3,600 5,450
Plant 1,125 2,700 3,825
Equipment 690 1,350 2,040
Other assets 240 510 750
Goodwill - - 100
12,165 [A]
Total fair value less cost to sell of CGU:

A B Total
--------------- Rs. million --------------
Building 1,800 4,200 6,000
Plant 1,300 1,600 2,900
Equipment 460 1,480 1,940
Other assets 130 280 410
11,250 [B]
Total value in use of CGU

1 2 3
--------------- Rs. million --------------
Net operating cash flows 1,650 2,450 2,900
Sale proceeds [8,200 - 283] - - 7,917
1,650 2,450 10,817
Factor @ 9% 0.917 0.842 0.772
1,514 2,062 8,353
[C] 11,929
23
NASIR ABBAS FCA
Recoverable amount [higher of B or C] 11,929

Total carrying amount [A] 12,165
Impairment loss 236
Revised carrying amount
Assets NBV L oss Revised NBV

Building A 1,850.00 42.00 1,808.00
Plant A 1,125.00 - 1,125.00
Equipment A 690.00 15.67 674.33
Other assets A 240.00 5.45 234.55
Building B 3,600.00 - 3,600.00
Plant B 2,700.00 61.30 2,638.70
Equipment B 1,350.00 - 1,350.00
Other assets B 510.00 11.58 498.42
Goodwill 100.00 100.00 -
12,165.00 236.00 11,929.00
W-1
Since fair values less cost to sell of following assets exceed carrying amounts therefore impairment
loss is not allocated to them:
NBV Fair value
Plant A 1,125 1,300
Building B 3,600 4,200
Equipment B 1,350 1,480
Loss in excess of Rs. 100 million (i.e. relating to goodwill) is allocated as

follows:
Assets NBV Loss
Building A 1,850.00 42.00
Equipment A 690.00 15.67
Other assets A 240.00 5.45
Plant B 2,700.00 61.30
Other assets B 510.00 11.58
5,990.00 136.00
Solution No. 6
Carrying ----------- Loss --------- Revised
Assets
amount CGU1 CGU2 NBV
----------------------- Rs. million ---------------------
CGU assets 4,000.00 30.89 338.07 3,631.04
Vehicles 100.00 0.48 10.50 89.02
Building 300.00 1.44 31.50 267.06
Equipment 150.00 0.72 15.75 133.33
4,550.00 33.52 395.82 4,120.66
24
NASIR ABBAS FCA
WORKINGS
W-1 Impairment loss allocation
Loss Loss
NBV NBV
CGU1 allocation CGU2 allocation
-------- Rs. million ------- ------ Rs. million -------
CGU assets 1,200.00 30.89 CGU assets 2,500.00 338.07
Vehicles 18.63 0.48 Vehicles 77.64 10.50
Building 55.90 1.44 Building 232.92 31.50
Equipment 27.95 0.72 Equipment 116.46 15.75
1,302.48 33.52 2,927.02 395.82
(W-2) (W-2)
W-2 Impairment loss of CGU

CGU1 CGU2 CGU3 Total
--------------- Rs. million -------------
Carrying amounts 1,200.00 2,500.00 300.00 4,000.00
Vehicles (W-2.1) 18.63 77.64 3.73 100.00
Building (W-2.1) 55.90 232.92 11.18 300.00
Equipment (W-2.1) 27.95 116.46 5.59 150.00
1,302.48 2,927.02 320.50
Recoverable amount (W-3) 1,268.96 2,531.20 388.80
Impairment loss 33.52 395.82 - -
W-2.1 Ratio for allocation of corporate assets
NBV of CGU 1,200.00 2,500.00 300.00

Weights of lives 5.00 10.00 4.00
Weighted average NBV 6,000.00 25,000.00 1,200.00
32,200.00
Corporate assets are allocated to CGUs in this ratio
W-3 Recoverable amount

CGU1 CGU2 CGU3
--------------- USD million -------------
Net annual cash flows 2.20 2.80 0.80
Annuity factor at 12% 3.605 5.650 3.037
Value in use 7.93 15.82 2.43
--------------- PKR million -------------
Value in use [USD x 160] 1,268.96 2,531.20 388.80
Fair value less cost to sell 800.00 2,300.00 150.00
Recoverable amount [higher] 1,268.96 2,531.20 388.80
25
NASIR ABBAS FCA
Solution No. 7
------- Rs. million ------
30-06-17 Impairment loss [P&L] 6.00
Acc. Depreciation & impairment loss 6.00
[Impairment loss charged]
30-06-19 Acc. Depreciation & impairment loss 3.00

Impairment loss reversal [P&L] 3.00
[Impairment loss reversed]
Workings
NBV Loss
01-07-15 Cost 40.00 -
30-06-16 Dep. [40/8] (5.00) -
35.00 -
30-06-17 Dep. (5.00) -
30.00 -
30-06-17 Impairment loss (6.00) (6.00)
24.00 (6.00)
30-06-18 Dep. [24/4] [6/4] (6.00) 1.50
18.00 (4.50)
30-06-19 Dep. (6.00) 1.50
12.00 (3.00)
30-06-19 Impairment loss reversal* 3.00 3.00
15.00 -
* Although recoverable amount is much higher but only Rs. 3 million loss can be reversed
Solution No. 8
------- Rs. million ------
01-07-16 Plant 24.000

Cash 24.000
[Plant purchased and installed]
30-06-17 Depreciation 2.400

[Depreciation for 2017]


Plant 4.800
[Elimination of accumulated depreciation]
26
NASIR ABBAS FCA
30-06-18 Revaluation loss [P&L] 1.700

Plant 1.700
[Revaluation of plant]
30-06-18 Impairment loss 1.100

[Impairment loss charged]



Impairment loss reversal [P&L] 0.825
[Reversal of impairment loss]
Workings
Impairment
NBV Surplus loss
-------------- Rs. million ------------
01-07-16 Cost 24.000 - -
30-06-17 Dep. [20/10] (2.400) - -
21.600 - -
30-06-18 Dep. (2.400) - -
19.200 - -
30-06-18 Revaluation (1.700) - (1.700)
17.500 - (1.700)
30-06-18 Impairment loss * (1.100) - (1.100)
16.400 - (2.800)
30-06-19 Dep. [16.50/8] [2.80/8] (2.050) - 0.350
14.350 - (2.450)
30-06-20 Dep. (2.050) - 0.350
12.300 - (2.100)
30-06-20 Impairment loss reversal** 0.825 - 0.825
13.125 - (1.275)
* Impairment loss:
Value in use 15.00
FV less cost to sell [17.50 - 1.1] 16.40
Recoverable amount (higher) 16.40
27
NASIR ABBAS FCA
** Only impairment loss upto Rs. [i.e. Rs. 1.1m - Rs. 1.1 x 2/8] can be reversed
Solution No. 9
Impairment testing on June 30, 2018
Impairment
Assets NBV Revised NBV
loss (W-1)
---------- Rs. million --------
Land 1,000.00 145.83 854.17
Building 1,200.00 175.00 1,025.00
P&M 1,800.00 262.50 1,537.50
Software 300.00 43.75 256.25
Goodwill 100.00 100.00 -
Equipment 500.00 72.92 427.08
4,900.00 800.00 4,100.00
Recoverable amount 4,100.00
W-1 Loss allocation

On all assets except goodwill
Impairment
Assets Carrying amount
loss
------ Rs. million -----
Land 1,000 145.83
Building 1,200 175.00
P&M 1,800 262.50
Software 300 43.75
Equipment 500 72.92
4,800 700.00
Impairment testing on June 30, 2020

Assets ----------------- Maximum upper limit for --------------- ------ Actual -----------
NBV Loss
Loss Revised
Revised NBV reversal (W-
reversal NBV
2)
----------------------------------------------- Rs. million ------------------------------------------
Land 854.17 1,000.00 145.83 129.96 984.13
Building [1,025 x 13/15] 888.33 1,040.00 [1,200 x 13/15] 151.67 135.16 1,023.49
P&M [1,537.50 x 8/10] 1,230.00 1,440.00 [1,800 x 8/10] 210.00 187.14 1,417.14
Software [256.25 x 2/4] 128.13 130.00 Recoverable amount 1.88 1.88 130.00
Goodwill - - - - -
Equipment [427.08 x 3/5] 256.25 300.00 [500 x 3/5] 43.75 38.99 295.24
3,356.88 3,910.00 553.13 493.13 3,850.00
Loss reversal 493.13
28
NASIR ABBAS FCA
W-2 Reversal of loss allocation

On all assets except goodwill
Loss
reversal
------ Rs. million -----
Land 854.17 125.48
Building 888.33 130.50
P&M 1,230.00 180.69
Software 128.13 18.82 Exceeding limit
3,356.88 493.13
Allocation of remaining reversal after limit of software [i.e. 18.82 - 1.88 = 16.95]
Loss
reversal
------ Rs. million -----
Land 854.17 4.48
Building 888.33 4.66
P&M 1,230.00 6.46
3,228.75 16.95
29
NASIR ABBAS FCA
Solution [Q-1 Dec-07]
1st impairment test [CGUs excluding computer network]
Plant 1 Plant 2 Plant 3
---------------- Rs. ------------
CGU assets 2,500,000 5,000,000 10,000,000
Building [2:3:5] 560,000 840,000 1,400,000
PABX [2:3:5] 280,000 420,000 700,000
3,340,000 6,260,000 12,100,000
Recoverable amount 1,200,000 7,000,000 6,400,000
Impairment loss 2,140,000 - 5,700,000
Loss allocation in proportion of carrying amounts:

CGU assets 1,601,796 - 4,710,744
Building 358,802 - 659,504
PABX 179,401 - 329,752
2,140,000 - 5,700,000
2nd impairment test [Group of CGUs including computer network]

Carrying amounts: Rs.
Plant 1 [2,500,000 - 1,601,796] 898,204
Plant 2 5,000,000
Plant 3 [10,000,000 - 4,701,744] 5,289,256
Building [2,800,000 - 358,802 - 659,504] 1,781,693
PABX system [1,400,000 - 179,401 - 329,752] 890,847
Computer network 2,100,000
15,960,000
Recoverable amount [1,200 + 7,000 + 6,400] 14,600,000
Impairment loss 1,360,000
Loss allocation in proportion of carrying amounts:

Plant 1 76,539
Plant 2 426,065
Plant 3 450,714
Building 151,824
PABX system 75,912
Computer network 178,947
1,360,000
Revised carrying amounts as at 30-06-07:

Rs.
Plant 1 [898,204 - 76,539] 821,665
Plant 2 [5,000,000 - 426,065] 4,573,935
Plant 3 [5,289,256 - 450,714] 4,838,543
Building [1,781,693 - 151,824] 1,629,870
PABX system [890,847 - 75,912] 814,935
Computer network [2,100,000 - 178,947] 1,921,053
14,600,000
30
Solution [Q-2 Winter 2016]
Carrying -- Impairment loss (W-1) --
Assets Revised NBV
amount Green Yellow
----------------------- Rs. million ---------------------
Buses [225 + 150 + 95] 470.00 27.40 26.50 416.10
Other assets [400 + 350 + 100] 850.00 160.60 80.87 608.53
Goodwill 10.00 5.69 3.42 0.89
Building 100.00 22.87 7.89 69.24
Computer 55.00 5.13 3.08 46.80
Equipment 45.00 - - 45.00
1,530.00 221.69 121.75 1,186.56
WORKINGS
W-1 Impairment loss allocation
Maximum Loss allocation
NBV Limit (W-1.1)
loss (W-1.2)
Green
----------------------- Rs. million ----------------------
Buses 225.00 197.60 27.40 27.40
Other assets 400.00 - 400.00 160.60
Goodwill 5.69 - 5.69 5.69
Building 56.95 - 56.95 22.87
Computer 31.32 26.20 5.13 5.13
Equipment 25.63 34.17 - -
744.59 221.69
Maximum Loss allocation

NBV Limit (W-1.3)
loss (W-1.4)
Yellow
----------------------- Rs. million ----------------------
Buses 150.00 123.50 26.50 26.50
Other assets 350.00 - 350.00 80.87
Goodwill 3.42 - 3.42 3.42
Building 34.17 - 34.17 7.89
Computer 18.79 15.72 3.08 3.08
Equipment 15.38 20.50 - -
571.75 121.75
31
W-1.1 W-1.3
Buses [(2.52 - 0.05) x 80] = 197.60 Buses [(2.52 - 0.05) x 50] = 123.50
Computers [31.32 x 46/55] = 26.20 Computers [18.79 x 46/55] = 15.72
Equipment [25.63 x 60/45] = 34.17 Equipment [15.38 x 60/45] = 20.50
W-1.2 Loss allocation W-1.4 Loss allocation

Limit check for assets other than GW and Equipment: Limit check for assets other than GW and Equipment:
[221.69 - 5.69 (GW) - 0 (Equipment) = 216.00] [121.75 - 3.42 (GW) - 0 (Equipment) = 118.34]
Buses 225.00 68.14 Exceeding limit Buses 150.00 32.10 Exceeding limit
Other assets 400.00 121.13 Other assets 350.00 74.90
Computer 31.32 9.48 Exceeding limit Computer 18.79 4.02 Exceeding limit
713.27 216.00 552.96 118.34
Revised allocation of remaining loss Revised allocation of remaining loss

[221.69 - 5.69 (GW) - 0 (Equipment) - 27.40 (Buses) - 5.13 (Computer) = 183.47] [121.75 - 3.42 (GW) - 0 (Equipment) - 26.50 (Buses) - 3.08 (Computer) = 88.76]
Other assets 400.00 160.60 Other assets 350.00 80.87

456.95 183.47 384.17 88.76
W-2 Impairment loss of CGU

Green Yellow Orange Total
--------------- Rs. million -------------
Buses 225.00 150.00 95.00 470.00
Other assets 400.00 350.00 100.00 850.00
Goodwill (W-2.1) 5.69 3.42 0.89 10.00 -
Building (W-2.1) 56.95 34.17 8.88 100.00 -
Computer (W-2.1) 31.32 18.79 4.89 55.00 -
Equipment (W-2.1) 25.63 15.38 4.00 45.00 -
744.59 571.75 213.66
Recoverable amount (W-3) 522.90 450.00 282.50
Impairment loss 221.69 121.75 - -
32
W-2.1 Ratio for allocation of GW and corporate assets
NBV of CGU 625.00 500.00 195.00

Weights of lives 2.00 1.50 1.00
Weighted average NBV 1,250.00 750.00 195.00
2,195.00
Goodwill and corporate assets are allocated to CGUs in this ratio
W-3 Recoverable amount

Green Yellow Orange
--------------- Rs. million -------------
Net cash flows 70.00 60.00 50.00
Annuity factor at 12% 7.47 6.81 5.65
Value in use 522.90 408.60 282.50
Fair value less cost to sell 500.00 450.00 250.00
Recoverable amount [higher] 522.90 450.00 282.50
33
IFRIC 1 – Class notes
Changes in the measurement of an existing decommissioning, restoration and similar liability that results
from changes in estimates shall be accounted for as follows:
At the date of estimate change:

Change in the amount of obligation = PV of obligation (using new estimates) – PV of obligation (using old
estimates)
If the related asset is measured using the cost model
Increase in obligation Decrease in obligation

Change in obligation is Added to the cost of Change in obligation is Deducted from the
asset. cost of asset.
Dr. Asset Dr. Provision for dismantling

Cr. Provision for dismantling Cr. Asset
The entity shall consider whether there is a The amount of change shall not exceed its
need for impairment testing as per IAS 36. carrying amount. If the amount of change is
higher than carrying amount, then the excess
shall be recognized immediately in P&L.
If the related asset is measured using the revaluation model
Increase in obligation Decrease in obligation

Change in obligation is treated as revaluation Change in obligation is treated as revaluation
decrease increase.
Dr. Revaluation surplus Dr. Provision for dismantling

Dr. P&L Cr. P&L (reversal of previous loss)
Cr. Provision for dismantling Cr. Revaluation surplus
If the amount of change is higher than carrying

amount that would have been determined as
per cost model, then the excess shall be
recognized immediately in P&L.
- A change in obligation is an indication that asset may have to be revalued. If so, then revaluation
and estimate change are handled in compound entry.
- If revalued amount (i.e. fair value) is provided by valuer as net of dismantling cost, then for
revaluation accounting, revalued amount will be the sum of (i) net value determined by valuer and
(ii) present value of new dismantling obligation amount.
Nasir Abbas FCA

34
IFRIC 1 – QUESTIONS
PRACTICE QUESTIONS
Question 1
On July 1, 2015 a plant was purchased and installed at a cost of Rs. 80 million. As per contract, plant would be
dismantled after 8 years. Initial estimates of dismantling cost discount rate were Rs. 8 million and 9%. Financial
statements are prepared to every June 30th. Estimates were revised as follows:
New estimates
Date
Dismantling cost Discount rate
July 1, 2017 Rs. 9 million No change
January 1, 2020 Rs. 11 million 11%
Required:
Prepare Journal entries for the years ending June 30, 2019 and 2020.
Question 2
On January 1, 2014 a plant was purchased and installed at a cost of Rs. 120 million. As per agreement, plant will have to
be dismantled after a stipulated period of 10 years. The dismantling cost was initially estimated at Rs. 20 million to be
discounted at 8%. The management decided to follow revaluation model. In this regard, revalued amounts, including
dismantling costs, were determined as follows:
Date of valuation Fair value (Rs. million)
31-12-14 126.00
31-12-16 91.00
On January 1, 2016 due to a change in technology, management decided to change the estimate of dismantling cost to
Rs. 18 million. On July 1, 2018 prevailing market based discount rate was revised to 5%.
Required:
Prepare all journal entries for the year ending December 31, 2018.
Question 3
On January 1, 2015 a plant was purchased and installed at a cost of Rs. 50 million. As per agreement, plant will have to be
dismantled after a stipulated period of 6 years. The dismantling cost was initially estimated at Rs. 30 million to be
discounted at 7%. The management decided to follow revaluation model. In this regard, revalued amounts, were
determined as follows:
Date of valuation Fair value net of
dismantling obligation
(Rs. million)
31-12-15 49.61
31-12-17 16.58
On January 1, 2017 due to a change in technology, management decided to change the estimate of dismantling cost to
Rs. 38 million. On July 1, 2019 technology changed significantly and dismantling estimate was reduced to Rs. 10 million.
Moreover, prevailing market based discount rate was revised to 5%.
Required:
(a) Prepare a schedule showing movements in relevant items for all five years till December 31, 2019
(b) Prepare all journal entries for the year ending December 31, 2019.
Question 4
On July 1, 2018 a plant was purchased and installed at a cost of Rs. 4,500 million. As per agreement, plant will have to be
dismantled after a stipulated period of 4 years. The dismantling cost was initially estimated at Rs. 600 million to be
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NASIR ABBAS FCA
IFRIC 1 – QUESTIONS
discounted at 10%. The management decided to follow revaluation model. In this regard, revalued amounts, were
Date of valuation Fair value net of
dismantling obligation
(Rs. million)
30-06-19 3,375
30-06-20 1,800
On June 30, 2019 due to a change in technology, management decided to change the estimate of dismantling cost to Rs.
825 million. It was further revised to Rs. 450 million on June 30, 2020.
Required:
Prepare all journal entries for the years ending June 30, 2019 and 2020.
36
NASIR ABBAS FCA
IFRIC 1 – SOLUTIONS
SOLUTIONS
Solution No. 1
---- Rs. million ----
30-06-19 Finance cost 0.53
Provision for dismantling 0.53
[Finance cost for 2019]

Accumulated depreciation 10.60

[Finance cost for 6-months 2020]

[Depreciation for 6-months 2020]
01-01-20 Plant 0.97

[Change in estimate of obligation]


W-1 NBV Provision

01-07-15 Initial 84.01 4.01 [8 x 1.09-8]
30-06-16 Dep / Finance cost (10.50) 0.36
73.51 4.38
30-06-17 Dep / Finance cost (10.50) 0.39
63.01 4.77
01-07-17 Estimate change 0.60 0.60
63.61 5.37 [9 x 1.09-6]
30-06-18 Dep / Finance cost (10.60) 0.48
53.01 5.85
30-06-19 Dep / Finance cost (10.60) 0.53
42.40 6.38
31-12-19 Dep / Finance cost [6 months] (5.30) 0.29
37.10 6.66
01-01-20 Estimate change 0.97 0.97
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NASIR ABBAS FCA
38.08 7.63 [11 x 1.11-3.5]

30-06-20 Dep / Finance cost [6 months] (5.44) 0.42
32.64 8.05
Solution No. 2
Dr. Cr.
--- Rs. million ---
[Depreciation for 6-months]
30-06-18 Revaluation surplus 0.10

Retained earnings 0.10
[Incremental depreciation for 6-months]

[Finance cost for 6-months]

P&L 0.82
[Change in provision due to discount rate change]

[Depreciation for 6-months]

[Finance cost for 6-months]
NBV Surplus P&L Provision

---------------------- Rs. million ---------------------
01-01-14 Cost 129.26 9.26 [20 x 1.08-10]
31-12-14 Dep / Interest (12.93) 0.74
116.33 - - 10.00
31-12-14 Revaluation 9.67 9.67 - -
126.00 9.67 - 10.00
31-12-15 Dep / Interest (14.00) (1.07) 0.80
112.00 8.60 - 10.80
01-01-16 Estimate change - 1.08 (1.08)
112.00 9.68 - 9.72 [18 x 1.08-8]
31-12-16 Dep / Interest (14.00) (1.21) 0.78
98.00 8.47 - 10.50
31-12-16 Revaluation (7.00) (7.00) -
91.00 1.47 - 10.50
31-12-17 Dep / Interest (13.00) (0.21) 0.84
78.00 1.26 - 11.34
01-07-18 Dep / Interest (6.50) (0.10) 0.45
71.50 1.15 - 11.79
01-07-18 Estimate change - (1.15) (0.82) 1.97
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NASIR ABBAS FCA
71.50 - (0.82) 13.76 [18 x 1.05-5.5]

31-12-18 Dep / Interest (6.50) - 0.07 0.34
65.00 - (0.74) 14.10
Solution No. 3
(a) NBV Surplus P&L Provision
---------------------- Rs. million ---------------------
01-01-15 Cost 69.99 19.99 [30 x 1.07-6]
31-12-15 Dep / Interest (11.67) 1.40
58.33 - - 21.39
31-12-15 Revaluation 12.67 12.67 - -
[21.39 + 49.61] 71.00 12.67 - 21.39
31-12-16 Dep / Interest (14.20) (2.53) - 1.50
56.80 10.14 - 22.89
01-01-17 Estimate change - (6.10) - 6.10
56.80 4.03 - 28.99 [38 x 1.07-4]
31-12-17 Dep / Interest (14.20) (1.01) - 2.03
42.60 3.02 - 31.02
31-12-17 Revaluation 5.00 5.00 - -
[31.02 + 16.58] 47.60 8.02 - 31.02
31-12-18 Dep / Interest (15.87) (2.67) - 2.17
31.73 5.35 - 33.19
01-07-19 Dep / Interest (7.93) (1.34) - 1.16
23.80 4.01 - 34.35
01-07-19 Estimate change - 19.79 5.28 (25.06)
23.80 23.80 5.28 9.29 [10 x 1.05-1.5]
31-12-19 Dep / Interest (7.93) (7.93) - 0.23
(b)

[Transfer to RE for 6 months 2019]

30-06-19 Provision for dismantling 25.06

P&L [25.06 - (23.80 - 4.01)] 5.28
Revaluation surplus 19.79
[Change in dismantling obligation]
39
NASIR ABBAS FCA


[Transfer to RE for 6 months 2019]

Solution No. 4
01-07-18 Plant 4,909.81
Cash 4,500.00
Provision for dismantling (W-1) 409.81
[Initial recognition]
30-06-19 Depreciation [4,909.81 / 4] 1,227.45

Accumulated depreciation 1,227.45

30-06-19 Accumulated depreciation 1,227.45

Plant 1,227.45
30-06-19 Plant 313.23

[Revaluation of plant & estimate change]
30-06-20 Depreciation [3,995.59 / 3] 1,331.86

Accumulated depreciation 1,331.86
30-06-20 Revaluation surplus [143.43 / 3] 47.81

[Incremental depreciation for 2020]

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NASIR ABBAS FCA
30-06-20 Accumulated depreciation 1,331.86

Plant 1,331.86
30-06-20 Provision for dismantling 310.75

P&L 85.46
Plant 491.83
W-1 NBV Surplus P&L Provision

---------------------- Rs. million ---------------------
01-07-18 Cost 4,909.81 409.81 [600 x 1.1-4]
30-06-19 Dep / Interest (1,227.45) 40.98
3,682.36 - - 450.79
30-06-19 Reval./Estimate 313.23 143.43 - 169.80
[3,375 + 620.59] 3,995.59 143.43 - 620.59 [826 x 1.1-3]
30-06-20 Dep / Interest (1,331.86) (47.81) - 62.06
2,663.73 95.62 - 682.65
30-06-20 Reval./Estimate (491.83) (95.62) (85.46) (310.75)
[1,800 + 371.90] 2,171.90 - (85.46) 371.90 [450 x 1.1-2]
41
NASIR ABBAS FCA
IFRS 5 – Class notes
SCOPE
The measurement provisions of this standard shall not apply to the assets, covered in following IFRS,
either as individual assets or as a part of a disposal group:
(a) deferred tax assets (IAS 12);
(b) assets arising from employee benefits (IAS 19);
(c) financial assets (IFRS 9);
(d) investment property measured at fair value (IAS 40);
(e) biological assets measured at fair value less costs to sell (IAS 41);
(f) groups of contracts within the scope of IFRS 17; and
However, classification and presentation requirements of this IFRS apply to above assets as well if these
are part of a disposal group.
Disposal group:
- It is a group of assets to be disposed of, by sale or otherwise, together as a group in a single
transaction, and liabilities directly associated with those assets that will be transferred in the
transaction. The group includes goodwill acquired in a business combination if the group is a
cash‑generating unit to which goodwill has been allocated.
- If a non-current asset, which falls within the scope of measurement requirements of this IFRS (e.g.
PPE), is a part of a disposal group, the measurement requirements of this IFRS apply to the disposal
group as a whole (i.e. not applied to that individual non-current asset).
CLASSIFICATION OF NON-CURRENT ASSETS (OR DISPOSAL GROUPS)
Classification as held for sale

1. An entity shall classify a non-current asset (or disposal group) as held for sale if following criteria is
met:
Its carrying amount will be recovered principally through a sale transaction rather than through
continuing use.
It must be available for immediate sale in its present condition subject only to terms that are
usual and customary for sales of such assets (or disposal groups).
Its sale must be highly probable. For a sale to be highly probable:
* The appropriate level of management must be committed to a plan to sell the asset (or
disposal group).
* An active programme to locate a buyer and complete the plan must have been initiated.
* The asset (or disposal group) must be actively marketed for sale at a price that is reasonable
in relation to its current fair value.
* The sale should be expected to be completed within in one year from the date of
classification.
* It is unlikely that the plan will be significantly changed or withdrawn.
Non adjusting event

If above criteria is met after the reporting period, then entity shall not classify the asset (or
disposal group) as held for sale, rather it shall be disclosed.
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42
2. Exception for “sale within one year” condition

An extension of the period, beyond one year, required to complete the sale does not preclude the
asset (or disposal group) from being classified as held for sale if the delay is caused by events or
circumstances beyond the entity’s control and there is sufficient evidence that the entity remains
committed to its plan.
Classification as held for distribution to owners

An entity shall classify a non-current asset (or disposal group) as held for distribution to owners if following
criteria is met:
The entity is committed to distribute the asset (or disposal group) to the owners.
It must be available for immediate distribution in its present condition.
Its distribution must be highly probable. For a distribution to be highly probable:
* The actions to complete the distribution must have been initiated.
* The distribution should be expected to be completed within in one year from the date of
classification.
* It is unlikely that the plan will be significantly changed or withdrawn.
Non-current assets that are to be abandoned

An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned.
This is because its carrying amount will be recovered principally through continuing use. It includes the
asset (or disposal group) that is to be used to the end of its economic life and the asset (or disposal group)
that is to be closed rather than sold.
MEASUREMENT
Measurement of a non-current asset (or disposal group) [Initial and subsequent]

1. A non-current asset (or disposal group) classified as held for sale shall be measured at the lower of:
- Its carrying amount; and
- Fair value less cost to sell
2. A non-current asset (or disposal group) classified as held for distribution to owners shall be measured
at the lower of:
- Its carrying amount; and
- Fair value less cost to distribute
Important:
When the sale is expected to occur beyond one year, the entity shall measure the costs to sell at
their present value. Any increase in the present value of the costs to sell that arises from the passage
of time shall be presented in profit or loss as a financing cost.
Immediately before the initial classification of the asset (or disposal group) as held for sale, the
carrying amounts of the asset (or all the assets and liabilities in the group) shall be measured in
accordance with applicable IFRSs.
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43
Recognition of impairment losses and reversals [Initial as well as subsequent]

Impairment loss = Carrying amount – Fair value less cost to sell
Impairment loss reversal (i.e. gain) = Fair value less cost to sell – Carrying amount
For individual asset:

1. An impairment loss shall be recognized in P&L for initial or subsequent write-down to fair value less
cost to sell.
2. If subsequently fair value less cost to sell increases, a gain shall be recognized in P&L only to the extent
to reverse the cumulative impairment loss previously recognized either as per this IFRS or as per IAS
36.
For disposal group:

1. On subsequent remeasurement of a disposal group, the carrying amounts of any assets and liabilities
that are not within the scope of the measurement requirements of this IFRS, but are included in a
disposal group classified as held for sale, shall be remeasured in accordance with applicable IFRSs
before the fair value less costs to sell of the disposal group is remeasured.
2. An impairment loss shall be recognized in P&L for initial or subsequent write-down to fair value less
cost to sell.
3. If subsequently fair value less cost to sell increases, a gain shall be recognized only to the extent to
reverse the cumulative impairment loss previously recognized on the assets that are within the scope
of measurement requirements of this IFRS, either as per this IFRS or as per IAS 36.
4. The impairment loss recognized for the group shall be allocated to all non-current assets in the group
that are within the scope of the measurement requirements of this IFRS, in following order:
first, to reduce the carrying amount of any goodwill allocated to the group; and
then, to the other assets of the group pro rata on the basis of the carrying amount of each asset
in the group.
Any subsequent gain (i.e. loss reversal) shall be allocated to other assets of the group, except for
goodwill, pro rata on the basis of the carrying amount of each asset in the group.
Exam note:
This loss allocation is same as studied in IAS 36 for loss allocation in CGU except here “maximum
limit for loss allocation as per IAS 36” is not applicable.
Depreciation and finance cost:

- A non-current asset shall not be depreciated/amortized while it is classified as held for sale or held
for distribution to owners or while it is a part of disposal group classified as held for sale or held for
distribution to owners.
- Interest and other expenses attributable to the liabilities of a disposal group classified as held for
sale or held for distribution to owners shall however continue to be recognized.
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44
Changes in plan of sale or distribution to owners
1. If the criteria for “held for sale” or “held for distribution to owners” classification are no longer met,
then entity shall cease to classify the asset (or disposal group) as “held for sale” or “held for
distribution to owners”.
Change between classes:
If an entity reclassifies an asset (or disposal group) directly from “held for sale” to “held for
distribution to owners” or vice verse, then this change is not considered as a change in plan,
therefore, it will be measured as per respective guidance studied earlier.
2. If an asset (or disposal group) ceases to be classified as “held for sale” or “held for distribution to
owners”, then it shall be measured at lower of:
- Its carrying amount before classification, adjusted for any depreciation, amortization or
revaluations that would have been recognized had the asset (or disposal group) not been
classified as “held for sale” or “held for distribution to owners”; and
- Its recoverable amount at the date of subsequent decision not to sell or distribute.
3. The required adjustment in carrying amount shall be immediately recognized in profit and loss from
continuing operations in the same caption as used to present earlier gain or loss.
4. If an entity removes an individual asset or liability an individual asset or liability from a disposal group
classified as “held for sale” or “held for distribution to owners”:
If the group still meets the classification criteria:
The remaining assets and liabilities of the disposal group to be sold shall continue to be measured as
a group.
If the group no longer meets the classification criteria:

- The remaining non‑current assets of the group that individually meet the criteria to be classified
as “held for sale” or “held for distribution to owners” shall be measured individually at the lower
of their carrying amounts and fair values less costs to sell (or costs to distribute) at that date.
- Any non‑current assets that do not meet the criteria for “held for sale” and “held for distribution
to owners” shall cease to be classified and be measured as per point 2 above.
PRESENTATION AND DISCLOSURES
Discontinued operations
A discontinued operation is a component (e.g. a cash generating unit or group of cash generating units)
of an entity that either has been disposed of, or is classified as held for sale, and
(a) represents a separate major line of business or geographical area of operations,
(b) is part of a single co‑ordinated plan to dispose of a separate major line of business or geographical
area of operations or
(c) is a subsidiary acquired exclusively with a view to resale.
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45
Disclosures:
An entity shall disclose:
(a) a single amount in the statement of comprehensive income comprising the total of:
(i) the post‑tax profit or loss of discontinued operations and
(ii) the post‑tax gain or loss recognised on the measurement to fair value less costs to sell or on the
disposal of the assets or disposal group(s) constituting the discontinued operation.
(b) an analysis of the single amount in (a) into:

(i) the revenue, expenses and pre‑tax profit or loss of discontinued operations and the related
income tax expense.
(ii) the gain or loss recognised on the measurement to fair value less costs to sell or on the disposal
of the assets or disposal group(s) constituting the discontinued operation and the related income
tax expense.
The analysis may be presented in the notes or in the statement of comprehensive income. If it is
presented in the statement of comprehensive income it shall be presented in a section identified as
relating to discontinued operations, i.e. separately from continuing operations.
(c) the net cash flows attributable to the operating, investing and financing activities of discontinued
operations. These disclosures may be presented either in the notes or in the financial statements.
Comparative figures:
- An entity shall re-present above disclosures for prior period presented in the financial statements
so that the disclosures relate to all operations that have been discontinued by the end of current
period.
- If an entity ceases to classify a component as held for sale, the results of operations of the
component previously presented in discontinued operations shall be reclassified and included in
income from continuing operations for all periods presented.
This restatement/reclassification of comparative figures is relevant for SOCI only. Disclosure of

disposal group held for sale under current assets (SOFP) shall not be represented/reclassified.
Non-current asset (or disposal group) classified as held of sale

1. Any gain or loss on the remeasurement of a non‑current asset (or disposal group) classified as held
for sale that does not meet the definition of a discontinued operation shall be included in profit or
loss from continuing operations.
2. An entity shall present a non‑current asset classified as held for sale and the assets of a disposal group
classified as held for sale separately from other assets in the statement of financial position. The
liabilities of a disposal group classified as held for sale shall be presented separately from other
liabilities in the statement of financial position. Those assets and liabilities shall not be offset and
presented as a single amount.
3. An entity shall present separately any cumulative income or expense recognised in other
comprehensive income relating to a non‑current asset (or disposal group) classified as held for sale.
Nasir Abbas FCA

46
IFRS 5 – QUESTIONS
PRACTICE QUESTIONS
Question 1
On 1 December 2020, a company became committed to a plan to sell a manufacturing facility and has already
found a potential buyer. The company does not intend to discontinue the operations currently carried out in
the facility. At 31 December 2020 there is a backlog of uncompleted customer orders. The company will not
be able to transfer the facility to the buyer until after it ceases to operate the facility and has eliminated the
backlog of uncompleted customer orders. This is not expected to occur until spring 2021.
Required
Can the manufacturing facility be classified as 'held for sale' at 31 December 2020?
Question No. 2
On 20 October 2019 the directors of a company made a public announcement of plans to close a steel works.
The closure means that the company will no longer carry out this type of operation, which until recently has
represented about 10% of its total turnover. The works will be gradually shut down over a period of several
months, with complete closure expected in July 2020. At 31 December output had been significantly reduced
and some redundancies had already taken place. The cash flows, revenues and expenses relating to the steel
works can be clearly distinguished from those of the subsidiary's other operations.
Required
How should the closure be treated in the financial statements for the year ended 31 December 2019?
Question No. 3
An entity is committed to a plan to sell its headquarters building and has initiated actions to locate a buyer.
The entity will continue to use the building until construction of a new headquarters building is completed. The
entity does not intend to transfer the existing building to a buyer until after construction of the new building
is completed (and it vacates the existing building).
Required:
Can the building be classified as ‘held for sale’?
Question No. 4
An entity is committed to a plan to sell a manufacturing facility in its present condition and classifies the facility
as held for sale at that date. After a firm purchase commitment is obtained, the buyer’s inspection of the
property identifies environmental damage not previously existed. The entity is required by the buyer to make
good the damage, which will extend the period required to complete the sale beyond one year. However, the
entity has initiated actions to make good the damage, and satisfactory rectification of the damage is highly
probable.
Required:
Can the facility be classified as ‘held for sale’?
Question No. 5
An entity is committed to a plan to sell a non-current asset and classifies the asset as held for sale at that date.
(a) During the initial one-year period, the market conditions that existed at the date the asset was classified
initially as held for sale deteriorate and, as a result, the asset is not sold by the end of that period. During
that period, the entity actively solicited but did not receive any reasonable offers to purchase the asset
and, in response, reduced the price. The asset continues to be actively marketed at a price that is
reasonable given the change in market conditions.
(b) During the following one-year period, market conditions deteriorate further, and the asset is not sold by
the end of that period. The entity believes that the market conditions will improve and has not further
reduced the price of the asset. The asset continues to be held for sale, but at a price in excess of its current
fair value.
47
NASIR ABBAS FCA
IFRS 5 – QUESTIONS
Required:
Discuss whether the non-current asset meets the criteria for classification as held for sale in each year.
Question No. 6
On 1 January 2017, AB acquires a building for Rs. 2,000,000 with an expected life of 50 years. On 31 December
2020 AB puts the building up for immediate sale. Costs to sell the building are estimated at Rs. 100,000.
Required
Outline the accounting treatment of the above if the building had a fair value at 31 December 2020 of:
(a) Rs. 2,200,000
(b) Rs. 1,100,000
Question No. 7
Nash purchased a building for its own use on 1 January 2017 for Rs. 10 million and attributed it a 50 year useful
economic life. Nash uses the revaluation model to account for buildings.
On 31 December 2018, this building was revalued to Rs. 12 million.
On 31 December 2019, the building met the criteria to be classified as held for sale. Its fair value was deemed
to be Rs. 11 million and the costs necessary to sell the building were estimated to be Rs. 500,000.
Required:
Journalize above transactions/adjustments till 31 December 2019.
Question No. 8
An entity plans to dispose of a group of its assets. The information regarding the assets forming the disposal
group as on June 30, 2020 is as follows:
Carrying amount Fair values immediately before
(Rs. million) classification as held for sale
(Rs. million)
Goodwill 150 -
Property, plant & equipment 460 400
(carried at revaluation model)
Property, plant & equipment 570 -
(carried at cost model)
Inventory 240 220
Financial assets 180 150
On June 30, 2020 the entity measured the fair value less cost to sell of the group at Rs. 1,300 million.
Required:
Calculate revised carrying amounts as on June 30, 2020.
Question No. 9
A building was purchased on July 1, 2015 at a cost of Rs. 40 million. Initial estimate of useful life was made at
8 years. On June 30, 2017 the building was classified as held for sale. Its fair value less cost to sell was
Date Fair value less cost
to sell
June 30, 2017 Rs. 27 million
June 30, 2018 Rs. 29 million
On June 30, 2019 the plan to sell the building was changed. Recoverable amount on that date was determined
at Rs. 24 million.
Required:
All journal entries till June 30, 2019.
48
NASIR ABBAS FCA
IFRS – 5 - SOLUTIONS
SOLUTIONS
Solution No. 1
The facility will not be transferred until the backlog of orders is completed; this demonstrates that the facility is not
available for immediate sale in its present condition. The facility cannot be classified as 'held for sale' at 31 December
2020. It must be treated in the same way as other items of property, plant and equipment: it should continue to be
depreciated and should not be separately disclosed.
Solution No. 2
Because the steel works is being closed, rather than sold, it cannot be classified as 'held for sale'. In addition,
the steel works is not a discontinued operation. Although at 31 December 2019 the group was firmly
committed to the closure, this has not yet taken place and therefore the steel works must be included in
continuing operations. Information about the planned closure could be disclosed in the notes to the financial
statements.
Solution No. 3
The delay in the timing of the transfer of the existing building imposed by the entity (seller) demonstrates that
the building is not available for immediate sale. The criteria can not be met until the construction of the new
building in completed. Therefore, the building is not classified as held for sale.
Solution No. 4
Since the delay is due to circumstances beyond entity’s control therefore this delay qualifies for exception to
one-year condition. Hence the facility shall be classified as held for sale.
Solution No. 5
(a) Since the delay is due to circumstances beyond entity’s control therefore this delay qualifies for exception
to one-year condition. Hence the facility shall be classified as held for sale. At the end of the initial one-
year period, the asset would continue to be classified as held for sale.
(b) In that situation, the absence of a price reduction demonstrates that the asset is not available for
immediate sale. Moreover, an asset must be marketed at a price that is reasonable in relation to its current
fair value. Therefore, the conditions for an exception to the one-year requirement would not be met. The
asset would be reclassified.
Solution No. 6
Until 31 December 2020 the building is a normal non-current asset and its accounting treatment is prescribed
by IAS 16. The annual depreciation charge was Rs. 40,000 (Rs. 2,000,000/50). As such, the carrying amount at
31 December 2020, prior to reclassification, was Rs. 1,840,000 [i.e. Rs. 2,000,000 – (4 × Rs. 40,000)].
(a) On 31 December 2020 the building is classified as a non-current asset held for sale. It is measured at the
lower of carrying amount (i.e. Rs. 1,840,000) and fair value less costs to sell (i.e. Rs. 2,200,000 – Rs. 100,000
= Rs. 2,100,000). This means that the building will continue to be measured at Rs. 1,840,000.
(b) On 31 December 2020 the building is classified as a non-current asset held for sale. It is measured at the
lower of carrying amount (i.e. Rs. 1,840,000) and fair value less costs to sell (i.e. Rs. 1,100,000 – Rs. 100,000
= Rs. 1,000,000). The building will therefore be measured at Rs. 1,000,000 as at 31 December 2020. An
impairment loss of Rs. 840,000 will be charged to the statement of profit or loss.
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NASIR ABBAS FCA
Solution No. 7
01-01-17 Building 10.00
Cash 10.00
[Purchase of building]


31-12-18 Accumulated depreciation 0.40

Building 0.40
31-12-18 Building 2.40

[Revaluation of building]


Building 0.25

Building 0.75
[Revaluation of building]
31-12-19 P&L 0.50

NCA held for sale 10.50
Building 11.00
[Loss on classification as held for sale]
W-1 NBV Surplus

------ Rs. million ----
01-01-17 Initial 10.00 -
31-12-17 Dep. [10/50] (0.20) -
9.80 -
31-12-18 Dep. (0.20) -
9.60 -
31-12-18 Revaluation 2.40 2.40
50
NASIR ABBAS FCA
12.00 2.40
31-12-19 Dep. [12/48] [2.40/48] (0.25) (0.05)
11.75 2.35
31-12-19 Revaluation (0.75) (0.75)
11.00 1.60
Solution No. 8
Remeasurement
NBV just
adjustment Impairment NBV after
NBV before initial
before initial loss (W-1) classification
classification
classification
-------------------------------------- Rs. million -------------------------------------
Goodwill 150.00 - 150.00 (150.00) -
PPE (revaluation model) 460.00 (60.00) 400.00 (16.49) 383.51
PPE (cost model) 570.00 - 570.00 (23.51) 546.49
Inventory 240.00 (20.00) 220.00 - 220.00
Financial assets 180.00 (30.00) 150.00 - 150.00
1,600.00 1,490.00 (190.00) 1,300.00
W-1 Loss allocation

Goodwill 150.00 [First allocated to GW]
PPE (revaluation model) 16.49 [40 x 400/970]
PPE (cost model) 23.51 [40 x 570/970]
Inventory - Scoped out
Financial assets -------------------------------------------------------- Scoped out
190.00 [1,490 - 1,300]
Solution No. 9
01-07-15 Building 40.00
Cash 40.00
[Purchase of building]
30-06-16 Depreciation [40/8] 5.00

Building 5.00

Building 5.00
30-06-17 P&L [30 - 27] 3.00

Building 30.00
[Initial classification as held for sale]
51
NASIR ABBAS FCA
30-06-18 NCA held for sale [29 - 27] 2.00

P&L 2.00
[Reversal of impairment loss]
30-06-19 P&L (W-1) 9.00

Building (W-1) 20.00
[Adjustment when classification is ceased]
W-1 Rs. million

Carrying amount (had asset not been classified) 20.00
[40 - 5 x 4]
Recoverable amount 24.00
Lower of both 20.00

Carrying amount as per books 29.00
Immediate charge to P&L 9.00
52
NASIR ABBAS FCA
Basic data
Following information relates to a Alpha Limited:
Statement of financial position - Extracts 2020 2019

------- Rs. million -------
Property, plant & equipment:

Division A 170 180
Other divisions 920 840
1,090 1,020
Statement of comprehensive income - Extracts

-------- 2020 -------- -------- 2019 --------
Other Other
Division A Division A
divisions divisions
---------------------- Rs. million ----------------------
Sales 560 1,520 430 1,330

Cost of sales (400) (1,100) (320) (980)
Gross profit 160 420 110 350
Operating expenses (40) (130) (30) (100)
PBT 120 290 80 250
Tax [20%] (24) (58) (16) (50)
PAT 96 232 64 200
53
Scenario I - Normal ongoing business
2020 2019
SOFP - Extracts ------- Rs. million ------
Non current assets

PPE 1,090 1,020
2020 2019
SOCI - Extracts ------- Rs. million ------
Sales 2,080 1,760

Cost of sales (1,500) (1,300)
Gross profit 580 460
Operating expenses (170) (130)
PBT 410 330
Tax [20%] (82) (66)
PAT 328 264
54
Scenario II - Division A was classified as held for sale in 2019 and still not sold in 2020
Fair value less cost to sell was:

Rs. million
31-12-2019 165
31-12-2020 155
2020 2019
Non current assets

PPE 920 840
Current assets
Disposal group held for sale 155 165
2020 2019
Sales 1,520 1,330

Cost of sales (1,100) (980)
Operating expenses* (130) (100)
PBT 290 250
Tax [20%] (58) (50)
Profit from continuing operations 232 200
Profit from discontinued operations (W-1) 88 52
Profit after tax 320 252
W-1
PBT 120 80
Loss as per IFRS 5 [165 - 155] [180 - 165] (10) (15)
110 65
Tax [20%] (22) (13)
88 52
* Ignore depreciation adjustment as information is not given
55
Scenario III - Division A was classified as held for sale in 2020

Rs. million
31-12-2020 155
2020 2019
Non current assets

PPE 920 1,020
Current assets
Disposal group held for sale 155 -
2020 2019
(reclassified)
Sales 1,520 1,330

Cost of sales (1,100) (980)
Operating expenses (130) (100)
PBT 290 250
Tax [20%] (58) (50)
Profit from continuing operations 232 200
Profit from discontinued operations (W-1) 84 64
Profit after tax 316 264
W-1
PBT 120 80
Loss as per IFRS 5 [170 - 155] (15) -
105 80
Tax [20%] (21) (16)
84 64
56
Scenario IV - Division A was classified as held for sale in 2019 but ceased in 2020

Rs. million
31-12-2019 165
Value in use 173

[as on 31-12-2020]
2020 2019
Non current assets

PPE 1,090 840
Current assets
Disposal group held for sale - 165
2020 2019
(reclassified)
Sales 2,080 1,760

Cost of sales (1,500) (1,300)
Operating expenses (W-1) (165) (145)
PBT 415 315
Tax [20%] (83) (63)
PAT 332 252
W-1
Operating expenses 170 130
Loss as per IFRS 5 [180 - 165] - 15
Loss reversal as per IFRS 5 [170 - 165] (5) -
165 145
57
SCOPE
This standard does not apply to:

(a) biological assets related to agricultural activity (IAS 41); and
(b) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources
IMPORTANT DEFINITIONS
Investment property is property (land or a building or part of a building or both) held (by the owner or by
the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.
Owner‑occupied property is property held (by the owner or by the lessee as a right-of-use asset) for use
in the production or supply of goods or services or for administrative purposes.
Important difference:
Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment
property generates cash flows largely independently of the other assets held by an entity. This
distinguishes investment property from owner‑occupied property. The production or supply of goods
or services (or the use of property for administrative purposes) generates cash flows that are
attributable not only to property, but also to other assets used in the production or supply process.
CLASSIFICATION OF PROPERTY
Examples of investment property

(a) land held for long‑term capital appreciation rather than for short‑term sale in the ordinary course of
business.
(b) land held for a currently undetermined future use. (If an entity has not determined that it will use the
land as owner‑occupied property or for short‑term sale in the ordinary course of business, the land is
regarded as held for capital appreciation.)
(c) a building owned by the entity (or a right-of-use asset relating to a building held by the entity) and
leased out under one or more operating leases.
(d) a building that is vacant but is held to be leased out under one or more operating leases.
(e) property that is being constructed or developed for future use as investment property.
Example of items that are not investment property

(a) property intended for sale in the ordinary course of business or in the process of construction or
development for such sale (see IAS 2 Inventories), for example, property acquired exclusively with a
view to subsequent disposal in the near future or for development and resale.
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58
(b) owner‑occupied property (see IAS 16 and IFRS 16)
(c) property held for future use as owner‑occupied property
(d) property held for future development and subsequent use as owner‑occupied property
(e) property occupied by employees (whether or not the employees pay rent at market rates)
(f) owner‑occupied property awaiting disposal.
(g) property that is leased to another entity under a finance lease.
Intra-group property transfers:

In some cases, an entity owns property that is leased to, and occupied by, its parent or another
subsidiary. The property does not qualify as investment property in the consolidated financial
statements, because the property is owner‑occupied from the perspective of the group. However,
from the perspective of the entity that owns it, the property is investment property if it meets the
definition. Therefore, the lessor treats the property as investment property in its individual financial
statements.
Composite properties
1. If a property comprises of two portions; one is held to earn rentals or for capital appreciation and
other is held as owner occupied:
Portions can be sold or leased under a finance Portions cannot be sold or leased under a
lease separately: finance lease:
Portions are accounted for as “investment Property is accounted for as “investment

property” and “owner-occupied property” property”, if only an insignificant portion is
accordingly. owner-occupied.
2. If an entity provides services to the occupants of a property it holds:
If services are insignificant to the arrangement If services are significant to the arrangement as
as a whole: a whole:
Property is accounted for as “investment Property is accounted for as “owner-occupied

property”. property”.
[For example when owner of the building [For example if entity owns and manages a
provides security and maintenance services to hotel, services provided to guests are significant
the lessees] to the arrangement as a whole]
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59
Subjectivity involved:
It may be difficult to determine whether ancillary services are so significant that a property does
not qualify as investment property. For example, the owner of a hotel sometimes transfers some
responsibilities to third parties under a management contract. The terms of such contracts vary
widely. At one end of the spectrum, the owner’s position may, in substance, be that of a passive
investor (i.e. investment property). At the other end of the spectrum, the owner may simply have
outsourced day‑to‑day functions while retaining significant exposure to variation in the cash flows
generated by the operations of the hotel (i.e. owner-occupied property).
RECOGNITION
An owned investment property shall be recognised as an asset when, and only when:
(a) it is probable that the future economic benefits that are associated with the investment property will
flow to the entity; and
(b) the cost of the investment property can be measured reliably.
MEASUREMENT – Initial
An owned investment property shall be measured initially at its cost. Transaction costs shall be included
in the initial measurement.
[Components of cost are same as earlier studied for property, plant and equipment IAS 16]
MEASUREMENT – Subsequent
An entity shall choose as its accounting policy either the fair value model or cost model and shall apply
that policy to all of its investment properties.
Fair value model

1. An entity shall measure all of its investment property at end of every year at fair value, except in the
case discussed below as “exception”.
2. Any gain or loss from change in fair value shall be recognized in profit or loss for the period.
Exception:
If an entity determines that the fair value of an investment property is not reliably measurable on
a continuing basis, the entity shall measure that investment property using cost model and continue
to apply cost model until disposal of the property and assume residual value to be zero.
If any entity determines that the fair value of an investment property under construction is not
reliably measurable but expects the fair value to be reliably measurable when construction is
complete, it shall measure that property under construction at cost untill the earlier of:
* When its fair value becomes reliably measurable; or
* When its construction is completed.
Cost model
It is same as studied in IAS 16.
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60
TRANSFERS
An entity shall transfer a property to, or from, investment property when, and only when, there is a change
in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment
property and there is evidence of the change in use.
In isolation, a change in management’s intentions for the use of a property does not provide evidence of
a change in use.
Examples of evidence of a change in use include:

(a) commencement of owner‑occupation, or of development with a view to owner-occupation [transfer
from investment property to owner‑occupied property];
(b) commencement of development with a view to sale [transfer from investment property to
inventories];
(c) end of owner‑occupation [transfer from owner‑occupied property to investment property]; and
(d) inception of an operating lease to another party [transfer from inventories to investment property].
Transfer out
--------------------- Property is now transferred to -----------------------

Property was carried at: Inventory Owner-occupied property
Carrying amount of property as Carrying amount of property as
Cost model per IAS 40 is now considered as per IAS 40 is now considered as
cost of inventory carrying amount of owner-
occupied property.
Property is remeasured at fair Property is remeasured at fair
value at the date of transfer as value at the date of transfer as
per IAS 40. per IAS 40.
Fair value model
This fair value at the date of This fair value at the date of
transfer is deemed as cost of transfer is deemed as cost of
inventory. owner-occupied property.
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61
Transfer in
--------------------- Property is transferred from -----------------------

Property will be carried at: Inventory Owner-occupied property
Carrying amount of inventory as Carrying amount of owner-
Cost model per IAS 2 is now considered as occupied property is now
cost of investment property considered as carrying amount
of investment property
Property is remeasured at fair Owner-occupied property is
value at the date of transfer and revalued to fair value in
resulting gain/loss is recognized accordance with revaluation
Fair value model in P&L. model of IAS 16.
(If revaluation surplus arises, it
This fair value at the date of stays there in equity till property
transfer is now the value of is subsequently disposed)
investment property.
This fair value at the date of
transfer is now the value of
investment property.
DERECOGNITION
It is same as studied in IAS 16.
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62
IAS 40 – QUESTIONS
PRACTICE QUESTIONS
QUESTION NO. 1
Bilal Developers (BD) wishes to create a credible investment property portfolio with a view to determining if any property
may be considered surplus to the functional objectives. The following portfolio of property is owned by BD:
(a) BD owns several plots of land. Some of the land is owned by BD for capital appreciation and this may be sold at
any time in the future. Other plots of land have no current purpose as BD has not determined whether it will use
the land to provide services such as those provided by national parks or for short-term sale in the ordinary course
of operations.
(b) BD supplements it income by buying and selling properties. The housing department regularly sells part of its
housing inventory in the ordinary course of its operations as a result of changing demographics. Part of the
inventory, which is not held for sale, is to provide housing to low-income employees at below market rental. The
rent paid by employees covers the cost of maintenance of the property.
Required:
Discuss how above properties should be accounted for in financial statements of BD.
QUESTION NO. 2
Briefly discuss, with reasons, whether following properties may be classified as investment properties or not:
(a) An entity rents out a building it owns to independent third parties under operating leases.
(b) An entity owns a building it rents out to an independent third party (the lessee) under an operating lease. The
lessee operates a hotel from the building and provides a range of services commonly provided by such hotels.
The entity does not provide any services to the hotel guests and its rental income is unaffected by the number
of guests that occupy the hotel.
(c) An entity acquired a tract of land to divide it into smaller plots to be sold in the ordinary course of business at an
expected 40% profit margin. No rentals are expected to be generated from the land.
(d) An entity owns a building that it rents out to independent third parties under operating leases. The entity
provides cleaning, security and maintenance services for the lessees of the building. To do this, the entity’s
building administration and maintenance staff occupies a part of the building that measures less than 1% of the
floor area of the building.
(e) An entity owns a two-storey building. Floor 1 is rented out to independent third parties under operating leases.
Floor 2 is occupied by the entity’s administration and maintenance staff. The entity can measure reliably the fair
value of each floor of the building without undue cost or effort.
QUESTION NO. 3
Briefly discuss, with reasons, whether following properties may be classified as investment properties or not:
(i) An entity rents out a building it owns to independent third parties under operating leases. The entity provides
cleaning, security and maintenance services for the lessees of the building.
(ii) An entity acquired a tract of land as a long-term investment because it expects its value to increase over
time. No rentals are expected to be generated from the land in the foreseeable future.
(iii) An entity owns a building which it operates as a hotel (i.e. it rents out rooms to independent third parties in
return for payments). The entity provides hotel guests with a range of services commonly provided by hotels.
Some of the services are included in the room daily rate (e.g. breakfast and television); other services are charged
for separately (e.g. other meals, minibars, and guided tours of the surrounding area).
(iv) An entity owns a building it rents out to independent third parties under operating leases. The entity’s building
administration and maintenance staff occupies 25% of the building’s floor area.
QUESTION NO. 4
Alpha Limited (AL) owns following two properties:
63
NASIR ABBAS FCA
Property X
An office building owned by AL was purchased on January 01, 2011 for Rs. 12 million. This building is mainly used for
administrative activities of AL. Total estimated useful life of building was 20 years. This building had a fair value of Rs. 8.8
million on January 1, 2015. On January 1, 2018 its fair value as determined at Rs. 8.32 million. There has been no change
in estimate of useful life.
Property Y
Another building owned by AL was purchased on July 1, 2017 for Rs. 8 million. This building was purchased for the
objective of earning rentals. However it could be rented out on July 1, 2018. It had a fair value of Rs. 8.5 million on
December 31, 2017 which was increased to Rs. 9.4 million on December 31, 2018. Estimated useful life of this building
was 15 years.
AL follows revaluation model for property, plant and equipment and fair value model for investment properties.
Required:
Prepare journal entries for the year ending December 31, 2018.
QUESTION NO. 5
Quality Limited (QL) owns following two properties:
Property A
An office building used by QL for administrative purposes has a depreciated historical cost of Rs.2 million. At July 1, 2018
it had a remaining life of 20 years. After a reorganisation on January 1, 2019, the property was let to a third party and
reclassified as an investment property applying QL’s policy of the fair value model. An independent valuer assessed the
property to have a fair value of Rs. 2.3 million at January 1, 2019, which had risen to Rs. 2.5 million at June 30, 2019.
Property B
Another office building has been rented out to a tenant. At June 30, 2018, it had a fair value of Rs. 1.5 million which had
risen to Rs. 1.65 million at June 30, 2019.
Required:
Prepare extracts of statement of comprehensive income and statement of financial position for the year ended June 30,
2019.
QUESTION NO. 6
Beta Limited (BL) is engaged in buying and selling of properties as well as renting out of properties. BL had many properties
classified as investment properties. It follows fair value model for its investment properties. On July 1, 2018 BL changed
use of following two properties:
Property M
Property M was purchased some years ago for Rs. 5 million with the intention of letting it out. It was given on rent for
many years. On December 31, 2017 it was updated to a fair value of Rs. 6.2 million. On July 1, 2018, the tenant vacated
the building and BL decided to sell it in ordinary course of business. The fair value of building on July 1, 2018 was Rs. 6.5
million.
Property N
Property N was purchased 5 years ago for Rs. 7 million. It was given on operating lease to a lessee since then. On July 1,
2018 it was vacated by the tenant and BL decided to use it as administration office. This building was updated to a fair
value of Rs. 5.5 million on December 31, 2017. On July 1, 2018 its fair value was Rs. 5.3 million.
Required:
Prepare journal entries for the transfers on July 1, 2018.
64
NASIR ABBAS FCA
IAS – 40 - SOLUTIONS
SOLUTIONS
SOLUTION TO QUESTION NO.1
(a) The land that is owned by BD for capital appreciation which may be sold at any time in the future and
the land that has no current purpose are both considered to be investment property under IAS 40. If
the land has no current purpose, it is considered to be held for capital appreciation.
(b) BD supplements its income by buying and selling property, and the housing department regularly sells
part of its housing inventory. As these sales are in the ordinary course of its operations and are
routinely occurring, then the housing stock held for sale will be classified as inventory.
The part of the inventory held to provide housing to low-income employees at below market rental
will not be treated as investment property as the property is not held for capital appreciation and the
income just covers the cost of maintaining the properties and thus is not for profit. The property is
held to provide housing services rather than rentals. The rental revenue is incidental to the purposes
for which the property is held. This property will be accounted for under IAS 16 Property, Plant and
Equipment. The property is treated as owner occupied as set out above.

(a) The building is classified as an item of investment property by the entity (lessor). It is a property held
to earn rentals.
(b) The building is an investment property of the entity. The entity is a passive investor and is not engaged
in the business of operating a hotel.
(c) The land is not classified as investment property. It is classified as inventory. It is held for sale in the
ordinary course of business.
(d) The entire building is classified as an investment property by the entity (lessor). It is a property held to
earn rentals. The portion of the building occupied by the owner (owner-occupation) is insignificant and
so the building does not need to be accounted for as a mixed use property.
(e) Floor 1 of the building is classified as an item of investment property by the entity (lessor) because it
is held to earn rentals.
Floor 2 of the building is classified as property, plant and equipment because it is held for use in the
production or supply of goods or services or for administrative purposes.

(i) If the services provided by the entity are insignificant to the arrangement as a whole, the property is
investment property. In most cases, cleaning, security and maintenance services will be insignificant,
and hence, the building would be classified as investment property.
(ii) The land is classified as investment property. It is property held for capital appreciation. The land is not
held for sale in the ordinary course of business; nor is it used in the production or supply of goods or
services or for administrative purposes.
(iii) Because the entity is actively engaged in operating a hotel business in the building, it should be
classified as property, plant and equipment. Its cash inflows (income from letting out the rooms and
income from the other services provided) are dependent on the way it operates the hotel business.
Therefore, the building is not an investment property.
(iv) The entity (owner) occupies 25% of the floor area of the building. The mixed use building should be
separated between investment property and property, plant and equipment. However, if the fair value
of the investment property component cannot be measured reliably without undue cost or effort, the
entire property should be accounted for as property, plant and equipment.
65
NASIR ABBAS FCA

Property X
Date Particulars Dr. (Rs.) Cr. (Rs.)
01-01-18 Accumulated depreciation (W-1) 1,650,000
Building 1,650,000
01-01-18 Building (W-1) 1,170,000
P&L 650,000
Revaluation surplus 520,000
[Revaluation of property X]
31-12-18 Depreciation (W-1) 640,000
Accumulated depreciation 640,000
31-12-18 Revaluation surplus (W-1) 40,000
Retained earnings 40,000
[Incremental depreciation for 2018]
W-1
NBV Surplus P&L
01-01-11 Cost 12,000
31-12-11/14 Dep. [12m x 4/20] (2,400)
9,600 - -
01-01-15 Reval. (800) - (800)
8,800 - (800)
31-12-15/17 Dep. [8.8m x 3/16] (1,650) 150
7,150 - (650)
01-01-18 Reval. 1,170 520 650
8,320 520 -
31-12-18 Dep. [8.32m / 13] (640) (40) -
7,680 480 -
Property Y
31-12-18 Investment property [9.4m – 8.5m] 900,000
P&L 900,000
[FV gain on investment property for 2018]
Extracts - SOCI
Rs.’000’
Depreciation [2m/20 x 6/12] 50.00
Fair value gain on investment property (W-1) 350.00
Other comprehensive income
Revaluation gain [2.3m – (2m – 0.05m)] 350.00
Extracts - SOFP
Rs.’000’
Non-current assets
Investment property [2.5m + 1.65m] 4,150.00
Equity
66
NASIR ABBAS FCA
W-1
Rs.’000’
FV gain on Property A [2.5m – 2.3m] 200.00
FV gain on Property B [1.65m – 1.5m] 150.00
350.00
Property M
01-07-18 Investment property (M) [6.5m – 6.2m] 300,000
P&L 300,000
[Fair value gain at the date of transfer]
01-07-18 Inventory 6,500,000
Investment property (M) 6,500,000
[Investment property reclassified as inventory]
Property N
01-07-18 P&L 200,000
Investment property (N) [5.5m – 5.3m] 200,000
[Fair value loss at the date of transfer]
01-07-18 Admin Building (PPE) 5,300,000
Investment property (N) 5,300,000
[Investment property reclassified as PPE]
67
NASIR ABBAS FCA
Q-6 Jun-12
(a)
5 - Investment property
5.1 Investment property carried at cost model
Rs. million
Cost
Balance as at 01-01-11 10.00
Addition -
Disposal -
Balance as at 31-12-11 10.00
Accumulated depreciation
Balance as at 01-01-11 (W-1) 2.25
Charge for the year (W-1) 0.90
Disposal
Balance as at 31-12-11 3.15
Net book value as at 31-12-11 6.85
Useful life 10 years
Property D is carried at cost because it is situated outside the main city and its fair
value cannot be determined.
5.2 Investment property carried at fair value model

Rs. million
Fair value
Balance as at 01-01-11 (Property C) 120.00
Addition (W-2) 30.00
Transfer in (Property A) 120.00
Fair value gain (W-3) 14.00
Balance as at 31-12-11 284.00
WORKINGS
W-1 Rs. million
Annual depreciation [(10 - 1)/10] 0.90
Accumulated depreciation on 01-01-11 [0.9 x 2.5 years] 2.25
W-2
Property E
Total purchase cost 48.00
Allocated administrative costs (3.00)
Cost of property 45.00
Cost of investment property portion [45 x 2/3] 30.00
W-3
Property A [120 - 100] (20.00)
Property C [150 - 120] 30.00
Property E [51 x 2/3 - 30] 4.00
14.00
Since Property B was transferred out of IAS 40, it is not included in investment property
68
SCOPE
This standard shall be applied in accounting for all employee benefits, except those to which IFRS 2
applies.
EMPLOYEE BENEFITS
Employee benefits are all forms of consideration given by an entity in exchange for service rendered by
employees or for the termination of employment. Employee benefits include:
(a) Short‑term employee benefits

Employee benefits (other than termination benefits) that are expected to be settled wholly before
twelve months after the end of the annual reporting period in which the employees render the related
service.
Examples:
(i) wages, salaries and social security contributions;
(ii) paid annual leave and paid sick leave;
(iii) profit‑sharing and bonuses; and
(iv) non‑monetary benefits (such as medical care, housing, cars and free or subsidised goods or
services) for current employees;
(b) Post‑employment benefits

Employee benefits (other than termination benefits and short‑term employee benefits) that are
payable after the completion of employment.
Examples:
(i) retirement benefits (e.g. pensions and lump sum payments on retirement); and
(ii) other post‑employment benefits, such as post‑employment life insurance and post‑employment
medical care;
(c) Other long‑term employee benefits

All employee benefits other than short‑term employee benefits, post‑employment benefits and
termination benefits.
Examples:
(i) long‑term paid absences such as long‑service leave or sabbatical leave;
(ii) jubilee or other long‑service benefits; and
(iii) long‑term disability benefits;
(d) Termination benefits

Employee benefits provided in exchange for the termination of an employee’s employment as a result
of either:
(i) an entity’s decision to terminate an employee’s employment before the normal retirement date;
or
(ii) an employee’s decision to accept an offer of benefits in exchange for the termination of
employment.
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69
SHORT TERM BENEFITS – Recognition and measurement
All short-term employee benefits

When an employee has rendered service to entity during an accounting year, the entity shall recognize
the undiscounted amount of short-term benefit expected to be paid for that service as an expense, unless
any other IFRS requires the inclusion in the cost of an assets (e.g. IAS 2 and IAS 16)
Prepayment or accrual
If payment is different from the amount of benefits, an entity shall recognize the difference as an
accrued expense (if amount of benefits exceeds payment) or prepayment (if payment exceeds the
amount of benefits).
Short-term paid absences

An entity may pay employees for absence for various reasons including holidays, sickness and short‑term
disability, maternity or paternity, jury service and military service. Entitlement to paid absences falls into
two categories:
(a) accumulating; and
(b) non‑accumulating.
Accumulating paid absences

1. Accumulating paid absences are those that are carried forward and can be used in future periods if
the current period’s entitlement is not used in full.
2. Accumulating paid absences may be either:

Vesting (i.e. employees are entitled to a cash payment for unused entitlement); or
Non‑vesting (i.e. employees are not entitled to a cash payment for unused entitlement).
3. An obligation arises as employees render service that increases their entitlement to future paid
absences. An entity shall measure the obligation at the expected cost of accumulating paid absences
as the additional amount that the entity expects to pay as a result of the unused entitlement that has
accumulated at the end of the reporting period.
Non-vesting:
The obligation exists, and is recognised, even if the paid absences are non‑vesting, although the
possibility that employees may leave before they use an accumulated non‑vesting entitlement
affects the measurement of that obligation.
Non-accumulating paid absences

Non‑accumulating paid absences do not carry forward: they lapse if the current period’s entitlement is
not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the
entity. This is commonly the case for sick pay (to the extent that unused past entitlement does not
increase future entitlement), maternity or paternity leave and paid absences for jury service or military
service. An entity recognises no liability or expense until the time of the absence, because employee
service does not increase the amount of the benefit.
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Profit-sharing and bonus plans

1. An entity shall recognise the expected cost of profit‑sharing and bonus payments when, and only
when:
(a) the entity has a present legal or constructive obligation to make such payments as a result of past
events; and
(b) a reliable estimate of the obligation can be made.
A present obligation exists when, and only when, the entity has no realistic alternative but to make
the payments.
2. Under some profit‑sharing plans, employees receive a share of the profit only if they remain with the
entity for a specified period. Such plans create a constructive obligation as employees render service
that increases the amount to be paid if they remain in service until the end of the specified period.
The measurement of such constructive obligations reflects the possibility that some employees may
leave without receiving profit‑sharing payments.
3. An entity can make a reliable estimate of its legal or constructive obligation under a profit‑sharing or
bonus plan when, and only when:
(a) the formal terms of the plan contain a formula for determining the amount of the benefit;
(b) the entity determines the amounts to be paid before the financial statements are authorised for
issue; or
(c) past practice gives clear evidence of the amount of the entity’s constructive obligation.
Difference between bonus plan and dividend

An obligation under profit‑sharing and bonus plans results from employee service and not from a
transaction with the entity’s owners. Therefore, an entity recognises the cost of profit‑sharing and
bonus plans not as a distribution of profit but as an expense.
POST-EMPLOYMENT BENEFITS
Defined contribution plan Defined benefit plan

- A post-employment benefit plan under which - A post-employment benefit plan other than
an entity pays fixed contribution into a defined contribution plan. It may be unfunded
separate entity (fund) and will have no legal or or it may fully or partially funded.
constructive obligation to pay further - Entity’s legal or constructive obligation is to
contributions if the fund does not hold provide the agreed benefits to current and
sufficient assets to pay all employee benefits former employees.
relating to employee service in the current and - The amount of the post-employment benefit
past periods. received by the employee is determined by
- Entity’s legal or constructive obligation is defined formula for the benefit.
limited to the amount that it agrees to - The actuarial risk and investment risk fall on
contribute to the fund or an insurance the entity.
company.
- The amount of the post-employment benefit
received by the employee is the amount of
contributions (employer and employee) plus
investment returns.
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- The actuarial risk and investment risk fall on

the employee.
Defined contribution plan

Recognition and measurement
When an employee has rendered service to entity during an accounting year, the entity shall recognize
the contribution payable to a defined contribution plan for that service as an expense, unless any other
IFRS requires the inclusion in the cost of an assets (e.g. IAS 2 and IAS 16)
Prepayment or accrual
If payment is different from the amount of contribution payable, an entity shall recognize the difference
as an accrued expense (if amount of contribution payable exceeds payment) or prepayment (if payment
exceeds the amount of contribution payable).
When contributions are not expected to be paid before twelve months after the end of year in which
employees render the related service, these shall be discounted.
Disclosures
The entity shall disclose the amount recognized as expense for defined contribution plans.
Defined benefit plan

Note for students:
Whole process for recognition and measurement under defined benefit plan is better understood by
first showing the presentation in SOFP, SOCI and notes. Afterwards, all terms will be explained one by
one.
Statement of financial position
Net defined benefit liability / (asset) XXX
(Working)
PV of defined benefit obligation XXX
Fair value of plan assets (XXX)
Net defined benefit liability / (asset)* XXX
* Asset ceiling test:

In case of net defined benefit asset, it shall be measured at the lower of:
(a) surplus in defined benefit plan (as calculated above)
(b) Present value of future economic benefits available to the entity in the form of a reduction in future
contribution or a cash refund. (same discount rate is used as used for defined benefit obligation)
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Statement of comprehensive income

Current service cost X
Past service cost X
Net interest X
Gain / loss on settlement X
Other comprehensive income:
Actuarial gain/loss X
Return on plan assets X
Asset ceiling adjustment X
Notes – Reconciliation of PV of defined benefit obligation

Opening balance X
Interest cost X
Current service cost X
Past service cost X
Benefits paid (X)
Settlement (X)
Actuarial (gain) / loss [balancing figure] X
Closing balance X
Notes – Reconciliation of fair value of plan assets

Opening fair value X
Interest income X
Contributions to the plan X
Benefits paid (X)
Settlement (X)
Return on plan assets (+/-) [balancing figure] X
Closing fair value X
1) Present value of defined benefit obligation and current service cost

1. Present value of defined benefit obligation is the present value without deducting any plan
assets, of expected future payments required to settle the obligation resulting from employee
service in the current and prior periods. Current service cost is the increase in the present value
of defined benefit obligation resulting from employee service in the current period.
Dr. Current service cost X

Cr. PV of Defined benefit obligation X
2. An entity shall use projected unit credit method to determine the present value of defined
obligation and related service cost. This method sees each period of service as giving rise to an
additional unit of benefit entitlement.
Example:
A lumpsum benefit equal to 1% of final salary multiplied by number of years of service will be paid
on retirement. Annual salary in year 1 is expected to be Rs. 25,000 and it is assumed to increase
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8% per year. Appropriate discount rate is 10%. Assuming that employee will remain employed for
5 years, following is the calculation of defined benefit obligation and its related costs:
Lumpsum benefit = Rs. 25,000 x 1.084 x 1% x 5 = Rs. 1,700

Benefit unit for each year service = Rs. 1,700 / 5 = Rs. 340
Yr-1 Yr-2 Yr-3 Yr-4 Yr-5

------------------------- Rs. --------------------------
Opening balance 232 511 843 1,236
Interest cost [Opening x 10%] - 23 51 84 124
Current service cost 232 256 281 309 340
[PV of single unit i.e. Rs. 340]
Closing balance 232 511 843 1,236 1,700
[PV of cumulative units]
Post-employment benefit in form of annuity:

If benefit is not a lumpsum amount rather a series of payments (e.g. pension, medical facility)
then for calculation of a single unit of benefit per year of service, first convert the series of
benefits into a single value as at retirement date.
3. An entity shall attribute benefits to periods of service under the plan’s benefit formula. However,
if an employee’s service in later years will lead to a materially higher level of benefit than in earlier
years, an entity shall attribute benefit on a straight‑line basis from:
(a) the date when service by the employee first leads to benefits under the plan (whether or not
the benefits are conditional on further service) until
(b) the date when further service by the employee will lead to no material amount of further
benefits under the plan, other than from further salary increases.
4. Employee service gives rise to an obligation under a defined benefit plan even if the benefits:
- are conditional on future employment (in other words they are not vested); or
- become payable only if a specified event occurs when an employee is no longer employed
(e.g. medical support).
In measuring its defined benefit obligation, an entity considers the probability that some
employees may not satisfy any vesting requirements or the specified event will not occur.
Examples:
1. A plan pays a benefit of Rs. 100 for each year of service. The benefits vest after ten years
of service.
A benefit of Rs. 100 is attributed to each year. In each of the first ten years, the current
service cost and the present value of the obligation reflect the probability that the employee
may not complete ten years of service.
2. A plan pays a benefit of Rs. 100 for each year of service, excluding service before the age
of 25. The benefits vest immediately.
No benefit is attributed to service before the age of 25 because service before that date does
not lead to benefits (conditional or unconditional). A benefit of Rs. 100 is attributed to each
subsequent year.
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5. If further service of an employee will lead to no material amount of further benefits, then all
benefit is attributed to the service periods ending on or before that date.
Examples:
1. A plan pays a lumpsum retirement benefit of Rs. 2,000 to all employees who are still
employed at the age of 55 after twenty years of service, or who are still employed at the
age of 65, regardless of their length of service.
For employees who join before the age of 35, service first leads to benefits under the plan
at the age of 35 (an employee could leave at the age of 30 and return at the age of 33, with
no effect on the amount or timing of benefits). Those benefits are conditional on further
service. Also, service beyond the age of 55 will lead to no material amount of further
benefits. For these employees, the entity attributes benefit of Rs. 100 (Rs. 2,000 divided by
twenty) to each year from the age of 35 to the age of 55.
For employees who join between the ages of 35 and 45, service beyond twenty years will
lead to no material amount of further benefits. For these employees, the entity attributes
benefit of Rs. 100 (Rs. 2,000 divided by twenty) to each of the first twenty years.
For an employee who joins at the age of 55, service beyond ten years will lead to no material
amount of further benefits. For this employee, the entity attributes benefit of Rs. 200 (Rs.
2,000 divided by ten) to each of the first ten years.
For all employees, the current service cost and the present value of the obligation reflect the
probability that the employee may not complete the necessary period of service.
2. A post-employment medical plan reimburses 40 per cent of an employee’s post-

employment medical costs if the employee leaves after more than ten and less than
twenty years of service and 50 per cent of those costs if the employee leaves after twenty
or more years of service.
Under the plan’s benefit formula, the entity attributes 4 per cent of the present value of the
expected medical costs (40 per cent divided by ten) to each of the first ten years and 1 per
cent (10 per cent divided by ten) to each of the second ten years. The current service cost in
each year reflects the probability that the employee may not complete the necessary period
of service to earn part or all of the benefits. For employees expected to leave within ten
years, no benefit is attributed.
6. If employee’s service in later years will lead to a materially higher level of benefit than in earlier
years, an entity attributes benefit on a straight-line basis until the date when further service by
the employee will lead to no material amount of further benefits. That is because the employee’s
service throughout the entire period will ultimately lead to a benefit at that higher level.
Example:
A post-employment medical plan reimburses 10 per cent of an employee’s post-employment
medical costs if the employee leaves after more than ten and less than twenty years of service
and 50 per cent of those costs if the employee leaves after twenty or more years of service.
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Service in later years will lead to a materially higher level of benefit than in earlier years.
Therefore, for employees expected to leave after twenty or more years, the entity attributes
benefit on a straight-line basis. Service beyond twenty years will lead to no material amount of
further benefits. Therefore, the benefit attributed to each of the first twenty years is 2.5 per cent
of the present value of the expected medical costs (50 per cent divided by twenty).
For employees expected to leave between ten and twenty years, the benefit attributed to each
of the first ten years is 1 per cent of the present value of the expected medical costs. For these
employees, no benefit is attributed to service between the end of the tenth year and the
estimated date of leaving.
For employees expected to leave within ten years, no benefit is attributed.
7. Estimates for defined benefit obligation and related service cost are based on actuarial
assumptions. Such assumptions shall be unbiased and mutually compatible. These assumptions
shall be based on market expectations at the end of the reporting period, for the period over
which the obligations are to be settled. Actuarial assumptions comprise of:
(a) Demographic assumptions that deal with matters such as:
- Mortality
- Rate of employee turnover, disability and early retirement
- The proportion of plan members with dependents who will be eligible for benefits
- The proportion of plan members who will select each form of payment option available
under the plan terms
- Claim rates under medical plans
(b) Financial assumptions that deal with items such as:
- The discount rate
- Benefits levels and future salary
- In case of medical benefits, future medical costs, claim handling costs
- Tax payable by the plan on contributions relating to service
2) Past service cost

1. Past service cost is the change in the present value of the defined benefit obligation for employee
service in prior periods, resulting from a plan amendment (i.e. the introduction or withdrawal of
or a change to defined benefit plan) or a curtailment (i.e. significant reduction by the entity in the
number of employees covered by a plan e.g. pant closure, discontinued operations or termination
of a plan).
2. Past service cost may be either positive or negative. An entity shall recognize past service cost as
an expense at the earliest of:
(a) When the plan amendment or curtailment occurs; and
(b) When the entity recognises related restructuring costs or termination benefits
Dr. Past service cost X

Cr. PV of Defined benefit obligation X
In case of negative past service cost, above entry shall be reversed.
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3) Settlement
1. Settlement is a transaction that eliminates all further legal or constructive obligations for part or
all of the benefits provided under a defined benefits plan, other than a payment of benefits to
employees that set out in the terms of plan and included in the actuarial assumptions. For
example one off transfer of significant employer obligations under the plan to an insurance
company.
2. An entity shall recognize a gain or loss on settlement of a defined benefit plan when the
settlement occurs. The gain or loss on settlement is calculated as the difference between:
(a) The present value of the defined benefit obligation being settled, as determined on the date
of settlement; and
(b) The settlement price, including any plan assets transferred and any payments made directly
by the entity in connection with the settlement.
Dr. PV of defined benefit obligation X

Cr. Plan assets / Cash X
Dr/Cr. Gain on settlement (balancing) X
4) Interest cost
1. Interest cost is the change during the period in the present value of defined benefit obligation
that arises from the passage of time.
2. It is calculated by applying discount rate (determined at start of year) to year start present value
of defined benefit obligation.
Interest cost = Opening PV of defined benefit obligation x discount rate %
Exam note:
Generally other movements in PV of defined benefit obligation are assumed to occur at year
end. However, interest calculation will be made on time proportionate basis to accommodate
the effect of changes (e.g. benefits paid) made during the year.
Dr. Interest cost X

Cr. PV of defined benefit obligation X
5) Fair value of plan assets

1. Plan assets comprise assets held by a long-term employee benefit fund and qualifying insurance
policies.
2. Fair value of plan assets is determined at end of every year and it is deducted from present value
of defined benefit obligation in determining net defined benefit obligation/(asset).
3. For disclosures in notes, fair value of plan assets is disaggregated into classes such as cash & cash
equivalents, equity instruments, debt instruments, real estate etc.
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4. Plan assets:
(a) Exclude unpaid contributions due from the reporting entity to the fund.
(b) Are reduced by accrued liabilities of the fund that do not relate to employee benefits.
6) Interest income
Interest income is calculated by applying discount rate (determined at start of year) to year start fair
value of plan assets.
Interest income = Opening fair value of plan assets x discount rate %
Exam note:
Generally other movements in fair value of plan assets are assumed to occur at year end. However,
interest calculation will be made on time proportionate basis to accommodate the effect of changes
(e.g. benefits paid, contributions) made during the year.
Dr. Plan assets X

Cr. Interest cost X
7) Contributions to fund
Necessary and timely contributions are made to fund.
Dr. Plan assets X

Cr. Cash X
8) Benefits paid
Post-employment benefits are paid to retiring employees out of plan assets.

Cr. Plan assets X
9) Remeasurement
1. Actuarial gain/loss is the change during the period in the present value of defined benefit
obligation because of changes in actuarial assumptions and experience adjustments. Such
gain/loss is recognized in other comprehensive income.
Dr. Actuarial loss [OCI] X

Cr. PV of defined benefit obligation X
OR

Cr. Actuarial gain [OCI] X
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2. Return on plan assets is interest, dividend and other income derived from the plan assets net of
the costs of managing the plan assets. It is determined as a balancing figure in movement in fair
value of plan assets. This return is recognized in other comprehensive income.
Dr. Plan assets X

Cr. Return on plan assets [OCI] X
OR
Dr. Return on plan assets [OCI] X

Cr. Plan assets X
3. Any adjustment for asset ceiling test shall be recognized in other comprehensive income.
Reclassification to P&L:
All above remeasurements recognized in other comprehensive income shall not be reclassified to
P&L in a subsequent period. However, an entity may transfer those amounts within equity.
Multi-employer plans
1. Multi-employer plans are defined contribution plans or defined benefit plans that pool the assets
contributed by various entities that are not under common control and use those assets to provide
benefits to employees of more than one entity on the basis that contribution and benefit levels are
determined without regard to the identity of the entity that employs the employees.
2. An entity shall classify a multi-employer plan as a defined contribution plan or a defined benefit plan
under the terms of the plan.
3. If multi-employer plan is a defined benefit plan then entity shall account for its proportionate share
of the defined benefit obligation, plan assets and related costs as studied earlier. When sufficient
information is not available for defined benefit plan accounting, then entity shall account for the plan
as defined contribution plan.
Group plans
Defined benefit plans that share risks between group entities e.g. parent and subsidiary, are not multi-
employer plans.
State plans
An entity shall account for state plan in the same way as for a multi-employer plan.
OTHER LONG-TERM EMPLOYEE BENEFITS
Examples:
- Long-term paid absences
- Jubilee
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- Long-term disability benefits

- Profit sharing and bonuses
- Deferred remuneration

It is accounted for same as learnt for defined benefit plan except remeasurement changes are also
recognized in P&L.
TERMINATION BENEFITS
Termination benefits result from either an entity’s decision to terminate the employment or an
employee’s decision to accept an entity’s offer of benefits in exchange for termination of employment.
Recognition
An entity shall recognize a liability and expense for termination benefits at the earlier of the following
dates:
(a) When the entity can no longer withdraw the offer of those benefits; and
(b) When the entity recognizes cost for a restructuring that is within the scope of IAS 37 and involves the
payment of termination benefits.
Measurement
If termination benefits are expected to be settled wholly before twelve months after the end of the year
in which the termination benefit is recognized, then entity shall account for these benefits same as short-
term benefits.
If termination benefits are not expected to be settled wholly before twelve months after the end of the
year in which the termination benefit is recognized, then entity shall account for these benefits same as
other long-term benefits.
Example
Background
As a result of a recent acquisition, an entity plans to close a factory in ten months and, at that time,
terminate the employment of all of the remaining employees at the factory. Because the entity needs
the expertise of the employees at the factory to complete some contracts, it announces a plan of
termination as follows.
Each employee who stays and renders service until the closure of the factory will receive on the
termination date a cash payment of RS. 30,000. Employees leaving before closure of the factory will
receive RS. 10,000.
There are 120 employees at the factory. At the time of announcing the plan, the entity expects 20 of
them to leave before closure. Therefore, the total expected cash outflows under the plan are RS.
3,200,000 (ie 20 × RS. 10,000 + 100 × RS. 30,000). The entity accounts for benefits provided in exchange
for termination of employment as termination benefits and accounts for benefits provided in exchange
for services as short-term employee benefits.
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Termination benefits
The benefit provided in exchange for termination of employment is RS. 10,000. This is the amount that
an entity would have to pay for terminating the employment regardless of whether the employees stay
and render service until closure of the factory or they leave before closure. Even though the employees
can leave before closure, the termination of all employees’ employment is a result of the entity’s
decision to close the factory and terminate their employment (ie all employees will leave employment
when the factory closes). Therefore the entity recognises a liability of RS. 1,200,000 (ie 120 × RS. 10,000)
for the termination benefits provided in accordance with the employee benefit plan at the earlier of
when the plan of termination is announced and when the entity recognizes the restructuring costs
associated with the closure of the factory.
Benefits provided in exchange for service

The incremental benefits that employees will receive if they provide services for the full ten-month
period are in exchange for services provided over that period. The entity accounts for them as short-
term employee benefits because the entity expects to settle them before twelve months after the end
of the annual reporting period. In this example, discounting is not required, so an expense of RS.
200,000 (ie RS. 2,000,000 ÷ 10) is recognised in each month during the service period of ten months,
with a corresponding increase in the carrying amount of the liability.
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EMPLOYEE BENEFITS (IAS-19) - QUESTIONS
PRACTICE QUESTIONS
Question 1
Employees of Alpha Limited (AL) are entitled to 10 paid leaves for each year. Unused leaves are entitled to cash
payment on leaving the entity. Average salary of employees for the year 2020 is Rs. 30,000 per month (2019:
Rs. 25,000 per month). As on June 30, 2019 there were 115 employees and their cumulative unused
compensated absences were 540 days.
During 2020, 15 employees resigned who cashed their unused leaves of 75 days. Of remaining employees 40%
employees availed 6 leaves each and 60% employees availed 9 leaves each.
Required:
Assuming 300 working days in a year, calculate the amount of compensated absence obligation at June 30,
2020 and related expense for the year 2020.
Question 2
Employees of Beta Limited (BL) are entitled to 5 paid leaves for each year. Unused leaves may be carried
forward for one calendar year (i.e. non-vesting). Leaves are allowed on LIFO basis therefore leave is taken first
out of the current year’s entitlement and then out any balance brought forward from the previous year.
Average salary of employees for the year 2020 is Rs. 1,000 per day (2019: Rs. 800 per day). As on June 30, 2019
there were 100 employees and their carried forward unused compensated absences were 240 days.
During 2020, on an average each employee availed 3 leaves. It is expected that during 2021, 70 employees will
avail 5 leaves or less, whereas 30 employees will avail 7 leaves.
Required:
Calculate the amount of compensated absence obligation at June 30, 2020 and related expense for the year
2020.
Question 3
Gamma Limited (GL) has offered its employees (including 5 directors) following profit share for their service
for the year:
o 10% of the profit in excess of target profit will be distributed to 5 directors, but each director can get a
maximum share equal to 20% of that profit share.
o 25% of the remaining excess profit (i.e. after deducting 10% share dedicated to directors) will be
distributed to all employees other than directors.
However, this profit share will be distributed to only those employees (including directors) who remain
employed till June 30th next year. Target profit for the year ending December 31, 2019 was set at Rs. 8,000,000.
However actual profit for the year 2019 was Rs. 10,500,000. Financial statements for the year ended December
31, 2019 are being finalized. It is estimated that one director will leave before June 30, 2020. Moreover, other
employees are also expected to leave as a result of which distribution of remaining excess profit to other
employees will reduce to 21%.
Required:
Journal entry to record profit share distribution for the year ending December 31, 2019.
Question 4
An annual pension equal to 2.5% of final salary multiplied by number of years of service will be paid from
retirement till death. Annual salary in year 1 is expected to be Rs. 40,000 and it is assumed to increase 6% per
year. Appropriate discount rate is 10%.
Required:
Assuming that employee will remain employed for 5 years and will live for 4 years after retirement, show yearly
calculations for service period of 5 years relating to defined benefit obligation and related costs.
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Question 5
A company is operating two post-employment benefits plans (funded), the details of which are as follows:
Plan A
The terms of the plan are as follows.
(i) Employees contribute 6% of their salaries to the plan.
(ii) Employer contributes, currently, the same amount to the plan for the benefit of the employees.
(iii) On retirement, employees are guaranteed a pension which is based upon the number of years service with
the company and their final salary.
The following details relate to the plan in the year to December 31, 2019:
Rs. million
Present value of obligation at January 1, 2019 200
Present value of obligation at December 31, 2019 240
Fair value of plan assets at January 1, 2019 190
Fair value of plan assets at December 31, 2019 225
Current service cost 20
Pension benefits paid 19
Total contributions paid to the scheme for year to December 31, 2019 17
The interest rate on high quality corporate bonds for the two plans are:
January 1, 2019 5%
December 31, 2019 6%
Plan B
Under the terms of the plan, the company does not guarantee any return on the contributions paid into the
fund. The company's legal and constructive obligation is limited to the amount that is contributed to the fund.
The following details relate to this scheme:
Rs. million
Fair value of plan assets at December 31, 2019 21
Contributions paid by company for year to December 31, 2019 10
Contributions paid by employees for year to December 31, 2019 10
Required:
(a) Discuss the nature of and differences between above two plans.
(b) Prepare extracts of SOFP, SOCI and notes for the year 2019 in respect of Plan A only.
Question 6
Savage, a public limited company, operates a funded defined benefit plan for its employees. The plan provides
a pension of 1% of the final salary for each year of service. The cost for the year is determined using the
projected unit credit method. This reflects service rendered to the dates of valuation of the plan and
incorporates actuarial assumptions primarily regarding discount rates, which are based on the market yields
of high quality corporate bonds.
The directors have provided the following information about the defined benefit plan for the current year (year
ended June 30, 2020).
(a) The actuarial cost of providing benefits in respect of employees' service for the year to June 30, 2020 was
Rs. 40 million. This is the present value of the pension benefits earned by the employees in the year.
(b) The pension benefits paid to former employees in the year were Rs. 42 million.
(c) Savage should have paid contributions to the fund of Rs. 28 million. Because of cash flow problems Rs. 8
million of this amount had not been paid at the financial year end of June 30, 2020.
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NASIR ABBAS FCA
(d) The present value of the obligation to provide benefits to current and former employees was Rs. 3,000
million at June 30, 2019 and Rs. 3,375 million at June 30, 2020.
(e) The fair value of the plan assets was Rs. 2,900 million at June 30, 2019 and Rs. 3,170 million (including the
contributions owed by Savage) at June 30, 2020.
With effect from July 1, 2019, the company had amended the plan so that the employees were now provided
with an increased pension entitlement. The actuaries computed that the present value of the cost of these
benefits at July 1, 2019 was Rs. 125 million. The interest rate on high quality corporate bonds was as follows
from the following dates:
June 30,2019 6%
June 30, 2020 7%
Required:
Prepare extracts of SOFP, SOCI and notes for the year 2020.
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EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS
SOLUTIONS
Solution No. 1
Days Rate* Amount
(Rs.) (Rs.)
Balance as on 01-07-19 540 1,000 540,000
Leave encashment (75) 1,000 (75,000)
Expense for the year (balancing) 357,000
Balance as on 30-06-20 **685 1,200 822,000
* Monthly salary x 12/300

** Year end balance = 540 - 75 + 100 x 10 - 40 x 6 - 60 x 9 = 685 days
Solution No. 2
Since brought forward leaves balance could not be availed in 2020 and hence expired, therefore, opening
obligation must be reversed.
Dr. Obligation for compensated absence [240 x Rs. 800] 192,000

Cr. P&L 192,000
At 30-06-20 average unused leaves balance is 2 days for 100 employees but only 30 employees are expected
to utilize this balance in 2021 and unused leaves of 70 employees will lapse. Therefore, obligation will be
recorded for 60 days (30 x 2 days) as follows:
Dr. P&L [60 x Rs. 1,000] 60,000

Cr. Obligation for compensated absence 60,000
Solution No. 3
Rs.
Excess profit [10,500,000 - 8,000,000] 2,500,000
Profit distribution to directors [2,500,000 x 10% x 4/5] 200,000

Profit distribution to other employees [2,500,000 x 90% x 21%] 472,500
672,500
Journal
entry Rs. Rs.
Dr. Employee cost 672,500
Cr. Bonus payable 672,500
Solution No. 4
Annual pension = Rs. 40,000 x 1.064 x 2.5% x 5 = Rs. 6,312

Lumpsum amount of pension (assuming 4 years remaining life) = Rs. 6,312 x annuity factor = Rs. 20,010
Benefit unit for each year service = Rs. 20,010 / 5 = Rs. 4,002
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Yr-1 Yr-2 Yr-3 Yr-4 Yr-5

------------------------- Rs. --------------------------
Opening balance - 2,733 6,013 9,922 14,553
Interest cost [Opening x 10%] - 273 601 992 1,455
Current service cost 2,733 3,007 3,308 3,639 4,002
[PV of single unit i.e. Rs. 4,002]
Closing balance 2,733 6,013 9,922 14,553 20,010
[PV of cumulative units]
Solution No. 5
(a)
With defined contribution plans, the employer (and possibly, as here, current employees too) pay regular
contributions into the plan of a given or 'defined' amount each year. The contributions are invested, and the
size of the post-employment benefits paid to former employees depends on how well or how badly the plan's
investments perform. If the investments perform well, the plan will be able to afford higher benefits than if
the investments performed less well. The B scheme is a defined contribution plan. The employer's liability is
limited to the contributions paid.
With defined benefit plans, the size of the post-employment benefits is determined in advance, i.e. the
benefits are 'defined'. The employer (and possibly, as here, current employees too) pay contributions into the
plan, and the contributions are invested. The size of the contributions is set at an amount that is expected to
earn enough investment returns to meet the obligation to pay the post-employment benefits. If, however, it
becomes apparent that the assets in the fund are insufficient, the employer will be required to make additional
contributions into the plan to make up the expected shortfall. On the other hand, if the fund's assets appear
to be larger than they need to be, and in excess of what is required to pay the post-employment benefits, the
employer may be allowed to take a 'contribution holiday' (ie stop paying in contributions for a while).
The main difference between the two types of plans lies in who bears the risk: if the employer bears the risk,
even in a small way by guaranteeing or specifying the return, the plan is a defined benefit plan. A defined
contribution scheme must give a benefit formula based solely on the amount of the contributions.
A defined benefit scheme may be created even if there is no legal obligation, if an employer has a practice of
guaranteeing the benefits payable. The A scheme is a defined benefit scheme. The employer, guarantees a
pension based on the service lives of the employees in the scheme. The company's liability is not limited to the
amount of the contributions. This means that the employer bears the investment risk: if the return on the
investment is not sufficient to meet the liabilities, the company will need to make good the difference.
(b)
Plan A
Extracts – SOFP
Rs. million
PV of defined benefit obligation 240
Fair value of plan assets (225)
Net defined benefit liability 15
Extracts – SOCI
Rs. million
Current service cost (20)
Net interest [10 – 9.50] (0.5)
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Actuarial loss (29.00)
Return on plan assets 27.50
Extracts – Notes
Reconciliation of PV of defined benefit obligation
Rs. million
Opening balance 200.00
Interest cost [200 x 5%] 10.00
Current service cost 20.00
Benefits paid (19.00)
Actuarial loss (balancing figure) 29.00
Closing balance 240.00
Reconciliation of Fair value of plan assets

Rs. million
Interest income [190 x 5%] 9.50
Contributions 17.00
Benefits paid (19.00)
Return on plan assets (balancing figure) 27.50
Solution No. 6
Extracts – SOFP
Rs. million
PV of defined benefit obligation 3,375
Fair value of plan assets [3,170 – 8] (3,162)
Net defined benefit liability 213
Extracts – SOCI
Rs. million
Current service cost (40)
Net interest [188 – 174] (14)
Past service cost (125)
Actuarial loss (64)
Return on plan assets 110
Extracts – Notes
Reconciliation of PV of defined benefit obligation
Rs. million
Opening balance 3,000
Past service cost 125
Interest cost [3,125 x 6%] 188
Current service cost 40
Benefits paid (42)
Actuarial loss (balancing figure) 64
Closing balance 3,375
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Reconciliation of Fair value of plan assets

Rs. million
Interest income [2,900 x 6%] 174
Contributions 20
Benefits paid (42)
Return on plan assets (balancing figure) 110
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Question 3(a) [Jun-15]

Tanzeem Limited (TL) operates a defined benefit pension plan for its employees. The following details relate
to the plan:
2014 2013
Discount rate 9% 8%
-------- Rs. million ------
Present value of obligation at year end 2,040 2,300
Fair value of plan assets at year end 1,784 2,150
Current service cost 125 143
Benefits paid during the year 99 110
Contributions made during the year 105 118
Additional information:
Present value of pension obligation and fair value of plan assets as on 1 January 2013 were Rs. 2,050 million
and Rs. 1,995 million respectively.
During the year 2013, TL amended the scheme whereby the benefits available under the plan had been
increased. It resulted in an increase in the present value of the defined benefit pension obligation by Rs.
13 million.
On 31 December 2014, TL sold a business segment to Sachai Limited (SL). Accordingly, TL transferred the
relevant component of its pension fund to SL. The present value of the defined benefit pension obligation
transferred was Rs. 280 million and the fair value of plan assets transferred was Rs. 240 million. TL also
made a cash payment of Rs. 20 million to SL in respect of the plan.
Required:
(a) Prepare relevant extracts to be reflected in the statement of financial position, statement of
comprehensive income and notes to the financial statements for the year ended 31 December 2014 in
accordance with International Financial Reporting Standards. (Show comparative figures) (11)
(b) Prepare entries to record the pension obligation:

- on sale of business segment to SL
- at the year-end. (03)
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Solution
(i)
Extracts – SOFP
2014 2013
Rs. million
PV of defined benefit obligation 2,040 2,300
Fair value of plan assets 1,784 2,150
Net defined benefit liability (Note – 5) 256 150
Extracts – SOCI
2014 2013
Rs. million
Current service cost (125) (143)
Net interest cost [207 – 94] [164 – 160] (13) (4)
Past service cost - (13)
Gain on settlement [280 – 240 – 20] 20 -
Remeasurement gain [213 – 326] [40 + 13] (113) (13)
Extracts – Notes
5 – Defined benefit liability
5.1 Reconciliation of PV of defined benefit obligation
2014 2013
Rs. million
Opening balance 2,300 2,050
Past service cost - 13
Interest cost [2,300 x 9%] [2,050 x 8%] 207 164
Settlement (280) -
Benefits paid (99) (110)
Actuarial (gain)/loss (balancing figure) (213) 40
Closing balance 2,040 2,300
5.2 Reconciliation of Fair value of plan assets

2014 2013
Rs. million
Interest income [2,150 x 9%][1,995 x 8%] 194 160
Contributions 105 118
Settlement (240) -
Return on plan assets (balancing figure) (326) (13)
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5.3 Settlement
During 2014, the company sells one of its business segments and transfers the relevant part of the pension
plan to the purchaser. This is a settlement. The overall gain on settlement is calculated as follows:
Rs. million
PV of benefit obligation 280
FV of plan assets (240)
Cash (20)
Gain on settlement 20
(ii) ----- Rs. million ------

PV of DBO 280
Plan assets 240
Cash 20
Gain on settlement 20
[Gain on settlement]
Employee cost [125 + 13] 138

OCI 113
Plan assets [194 - 326] 132
PV of DBO [207+ 125 - 213] 119
[Year end adjustments]
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BACKGROUND
IAS 19 limits the measurement of a net defined benefit asset to the lower of the surplus in the defined
benefit plan and the asset ceiling. Asset ceiling is defined as ‘the present value of any economic benefits
available in the form of refunds from the plan or reductions in future contributions to the plan’.
Questions have arisen about when refunds or reductions in future contributions should be regarded as
available, particularly when a Minimum Funding Requirement (MFR) exists. MFRs exist in many countries
to improve the security of the post-employment benefit promise made to members of an employee
benefit plan. Such requirements normally stipulate a minimum amount or level of contributions that must
be made to a plan over a given period. Therefore, an MFR may limit the ability of the entity to reduce
future contributions.
ISSUES
Following issues have been addressed in this IFRIC:
1. when refunds or reductions in future contributions should be regarded as available.
2. how an MFR might affect the availability of reductions in future contributions.
3. when an MFR might give rise to a liability.
1) AVAILABILITY OF A REFFUND OR REDUCTION IN FUTURE CONTRIBUTIONS

An entity shall determine the availability of a refund or a reduction in future contributions in accordance
with the terms and conditions of the plan and any statutory requirements in the jurisdiction of the plan.
An economic benefit, in the form of a refund or a reduction in future contributions, is available if the entity
can realize it at some point during the life of the plan or when the plan liabilities are settled. An entity
shall determine the maximum economic benefit that is available from refunds, reduction in future
contributions or a combination of both.
Economic benefit available as refund

The right to refund
A refund is available to an entity only if the entity has an unconditional right to a refund. It can exist
whatever the funding level of a plan at the end of the reporting period. However, if the entity’s right to a
refund of a surplus depends on the occurrence or non-occurrence of one or more uncertain future events
not wholly within its control, the entity does not have an unconditional right and shall not recognize an
asset.
Measurement of the economic benefit

1. An entity shall measure the economic benefit available as a refund as the amount of the surplus at
the end of the reporting period (being the fair value of the plan assets less the present value of the
defined benefit obligation) that the entity has a right to receive as a refund, less any associated costs.
For instance, if a refund would be subject to a tax other than income tax, an entity shall measure the
amount of the refund net of the tax.
2. In measuring the amount of a refund available when the plan is wound up, an entity shall include the
costs to the plan of settling the plan liabilities and making the refund. For example, an entity shall
deduct professional fees if these are paid by the plan rather than the entity, and the costs of any
insurance premiums that may be required to secure the liability on wind-up.
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3. If the amount of a refund is determined as the full amount or a proportion of the surplus, rather than
a fixed amount, an entity shall make no adjustment for the time value of money, even if the refund is
realizable only at a future date.
Economic benefit available as a contribution reduction

If there is no MFR for contributions relating to future service, the economic benefit available as a reduction
in future contributions is the future service cost to the entity for each period over the shorter of the
expected life of the plan and the expected life of the entity. The future service cost to the entity excludes
amounts that will be borne by employees.
2) EFFECT OF MINIMUM FUNDING REQUIREMENT ON REDUCTION IN FUTURE CONTRIBUTIONS
If there is an MFR relating to future service, the economic benefit available as a reduction in future
contributions is the sum of:
(a) Prepayment in respect of contributions relating to future service; and
(b) Estimated future service cost for each period over the shorter of the expected life of the plan and the
expected life of the entity less MFR contributions required for future service ignoring prepayment in
(a) above.
Limit for (b)
While discounting the amounts in (b), if the MFR contributions required for future service exceed
the future service cost in any year, then it will be taken as a negative for discounting purpose.
However, the total present value of (b) can never be less than zero.
3) WHEN A MINIMUM FUNDING REQUIREMENT MAY GIVE RISE TO A LIABILITY
If an entity has an obligation under an MFR to pay contributions to cover an existing shortfall on the
minimum funding basis in respect of past service, then:
(a) If MFR contributions payable will be available as a refund or reduction in future contributions after
payment
No liability shall be recognized. (in simple words no accounting needed for this obligation)
(b) If MFR contributions payable will NOT be available as a refund or reduction in future contributions
after payment
To the extent that the contributions payable will not be available after they are paid into the plan, the
entity shall recognize a liability when the obligation arises.
Exam note:
- If there is existing plan surplus
Find asset ceiling adjustment for existing surplus separately and determine liability for MFR
contribution separately. Then combine both adjustments to determine final net adjustment.
- If there is existing plan deficit
First find updated plan balance after making MFR contribution (only for the purpose of
working), then determine liability adjustment on that updated balance.
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LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – QUESTIONS
PRACTICE QUESTIONS
Question 1
ABC Limited operates a funded defined benefit plan for its employees. The plan provides a pension of 1% of
the final salary for each year of service. The cost for the year is determined using the projected unit credit
method. This reflects service rendered to the dates of valuation of the plan and incorporates actuarial
assumptions primarily regarding discount rates, which are based on the market yields of high quality corporate
bonds.
Following information is available in respect of the benefit plan:
2020 2019 2018
------------ Rs. million ------------
Fair value of plan assets 1,970 1,700 1,500
PV of defined benefit obligation 1,766 1,510 1,300
PV of economic benefits available (Asset ceiling) 220 180 170
Current service cost 280 250 210
Contributions 160 120 100
Benefits paid 190 150 140
Discount rate 10% 10% 10%
Required:
Prepare extracts of SOFP and SOCI for the year 2020 (also show comparative figures for 2019).
Question 2
XYZ Limited operates a funded defined benefit plan for its employees. As per the terms and conditions of the
plan, any surplus in plan can be refunded only after following deductions:
5% for professional costs.
3% local govt. tax
10% income tax
The present value of defined benefit plan and fair value of plan assets as determined at June 30, 2020 were Rs.
1,500 million and Rs. 1,700 million respectively.
Required:
Determine the amount of net defined liability/asset to be included in statement of financial position as at June
30, 2020.
Question 3
MNO Limited has a defined benefit plan. The MFR requires it to pay contributions to cover the future service
cost. The future service cost and related MFR contribution required as follows:
Future service MFR

cost contribution
Year ---------- Rs. million -----------
2021 15 17
2022 15 15
2023 15 12
2024 onwards 15 11
(till perpetuity)
1,520 million and Rs. 1,600 million (including prepayment of Rs. 20 million in respect of above MFR
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NASIR ABBAS FCA
contributions) respectively. Any surplus in plan cannot be refunded to the entity under any circumstances but
can be used for reductions of future contributions.
Appropriate discount rate is 7%.
Required:
Determine the amount of net defined liability/asset to be included in statement of financial position as at June
30, 2020.
Question 4
AB Limited has a funding level on the MFR basis of 80% in a benefit plan. Under the MFR, it is required to
increase the funding level to 95% immediately. As a result, it has an obligation to contribute Rs. 50 million to
the plan to cover shortfall in respect of past service. The plan rules permit a full refund of any surplus to the
entity at the end of the life of the plan.
Required:
Discussing the effect of MFR contribution required, determine the amount of net defined liability/asset to be
included in statement of financial position as at June 30, 2020.
Question 5
XY Limited has a funding level on the MFR basis of 75% in a benefit plan. Under the MFR, it is required to
increase the funding level to 100% immediately. As a result, it has an obligation to contribute Rs. 300 million
to the plan to cover shortfall in respect of past service. The plan rules permit a maximum refund of 70% of any
surplus to the entity at the end of the life of the plan.
Required:
Question 6
MNO Limited has a funding level on the MFR basis of 77% in a benefit plan. Under the MFR, it is required to
increase the funding level to 100% immediately. As a result, it has an obligation to contribute Rs. 300 million
to the plan to cover shortfall in respect of past service. The plan rules permit a maximum refund of 60% of any
surplus to the entity at the end of the life of the plan.
Required:
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Question 7
PQR Limited has a funding level on the MFR basis of 95% in a benefit plan. Under the MFR, it is required to
increase the funding level to 100% over the next 3 years. The contributions are required to cover past service
as well as future service. The plan rules do not permit any refund of any surplus to the entity at the end of the
life of the plan however can be used for reductions of future contributions.
On June 30, 2020:
- The present value of MFR contributions required for past service is approximately Rs. 300 million.
- The present value of economic benefits available as a future contribution reduction (i.e. future service cost
net of MFR contributions required) is approximately Rs. 80 million.
- The present value of defined benefit plan is Rs. 1,200 million
- Fair value of plan assets is Rs. 1,300 million.
Required:
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LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – SOLUTIONS
SOLUTIONS
Solution No. 1
2020 2019
Extracts - SOFP ------ Rs. million ------
Net defined benefit (liability) / asset (W-1) 204 180
Extracts – SOCI
Current service cost (W-2) (280) (250)
Interest income [(W-2) (W-3) (W-4)] 18 17
Remeasurement of benefit plan (W-5) 156 83
Workings 2020 2019 2018

W-1 -------------- Rs. million ------------
Fair value of plan assets 1,970 1,700 1,500
PV of DBO (1,766) (1,510) (1,300)
Net benefit asset 204 190 200
Asset ceiling adjustment - (10) (30)
Net benefit asset 204 180 170
2020 2019
W-2 Reconciliation of PV of DBO ------ Rs. million ------
Interest 151 130
Actuarial (gain)/loss 15 (20)
W-3 Reconciliation of FV of Plan assets

Interest 170 150
Contributions 160 120
Return on plan assets 130 80
W-4 Asset ceiling adjustment

Opening balance 10 30
Interest 1 3
Remeasurement (11) (23)
Closing balance - 10
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W-5 Remeasurement
Actuarial gain /(loss) (15) 20
Asset ceiling adjustment 11 23
Return on plan assets 130 80
126 123
Solution No. 2
Rs. million
Fair value of plan assets 1,700
PV of DBO 1,500
Surplus in plan 200
Asset ceiling [200 x 92%] 184
Net defined benefit asset to be recognized 184
Solution No. 3
Rs. million
Fair value of plan assets 1,600.00
PV of defined benefit obligation 1,520.00
Surplus 80.00
Asset ceiling (W-1) 67.23
Net defined benefit asset 67.23
W-1
Future MFR Contribution
Year
service cost contributions reduction
----------- Rs. million -----------
2021 15.00 17.00 (2.00)
2022 15.00 15.00 -
2023 15.00 12.00 3.00
2024
15.00 11.00 4.00
onwards
Rs. million
PV of future service cost less MFR 47.23
[-2 x 1.07-1 + 0 x 1.07-2 + 3 x 1.07-3 + 4 x 0.07-1 x 1.07-3]
Prepayment of MFR 20.00
Asset ceiling 67.23
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Solution No. 4
IFRIC 14 requires the entity to recognize a liability to the extent that the contributions payable are not fully
available. Payment of the contributions of Rs. 50 million will increase the IAS 19 surplus from Rs. 100 million
to Rs. 150 million. Under the rules of the plan this amount will be fully refundable to the entity with no
associated costs. Therefore, no liability is recognized for the obligation to pay the contributions and the net
defined benefit asset will be presented in SOFP at Rs. 100 million.
Solution No. 5
The payment of Rs. 300 million would increase the IAS 19 surplus of Rs. 100 million to Rs. 400 million. Of this
Rs. 400, 70% (Rs. 280 million) is refundable. The remaining Rs. 120 million (30% of Rs. 400 million) of the
contributions paid is not available to the entity. IFRIC 14 requires the entity to recognize a liability to the extent
that the additional contributions payable are not available to it. Therefore, existing surplus of Rs. 100 million
will be reduced to its asset ceiling of Rs. 70 million and additional liability will be recorded for Rs. 90 million
(30% of Rs. 300 million). As a result the net defined benefit liability recognized in SOFP is Rs. 20 million. On
payment of MFR contribution of Rs. 300 million, it will be converted into net defined benefit asset of Rs. 280
million.
Summary:
Rs. million
Surplus 100.00
Asset ceiling adjustment(W-1) (120.00)
Net defined benefit liability (20.00)
W-1
Reduction of existing surplus [Rs. 100m x 30%] (30)
Additional liability for additional contributions (90)
(120)
Solution No. 6
The payment of Rs. 300 million would change the IAS 19 deficit of Rs. 100 to a surplus of Rs. 200 million. Of
this Rs. 200 million, 60% (Rs. 120 million) is refundable. The remaining Rs. 80 million (40% of Rs. 200 million)
of the contributions paid is not available to the entity. IFRIC 14 requires the entity to recognize a liability to the
extent that the additional contributions payable are not available to it. Therefore, the net defined benefit
liability is Rs. 180 million, comprising the deficit of Rs. 100 million plus the additional liability of Rs. 80 million.
On payment of MFR contribution of Rs. 300 million, it will be converted into net defined benefit asset of Rs.
120 million.
Summary:
Rs. million
Deficit (100.00)
Additional liability [200 x 40%] (80.00)
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Solution No. 7
Current surplus of Rs. 100 million can not be refunded however it can be used for future reduction in future
contributions. Only Rs. 80 million is available as economic benefit in form of reduction in future contributions,
thus it will be reduced by Rs. 20 million. Moreover, additional liability of Rs. 300 million will be recognized for
MFR in respect of past service as no refund is available.
Summary:
Rs. million
Surplus 100.00
Asset ceiling adjustment (W-1) (320.00)
W-1
Reduction of existing surplus [Rs. 100m - Rs. 80m] (20)
Additional liability for additional contributions (300)
(320)
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SCOPE
1. This standard shall be applied in accounting for all share-based payment transactions, including:
(i) Equity-settled share-based payment transactions.
(ii) Cash-settled share-based payment transactions.
(iii) Transactions with options for settlement in cash or equity instruments.
Group entities:
This IFRS applies when goods and services are received by one entity and another entity in the
same groups has an obligation to settle a share-based payment transaction.
2. This standard shall not apply to:

(i) Issue of shares to existing holders of equity instruments in their capacity as a holder of equity
instruments. (e.g right issue)
(ii) Issue of shares in business combination.
SHARE-BASED PAYMENT TRANSACTIONS
Share-based payment arrangement

An agreement between the entity (or another group entity or any shareholder of any group entity) and
another party (including an employee) that entitles the other party to receive:
(a) cash or other assets of the entity for amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the entity or another group entity, or
(b) equity instruments (including shares or share options) of the entity or another group entity,
provided the specified vesting conditions, if any, are met.
Share-based payment transaction

A transaction in which the entity:
(a) receives goods or services from the supplier of those goods or services (including an employee) in a
share-based payment arrangement, or
(b) incurs an obligation to settle the transaction with the supplier in a share-based payment arrangement
when another group entity receives those goods or services.
Equity-settled share-based payment transaction

A share-based payment transaction which is settled in entity’s own equity instruments (including shares
or share options).
Cash-settled share-based payment transaction

A share-based payment transaction in which the entity acquires goods or services by incurring a liability
to transfer cash or other assets to the supplier of those goods or services for amounts that are based on
the price (or value) of equity instruments (including shares or share options) of the entity or another
group entity.
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RECOGNITION – General
When an entity obtains the goods or receive the services, it shall recognize the transaction:
Dr. Expense / Asset

Cr. Relevant equity account [in case of equity-settled share-based payment transaction]
Cr. Liability [in case of cash-settled share-based payment transaction]
Exam note:
IFRS 2 does not specifically mention which equity account is credited. It is better to use a separate
account e.g. “equity instruments granted” unless shares are eventually issued.
Equity instrument granted

The right (conditional or unconditional) to an equity instrument of the entity conferred by the entity on
another party, under a share-based payment transaction.
EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTION
Overview of measurement
An entity shall measure the goods or services received:
If fair value of goods or services received can be If fair value of goods or services cannot be
measured reliably: measured reliably (e.g. employee service)
at the fair value of the goods or services received at the fair value of equity instrument granted,
measured at grant date.
Fair value
The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted
could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.
(It is different from IFRS 13)
Grant date
The date at which the entity and another party (including an employee) agree to a share-based
payment arrangement. If that agreement is subject to an approval process (for example, by
shareholders), grant date is the date when that approval is obtained.
Example where fair value of goods or services cannot be measured reliably:

Background
An entity granted shares with a total fair value of Rs. 100,000 to parties other than employees who are
from a particular section of the community (historically disadvantaged individuals), as a means of
enhancing its image as a good corporate citizen. The economic benefits derived from enhancing its
corporate image could take a variety of forms, such as increasing its customer base, attracting or
retaining employees, or improving or maintaining its ability to tender successfully for business
contracts. The entity cannot identify the specific consideration received. For example, no cash was
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102
received and no service conditions were imposed. Therefore, the identifiable consideration (nil) is less
than the fair value of the equity instruments granted (Rs. 100,000).
Application of requirements
Although the entity cannot identify the specific goods or services received, the circumstances indicate
that goods or services have been (or will be) received, and therefore IFRS 2 applies. In this situation,
because the entity cannot identify the specific goods or services received, the rebuttable presumption
in paragraph 13 of IFRS 2, that the fair value of the goods or services received can be estimated reliably,
does not apply. The entity should instead measure the goods or services received by reference to the
fair value of the equity instruments granted.
Transactions in which services are received

[A detailed discussion on recognition]
Case I – If the equity instruments granted vests immediately [i.e. no vesting conditions]
In the absence of evidence to the contrary, the entity shall presume that services rendered by the
counterparty as consideration for the equity instruments have been received. In this case, on grant date
the entity shall recognize the services received in full, with a corresponding increase in equity.
Case II – If the equity instruments granted requires some vesting conditions

Vesting conditions
A condition that determines whether the entity receives the services that entitle the counterparty to
receive cash, other assets or equity instruments of the entity, under a share-based payment
arrangement. A vesting condition is either a service condition or a performance condition.
Service condition:
A vesting condition that requires the counterparty to complete a specified period of service during
which services are provided to the entity. If the counterparty, regardless of the reason, ceases to
provide service during the vesting period, it has failed to satisfy the condition. A service condition does
not require a performance target to be met.
Performance condition
A vesting condition that requires:
(a) the counterparty to complete a specified period of service (ie a service condition); the service
requirement can be explicit or implicit; and
(b) specified performance target(s) to be met while the counterparty is rendering the service required
in (a) [for example share price growth, profits growth].
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The entity shall presume that the services to be rendered by the counterparty as consideration for those
equity instruments will be received in the future, during the vesting period.
(a) Service condition

If equity instruments granted do not vest until the counterparty completes a service period, the entity
shall account for those services as they are rendered by the counterparty over the vesting period,
with a corresponding increase in equity. For example, if an employee is granted share options
conditional upon completing three years’ service, then the entity shall presume that the services to
be rendered by the employee as consideration for the share options will be received in the future,
over that three-year vesting period.
(b) Performance condition

1. If equity instrument granted is conditional upon the achievement of a performance condition and
remaining in the entity’s employ/service until that performance condition is satisfied, the entity
shall account for the service expense with a corresponding increase in equity over the expected
vesting period.
2. An entity shall estimate the length of the expected vesting period at the grant date, based on
most likely outcome of the performance condition. If performance condition is:
a market condition: not a market condition:

the estimate of the length of the vesting the entity shall revise its estimate of the
period shall be consistent with the length of the vesting period, if necessary, if
assumptions used in estimating the fair value subsequent information indicates that the
of the options granted, and shall not be length of the vesting period differs from
subsequently revised. previous estimates.
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Market condition
A performance condition, upon which the exercise price, vesting or exercisability of an equity
instrument depends, that is related to market price of the entity’s equity instruments for
example attaining a specified share price or a specified amount of intrinsic value of share option
or a specified % of total shareholders return.
Exam note:
Discussion about vesting period above can be summarized as follows:
In case of service condition:
Vesting period is the conditional period specifically agreed.
In case of performance condition (other than market condition):

Vesting period is the period estimated by the management for completion of conditions. This
estimate is subsequently reviewed and revised if needed.
In case of market condition:

Vesting period is the period estimated by the management initially while estimating the fair
value of the instrument granted. This estimate is not revised subsequently.
Transactions measured at fair value of equity instrument granted

[A detailed discussion on measurement]
Case I – Fair value of equity instrument granted can be measured reliably
Determining the fair value of equity instrument granted:

An entity shall measure the fair value of equity instrument granted at measurement date based on:
- Market prices [if market prices are available]
- Other generally accepted valuation techniques [if market prices are not available]
Measurement date:
It is the date at which fair value of the equity instrument granted is measured. Measurement date:
For transactions with employees – is the grant date
For transactions with other parties – is the date when goods or services are received
Exam note:
Fair value of “equity instrument granted (i.e. right to get shares)” is by default equal to the fair value of
the related “equity instrument (i.e. share itself)”.
Treatment of vesting conditions:
Market condition: Any other condition:

- Market condition (e.g. target share price) shall - Vesting conditions shall not be taken into
be taken into account when estimating the fair account when estimating the fair value of
value of the equity instrument granted. equity instruments
- The entity shall recognize the goods or services - Instead these conditions shall be taken into
when other vesting conditions are met, account by adjusting the number of equity
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irrespective of whether that market condition instruments included in the measurement of

is satisfied. the transaction amount.
- The entity shall recognize the amount of goods

or services over the vesting period on the best
available estimate of the number of equity
instruments expected to vest and shall revise
that estimate subsequently, if necessary, so
that ultimately the amount recognized for
goods and services shall be based on the
number of equity instruments that eventually
vest.
- Hence on a cumulative basis, no amount is

recognized for goods or services received if
the equity instruments granted do no vest
because of failure to satisfy a vesting
condition.
Exam note:
Amount is calculated at end of every year (till vesting date) on cumulative basis as follows:
= Best estimate of no. of equity instruments expected to eventually vest x fair value of instrument
granted at measurement date x reporting year*/ Vesting period
Here, in case of employees, best estimate of no. of equity instruments can be further split into:
= Number of persons x number of instruments per person
It is considered as closing balance of equity and any change in equity balance is:
Dr. Employee cost
Cr. Equity instrument granted
* Do not forget to pro-rate it in months if transaction occurs during the year.
After vesting date:

The entity shall not subsequently reverse the amount recognized for goods or services received if the
vested equity instruments are later forfeited or expired without exercise. However, entity may transfer
the amount within equity (e.g. transferred to retained earnings).
Case II – Fair value of equity instrument granted cannot be measured reliably
1. The entity shall measure the equity instruments (generally share options) initially at measurement
date at intrinsic value. This intrinsic value is remeasured subsequently on every year end and finally
on the date of settlement (e.g. exercise, forfeiture, lapse). Any changes on this remeasurement are
recognized in P&L.
Intrinsic value of share option
= Fair value of shares – exercise price
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2. The entity shall recognize the goods or services received based on the number of instruments that are
expected to ultimately vest or ultimately be exercised. The entity shall revise that estimate, if
necessary, if subsequent information indicates that the number of instruments expected to vest
differs from previous estimates. [as studied earlier in “treatment of other vesting conditions”]
3. After vesting date, the entity shall reverse the amount recognized for goods or services received if
the share options are later forfeited, or lapse at the end of the share option’s life.
4. If an entity settles a grant, it shall account for it as an acceleration of vesting and shall therefore
recognize immediately the amount that would otherwise would have been recognized over the
remaining vesting period. Moreover, any payment made to counterparty on settlement of the grant
shall be accounted for:
Upto the amount of fair value of equity instruments granted measured at cancellation date:
as the repurchase of equity (i.e. deduction from equity)
Any payment in excess of the fair value:

as an expense immediately in P&L
Modification to the terms and conditions of grant (including cancellations and settlements)
[For example, a downturn in the equity market may mean that the original option exercise price set is no
longer attractive, therefore, the exercise price is reduced]
This guidance is relevant for share-based payment transactions with employees as well as transactions
with other parties that are measured by at the fair value of the equity instruments granted. This guidance
is technically not necessary when equity instrument granted is measured at intrinsic value.
Case I – Modification is beneficial for counterparties (e.g. employees)
Examples – reduction in exercise price, increase in equity instruments granted, reduction in vesting
period, reduction in performance condition (other than market condition)
Steps for application of modification:
1. Continue to recognize the original fair value of measurement date of the original equity instruments
granted over the original vesting period. (i.e. same as was done before modification)
2. Any increase in total fair value at the date of modification (either due to increase in fair value or due
to increase in number of equity instruments granted) shall be recognized:
If modification occurs before vesting date If modification occurs after vesting period
Over the remaining period from the Immediately OR
modification date until the date when the Over the remaining vesting period if employee
modified equity instruments vest. is required to complete an additional vesting
period.
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Increase in total fair value of equity instruments
If fair value of equity instrument is increased (e.g. by reducing the exercise price)
Rs.
Fair value of instruments measured immediately after modification XXX
Less Fair value of instruments measured immediately before modification (XXX)
Total increase in fair value XXX
If number of equity instruments is increased
Total increase in fair value

= Total fair value of additional equity instruments granted measured at the date of modification
3. If the entity modifies the vesting conditions in a manner that is beneficial to the counterparty, the
entity shall consider the modified vesting conditions for “treatment of vesting conditions” as studied
earlier.
Case II – Modification is not beneficial for counterparties (e.g. employees)
Examples – increase in exercise price, decrease in equity instruments granted, increase in vesting period,
addition in performance condition (other than market condition)
Steps for application of modification:
1. If the modification decreases the fair value of equity instruments granted (e.g. due to increase in
exercise price), the entity shall not account for this decrease in fair value rather it shall continue to
recognize the original fair value of measurement date of the original equity instruments granted over
the original vesting period. (i.e. same as was done before modification)
2. If modification reduces the number of equity instruments granted, that reduction shall be accounted
for as a cancellation in accordance with Case III below.
3. If the entity modifies the vesting conditions in a manner that is not beneficial to the counterparty, the
entity shall not consider the modified vesting conditions for “treatment of vesting conditions” as
studied earlier.
Case III – Cancellation (other than cancellation by failure of vesting conditions)
(a) Cancellation and settlement

1. The entity shall account for the cancellation as an acceleration of vesting and shall therefore
recognize immediately the amount that would otherwise would have been recognized over the
remaining vesting period.
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2. Any payment made to counterparty on settlement of the grant shall be accounted for:
Upto the amount of fair value of equity instruments granted measured at cancellation date:
as the repurchase of equity (i.e. deduction from equity)
Any payment in excess of the fair value:

as an expense immediately in P&L
3. If share-based payment arrangement included liability components, the entity shall remeasure
the fair value of the liability at the date of cancellation. Any payment made to settle the liability
component shall be accounted for as a repayment of the liability.
(b) Cancellation and replacement with new equity instruments

The entity shall account for the grant of new equity instruments as replacement for the cancelled
equity instruments in the same way as a modification of original grant as studied in Case I and II above.
Except here the increase in total fair value is determined as follows:
Rs. Rs.
Fair value replacement equity instruments at replacement date X
Less:
Fair value of cancelled equity instruments immediately before cancellation X
Less: Payment made to counterparty [i.e. debited to equity as studied in (a)] (X) (X)
Increase in total fair value to be accounted for X
If new grant cannot be identified as a replacement reward

Then original grant shall be accounted for as “cancelled” and new grant shall be accounted in a
normal way as a new grant of equity instruments.
CASH-SETTLED SHARE-BASED PAYMENT TRANSACTION
Examples – share appreciation rights, granting shares that are redeemable
Measurement
The entity shall measure the goods and services received and the related liability at the fair value of the
liability. This fair value of liability is remeasured subsequently on every year end and finally on the date
of settlement. Any changes on this remeasurement are recognized in P&L.
Recognition
Case I – If the counterparty’s right to receive cash vests immediately [i.e. no vesting conditions]
In the absence of evidence to the contrary, the entity shall presume that services rendered by the
counterparty have been received. In this case, the entity shall recognize the services received in full, with
a corresponding increase in liability.
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Case II – If the transaction requires some vesting conditions

The entity shall presume that the services to be rendered by the counterparty will be received in the
future, during the expected vesting period.
Treatment of vesting conditions:
Market condition: Any other condition:

- Market condition (e.g. target share price) shall - Vesting conditions shall not be taken into
be taken into account when estimating the fair account when estimating the fair value of the
value of the liability. liability.
- Instead these conditions shall be taken into

account by adjusting the number of awards
included in the measurement of the
transaction amount.
- The entity shall recognize the amount of goods

or services over the vesting period on the best
available estimate of the number of awards
expected to vest and shall revise that estimate
subsequently, if necessary, so that ultimately
the amount recognized for goods and services
shall be based on the number of awards that
eventually vest.
- Hence on a cumulative basis, the amount

recognized for goods or services received is
equal to the cash that is paid.
SHARE-BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVE
Counterparty has a choice of settlement

If entity has granted the counterparty the right to choose whether to settle a share-based payment
transaction in cash or issuance of equity instruments, the entity has granted compound financial
instruments thus it includes a debt component and an equity component.
Case I – If the fair value of goods or services can be measured reliably
Dr. Expense / Asset [at the fair value of goods or services]

Cr. Liability [at the fair value of debt component i.e. fair value of liability for a cash-settled transaction]
Cr. Equity [balancing figure]
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Case II – If the fair value of goods or services cannot be measured [e.g. services of employees]
Dr. Expense/Asset [at the fair value of share alternative]

Cr. Liability [at the fair value of cash alternative]
Cr. Equity [balancing figure]
Subsequent treatment
1. After initial recognition, “liability component” and “equity component” are accounted for as studied
earlier for “cash-settled share-based payment transactions” and “equity-settled share-based payment
transaction” respectively and corresponding increase/decrease is charged to the related expense for
goods or services received.
2. At the settlement date, liability component shall be remeasured to its fair value with corresponding
increase/decrease in P&L.
3. If at settlement:
(a) Entity pays in cash rather than issuing equity instruments then:
- Payment is applied to settle the liability in full
- Equity component is transferred to any other reserve (e.g. retained earnings)
(b) Entity issues equity instruments rather than paying cash then:
- Liability shall be transferred to equity as the consideration of the equity instruments issued
Entity has a choice of settlement

If entity has a choice of whether to settle in cash or by issuing equity instruments, the entity shall
determine whether it has a present obligation to settle in cash or not.
Case I – If the entity has a present obligation to settle in cash

1. It may happen if:
- Entity is legally prohibited from issuing shares
- Entity has a past practice or stated policy to settle in cash
- Entity generally settles in cash whenever counterparty asks for cash settlement
2. It shall account for the transaction as “cash-settled share-based payment transaction”
Case II – If the entity has no such obligation to settle in cash

1. It shall account for the transaction as “equity-settled share-based payment transaction”
2. Upon settlement if:
(i) Entity selects to settle in cash, the payment shall be accounted for as the repurchase of equity
(i.e. deduction from equity.)
(ii) Entity elects to settle by issuing equity instruments, it is normally accounted for as studied earlier
for equity-settled share-based payment transaction
(iii) Entity selects out of (i) or (ii) which have higher fair value (as settlement date) then the difference
between (i) and (ii) shall be recognized as expense.
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SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
SOLUTIONS
Solution [Q-1(a) Dec-18]
Corolla Limited
Extracts – SOFP 2014 2015 2016 2017
------------------------ Rs. million ---------------------
Equity 31.20 - 170.79 187.56
2014
[(47 – 8) x 4,000(W-1) x Rs. 600 x 1/3]
2015
[(44 – 4) x 0(W-1) x Rs. 600 x 2/3]
2016
[43 x 6,000(W-1) x Rs. 600 x 3/3 + (43 – 2) x 6,000(W-1) x Rs. 130* x 1/2]
2017
[43 x 6,000(W-1) x Rs. 600 x 3/3 + 42 x 6,000(W-1) x Rs. 130* x 2/2]
* Increase in fair value at modification date = Rs. 710 – Rs. 580 = Rs. 130
Extracts – SOCI 2014 2015 2016 2017

------------------ Rs. million ------------------
Employee cost 31.20 (31.20) 170.79 16.77
[i.e. change in equity instrument valuation]
Explanations
Service conditions/Number of executives
Initially service condition was 3 years. During 2016, as a result of modification one more year was added to
vesting service condition. This condition shall be taken into account while estimating the number of employees
who will eventually receive the share options granted.
Performance condition (other than market condition)
Performance condition (i.e. target amount of average gross profit) shall be taken into account while estimating
the number of share options that will eventually vest.
W-1 Number of equity instruments granted
Year Average GP estimate (i.e. performance condition) No. of
(Rs. million) options
2014 (940 + 940 + 940) ÷ 3 = 940 4,000
2015 (940 + 820 + 820) ÷ 3 = 860 -
2016 (940 + 820 + 1,270) ÷ 3 = 1,010 6,000
2017 (940 + 820 + 1,270 + 1,200) ÷ 4 = 1,058 6,000
Market condition
Market condition (i.e. target share price) shall be taken into account while estimating the fair value of equity
instrument granted. It is assumed that fair values of share options given are estimated using market condition.
Modification
On January 1, 2016 exercise price of share option was reduced as a result of which fair value of share option
was increased. Since this change is beneficial for employees, therefore, it was treated as follows:
- Continue to the original fair value of measurement date of the original equity instruments granted over
original vesting period.
- Any increase in total fair value (i.e. Rs. 130) shall be recognized over remaining vesting period including the
additional one year.
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Solution [Q-3(b) Jun-15]

Mehran Bank Limited
31-12-15 Rs. Rs.
Dr. Employee cost 4,633,333
Cr. Equity component [1,900,000 (W-1) x 1/3] 633,333
Cr. Liability component (W-2) 4,000,000
[Year end expenses and remeasurement]
31-12-16
Cr. Equity component 633,333
31-12-17
Cr. Equity component 633,333
Settlement
01-07-18
Cr. Liability component (W-2) 800,000
[Remeasurement on settlement]
Dr. Equity component (W-1) 1,900,000

Dr. Liability component (W-2) 14,000,000
Cr. Share capital [100,000 x Rs. 10] 1,000,000
Cr. Share premium 14,900,000
[Issue of 100,000 shares]
W-1 Initial measurement

Total amount Rs.
Employee cost [100,000 x Rs. 135] 13,500,000
Liability component [80,000 x Rs. 145] 11,600,000
Equity component 1,900,000
W-2 Liability component

Balance -
Year 1
Expense (balancing) 4,000,000
Balance [80,000 x Rs. 150 x 1/3] 4,000,000
Year 2
Balance [80,000 x Rs. 156 x 2/3] 8,320,000
Year 3
Balance [80,000 x Rs. 165 x 3/3] 13,200,000
Expense (balancing) 800,000
Settlement [80,000 x Rs. 175] 14,000,000
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Engineering Works Limited
It is estimated that EWL expected all employees to take share options, therefore, equity instruments granted
were recognized for total employees at intrinsic value (because fair value of share options is not given)
30-06-10 Rs. Rs.

Cr. Equity instruments granted [600 x 1,000 x Rs. 22] 13,200,000
[Recognition on vesting date at intrinsic value]
Dr. Equity instruments granted 7,920,000

Cr. Share options [13,200,000 x 60%] 7,920,000
[Issued share options to 60% employees]
31-07-10
Dr. Equity instruments granted 2,640,000
Cr. Share options [13,200,000 x 20%] 2,640,000
[Issued share options to 20% employees]
Dr. Equity instruments granted [13,200,000 x 20%]* 2,640,000

Cr. Employee cost (balancing) 1,440,000
Cr. Bonus payable [600 x 20% x Rs. 10,000] 1,200,000
[Equity instrument granted lapse for 20% employees]
* Since balancing figure of this entry is “employee cost” so no need to remeasure equity instruments granted
to intrinsic value at settlement date (i.e. lapse)
01-09-10
Cr. Share options [600 x 80% x 1,000 x Rs. 10] 4,800,000
[Remeasurement of intrinsic value on settlement]
Dr. Bonus payable 1,200,000

Cr. Cash 1,200,000
[Payment of bonus]
Dr. Cash [600 x 80% x 1,000 x Rs. 8] 3,840,000

Dr. Share options [600 x 80% x 1,000 x Rs. 32] 15,360,000
Cr. Share capital [600 x 80% x 1,000 x Rs. 10] 4,800,000
Cr. Share premium 14,400,000
[Issue of shares on exercise of share options]
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SHARE BASED PAYMENTS (IFRS-2) - QUESTIONS
PRACTICE QUESTIONS
Question 1
An entity grants 100 share options to each of its 500 employees. Each grant is conditional upon the employee
working for the entity over the next three years. The entity estimates that the fair value of each share option
is Rs. 15.
On the basis of a weighted average probability, the entity estimates that 20 % of employees will leave during
the three-year period and therefore forfeit their rights to the share options.
Required:
Prepare extracts of SOFP and SOCI for all 3 years and journal entry of issuing share options at end of 3rd year
if:
(a) If everything turns out exactly as expected.
(b) During year 1, 20 employees leave. The entity revises its estimate of total employee departures over the
three-year period from 20 % (100 employees) to 15 % (75 employees). During year 2, a further 22
employees leave. The entity revises its estimate of total employee departures over the three-year period
from 15 % to 12 % (60 employees). During year 3, a further 15 employees leave. Hence, a total of 57
employees forfeited their rights to the share options during the three-year period, and a total of 44,300
share options (443 employees × 100 options per employee) vested at the end of year 3.
Question 2
At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional upon the
employees’ remaining in the entity’s employ during the vesting period. The shares will vest at the end of year
1 if the entity’s earnings increase by more than 18 %; at the end of year 2 if the entity’s earnings increase by
more than an average of 13 % per year over the two-year period; and at the end of year 3 if the entity’s earnings
increase by more than an average of 10 % per year over the three-year period. The shares have a fair value of
Rs. 30 per share at the start of year 1, which equals the share price at grant date. No dividends are expected
to be paid over the three-year period.
By the end of year 1, the entity’s earnings have increased by 14 %, and 30 employees have left. The entity
expects that earnings will continue to increase at a similar rate in year 2, and therefore expects that the shares
will vest at the end of year 2. The entity expects, on the basis of a weighted average probability, that a further
30 employees will leave during year 2, and therefore expects that 440 employees will vest in 100 shares each
at the end of year 2.
By the end of year 2, the entity’s earnings have increased by only 10 % and therefore the shares do not vest at
the end of year 2. 28 employees have left during the year. The entity expects that a further 25 employees will
leave during year 3, and that the entity’s earnings will increase by at least 6 %, thereby achieving the average
of 10 % per year.
By the end of year 3, 23 employees have left and the entity’s earnings had increased by 8 %, resulting in an
average increase of 10.67 % per year. Therefore, 419 employees received 100 shares at the end of year 3.
Required:
Prepare extracts of SOFP and SOCI for all 3 years and journal entry of issue of shares at end of 3rd year (assuming
face value of each share Rs. 10).
Question 3
At the beginning of year 1, Entity A grants share options to each of its 100 employees working in the sales
department. The share options will vest at the end of year 3, provided that the employees remain in the entity’s
employ, and provided that the volume of sales of a particular product increases by at least an average of 5 %
per year. If the volume of sales of the product increases by an average of between 5 % and 10 % per year, each
employee will receive 100 share options. If the volume of sales increases by an average of between 10 % and
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15 % each year, each employee will receive 200 share options. If the volume of sales increases by an average
of 15 % or more, each employee will receive 300 share options.
On grant date, Entity A estimates that the share options have a fair value of Rs. 20 per option. Entity A also
estimates that the volume of sales of the product will increase by an average of between 10 % and 15 % per
year, and therefore expects that, for each employee who remains in service until the end of year 3, 200 share
options will vest. The entity also estimates, on the basis of a weighted average probability, that 20 % of
employees will leave before the end of year 3.
By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees will
leave by the end of year 3. Hence, the entity expects that 80 employees will remain in service for the three-
year period. Product sales have increased by 12 % and the entity expects this rate of increase to continue over
the next 2 years.
By the end of year 2, a further five employees have left, bringing the total to 12 to date. The entity now expects
only three more employees will leave during year 3, and therefore expects a total of 15 employees will have
left during the three-year period, and hence 85 employees are expected to remain. Product sales have
increased by 18 %, resulting in an average of 15 % over the two years to date. The entity now expects that sales
will average 15 % or more over the three-year period, and hence expects each sales employee to receive 300
share options at the end of year 3.
By the end of year 3, a further two employees have left. Hence, 14 employees have left during the three-year
period, and 86 employees remain. The entity’s sales have increased by an average of 16 % over the three years.
Therefore, each of the 86 employees receives 300 share options.
Required:
Prepare extracts of SOFP and SOCI for all 3 years.
Question 4
At the beginning of year 1, an entity grants to a senior executive 10,000 share options, conditional upon the
executive remaining in the entity’s employ until the end of year 3. The exercise price is Rs. 40. However, the
exercise price drops to Rs. 30 if the entity’s earnings increase by at least an average of 10 % per year over the
three-year period. On grant date, the entity estimates that the fair value of the share options, with an exercise
price of Rs. 30, is Rs. 16 per option. If the exercise price is Rs. 40, the entity estimates that the share options
have a fair value of Rs. 12 per option.
During year 1, the entity’s earnings increased by 12 %, and the entity expects that earnings will continue to
increase at this rate over the next two years. The entity therefore expects that the earnings target will be
achieved, and hence the share options will have an exercise price of Rs. 30.
During year 2, the entity’s earnings increased by 13 %, and the entity continues to expect that the earnings
target will be achieved.
During year 3, the entity’s earnings increased by only 3 %, and therefore the earnings target was not achieved.
The executive completes three years’ service, and therefore satisfies the service condition. Because the
earnings target was not achieved, the 10,000 vested share options have an exercise price of Rs. 40.
Required:
Question 5
executive remaining in the entity’s employ until the end of year 3. However, the share options cannot be
exercised unless the share price has increased from Rs. 50 at the beginning of year 1 to above Rs. 65 at the end
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NASIR ABBAS FCA
of year 3. If the share price is above Rs. 65 at the end of year 3, the share options can be exercised at any time
during the next seven years, i.e. by the end of year 10.
The entity applies a binomial option pricing model, which takes into account the possibility that the share price
will exceed Rs. 65 at the end of year 3 (and hence the share options become exercisable) and the possibility
that the share price will not exceed Rs. 65 at the end of year 3 (and hence the options will be forfeited). It
estimates the fair value of the share options with this market condition to be Rs. 24 per option.
Required:
Question 6
At the beginning of year 1, an entity grants 10,000 share options with a ten-year life to each of ten senior
executives. The share options will vest and become exercisable immediately if and when the entity’s share
price increases from Rs. 50 to Rs. 70, provided that the executive remains in service until the share price target
is achieved. The entity applies a binomial option pricing model, which takes into account the possibility that
the share price target will be achieved during the ten-year life of the options, and the possibility that the target
will not be achieved. The entity estimates that the fair value of the share options at grant date is Rs. 25 per
option. From the option pricing model, the entity determines that the mode of the distribution of possible
vesting dates is five years. In other words, of all the possible outcomes, the most likely outcome of the market
condition is that the share price target will be achieved at the end of year 5. Therefore, the entity estimates
that the expected vesting period is five years. The entity also estimates that two executives will have left by
the end of year 5, and therefore expects that 80,000 share options (10,000 share options × 8 executives) will
vest at the end of year 5.
Throughout years 1–4, the entity continues to estimate that a total of two executives will leave by the end of
year 5. However, in total three executives leave, one in each of years 3, 4 and 5. The share price target is
achieved at the end of year 6. Another executive leaves during year 6, before the share price target is achieved.
Required:
Prepare extracts of SOFP and SOCI for 5 years.
Question 7
At the beginning of year 1, an entity grants 1,000 share options to 50 employees. The share options will vest
at the end of year 3, provided the employees remain in service until then. The share options have a life of 10
years. The exercise price is Rs. 60 and the entity’s share price is also Rs. 60 at the date of grant.
At the date of grant, the entity concludes that it cannot estimate reliably the fair value of the share options
granted.
At the end of year 1, three employees have ceased employment and the entity estimates that a further seven
employees will leave during years 2 and 3. Hence, the entity estimates that 80 per cent of the share options
will vest.
Two employees leave during year 2, and the entity revises its estimate of the number of share options that it
expects will vest to 86 per cent.
Two employees leave during year 3. Hence, 43,000 share options vested at the end of year 3.
The entity’s share price during years 1–10, and the number of share options exercised during years 4–10, are
set out below. (Share options that were exercised during a particular year were all exercised at the end of that
year)
Year Share price at Options
year end exercised at year
end
1 63 -
2 65 -
3 75 -
4 88 6,000
5 100 8,000
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6 90 5,000
7 96 9,000
8 105 8,000
9 108 5,000
10 115 2,000
Required:
(a) Journal entries for 1st four years
(b) Also compute following figures to be shown in SOFP (separately under following heads) and SOCI for all 10
years:
o Equity instruments granted
o Share options
o Share capital (assuming Face value of each share is Rs. 10 each)
o Share premium
Question 8
At the beginning of year 1, an entity grants 100 share options to each of its 500 employees. Each grant is
conditional upon the employee remaining in service over the next three years. The entity estimates that the
fair value of each option is Rs. 15. On the basis of a weighted average probability, the entity estimates that 100
employees will leave during the three-year period and therefore forfeit their rights to the share options.
Suppose that 40 employees leave during year 1. Also suppose that by the end of year 1, the entity’s share price
has dropped, and the entity reprices its share options, and that the repriced share options vest at the end of
year 3. The entity estimates that a further 70 employees will leave during years 2 and 3, and hence the total
expected employee departures over the three-year vesting period is 110 employees.
During year 2, a further 35 employees leave, and the entity estimates that a further 30 employees will leave
during year 3, to bring the total expected employee departures over the three-year vesting period to 105
employees.
During year 3, a total of 28 employees leave, and hence a total of 103 employees ceased employment during
the vesting period. For the remaining 397 employees, the share options vested at the end of year 3. The entity
estimates that, at the date of repricing, the fair value of each of the original share options granted (i.e. before
taking into account the repricing) is Rs. 5 and that the fair value of each repriced share option is Rs. 8.
Required:
Question 9
On January 1, 2019, an entity granted 100 share options to each of its 200 employees. Each grant was
conditional upon the employee remaining in service over the next four years. The entity estimated that the fair
value of each option was Rs. 20 on grant date. On the basis of a weighted average probability, the entity
estimated that 20 employees would leave during the 4-year period and therefore forfeit their rights to the
share options.
During 2019, 10 employees left and by the end of year, the entity still estimated that only 20 employees would
leave during the 4-year vesting period. During 2020, no employee left and the entity revised its estimate to a
total 15 employees leaving during 4-year vesting period. Financial year ends on every December 31st.
Required:
Prepare extracts of SOFP and SOCI for the years ending December 31, 2019 and 2020 in respect of each of the
following independent situations:
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(a) On July 1, 2020 after share price collapsed, the entity reduced the exercise price to accommodate
employees. On the date of modification, fair value of each original share option granted was Rs. 10 and
fair value of each repriced share option granted was Rs. 14.
(b) On July 1, 2020 to further motivate, the entity granted additional 30 share options each without any change
in remaining vesting period. On the date of modification, fair value of each additional share option was Rs.
24.
(c) On July 1, 2020 the entity reduced to vesting period from 4 years to 3 years.
Question 10
At the beginning of year 1, the entity grants 1,000 share options to each member of its sales team, conditional
upon the employee remaining in the entity’s employ for three years, and the team selling more than 50,000
units of a particular product over the three-year period.
The fair value of the share options is Rs. 15 per option at the date of grant.
During year 2, the entity increases the sales target to 100,000 units. By the end of year 3, the entity has sold
55,000 units, and the share options are forfeited. Twelve members of the sales team have remained in service
for the three-year period.
Required:
Discuss the accounting treatment of above transactions.
Question 11
executive remaining in the entity’s employ until the end of year 3. At grant date, the fair value of each share
option is estimated at Rs. 12. At the beginning of year 2, the entity cancels the original grant and replaces it
with new 10,000 share options, without any change in vesting period, and also pays Rs. 2 per option as a
compensation. Immediately before cancellation, fair value of original instrument reduces to Rs. 8 whereas fair
value of new replacement instruments is estimated at Rs. 17 each.
Required:
Journalize transactions for year 2 only.
Question 12
An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on condition that the
employees remain in its employ for the next three years.
During year 1, 35 employees leave. The entity estimates that a further 60 will leave during years 2 and 3.
During year 2, 40 employees leave and the entity estimates that a further 25 will leave during year 3.
During year 3, 22 employees leave. At the end of year 3, 150 employees exercise their SARs, another 140
employees exercise their SARs at the end of year 4 and the remaining 113 employees exercise their SARs at
the end of year 5.
The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below.
At the end of year 3, all SARs held by the remaining employees vest. The intrinsic values of the SARs at the date
of exercise (which equal the cash paid out) at the end of years 3, 4 and 5 are also shown below.
Year Fair value (Rs.) Intrinsic value

(Rs.)
1 14.40 -
2 15.50 -
3 18.20 15.00
4 21.40 20.00
5 - 25.00
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Required:
Show movement in liability for cash-settled share-based payment transaction for all 5 years.
Question 13
An entity grants 100 cash-settled share appreciation rights (SARs) to each of its 500 employees on the condition
that the employees remain in its employ for the next three years and the entity reaches a revenue target (Rs.
1 billion in sales) by the end of Year 3. The entity expects all employees to remain in its employ.
For simplicity, this example assumes that none of the employees’ compensation qualifies for capitalization as
part of the cost of an asset.
At the end of Year 1, the entity expects that the revenue target will not be achieved by the end of Year 3.
During Year 2, the entity’s revenue increased significantly and it expects that it will continue to grow.
Consequently, at the end of Year 2, the entity expects that the revenue target will be achieved by the end of
Year 3.
At the end of Year 3, the revenue target is achieved and 150 employees exercise their SARs. Another 150
employees exercise their SARs at the end of Year 4 and the remaining 200 employees exercise their SARs at
the end of Year 5.
Using an option pricing model, the entity estimates the fair value of the SARs, ignoring the revenue target
performance condition and the employment-service condition, at the end of each year until all of the cash-
settled share-based payments are settled. At the end of Year 3, all of the SARs vest. The following table shows
the estimated fair value of the SARs at the end of each year and the intrinsic values of the SARs at the date of
exercise (which equals the cash paid out).
Year Fair value (Rs.) Intrinsic value

(Rs.)
1 14.40 -
2 15.50 -
3 18.20 15.00
4 21.40 20.00
5 25.00 25.00
Required:
Show movement in liability for cash-settled share-based payment transaction for all 5 years.
Question 14
An entity grants to an employee the right to choose either 1,000 phantom shares, i.e. a right to a cash payment
equal to the value of 1,000 shares, or 1,200 shares. The grant is conditional upon the completion of three years’
service. If the employee chooses the share alternative, the shares must be held for three years after vesting
date.
At grant date, the entity’s share price is Rs. 50 per share. At the end of years 1, 2 and 3, the share price is Rs.
52, Rs. 55 and Rs. 60 respectively. The entity does not expect to pay dividends in the next three years. After
taking into account the effects of the post-vesting transfer restrictions, the entity estimates that the grant date
fair value of the share alternative is Rs. 48 per share.
At the start of year 4, the employee chooses:

Scenario 1: The cash alternative
Scenario 2: The equity alternative
Required:
Journalize all transactions over 3 years. (assuming face value of each share Rs. 10).
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SOLUTIONS
Solution No. 1
(a)
Extracts – SOFP Year 1 Year 2 Year 3
------------------ Rs. ------------------
Equity 200,000 400,000 600,000
[50,000 x 80% x Rs. 15 x 1/3]
[50,000 x 80% x Rs. 15 x 2/3]
[50,000 x 80% x Rs. 15 x 3/3]
Extracts – SOCI Year 1 Year 2 Year 3

------------------ Rs. ------------------
Employee cost 200,000 200,000 200,000
Rs. Rs.
Dr. Equity instrument granted 600,000
Cr. Share options 600,000
(b)
------------------ Rs. ------------------
Equity 212,500 440,000 664,500
[50,000 x 85% x Rs. 15 x 1/3]
[50,000 x 88%x Rs. 15 x 2/3]
[44,300 x Rs. 15 x 3/3]

------------------ Rs. ------------------
Employee cost 212,500 227,500 224,500
Rs. Rs.
Solution No. 2
------------------ Rs. ------------------
Equity 660,000 834,000 1,257,000
[44,000 x Rs. 30 x 1/2]
[41,700 x Rs. 30 x 2/3]
[41,900 x Rs. 30 x 3/3]

------------------ Rs. ------------------
Employee cost 660,000 174,000 423,000
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Rs. Rs.
Dr. Equity instrument granted 1,257,000
Cr. Share capital 419,000
Cr. Share premium 838,000
Solution No. 3
------------------ Rs. ------------------
Equity 106,667 340,000 516,000
[80 x 200 x Rs. 20 x 1/3]
[85 x 300 x Rs. 20 x 2/3]
[86 x 300 x Rs. 20 x 3/3]

------------------ Rs. ------------------
Employee cost 106,667 233,333 176,000
Solution No. 4
------------------ Rs. ------------------
Equity 53,333 106,667 120,000
[10,000 x Rs. 16 x 1/3]
[10,000 x Rs. 16 x 2/3]
[10,000 x Rs. 12 x 3/3]

------------------ Rs. ------------------
Employee cost 53,333 53,334 13,333
Solution No. 5
------------------ Rs. ------------------
Equity 80,000 160,000 240,000
[10,000 x Rs. 24 x 1/3]
[10,000 x Rs. 24 x 2/3]
[10,000 x Rs. 24 x 3/3]

------------------ Rs. ------------------
Employee cost 80,000 80,000 80,000
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Solution No. 6
Extracts – SOFP Year 1 Year 2 Year 3 Year 4 Year 5
----------------------------------- Rs. -------------------------------
Equity 400,000 800,000 1,200,000 1,600,000 1,750,000
[80,000 x Rs. 25 x 1/5]
[80,000 x Rs. 25 x 2/5]
[80,000 x Rs. 25 x 3/5]
[80,000 x Rs. 25 x 4/5]
[70,000 x Rs. 25 x 5/5]
Extracts – SOCI Year 1 Year 2 Year 3 Year 4 Year 5

----------------------------------- Rs. -------------------------------
Employee cost 400,000 400,000 400,000 400,000 150,000
[i.e. change in equity
instrument valuation]
Solution No. 7
(a)
Year - 1 Rs. Rs.
Dr. Employee cost (W-1) 40,000
Cr. Equity instruments granted 40,000
[Year 1 expense recorded]
Year - 2
Year - 3
Dr. Equity instruments granted 645,000

[Share options actually vested]
Year - 4
Dr. Employee cost [6,000 x (88 - 75)] 78,000
[Intrinsic value updated on settlement]
Dr. Cash [6,000 x Rs. 60] 360,000

Dr. Share options (W-1) 168,000
Cr. Share capital 60,000
Cr. Share premium (W-2) 468,000
[6,000 options exercised]
Dr. Employee cost [37,000 x (88 - 75)] 481,000

[Intrinsic value updated on Year 4 end]
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(b)
------------------------ SOFP -------------------------
SOCI
Equity Share Share Share Expense/
instrument options capital premium (income)
granted (W-1) (W-2) (W-2)
----------------------------------- Rs. -------------------------------
Year – 1 40,000 - - 40,000
Year – 2 143,333 - - 103,333
Year – 3 - 645,000 - - 501,667
Year – 4 [6,000 shares issued] - 1,036,000 60,000 468,000 559,000
Year – 5 [8,000 shares issued] - 1,160,000 140,000 1,188,000 444,000
Year – 6 [5,000 shares issued] - 720,000 190,000 1,588,000 (290,000)
Year – 7 [9,000 shares issued] - 540,000 280,000 2,362,000 144,000
Year – 10 [2,000 shares issued] - - 430,000 3,822,000 14,000
W-1 Equity instruments granted/Share options Rs.

Balance -
Year 1 Settlement -
Balance [50,000 x 80% x (63 - 60) x 1/3] 40,000
Year 2 Settlement -
Balance [50,000 x 86% x (65 - 60) x 2/3] 143,333
Year 3 Settlement -
Balance [43,000 x (75 - 60) x 3/3] 645,000
Year 4 Settlement [6,000 x (88 - 60)] (168,000)
Balance [37,000 x (88 - 60)] 1,036,000
Balance [29,000 x (100 - 60)] 1,160,000
Expense (balancing) (290,000)
Balance [24,000 x (90 - 60)] 720,000
Balance [15,000 x (96 - 60)] 540,000
Balance [7,000 x (105 - 60)] 315,000
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Balance [2,000 x (108 - 60)] 96,000

Balance -
Share Share
W-2 Share capital and Share premium capital premium
--------- Rs. -------
Issue [6,000 x 60 + 168,000 - 60,000] 60,000 468,000
Year 4
Balance 60,000 468,000
Issue [8,000 x 60 + 320,000 - 80,000] 80,000 720,000
Year 5
Balance 140,000 1,188,000
Issue [5,000 x 60 + 150,000 - 50,000] 50,000 400,000
Year 6
Balance 190,000 1,588,000
Issue [9,000 x 60 + 324,000 - 90,000] 90,000 774,000
Year 7
Balance 280,000 2,362,000
Issue [8,000 x 60 + 360,000 - 80,000] 80,000 760,000
Year 8
Balance 360,000 3,122,000
Issue [5,000 x 60 + 240,000 - 50,000] 50,000 490,000
Year 9
Balance 410,000 3,612,000
Issue [2,000 x 60 + 110,000 - 20,000] 20,000 210,000
Year 10
Balance 430,000 3,822,000
Solution No. 8
------------------ Rs. ------------------
Equity 195,000 454,250 714,600
[(500 – 110) x 100 x Rs. 15 x 1/3]
[(500 – 105) x 100 x (Rs. 15 x 2/3 + Rs. 3 x 1/2)]
[397 x 100 x (Rs. 15 + Rs. 3)]

------------------ Rs. ------------------
Employee cost 195,000 259,250 260,350
Solution No. 9
(a)
Extracts – SOFP 2019 2020

-------- Rs. -------
Equity 90,000 199,800
[(200 – 20) x 100 x Rs. 20 x 1/4]
[(200 – 15) x 100 x (Rs. 20 x 2/4 + Rs. 4 x 0.5/2.5)]
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Extracts – SOCI 2019 2020

-------- Rs. -------
Employee cost 90,000 109,800
(b)

-------- Rs. -------
Equity 90,000 211,640
[(200 – 20) x 100 x Rs. 20 x 1/4]
[(200 – 15) x (100 x Rs. 20 x 2/4 + 30 x Rs. 24 x 0.5/2.5)]

-------- Rs. -------
(c)

-------- Rs. -------
Equity 90,000 246,667
[(200 – 20) x 100 x Rs. 20 x 1/4]
[(200 – 15) x 100 x Rs. 20 x 2/3)]

-------- Rs. -------
Solution No. 10
IFRS requires, for a performance condition that is not a market condition, the entity to recognize the services
received during the vesting period based on the best available estimate of the number of equity instruments
expected to vest and to revise that estimate, if necessary, if subsequent information indicates that the number
of equity instruments expected to vest differs from previous estimates. On vesting date, the entity revises the
estimate to equal the number of equity instruments that ultimately vested.
If the entity modifies the vesting conditions in a manner that is not beneficial to the employee, the entity does
not take the modified vesting conditions into account when applying the requirements of the IFRS regarding
treatment of vesting conditions.
Therefore, because the modification to the performance condition made it less likely that the share options
will vest, which was not beneficial to the employee, the entity takes no account of the modified performance
condition when recognizing the services received. Instead, it continues to recognize the services received over
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the three-year period based on the original vesting conditions. Hence, the entity ultimately recognizes
cumulative remuneration expense of Rs. 180,000 over the three-year period (12 employees × 1,000 options ×
Rs. 15).
Solution No. 11
Year - 2 Rs. Rs.
Cr. Cash [10,000 x Rs. 2] 20,000
Dr. P&L 115,000

Cr. Equity instrument granted 115,000
Workings
Balance -
Year 1
Balance [10,000 x Rs. 12 x 1/3] 40,000
Year 2 Repurchase of equity [Rs. 2 x 10,000] (20,000)
Balance [10,000 x Rs. 12 x 2/3 + 10,000 x Rs. 11* x 1/2] 135,000
* Rs. 17 - [Rs. 8 - Rs. 2] = Rs. 11
Solution No. 12
Movement in liability Rs.
Balance -
Year 1 Settlement -
Balance [(500 - 95) x 100 x Rs. 14.40 x 1/3] 194,400
Year 2 Settlement -
Balance [(500 - 100) x 100 Rs. 15.50 x 2/3] 413,333
Year 3 Settlement [150 x 100 x Rs. 15] (225,000)
Balance [(403 - 150) x 100 x Rs. 18.20] 460,460
Balance [(403 - 290) x 100 x Rs. 21.40] 241,820
Balance -
Solution No. 13
Movement in liability Rs.
Balance -
Year 1 Settlement -
Expense (balancing) -
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Balance [0 x Rs. 14.40 x 1/3] -

Year 2 Settlement -
Balance [500 x 100 Rs. 15.50 x 2/3] 516,667
Balance [(500 - 150) x 100 x Rs. 18.20] 637,000
Balance [(500 - 300) x 100 x Rs. 21.40] 428,000
Balance -
Solution No. 14
Year - 1 Rs. Rs.
Dr. Employee cost [57,600(W-1) x 1/3] 19,200
Cr. Equity component [7,600(W-1) x 1/3] 2,533
Cr. Liability component [50,000(W-1) x 1/3] 16,667
[Initial recognition of transaction]
Dr. Employee cost 666

Cr. Liability component (W-2) 666
[Year end remeasurement]
Year - 2
Cr. Equity component [7,600 x 2/3 - 2,533] 2,533
Year - 3
Cr. Equity component [7,600 x 3/3 - 2,533 - 2,533] 2,533
Settlement
Scenario I
Dr. Liability component (W-2) 60,000
Cr. Cash 60,000
[Cash settlement]
Dr. Equity component (W-1) 7,600

Cr. Retained earnings 7,600
[Transfer of equity component to retained earnings]
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Scenario II
Dr. Equity component (W-1) 7,600
Dr. Liability component (W-2) 60,000
Cr. Share capital [1,200 x Rs. 10] 12,000
Cr. Share premium 55,600
[Issue of 1,200 shares]
W-1 Initial measurement

Total amount Rs.
Employee cost [1,200 x Rs. 48] 57,600
Liability component [1,000 x Rs. 50] 50,000
Equity component 7,600
W-2 Liability component

Balance -
Year 1 Initial recognition [1,000 x Rs. 50 x 1/3] 16,667
Expense (balancing) 666
Balance [1,000 x Rs. 52 x 1/3] 17,333
Year 2
Balance [1,000 x Rs. 55 x 2/3] 36,667
Year 3
Settlement [1,000 x Rs. 60] 60,000
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IAS 21 [Separate financial statements] – Class notes
IMPORTANT CONCEPTS
Currencies
Foreign currency
It is a currency other than functional currency of the entity.
Presentation currency
It is the currency in which the financial statements are presented.
Functional currency
1. It is the currency of the primary economic environment in which the entity operates.
2. The primary economic environment in which an entity operates is normally the one in which it
primarily generates and expends cash. An entity considers the following factors in determining its
functional currency:
(a) the currency:
(i) that mainly influences sales prices for goods and services (this will often be the currency in
which sales prices for its goods and services are denominated and settled); and
(ii) of the country whose competitive forces and regulations mainly determine the sales prices of
its goods and services.
(b) the currency that mainly influences labour, material and other costs of providing goods or services
(this will often be the currency in which such costs are denominated and settled).
3. The following factors may also provide evidence of an entity’s functional currency:
(a) the currency in which funds from financing activities (i.e. issuing debt and equity instruments) are
generated.
(b) the currency in which receipts from operating activities are usually retained.
4. An entity’s functional currency reflects the underlying transactions, events and conditions that are
relevant to it. Accordingly, once determined, the functional currency is not changed unless there is a
change in those underlying transactions, events and conditions.
Monetary items
1. Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed
or determinable number of units of currency.
2. The essential feature of a monetary item is a right to receive (or an obligation to deliver) a fixed or
determinable number of units of currency.
Examples
- pensions and other employee benefits to be paid in cash
- provisions that are to be settled in cash
- lease liabilities
- cash dividends that are recognised as a liability
- a contract to receive (or deliver) a variable number of the entity’s own equity instruments or a
variable amount of assets in which the fair value to be received (or delivered) equals a fixed or
determinable number of units of currency is a monetary item.
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130
3. Conversely, the essential feature of a non‑monetary item is the absence of a right to receive (or an
obligation to deliver) a fixed or determinable number of units of currency.
Examples
- amounts prepaid for goods and services
- goodwill
- intangible assets
- inventories
- property, plant and equipment
- right‑of‑use assets
- provisions that are to be settled by the delivery of a non‑monetary asset.
INITIAL RECOGNITION OF FOREIGN CURRENCY TRANSACTIONS

1. A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign
currency, including transactions arising when an entity:
(a) buys or sells goods or services whose price is denominated in a foreign currency;
(b) borrows or lends funds when the amounts payable or receivable are denominated in a foreign
currency; or
(c) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign
currency.
2. A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by
applying to the foreign currency amount the spot exchange rate between the functional currency and
the foreign currency at the date of the transaction.
Date of the transaction

- The date of a transaction is the date on which the transaction first qualifies for recognition in
accordance with IFRSs. (Preferable for exam questions)
- For practical reasons, a rate that approximates the actual rate at the date of the transaction is
often used, for example, an average rate for a week or a month might be used for all
transactions in each foreign currency occurring during that period. (Only use if asked in
question)
- However, if exchange rates fluctuate significantly, the use of the average rate for a period is
inappropriate.
REPORTING AT THE ENDS OF SUBSEQUENT REPORTING PERIODS
At end of each reporting period:

Items Translation
Foreign currency monetary Using closing rate (i.e. spot exchange rate at year end).
items
Non-monetary items that Using the exchange rate at the date of transaction.
are measured in terms of
historical cost in a foreign
currency
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131
Non-monetary items that Using the exchange rate at the date when fair value was measured.
are measured at fair value in
a foreign currency
Items where carrying amount is determined as a comparison of two or more amounts

The carrying amount of some items is determined by comparing two or more amounts. For example, the
carrying amount of inventories is the lower of cost and net realizable value in accordance with IAS 2
Inventories. Similarly, in accordance with IAS 36 Impairment of Assets, the carrying amount of an asset for
which there is an indication of impairment is the lower of its carrying amount before considering possible
impairment losses and its recoverable amount. When such an asset is non-monetary and is measured in
a foreign currency, the carrying amount is determined by comparing:
(a) the cost or carrying amount, as appropriate, translated at the exchange rate at the date when that
amount was determined (i.e. the rate at the date of the transaction for an item measured in terms of
historical cost); and
(b) the net realizable value or recoverable amount, as appropriate, translated at the exchange rate at the
date when that value was determined (e.g. the closing rate at the end of the reporting period).
The effect of this comparison may be that an impairment loss is recognized in the functional currency but
would not be recognized in the foreign currency, or vice versa.
RECOGNITION OF EXCHANGE DIFFERENCES
Monetary items Non-monetary items

Exchange differences arising on: Exchange differences arising on valuation (as per
relevant standards):
- the year-end remeasurement; and For assets whose valuation gains/losses are
- the settlement recognized in P&L (e.g. Inventory, impairment)
shall be recognized in P&L Shall be recognized in P&L
For assets whose valuation gains/losses are

recognized in OCI (e.g. revaluation model)
Shall be recognized in OCI
Exam note:
It is automatically done when valuation gain/loss
as per relevant IAS is calculated by comparing
values translated in functional currency at
valuation date.
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132
PRACTICE QUESTIONS
Question No. 1
Determine the functional currency in each of the following cases:
(a) Company A manufactures a product for the domestic market in Pakistan. Its sales are denominated in Pak
rupee. The sale of its product in Pakistan is affected mainly by local supply and demand and regulations.
Its inputs are sources in Pakistan and the prices of inputs are denominated in Pak rupee and mainly
influenced by economic forces and regulations of Pakistan.
(b) Company B mines a product in Pakistan. Sales of the product in denominated in US dollars. The sale price
in USD is affected by global demand for the product. About 90% of company’s costs are for expatriate staff
salaries and for chemicals and specialized machinery imported from USA. These costs are denominated
and settled in US dollars. However its other costs are incurred and settled in Pak rupee.
Question No. 2
On December 21, 2018 40,000 units of a raw material were imported at $ 2 per unit on credit. Financial year
ends on December 31st. 60% of the payment was made on January 22, 2019 and 40% of the payment was made
on February 10, 2019. The spot exchange rates are as follows:
Date Exchange rate ($ 1)

21-12-18 Rs. 110
31-12-18 Rs. 114
22-01-19 Rs. 120
10-02-19 Rs. 125
Required:
Journalize above transactions.
Question No. 3
On July 1, 2018 Alpha Limited (AL) purchased a building in UAE for Dhs. 500,000. After initial recognition,
management decided to measure this property using fair value model in accordance with IAS 40. AL’s financial
year ends on December 31st. The fair values and spot exchange rates are as follows:
Date Fair value Exchange rate

(Dhs) (Dh 1)
01-07-18 500,000 Rs. 32
31-12-18 515,000 Rs. 30
31-12-19 505,000 Rs. 40
Required:
Question No. 4
On January 1, 2017 Beta Limited (BL) purchased a building for administrative purposes for a liaison office in UK
for £ 100,000. Its useful life was initially estimated at 10 years. After initial recognition, management decided
to measure this property using revaluation model in accordance with IAS 16. BL’s financial year ends on
December 31st. The fair values and spot exchange rates are as follows:
Date Fair value Exchange rate

(£) (£ 1)
01-01-17 100,000 Rs. 140
01-01-18 90,000 Rs. 134
01-01-19 102,000 Rs. 136
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NASIR ABBAS FCA
Required:
Prepare extracts of statement of financial position and statement of comprehensive income for the years
ending December 31, 2017, 2018 and 2019.
Question No. 5
On September 1, 2018 purchase order was issued for import of a plant at an invoice price of $ 120,000. 20%
advance was paid alongwith purchase order. Plant was received on October 1, 2018 and installed accordingly.
30% of the invoice amount was paid at the time of delivery and remaining 50% was paid on February 28, 2019.
Plant has a useful life of 10 years. Financial year ends on every 31st December. The spot exchange rates are as
follows:
Date Exchange rate ($ 1)

01-09-18 Rs. 110
01-10-18 Rs. 120
31-12-18 Rs. 130
28-02-19 Rs. 140
Required:
Question No. 6
Following transactions took place during the year ending June 30, 2019:
(a) On August 15, 2018 5,000 units of product “MN” were purchased for Dinars 5 per unit on credit. The
account was fully settled on September 30, 2018.
(b) On October 1, 2018 following equity investments were made:
Company Number of Purchase Measurement policy

shares Price
A 5000 $5 Fair value through OCI
B 8000 $9 Fair value through P&L
On May 1, 2019 2000 shares of company A were sold at a price of $ 5.8 per share and 1000 shares of
company B were sold at a price of $ 10 per share. Market prices at June 30, 2019 of shares of company A
and B were $ 6 and $ 9.3 per share respectively.
(c) On January 1, 2019 3,000 units of product “MN were sold locally at a price of Rs. 750 per unit and remaining
2,000 units were exported at a price of € 6 per unit on credit. Sale proceeds from foreign customer were
realized on July 31, 2019.
(d) On April 1, 2019 a machine was imported from Japan for ¥ 2 million. 30% advance had been piad on March
1, 2019 and remaining balance was settled on July 31, 2019. Useful life of machine has been estimated at
10 years.
Following spot exchange rates in rupees are available:

Date Dinar 1 $1 €1 ¥1
15-08-18 100 - - -
30-09-18 102 - - -
01-10-18 - 110 - -
01-01-19 - - 140 -
01-03-19 - - - 2.50
01-04-19 - - - 3.00
01-05-19 - 118 - -
30-06-19 - 120 137 3.20
31-07-19 - - 132 3.50
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NASIR ABBAS FCA
Required:
Calculate “total profit or loss” and “other comprehensive income” for the year ending June 30, 2019.
Question No. 7
Copper Limited (CL) entered into following transactions during the year ended 30 June 2019:
(i) 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.
(ii) 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 01-Jul-18 01-Oct-18 01-Jan-19 01-Apr-19 30-Jun-19 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.
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NASIR ABBAS FCA
SOLUTIONS
Solution No. 1
(a) Since market forces and regulations in Pakistan’s economy largely determines the selling price and costs
of entity’s inputs, therefore its functional currency is Pak rupee.
(b) Since market forces and regulations in USA’s economy largely determines the selling price and costs of
entity’s inputs, therefore its functional currency is US dollar.
Solution No. 2
Dr. Cr.
--------- Rs. ----------
21-12-18 Inventory 8,800,000
Creditors [40,000 x $ 2 x Rs. 110] 8,800,000
[Purchase of raw material]
31-12-18 P&L (exchange loss) 320,000

Creditors [$ 80,000 x Rs. 4] 320,000
[Reporting at year end]
22-01-19 P&L (exchange loss) 288,000

Creditors [$ 80,000 x Rs. 114 x 60%] 5,472,000
Cash [$80,000 x 60% x Rs. 120] 5,760,000
[Partial settlement of creditors]
10-02-19 P&L (exchange loss) 352,000

Creditors [$ 80,000 x Rs. 114 x 40%] 3,648,000
Cash [$80,000 x 40% x Rs. 125] 4,000,000
[Final settlement of creditors]
Solution No. 3
Dr. Cr.
--------- Rs. ----------
01-07-18 Investment property 16,000,000
Bank 16,000,000
[Purchase of property]
31-12-18 P&L (FV loss) 550,000

Investment property 550,000
[Fair value adjustment at year end]
31-12-19 Investment property 4,750,000

P&L (FV gain) 4,750,000
[Fair value adjustment at year end]
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NASIR ABBAS FCA
W-1
Converted
Fair value Rate value Gain/(loss)
(Dhs) (Rs/Dhs) (Rs.) (Rs.)
01-07-18 500,000 32.00 16,000,000 -
31-12-18 515,000 30.00 15,450,000 (550,000)
31-12-19 505,000 40.00 20,200,000 4,750,000
Solution No. 4
2019 2018 2017
-------------------- Rs.'000 --------------------
Extracts – SOFP
Non-current assets
Building (W-1) 12,138 10,720 12,600
Equity
Revaluation surplus 2,338 - -
Extracts – SOCI
Depreciation (1,734) (1,340) (1,400)
Revaluation loss - (540) -
Revaluation loss reversal 480 - -
Revaluation gain / (loss) 2,672 - -
W-1 NBV Surplus P&L

-------------------- Rs.'000 --------------------
01-01-17 Cost [£ 100,000 x Rs. 140] 14,000
31-12-17 Dep [14,000 / 10] (1,400)
12,600 - -
01-01-18 Revaluation (540) - (540)
[£ 90,000 x Rs. 134] 12,060 - (540)
31-12-18 Dep [12,060 / 9] (1,340) 60
10,720 - (480)
01-01-19 Revaluation 3,152 2,672 480
[£ 102,000 x Rs. 136] 13,872 2,672 -
31-12-19 Dep [13,872 / 8] (1,734) (334) -
12,138 2,338 -
Solution No. 5
Dr. Cr.
--------- Rs. ----------
01-01-18 Advance to supplier 2,640,000
Bank [$120,000 x 20% x Rs. 110] 2,640,000
[20% advance paid to supplier]
01-10-18 Plant 14,160,000

Advance to supplier 2,640,000
Bank [$ 120,000 x 30% x Rs. 120] 4,320,000
Creditors [$ 120,000 x 50% x Rs. 120] 7,200,000
[Plant is received and installed]
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NASIR ABBAS FCA
31-12-18 Depreciation 354,000

31-12-18 P&L [exchange loss] 600,000

Creditors [$ 120,000 x 50% x Rs. 10] 600,000
[Exchange loss on creditors at year end]
10-02-19 P&L (exchange loss) 600,000

Creditors [$ 60,000 x Rs. 140] 7,800,000
Bank [$60,000 x Rs. 10] 8,400,000
[Final settlement of creditors]
Solution No. 6
For the year ending June 30, 2019 P&L OCI

-------- Rs. -------
(a)
Purchases [5,000 x Dinar 5 x Rs. 100] (2,500,000) -
Exchange loss on settlement [Dinar 25,000 x Rs. 2] (50,000) -
(b)
Profit on sale of shares:
A [2000 x ($5.8 x Rs. 118 - $5 x Rs. 110)] - 268,800
B [1000 x ($10 x Rs. 118 - $9 x Rs. 110)] 190,000 -
Fair value gain at year end:
A [3000 x ($6 x Rs. 120 - $5 x Rs. 110)] - 510,000
B [7000 x ($9.3 x Rs. 120 - $9 x Rs. 110)] 882,000 -
(c)
Sales [3,000 x Rs. 750 + 2,000 x € 6 x Rs. 140] 3,930,000 -
Exchange loss on debtors [2,000 x € 6 x Rs. 3] (36,000) -
(d)
Depreciation [(¥ 2m x 30% x Rs. 2.50 + ¥ 2m x 70% x Rs. 3) / 10 x 3/12] (142,500) -
Exchange loss on creditors [¥ 2m x 70% x Rs. 0.2] (280,000) -
1,986,000 778,800
Solution No. 7
(i) Rs '000'
Date Debit Credit
1-Jul-18 Advance for PPE 18,150
Bank [250,000 x 60% x 121] 18,150
1-Oct-18 PPE 30,550

Advance for PPE 18,150
Payable for PPE (250,000 x 40% x 124) 12,400
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NASIR ABBAS FCA
1-Apr-19 Payable for PPE 12,400

Exchange Loss (P&L)(bal.) 1,600
Bank (250,000 x 40% x 140) 14,000
(ii)
1-Jan-19 Debtor 5,480
Sales [40,000 x 137] 5,480
1-Apr-19 Bank (40,000 x 25% x 140) 1,400

Debtor (5,480 x 25%) 1,370
Exchange gain(P&L)(bal.) 30
30-Jun-19 Debtor [(30,000 x 163) - (5,480 x 75%)] 780

Exchange gain (P&L)(Bal.) 780
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NASIR ABBAS FCA
IFRS 9 (Recognition, Classification and Measurement) – Class notes
RECOGNITION
An entity shall recognize a financial asset or a financial liability in its statement of financial position when
and only when the entity becomes party to the contractual provisions of the instrument. On initial
recognition the entity shall also classify financial asset or financial liability as per guidance discussed later
in this chapter.
Examples:
- Entity B transfers cash to Entity A as a collateral for a borrowing transaction. The cash is not legally
segregated from Entity A’s assets. Therefore, Entity A recognizes the cash as an asset and a payable
to Entity B, while Entity B derecognizes the cash and recognizes a receivable from Entity A.
- Assets to be acquired and liabilities to be incurred as a result of a firm commitment to purchase or
sell goods or services are generally not recognized until at least one of the parties has performed
under the agreement. For example, an entity that receives a firm order does not generally recognize
an asset (and the entity that places the order does not recognize a liability) at the time of the
commitment but, instead, delays recognition until the ordered goods or services have been shipped,
delivered or rendered.
- Planned future transactions, no matter how likely, are not assets and liabilities because the entity has
not become a party to a contract.
CLASSIFICATION OF FINANCIAL ASSETS
Financial assets which are debt instruments of other entity

An entity shall classify financial assets as subsequently measured at:
1) Amortized cost
2) Fair value through other comprehensive income
3) Fair value through profit or loss
1) Amortized cost
A financial asset shall be measured, except for 3(ii) below, at amortized cost if both of the following
conditions are met:
(i) the financial asset is held within a business model whose objective is to hold financial assets in order
to collect contractual cash flows and
(ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
Amortized cost
The amount at which the financial asset or financial liability is measured at initial recognition minus
the principal repayments, plus or minus the cumulative amortization using the effective interest
method of any difference between that initial amount and the maturity amount and, for financial
assets, adjusted for any loss allowance.
2) Fair value through OCI

A financial asset shall be measured, except for 3(ii) below, at fair value through other comprehensive
income if both of the following conditions are met:
(i) the financial asset is held within a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets and
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140
(ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
Business model
Any entity’s business model is determined at a level that reflects how groups of financial assets are
managed together to achieve a particular business objective. It does not depend on management’s
intentions for an individual instrument. However, an entity may have more than one business models
for managing its financial instruments. For example, an entity may hold a portfolio of investments that
it manages to collect contractual cash flows and another portfolio of investments that it manages in
order to trade to realize fair value changes.
Contractual cashflows comprise of:

Principal Interest
It is the fair value of the financial It consists of consideration for the time value of money, for the
asset at initial recognition. credit risk associated with the principal amount outstanding
during a particular period of time and for other basic lending
risks and costs, as well as a profit margin.
3) Fair value through P&L

A financial asset shall be measured at fair value through profit or loss if either:
(i) it cannot be classified as measured at amortized cost or fair value through OCI; or
(ii) an entity has, at initial recognition, irrevocably designated the financial asset as measured at fair value
through P&L if doing so eliminates or significantly reduces an accounting mismatch.
Financial assets which are equity instruments of other entity

An entity shall classify financial assets as subsequently measured at:
1) Fair value through other comprehensive income
2) Fair value through profit or loss
A financial asset shall be measured at fair value through P&L (default method) unless an entity has made
an irrevocable election, at initial recognition, for particular investments in equity instruments if these are
not held for trading to present subsequent changes in fair value in OCI.
CLASSIFICATION OF FINANCIAL LIABILITIES
An entity shall classify all financial liabilities as subsequently measured at amortized cost except for:
(a) Financial liabilities, including derivatives that are liabilities, measured at fair value through P&L
An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair
value through P&L if either:
- It eliminates or significantly reduces an accounting mismatch; or
- A group of financial liabilities is managed and its performance is evaluated on a fair value basis
in accordance with a documented risk management or investment strategy.
(b) Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or
when the continuing involvement approach applies.
(c) Financial guarantee contracts.
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141
(d) Commitments to provide a loan at a below-market interest rate.

(e) Contingent consideration recognized by an acquirer in a business combination.
INITIAL MEASUREMENT
Financial assets
Financial assets subsequently measured at Financial assets subsequently measured at fair

amortized cost or fair value through OCI: value at P&L:
Fair value of asset + transaction cost Fair value of asset
Financial liabilities
Financial liabilities subsequently measured at Financial liabilities subsequently measured at fair

amortized cost: value at P&L:
Fair value of liability – transaction cost Fair value of liability
Transaction costs
Incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial
liability. An incremental cost is one that would not have been incurred if the entity had not acquired or
issued of the financial instrument.
Examples of transactions costs:

Include Do not include
Fees and commission paid to agent, advisers, brokers Debt premium and discounts
and dealers Financing costs
Levies by regulatory agencies and security exchanges Internal administrative or holding costs
Transfer taxes and duties
Important for initial measurement:

Transaction costs for financial asset or financial liability subsequently measured at fair value
through P&L are recognized as expense when incurred.
Transaction costs expected to be incurred on transfer or disposal of a financial instrument are not
included in the measurement of the financial instrument.
Generally transaction price (i.e. fair value of consideration given or received) is equal to the fair
value of financial asset or financial liability at initial recognition, however, if transaction price is
different then, the difference on initial measurement shall be charged to P&L. [Fair value of an
interest free long term loan is measured as the present value of all future cash receipts discounted
using the prevailing market interest rate for a similar instrument.]
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SUBSEQUENT MEASUREMENT [IGNORING IMPAIRMENT]
Financial assets
A financial asset which is an equity instrument of another entity

Types Treatment
(i) Equity investments which - At each reporting date, the asset shall be measured at fair value.
are not held for trading and, - Fair value gain or loss shall be recognized in other comprehensive
at initial recognition, entity income.
has made irrevocable - It is a non-monetary item, therefore, as per IAS 21, its related foreign
election for this treatment exchange gain or loss shall also be recognized in OCI.
[Fair value through OCI] - Cumulative gain or loss recognized in OCI, shall not be reclassified to
profit or loss on de-recognition of the asset. However, it may be
transferred within equity e.g. retained earnings.
- Any dividend shall be recognized in P&L.
(ii) All other equity - At each reporting date, the asset shall be measured at fair value.
investments - Fair value gain or loss shall be recognized in P&L.
[Fair value through P&L] - It is non-monetary item, therefore, as per IAS 21, its related foreign
(default measurement)
exchange gain or loss shall also be recognized in P&L.
- Any dividend shall be recognized in P&L.
A financial asset which is a financial liability of another entity (e.g. loans)

Types Treatment
(i) If asset is classified as - The asset shall be measured at amortized cost using effective
measured at amortized cost interest rate method.
- Interest income using effective interest rate shall be recognized in
P&L.
- It is a monetary item, therefore, as per IAS 21 its exchange gain or
loss shall be recognized in P&L.
- Any gain or loss on derecognition shall be recognized in P&L.
(ii) If asset is classified as - At each reporting date, the asset shall be measured at fair value with
measured at fair value any gain or loss recognized in other comprehensive income.
through OCI - Interest income using effective interest rate shall be recognized in
profit or loss (i.e. same as calculated in amortized cost).
- Any foreign exchange gain/loss on amortized cost measured in
foreign currency shall be recognized in P&L.
- Cumulative fair value gain or loss, previously recognized in OCI, shall
be reclassified to profit or loss on de-recognition of the asset.
(All amounts recognized in P&L would be the same which would have
been recognized had the asset been measured at amortized cost)
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143
(iii) If asset is classified as - At each reporting date, the asset shall be measured at fair value with
measured at fair value any gain or loss recognized in profit or loss.
through profit or loss - It is a monetary item, therefore, as per IAS 21 its exchange gain or
loss shall be recognized in P&L.
- Actual interest received is recognized in profit or loss.
Types Treatment
(i) If liability is classified as - The liability shall be measured at amortized cost using effective
measured at amortized cost interest rate method.
(default measurement) - Interest expense using effective interest rate shall be recognized in
P&L.
- Any gain or loss on derecognition shall be recognized in P&L.
(ii) If liability is classified as - At each reporting date, the liability shall be measured at fair value.
measured at fair value - Any change in fair value attributable to change in own credit risk is
through profit or loss recognized in OCI (Amount presented in OCI shall not be
subsequently transferred to P&L, however, the entity may transfer
the cumulative gain or loss within equity e.g. retained earnings). The
remaining amount of change in the fair value of the liability shall be
presented in P&L. However, if it creates or enlarges accounting
mismatch, then entire fair value gain or loss shall be recognized in
P&L.
- Actual interest paid is recognized in profit or loss.
Estimating change in fair value of liability attributable to change in own credit risk:
Multiple methods can be used to estimate the amount of change in fair value attributable to change in
own credit risk. If the only significant relevant changes in market conditions for a liability are changes
in an observed (benchmark) interest rate, the amount of change in fair value attributable to change in
own credit risk can be estimated in following steps:
1) First find “Instrument-specific component” of IRR of the liability as
= IRR of liability at start of period (i.e. a market rate of return which is calculated using fair value of
liability and the contractual cash flows at the start of the period) LESS observed benchmark interest
rate (e.g. KIBOR) at start of period
2) Calculate the amount of change to be presented in OCI as follows:

Rs.
Fair value of liability at end of the period XXX
Present value of contractual cash flows of liability at end of year discounted at “Year (XXX)
end KIBOR + Instrument-specific component (as calculated in Step 1)”
(Gain)/Loss to be recognized in OCI XXX
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IFRS 9 (Recognition, Classification and Measurement) – QUESTIONS
PRACTICE QUESTIONS
Question 1
Following independent situations relate to financial assets:
(1) A Limited (AL) holds investments to collect their contractual cash flows. The funding needs of AL are predictable and
the maturity of investments matches to estimated funding needs. However AL would sell an investment in particular
circumstances, perhaps to fund unanticipated capital expenditure, or because the credit rating of the instrument falls
below that required by AL’s investment policy.
(2) B Limited (BL) expects to pay a cash outflow in ten years to fund capital expenditure and invests excess cash in short-
term financial assets. When the investments mature, BL reinvests the cash in new short-term financial assets. BL
maintains this strategy until the funds are needed, at which time BL uses the proceeds from the maturing financial
assets to fund the capital expenditure. Only sales that are insignificant in value occur before maturity (unless there is
an increase in credit risk).
(3) D Limited (DL) expects to incur capital expenditure in a few years’ time. DL invests its excess cash in short and long-
term financial assets so that it can fund the expenditure when the need arises. Many of the financial assets have
contractual lives that exceed DL’s anticipated investment period. DL will hold financial assets to collect the contractual
cash flows and, when an opportunity arises, it will sell financial assets to re-invest the cash in financial assets with a
higher return.
(4) F Bank holds financial assets to meet its everyday liquidity needs. The bank actively manages the return on the
portfolio in order to minimize the costs of managing those liquidity needs. That return consists of collecting
contractual payments as well as gains and losses from the sale of financial assets. F Bank holds financial assets to
collect contractual cash flows and sells financial assets to reinvest in higher yielding financial assets or to better match
the duration of its liabilities. In the past, this strategy has resulted in frequent sales activity and such sales have been
significant in value. This activity is expected to continue in the future
Required:
Briefly discuss how each of the above assets should be classified?
Question 2
Following independent situations relate to financial assets (i.e. investments in bonds):
(1) Bond A has a stated maturity date. Payments of principal and interest on the principal amount outstanding are linked
to an inflation index.
(2) Bond B is a variable interest rate instrument with a stated maturity date that permits the borrower to choose the
market interest rate on an ongoing basis. For example, at each interest rate reset date, the borrower can choose to
pay three-month LIBOR for a three-month term or one-month LIBOR for a one-month term.
(3) Bond C has a stated maturity date and pays a variable market interest rate. That variable interest rate is capped.
(4) Bond D is a full recourse loan and is secured by collateral.
(5) Bond E is convertible into fixed number of equity instruments of the issuer.
(6) Bond F is a perpetual bond but the issuer may call the instrument at any point and pay the holder the par amount
plus accrued interest due. It pays a market interest rate but payment of interest cannot be made unless the issuer is
able to remain solvent immediately afterwards. Deferred interest does not accrue additional interest.
Required:
For each of the above assets, briefly discuss whether contractual cashflows solely comprise of principal and interest?
Question 3
On 1 January 2018 Abacus Co purchases a debt instrument for its fair value of Rs. 100,000. The debt instrument is due to
mature on 31 December 2022 at par. The instrument has a face value of Rs. 125,000 and the instrument carries fixed
interest at 4.72% that is paid annually. (The effective interest rate is 10%.)
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NASIR ABBAS FCA
Required:
Show extracts of Income statement and Balance sheet for each of the five years till December 31, 2022.
Question 4
On May 14, 2018 Zain Limited (ZL) acquired 5,000 shares of a listed company for Rs. 27.50 per share (including Rs. 1.50
per share as broker’s commission). On that date the fair value of share was Rs. 25 per share. ZL had purchased these
shares with the intention of holding in long term. Moreover, it made an irrevocable election for designation as fair value
through other comprehensive income. On June 30, 2018 (i.e. year-end) fair value of shares moved to Rs. 28 per share.
This price further increased to Rs. 33 per share on June 30, 2019. On August 1, 2019 ZL sold 3,000 shares for Rs. 31 per
share.
Required:
Journalize all of the above transactions.
Question 5
In January 1, 2018 Wolf Limited (WL) purchased 10 million shares of a listed company at a price of Rs. 25 per share
(whereas fair value was Rs. 25.50 per share). WL also paid transaction costs of Rs. 15 million. On November 30, 2018 WL
received a dividend of Rs. 4 per share. WL’s year end is December 31. At December 31, 2018, the shares were trading at
Rs. 28.
Required:
Show the financial statements extracts of WL at December 31, 2018 relating to the investment in shares if:
(i) The shares were bought for trading.
(ii) The shares were bought as a source of dividend income and were the subject of an irrevocable election at initial
recognition to recognize them at fair value through other comprehensive income.
Question 6
On January 1, 2018, Tokyo Limited (TL) bought Rs. 100,000 (nominal value) 5% bonds for Rs. 95,000 (fair value), incurring
transactions costs of Rs. 2,000. Interest is received at end of every year. The bonds will be redeemed at a premium of Rs.
5,960 over nominal value on December 31, 2020. The effective rate of interest is 8%. The fair value of the bond was as
follows:
Date Fair value (Rs.)

December 31, 2018 110,000
December 31, 2019 104,000
On January 1, 2020 TL sold this bond for Rs. 105,000.

Required:
Journalize all above transactions over all relevant years if:
(a) TL's business model is to hold bonds until the redemption date and collect contractual cash flows.
(b) TL's business model is to hold bonds until redemption but also to sell them if investments with higher returns become
available.
(c) TL's business model is to buy and sell bonds in the short term to gain from fair value changes.
Question 7
On January 1, 2018, Sialkot Limited (SL) bought 100 Euro-dollar bonds at a price of $ 50 each and incurred transaction
cost of $ 0.5 per bond. The bonds will be redeemed at a premium of 20% over face value of $ 40 each after four years.
Coupon rate is 10%. The effective rate of interest is 6.80%.
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NASIR ABBAS FCA
The exchange rates and fair value of the bond were as follows:
Date Exchange rate Fair value

(Rs. per $) ($)
01-01-18 150 50
31-12-18 152 51
31-12-19 153 48
Required:
Journalize all transactions for the years ending December 31, 2018 and 2019 if:
(a) SL's business model is to hold bonds until the redemption date and collect contractual cash flows.
(b) SL's business model is to hold bonds until redemption but also to sell them if investments with higher returns become
available.
Question 8
Decent Limited (DL) issued following bonds on January 1, 2019:
1) Face value = Rs. 150,000
Issued at a discount of 5%
Coupon rate = 7%
Redemption after 4 years at a premium of 10%
Effective interest rate = 10.734%
Issued at a premium of 10%
Issue costs = Rs. 2,000
Contractual cash flows:
31-12-19 – Rs. 9,500
31-12-20 – Rs. 41,500
31-12-21 – Rs. 52,700
Coupon rate = zero
Issued at a discount of 25%
Redemption after 4 years at par
Required:
(a) Prepare complete schedules for amortized cost calculation for each bond.
(b) Journalize all the transactions for the year ending December 31, 2019.
(c) Show extracts of SOFP and SOCI for the year ending December 31, 2019.
Question 9
On January 1, 2018 Engro Limited (EL) issued debentures (nominal value Rs. 50,000) at a premium of 10%. Coupon rate is
10% payable at end of every year. A broker commission of 4% of nominal value was paid on issuance. These debentures
will be redeemed at a premium of 5% after 3 years.
Required:
(a) Calculate effective interest rate to be used for amortized cost calculation.
(b) Journalize all transactions for all three years.
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NASIR ABBAS FCA
Question 10
On January 1, 2018 Alpha Limited (AL) issued 9% debentures at nominal value of Rs. 80,000 to finance a certain investment
in assets. The management has decided to classify these debentures to be measured at fair value through profit and loss.
AL’s credit rating was also changed in subsequent years due to some factors. These debentures were revalued to fair
values as follows:
Date of fair value Fair value

31-12-18 Rs. 88,000 (Fair value loss of Rs. 3,000 is attributable to change in credit rating of AL)
31-12-19 Rs. 82,000 (Fair value gain of Rs. 7,000 is attributable to change in credit rating of AL)
Required:
(a) Show extracts of Statement of comprehensive income and Statement of financial position for the years ending
December 31, 2018 and 2019.
(b) Journalize above transactions for the years ending December 31, 2018 and 2019.
Question 11
Beta Limited (BL) issued 8% debentures some years ago. These debentures will be redeemed at par (i.e. Rs. 100,000) on
December 31, 2023. On January 1, 2019 the fair value of debentures was Rs. 100,000 showing a market rate of return of
8% (i.e. IRR of fair value and contractual cashflows over remaining life). On that date KIBOR was 5%.
On December 31, 2019 KIBOR moved to 5.75% and fair value of BL’s debentures moved to Rs. 95,972 showing a market
rate of return of 9.25%.
On December 31, 2020 KIBOR moved to 5.50% and fair value of BL’s debentures moved to Rs. 95,026 showing a market
rate of return of 10%.
It is BL’s policy to measure financial liabilities at fair value through P&L.
Required:
Calculate fair value gain/loss to be recognized in OCI and P&L for the years ending December 31, 2019 and 2020.
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NASIR ABBAS FCA
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
SOLUTIONS
Solution No. 1
(1) Although AL may consider, among other information, the financial assets' fair values from a liquidity perspective (i.e.
the cash amount that would be realised if AL needs to sell assets), AL’s objective is to hold the financial assets and
collect the contractual cash flows. Therefore, these assets shall be classified as measured at amortized cost.
(2) The objective of BL’s business model is to hold financial assets to collect contractual cash flows. Selling financial
assets is only incidental to BL’s business model. Therefore, these assets shall be classified as measured at amortized
cost.
(3) The objective of the business model is achieved by both collecting contractual cash flows and selling financial assets.
DL decides on an ongoing basis whether collecting contractual cash flows or selling financial assets will maximise the
return on the portfolio until the need arises for the invested cash. Therefore, these assets shall be measured at fair
value through other comprehensive income.
(4) The objective of the business model is to maximise the return on the portfolio to meet everyday liquidity needs and
F Bank achieves that objective by both collecting contractual cash flows and selling financial assets. In other words,
both collecting contractual cash flows and selling financial assets are integral to achieving the business model’s
objective. Therefore, these assets shall be measured at fair value through other comprehensive income.
Solution No. 2
(1) The contractual cash flows are solely payments of principal and interest on the principal amount outstanding. Linking
payments of principal and interest on the principal amount outstanding to an unleveraged inflation index resets the
time value of money to a current level. In other words, the interest rate on the instrument reflects ‘real’ interest.
Thus, the interest amounts are consideration for the time value of money on the principal amount outstanding.
However, if the interest payments were indexed to another variable such as the debtor’s performance (eg the
debtor’s net income) or an equity index, the contractual cash flows are not payments of principal and interest on the
principal amount outstanding.
(2) The contractual cash flows are solely payments of principal and interest on the principal amount outstanding as long
as the interest paid over the life of the instrument reflects consideration for the time value of money, for the credit
risk associated with the instrument and for other basic lending risks and costs, as well as a profit margin. The fact that
the LIBOR interest rate is reset during the life of the instrument does not in itself disqualify the instrument. However,
if the borrower is able to choose to pay a one-month interest rate that is reset every three months, the interest rate
is reset with a frequency that does not match the tenor of the interest rate. Consequently, the time value of money
element is modified. Similarly, if an instrument has a contractual interest rate that is based on a term that can exceed
the instrument’s remaining life (for example, if an instrument with a five-year maturity pays a variable rate that is
reset periodically but always reflects a five-year maturity), the time value of money element is modified. That is
because the interest payable in each period is disconnected from the interest period.
(3) The contractual cash flows of both:

(a) an instrument that has a fixed interest rate; and
(b) an instrument that has a variable interest rate
are payments of principal and interest on the principal amount outstanding as long as the interest reflects
consideration for the time value of money, for the credit risk associated with the instrument during the term of the
instrument and for other basic lending risks and costs, as well as a profit margin.
(4) The fact that a full recourse loan is collateralized does not in itself affect the analysis of whether the contractual cash
flows are solely payments of principal and interest on the principal amount outstanding.
149
NASIR ABBAS FCA
(5) The holder would analyze the convertible bond in its entirety. The contractual cash flows are not payments of
principal and interest on principal amount outstanding because they reflect a return that is inconsistent with a basic
lending arrangement i.e. the return is linked to the value of the equity of the issuer.
(6) The contractual cashflows are not payments of principal and interest on the principal amount outstanding because
the issuer may be required to defer interest payments and additional interest does not accrue on those deferred
interest amounts. As a result, interest amounts are not consideration for the time value of money on the principal
amount outstanding.
Solution 3
2018 2019 2020 2021 2022
-------------------------------------- Rs. --------------------------------------
Income statement - extracts
Interest income 10,000 10,410 10,861 11,357 11,872
Balance sheet - extracts

Non-current assets
Investment 104,100 108,610 113,571 - -
Current assets
Investment - - - 119,028 -
W-1
Opening Closing
Date Interest Cashflow
balance balance
[A] [B = A x 10%] [C] [A + B - C]
31-12-18 100,000 10,000 5,900 104,100

31-12-19 104,100 10,410 5,900 108,610
31-12-20 108,610 10,861 5,900 113,571
31-12-21 113,571 11,357 5,900 119,028
31-12-22 119,028 11,872 130,900 -
Solution 4
Dr. Cr.
-------- Rs. -------
14-05-18 Investment [5,000 x (25 + 1.50)] 132,500
P&L [5,000 x (27.50 – 25 – 1.50)] 5,000
Cash [5,000 x 27.50] 137,500
30-06-18 Investment [5,000 x (Rs. 28 - Rs. 26.5)] 7,500

Fair value gain [OCI] 7,500
[Re-measurement at fair value]
30-06-19 Investment [5,000 x (Rs. 33 - Rs. 28)] 25,000

Fair value gain [OCI] 25,000
[Re-measurement at fair value]
150
NASIR ABBAS FCA
01-08-19 Cash [3,000 x Rs. 31] 93,000

Loss on sale of shares 6,000
Investment [3,000 x Rs. 33] 99,000
[Sale of 3,000 shares]
Solution 5
(i)
Rs. million
SOCI – extracts
Dividend income [10m x Rs. 4] 40.00

Gain on initial recognition [10m x Rs. 0.50] 5.00
Transaction cost (15.00)
Fair value gain [(Rs. 28 – Rs. 25.50) x 10m] 25.00
SOFP – extracts
Non-current assets
Investment [10m x Rs. 28] 280.00
(ii)
SOCI – extracts
Dividend income [10m x Rs. 4] 40.00

Gain on initial recognition 5.00
Fair value gain [(Rs. 28 x 10m - (Rs. 25.50 x 10m + Rs. 15m)] 10.00
SOFP – extracts
Equity
Fair value reserve 10.00
Non-current assets
Investment [10m x Rs. 28] 280.00
Solution 6
(a) Asset shall be measured at amortized cost
Dr. Cr.
-------- Rs. -------
01-01-18 Investment [95,000 + 2,000] 97,000
Cash 97,000
31-12-18 Investment 7,760

Investment income (W-1) 7,760
[Investment income for 2018]
151
NASIR ABBAS FCA
31-12-18 Cash [100,000 x 5%] 5,000

Investment 5,000
[Interest received for 2018]

31-12-19 Cash 5,000

Investment 5,000
01-01-20 Cash 105,000

Investment (W-1) 102,741
Profit on disposal 2,259
[Sale of investment]
(b) Asset shall be measured at fair value through OCI
01-01-18 Investment [95,000 + 2,000] 97,000

Cash 97,000

31-12-18 Cash 5,000

Investment 5,000
31-12-18 Investment (W-1) 10,240

Fair value reserve [OCI] 10,240
[Fair value gain 2018]

31-12-19 Cash 5,000

Investment 5,000
31-12-19 Fair value reserve [OCI] 8,981

[Fair value loss 2019]
01-01-20 Cash 105,000

Investment 104,000
152
NASIR ABBAS FCA

P&L (W-1) 1,259
[Cumulative gain reclassified to P&L]
(c) Asset shall be measured at fair value through P&L
01-01-18 Investment 95,000

P&L (transaction costs) 2,000
Cash 97,000
31-12-18 Investment [110,000 - 95,000] 15,000

P&L 15,000
[Fair value gain for 2018]
31-12-18 Cash 5,000

Investment income 5,000
31-12-19 P&L [110,000 - 104,000] 6,000

Investment 6,000
[Fair value loss for 2019]
31-12-19 Cash 5,000

Investment income 5,000
01-01-20 Cash 105,000

Investment 104,000
W-1
Opening Closing Fair Fair value
Date Interest Cashflow OCI
balance balance value reserve
[A] [B = A x 8%] [C] [D = A + B - C] [E] [F = E - D] [Change in F]
31-12-18 97,000 7,760 5,000 99,760 110,000 10,240 10,240

31-12-19 99,760 7,981 5,000 102,741 104,000 1,259 (8,981)
Solution 7
(a) Measured at amortized cost Dr. Cr.
-------- Rs. -------
01-01-18 Investment [(50 + 0.5) x 100 x Rs. 150] 757,500
Cash 757,500
31-12-18 Investment [$343(W-1) x Rs. 152] 52,136

153
NASIR ABBAS FCA
31-12-18 Cash [$400 x Rs. 152] 60,800

Investment 60,800
31-12-19 Investment [$340(W-1) x Rs. 153] 52,020

31-12-19 Cash [$400 x Rs. 153] 61,200

Investment 61,200
(b) Measured at fair value through OCI Dr. Cr.

-------- Rs. -------
01-01-18 Investment [(50 + 0.5) x 100 x Rs. 150] 757,500
Cash 757,500
31-12-18 Investment [$343(W-1) x Rs. 152] 52,136

31-12-18 Cash [$400 x Rs. 152] 60,800

Investment 60,800
31-12-18 Investment (W-1) 26,364

Exchange gain (P&L) (W-2) 10,100
Fair value reserve [OCI] (W-2) 16,264
[Fair value gain & exchange gain 2018]
31-12-19 Investment [$340(W-1) x Rs. 153] 52,020

31-12-19 Cash [$400 x Rs. 153] 61,200

Investment 61,200
31-12-19 Fair value reserve [OCI] (W-2) 36,613

Investment 31,620
Exchange gain (P&L) (W-2) 4,993
[Fair value loss & exchange gain 2019]
154
NASIR ABBAS FCA
W-1
------------------------ $ Amortized cost ------------------------- Rupees
amortized
Date Opening Closing
Interest Cashflow cost
balance balance (translated)
[A] [B = A x 6.8%] [C] [D = A + B - C] [E]
31-12-18 5,050 343 400 4,993 758,936 [4,993 x 152]
31-12-19 4,993 340 400 4,933 754,749 [4,933 x 153]
W-2
------------------------ Book value (ignoring FV change) -------------------------
Date Opening Exchange Closing
Interest Cashflow
balance gain/(loss) balance
[F] [G] [H] [I = E - F - G + H] [J = F + G - H + I]
--------------------------------------------- Rs. ------------------------------------------------
31-12-18 757,500 52,136 60,800 10,100 758,936
31-12-19 758,936 52,020 61,200 4,993 754,749
W-3
Opening Fair value Fair value
Date OCI
balance (translated) reserve
[J] [K] [L = K - J] [Change in L]
--------------------------- Rs. -----------------------------------
31-12-18 758,936 775,200 16,264 16,264
[5,100 x 152]
31-12-19 754,749 734,400 (20,349) (36,613)
[4,800 x 153]
Exam note for students:

If average exchange rate for the period is given then interest income for the year can be required to be translated at
average exchange rate.
Solution 8
(a) ------------------------------- Rs. -----------------------------
Bond - 1
Opening Closing
balance balance
[A] [B = A x 10.734%] [C] [A + B - C]
31-12-19 142,500 15,296 10,500 147,296

31-12-20 147,296 15,811 10,500 152,607
31-12-21 152,607 16,381 10,500 158,488
31-12-22 158,488 17,012 175,500 -
Bond - 2 ------------------------------- Rs. -----------------------------

Opening Closing
balance balance
[A] [B = A x 8.111%] [C] [A + B - C]
31-12-19 86,000 6,975 9,500 83,475

31-12-20 83,475 6,771 41,500 48,746
31-12-21 48,746 3,954 52,700 -
155
NASIR ABBAS FCA
Bond - 3
Opening Closing
balance balance
[B = A x [A + B -
[A] 7.457%] [C]
C]
31-12-19 75,000 5,593 - 80,593
31-12-20 80,593 6,010 - 86,603
31-12-21 86,603 6,458 - 93,061
31-12-22 93,061 6,939 100,000 -
(b) Dr. Cr.

Bond - 1 -------- Rs. -------
01-01-19 Cash [150,000 x 95%] 142,500

Bonds 142,500
31-12-19 Finance cost [142,500 x 10.734%] 15,296

Bonds 15,296
[Finance cost for the year]
31-12-19 Bonds [150,000 x 7%] 10,500

Cash 10,500
[Interest payment for the year]
Bond - 2
01-01-19 Cash [80,000 x 1.1 - 2,000] 86,000

Bonds 86,000
31-12-19 Finance cost [86,000 x 8.111%] 6,975

Bonds 6,975
31-12-19 Bonds 9,500

Cash 9,500
[Interest payment for the year]
156
NASIR ABBAS FCA
Bond - 3
Dr. Cr.
-------- Rs. -------
01-01-19 Cash [100,000 x 75%] 75,000
Bonds 75,000
31-12-19 Finance cost [75,000 x 7.457%] 5,593

Bonds 5,593
Solution No. 9
(a) ------ 5% ------ -------- 10% -------
Factor PV Factor PV
Initial recognition [50,000 x 1.1 - 50,000 x 4%] (53,000) 1.000 (53,000) 1.000 (53,000)
Year 1 payment [50,000 x 10%] 5,000 0.952 4,760 0.909 4,545
Year 2 payment [50,000 x 10%] 5,000 0.907 4,535 0.826 4,130
Year 3 payment [50,000 x 10% + 50,000 x 1.05] 57,500 0.864 49,680 0.751 43,183
5,975 (1,143)
Effective interest rate = 5% + [5,975/(5,975 + 1,143)] x 5% = 9.20%
(b)
Dr. Cr.
-------- Rs. -------
01-01-18 Cash 53,000
Debentures 53,000
31-12-18 Finance cost 4,875

Debentures 4,875
[Finance cost for the 2018]
31-12-18 Debentures 5,000

Cash 5,000
[Interest payment for the 2018]

Debentures 4,863
31-12-19 Debentures 5,000

Cash 5,000
[Interest payment for the 2019]

Debentures 4,762
31-12-20 Debentures 57,500

Cash 57,500
[Interest and redemption payment]
157
NASIR ABBAS FCA
W-1
Date Opening balance Interest Cashflow Closing balance
[B = A x
[A] [C] [A + B - C]
9.2%]
31-12-18 53,000 4,875 5,000 52,875
31-12-19 52,875 4,863 5,000 52,738
31-12-20 52,738 4,762 57,500 0
Solution No. 10
(a) 2018 2019
-------------- Rs. ----------------
SOCI – extracts
Interest expense [80,000 x 9%] (7,200) (7,200)
Fair value gain / (loss) [W-1] (5,000) (1,000)
Fair value gain / (loss) (3,000) 7,000
SOFP - extracts
Equity
Fair value reserve (3,000) 4,000
Non-current liabilities
Debentures 88,000 82,000
(b)
Dr. Cr.
-------- Rs. -------
01-01-18 Cash 80,000
Debentures 80,000
31-12-18 Finance cost [80,000 x 9%] 7,200

Cash 7,200
31-12-18 P&L 5,000

Debentures 8,000
[Fair value loss for 2018]

Cash 7,200
31-12-19 P&L 1,000

Debentures 6,000
158
NASIR ABBAS FCA
W-1 2018 2019

---------- Rs. ----------
FV gain/(loss) to be recognized in:
OCI (3,000) 7,000
P&L (balancing) (5,000) (1,000)
Total [88 - 80] [82 - 88] (8,000) 6,000
Solution No. 11
Calculation for 2019
01-01-19
Market rate for valuation 8%
Cashflows PV
(Rs.) (Rs.)
It is only shown for students
31-12-19 8,000 7,407
knowledge about calculation of
31-12-20 8,000 6,859 market value which is already
31-12-21 8,000 6,351 given in questions
31-12-22 8,000 5,880
31-12-23 108,000 73,503
Market value [A] 100,000
IRR 8.00%
KIBOR 5.00%
Instrument-specific component for 2019 3.00%
31-12-19
Market rate for valuation 9.25%
Cashflows PV
(Rs.) (Rs.) It is only shown for students
31-12-20 8,000 7,323 knowledge about calculation of
31-12-21 8,000 6,703 market value which is already
31-12-23 108,000 75,812
Market value [B] 95,972
KIBOR 5.75%
Instrument-specific component 3.00%
Discount rate to find OCI portion 8.75%
Present value:
Rate to find OCI portion 8.75%
Cashflows PV
(Rs.) (Rs.)
31-12-20 8,000 7,356
31-12-21 8,000 6,764
31-12-22 8,000 6,220
31-12-23 108,000 77,216
[C] 97,557
159
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Fair value gain/(loss) for the year 2019 Rs.

Total fair value gain/(loss) [A - B] 4,028
Far value gain/(loss) in OCI [C - B] 1,584
Far value gain/(loss) in P&L (balancing) 2,443
Calculation for 2020

01-01-20
Market value [A] 95,972
IRR 9.25%
KIBOR 5.75%
Instrument-specific component for 2020 3.50%
31-12-20
Market rate for valuation 10.00%

Cashflows PV
It is only shown for students
(Rs.) (Rs.)
knowledge about calculation of
31-12-21 8,000 7,273
market value which is already
31-12-23 108,000 81,142
Market value [B] 95,026
KIBOR 5.50%
Instrument-specific component 3.50%
Discount rate to find OCI portion 9.00%
Present value:
Rate to find OCI portion 9.00%
Cashflows PV
(Rs.) (Rs.)
31-12-21 8,000 7,339
31-12-22 8,000 6,733
31-12-23 108,000 83,396
[C] 97,469
Fair value gain/(loss) for the year 2019 Rs.

Total fair value gain/(loss) [A - B] 946
Far value gain/(loss) in OCI [C - B] 2,442
Far value gain/(loss) in P&L (balancing) (1,496)
160
NASIR ABBAS FCA
IFRS 9 (Regular way transactions and Impairment) – Class notes
REGULAR WAY PURCHASE OR SALE
It is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset
within the time frame established generally by regulation or convention in the marketplace concerned.
(e.g. Pakistan Stock Exchange)
Following two methods are allowed for accounting for regular way purchase or sale of financial assets:
1) Trade date accounting
2) Settlement date accounting
Trade date
The trade date is the date that an entity commits itself to purchase or sell an asset.
Settlement date
The settlement date is the date that an asset is delivered to or by an entity.
1) Trade date accounting

Purchase of financial asset
On trade date Financial asset is recognized at the amount as already studied earlier
depending upon the class of asset (i.e. initial measurement) and a
corresponding payable is recognized as payment has not yet been
made.
Dr. Financial asset (i.e. purchased)

Cr. Payable
Fair value changes at year-end Gain/loss on changes in fair value of the financial asset is accounted for
(if it arrives between Trade as studied earlier depending upon the class of asset (i.e. as follows):
date and Settlement date) – Not applicable (for amortized cost class)
– Recognized in OCI (for FV through OCI class)
– Recognized in P&L (for FV through P&L class)
On settlement date (i) Payable is settled
Dr. Payable
Cr. Cash
(ii) Further gain/loss on changes in fair value of the financial asset is

accounted for as studied earlier depending upon the class of asset
(i.e. as follows):
– Not applicable (for amortized cost class)
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161
Sale of financial asset
On trade date Financial asset is de-recognized and a gain or loss on disposal is

recognized in P&L and a corresponding receivable is recognized at sale
value (i.e. fair value at trade date).
Dr. Receivable
Cr. Financial asset
Dr./Cr. P&L (i.e. gain or loss on disposal)
Fair value changes at year-end No entry as the financial asset is already derecognized.
(if it arrives between Trade
date and Settlement date)
On settlement date Receivable is settled
Dr. Cash
Cr. Receivable
2) Settlement date accounting

Purchase of financial asset
On trade date No accounting
Fair value changes at year-end Although no financial asset has yet been recognized even then a
(if it arrives between Trade gain/loss on changes in fair value of the financial asset (except if it
date and Settlement date) would be classified as measured at amortized cost) is accounted as
follows (as studied earlier depending upon the class of asset to be used):
Dr. Receivable
Cr. OCI (if it would be classified as measured at FV through OCI)
Cr. P&L (if it would be classified as measured at FV through P&L
[Above entry is an example of fair value gain. In case of fair value

loss, it is reverse]
On settlement date The financial asset is now recognized as follows:
If asset is classified as measured at amortized cost:

Dr. Financial asset [fair value of trade date]
Cr. Cash [fair value of trade date]
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162
If asset is classified as measured at fair value through OCI:

Dr. Financial asset [fair value of settlement date]
Cr. Receivable
Dr./Cr. OCI [balancing figure]
If asset is classified as measured at fair value through P&L:

Dr. Financial asset [fair value of settlement date]
Cr. Receivable
Dr./Cr. P&L [balancing figure]
Sale of financial asset
On trade date Although the financial asset is not de-recognized but a gain or loss on
changes in fair value of the financial asset is accounted for as follows:
– Not applicable (for amortized cost class)
Fair value changes at year- No further gain/loss on fair value changes is recognized because the
end (if it arrives between entity’s right to changes in the fair value ceased on trade date.
Trade date and Settlement
date)
On settlement date The financial asset is now de-recognized as follows:
If asset was classified as measured at amortized cost:

Dr. Cash [fair value of trade date]
Cr. Financial asset [Carrying amount]
Dr./Cr. Profit or loss on disposal
If asset was classified as measured at fair value through OCI:

Cr. Financial asset [fair value of trade date]
Dr. OCI OR Dr. Loss on disposal

Cr. Profit on disposal Cr. OCI
If asset was classified as measured at fair value through P&L:

Cr. Financial asset [fair value of trade date]
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163
IMPAIRMENT OF FINANCIAL ASSETS
Impairment does not apply to:

- Financial assets which are equity instruments of other entity
- Financial assets which are debt instruments of other entity and measured at FV through P&L
Following terms should be understood first to discuss the topic of impairment of financial assets:
Key terms
Credit loss
The difference between all contractual cash flows that are due to an entity in accordance with the
contract and all the cash flows that the entity expects to receive (i.e. all cash shortfalls), discounted at
the original effective interest rate (or credit-adjusted effective interest rate for purchased or
originated credit-impaired financial assets).
Expected credit losses

The weighted average of credit losses with the respective risks of a default occurring as the weights.
Lifetime expected credit losses

The expected credit losses that result from all possible default events over the expected life of a
financial instrument.
12-months expected credit losses

The portion of lifetime expected credit losses that represent the expected credit losses that result
from default events on a financial instrument that are possible within the 12 months after the reporting
date.
Credit-impaired financial asset

A financial asset is credit-impaired when one or more events that have a detrimental impact on the
estimated future cash flows of that financial asset have occurred.
Purchased or originated credit-impaired financial asset

Purchased or originated financial asset(s) that are credit-impaired on initial recognition.
Credit-adjusted effective interest rate

The rate that exactly discounts the estimated future cash payments or receipts through the expected
life of the financial asset to the amortized cost of a financial asset that is a purchased or originated
credit-impaired financial asset.
1) Expected credit losses

IAS 36 covers impairment of most of the non-current assets (except for financial assets) and it operates
an incurred loss model. This means that impairment is recognized only when an event has occurred which
has caused a fall in recoverable amount of asset. However, IFRS 9 operates an expected loss model. It is
no longer necessary for a credit event to have occurred before credit losses are recognized. Instead, an
entity always accounts for expected credit losses, and changes in those expected credit losses. The
amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since
initial recognition and, consequently, more timely information is provided about expected credit losses.
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164
1.1 – RECOGNITION OF EXPECTED CREDIT LOSSES
(a) General approach

1. An entity shall recognize an allowance for expected losses at an amount equal to 12-months expected
credit losses at initial recognition.
2. An entity shall measure the allowance for expected credit losses at each reporting date:
If the credit risk on that financial instrument If the credit risk on that financial instrument
has increased significantly since initial has NOT increased significantly since initial
recognition: recognition:
At an amount equal to lifetime expected credit At an amount equal to 12-months expected

losses credit losses
Important
o Changes in credit risk can be assessed on an individual or collective basis considering all
reasonable and supportable information.
o When making the assessment of changes in credit risk, an entity shall use the change in the risk
of a default occurring over the expected life instead of the change in the amount of expected
credit losses.
o If reasonable and supportable forward-looking information is available without undue cost or
effort, an entity cannot rely solely on past due information when determining whether credit
risk has increased significantly since initial recognition.
o There is a rebuttable presumption that the credit risk on a financial asset has increased
significantly since initial recognition when contractual payments are more than 30 days past
due.
o If previously a loss allowance has been recognized at lifetime expected credit losses, the entity
shall measure the loss allowance at 12-months expected credit losses at current reporting date
if change in credit risk is not significant now.
3. Initial recognition of loss allowance as well as any change in the amount of allowance for expected
credit losses (or reversal) shall be recognized in profit or loss as an impairment gain or loss.
In case of financial asset measured at amortized cost:

Dr. Impairment loss (P&L)
Cr. Allowance for expected credit loss (it is a contra asset account)
This “allowance for expected credit loss” is deducted from gross carrying amount of financial asset
so that a net position is presented in statement of financial position.
In case of financial asset (which is a debt instrument of another entity) measured at FV through OCI
Cr. Allowance for expected credit loss [OCI]
Since loss is credited to OCI, hence no allowance is deducted from gross carrying amount of
financial asset.
Notes: Above entries are given for impairment loss. These should be reversed in case of impairment
gain.
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165
(b) Simplified approach for trade receivables, contract assets (IFRS 15) and lease receivables
In case of Trade receivable and contract assets In case of Trade receivable and contract assets
which do not contain a significant financing which contain a significant financing component
component: and Lease receivables:
Simplified approach must be followed Simplified approach may be followed if the entity
chooses this treatment as an accounting policy
[Otherwise general approach will be used]
1. An allowance for expected credit losses on initial recognition as well as at each reporting date at an
amount equal to lifetime expected credit loss shall be recognized.
2. Any change in the amount of allowance for expected credit losses (or reversal) shall be recognized in
profit or loss as an impairment gain or loss.

Cr. Allowance for expected credit loss
This “allowance for expected credit loss” is deducted from gross carrying amount of financial asset
so that a net position is presented in statement of financial position.
Notes: Above entry is given for impairment loss. This should be reversed in case of impairment gain.
1.2 – MEASUREMENT OF EXPECTED CREDIT LOSSES

An entity shall measure expected credit losses of a financial instrument in a way that reflects:
(a) an unbiased and probability-weighted amount that is determined by evaluating a range of possible
outcomes;
(b) the time value of money; and
(c) reasonable and supportable information that is available without undue cost or effort at the reporting
date about past events, current conditions and forecasts of future economic conditions.
2) Credit-impaired asset
Evidence that a financial asset is credit-impaired include observable data about the following events:
(a) significant financial difficulty of the issuer or the borrower;

(b) a breach of contract, such as a default or past due event;
(c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial
difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise
consider;
(d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganization;
Nasir Abbas FCA

166
(e) the disappearance of an active market for that financial asset because of financial difficulties; or
(f) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit
losses.
It may not be possible to identify a single discrete event—instead, the combined effect of several events
may have caused financial assets to become credit-impaired.
2.1 – FINANCIAL ASSET WHICH SUBSEUQUENTLY BECOMES CREDIT-IMPAIRED
1. Interest revenue shall be calculated by applying the normal effective interest rate to the amortized
cost of the financial asset
Interest income = (Gross carrying amount – Loss allowance) x normal effective interest rate
2. Measurement and accounting for subsequent allowance for impairment loss would be same as
studied earlier for general approach. However, an adjustment would be needed by applying effective
interest rate to opening balance of loss allowance as follows:
Dr. Financial asset

Cr. Loss allowance [Opening loss allowance x effective interest %]
Exam note:
1 and 2 above are easier to handle if accounted for in a compound entry.
3. If in subsequent reporting periods, the credit risk on the financial instrument improves so that the
financial asset is no longer credit-impaired (e.g. improvement in the borrower’s credit rating) then we
would revert to measuring the interest income by applying the effective interest rate to the gross
carrying amount as before.
2.2 – PURCHASED OR ORIGINATED CREDIT-IMPAIRED FINANCIAL ASSET
1. In some cases, a financial asset is considered credit-impaired at initial recognition because the credit
risk is very high and in a case of purchase it is acquired at a deep discount. Credit-adjusted effective
interest rate is calculated using all contractual cashflows adjusted for initial estimate of the lifetime
expected credit losses.
2. Interest revenue shall be calculated by applying credit-adjusted effective interest rate to the
amortized cost (i.e. net carrying amount) of the financial asset from initial recognition.
3. An entity shall only recognize the cumulative changes in lifetime expected credit losses since initial
recognition as a loss allowance for purchased or originated credit-impaired financial assets. At each
reporting date, an entity shall recognize in profit or loss the amount of the change in lifetime expected
credit losses as an impairment gain or loss. An entity shall recognize favourable changes in lifetime
expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than
the amount of expected credit losses that were included in the estimated cash flows on initial
recognition.
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167
4. If expected credit losses are to be discounted then credit-adjusted effective interest rate determined
at initial recognition shall be used.
Helpful diagram for impairment
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168
IFRS 9 (Regular way transactions and Impairment) – QUESTIONS
PRACTICE QUESTIONS
Question 1
On December 29, 2019 an entity commits itself to purchase a financial asset for Rs. 1,000, which its fair value on
commitment (trade) date. On December 31, 2019 (i.e. year-end) and on January 4, 2020 (settlement date) the fair value
of the asset is Rs. 1,025 and Rs. 1,038 respectively.
Required:
Journal entries for the above transactions for each of the following cases:
Case – I Financial asset will be measured at amortized cost
Case – II Financial asset will be measured at fair value through OCI
Case – III Financial asset will be measured at fair value through P&L
Under following accounting policies:
(a) Trade date accounting
(b) Settlement date accounting
Question 2
On December 29, 2019 an entity commits itself to sell a financial asset for Rs. 1,010, which its fair value on commitment
(trade) date. Carrying amount of the asset is Rs. 1,000. On December 31, 2019 (i.e. year-end) and on January 4, 2020
(settlement date) the fair value of the asset is Rs. 1,025 and Rs. 1,030 respectively.
Required:
Journal entries for the above transactions for each of the following cases:
Case – I Financial asset will be measured at amortized cost
Case – II Financial asset will be measured at fair value through OCI
Case – III Financial asset will be measured at fair value through P&L
Under following accounting policies:
(c) Trade date accounting
(d) Settlement date accounting
Question 3
On January 1, 2018, Nobita Limited (NL) bought Rs. 200,000 (nominal value) 10% bonds, incurring transactions costs of
1% of purchase price. The bonds will be redeemed at a premium of Rs. 25% over nominal value on December 31, 2020.
The effective rate of interest is 16.6386%. The fair value of the bond was as follows:

December 31, 2018 260,000
December 31, 2019 280,000
The investment was not considered to be credit-impaired at any stage. The relevant expected credit losses, for use in
measuring the loss allowance were as follows:
Date Rs.
January 1, 2018 7,000
December 31, 2018 10,000
December 31, 2019 12,000
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NASIR ABBAS FCA
Required:
Journalize all above transactions over all relevant years if:
(a) NL's business model is to hold bonds until the redemption date and collect contractual cash flows.
(b) NL's business model is to hold bonds until redemption but also to sell them if investments with higher returns become
available.
Question 4
An entity purchased debentures of Rs. 450,000 on January 1, 2019, on which date they are not considered to be credit-
impaired. The financial asset is classified at amortized cost and has an effective interest rate of 10%. Coupon payment of
Rs. 30,000 was duly received on December 31, 2019 and December 31, 2020. The following additional information is also
available on December 31, 2019:
2019 2020
Lifetime expected credit loss if there is a default (i.e. LGD) 30% 35%
[% of gross carrying amount]
Probability of default occurring within 12-months 10% 11%
Probability of default occurring within lifetime 12% 15%
Required:
Extracts of SOFP and SOCI for the year ending December 31, 2019 and 2020 if risk assessment on each year end shows:
(a) There is no significant increase in credit risk since initial recognition
(b) There is a significant increase in credit risk since initial recognition
(c) The asset has become credit-impaired
Question 5
On January 1, 2019 Happy Limited (HL) invested in 5,000 debentures issued by Sad Limited (SL). Each debenture is
redeemable at par (i.e. Rs. 100) after 4 years. Coupon rate was 9% payable annually. Issue price was Rs. 98 per debenture
(i.e. equal to the fair value). Transaction costs incurred amount to Rs. 2,500. Effective rate of interest was 9.4678%.
HL classified this investment at amortized cost. The investment was not credit-impaired on initial recognition. On initial
recognition HL estimated the lifetime expected credit losses to be Rs. 15,000 and the 12-month expected credit losses to
be Rs. 3,125.
On December 31, 2019, due to high debt ratio and declining profit margins, SL issued a warning to its creditors that it is
undergoing a business restructuring process aimed at saving the business from bankruptcy. As a result, the directors of
HL determined that there was a significant increase in credit risk since the initial recognition. On that date, revised
estimates were as follows:
- The lifetime expected credit losses had increased to Rs. 17,500; and
- The 12-months expected credit loss had increased to Rs. 5,000
On December 31, 2020, the credit risk for the investment remained significantly higher than at initial recognition. On that
date, revised estimates were as follows:
- The lifetime expected credit losses had increased to Rs. 20,000; and
- The 12-months expected credit loss had increased to Rs. 8,000
Required:
Journal entries for the year ending December 31, 2019 and 2020 if risk assessment shows:
(a) The asset was not credit-impaired at either December 31, 2019 or December 31, 2020.
(b) The asset became credit-impaired at December 31, 2019 and remained so at December 31, 2020.
170
NASIR ABBAS FCA
Question 6
On December 1, 2019 Good Limited (GL) entered into a contract with a customer for Rs. 500,000. All performance
obligations were satisfied on that date. There is no significant financing component in the contract.
At December 31, 2019 GL does not believe that the increase in credit risk since initial recognition is significant.
If default occurs, GL expects to lose 80% of the gross carrying amount of the receivable. The customer pays in full on
January 15, 2020.
01-12-19 31-12-19
Probability of default over the next 12-months 4% 5%
Probability of default over the lifetime 6% 7%
Required:
Journal entries of above transactions.
Question 7
On December 31, 2019 Mango Limited (ML) has a portfolio of receivables of Rs. 30 million. The trade receivables do not
have a significant financing component in accordance with IFRS 15.
ML has constructed following provision matrix to determine expected credit losses on the portfolio of receivables:
Number of days past due

Current
1-30 31-60 61-90 More than 90
Gross carrying amount (Rs. million) 15.00 7.50 4.00 2.50 1.00
Default rate 0.3% 1.6% 3.6% 6.6% 10.6%
The loss allowance measured at end of 2018 was Rs. 350,000
Required:
Journal entry to record impairment loss on December 31, 2019.
Question 8
On January 1, 2019 Almond Limited (AL) purchased 10% debentures (having nominal value of Rs. 60,000) at a price of Rs.
50,000. These bonds are redeemable at par on December 31, 2022. AL’s management had estimated at initial recognition
that only 85% of contractual cashflows would be recovered. As a result of which, the investment was considered as
purchased credit-impaired financial asset and credit-adjusted effective rate was estimated at 10.627%.
On December 31, 2019 Rs. 4,800 was received in respect of coupon payment of 2019 and AL’s revised its estimate of
expected default on contractual cashflows to 20%.
Finally on December 31, 2022 the debentures were redeemed at Rs. 58,000.
Required:
All journal entries till December 31, 2022.
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NASIR ABBAS FCA
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
SOLUTIONS
Solution No. 1
Case – I Case – II Case – III
29-12-19
Financial asset 1,000 Financial asset 1,000 Financial asset 1,000

Payable 1,000 Payable 1,000 Payable 1,000
31-12-19
No entry Financial asset 25 Financial asset 25

OCI 25 P&L 25
04-01-20
Payable 1,000 Payable 1,000 Payable 1,000

Cash 1,000 Cash 1,000 Cash 1,000
Financial asset 13 Financial asset 13

OCI 13 P&L 13

29-12-19
No entry No entry No entry
31-12-19
No entry Receivable 25 Receivable 25

OCI 25 P&L 25
04-01-20

Cash 1,000 Cash 1,000 Cash 1,000
Receivable 25 Receivable 25
OCI 13 P&L 13
Solution No. 2
29-12-19
Receivable 1,010 Receivable 1,010 Receivable 1,010

Profit on disposal 10 Profit on disposal 10 Profit on disposal 10
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NASIR ABBAS FCA
31-12-19
04-01-20
Cash 1,010 Cash 1,010 Cash 1,010

Receivable 1,010 Receivable 1,010 Receivable 1,010

29-12-19
No entry Financial asset 10 Financial asset 10

OCI 10 P&L 10
31-12-19
04-01-20
Cash 1,010 Cash 1,010 Cash 1,010

Financial asset 1,000 OCI 10 Financial asset 1,010
Profit on disposal 10 Financial asset 1,010
Profit on disposal 10
Solution 3
(a) Asset shall be measured at amortized cost
Dr. Cr.
-------- Rs. -------
01-01-18 Investment [200,000 x 1.01] 202,000
Cash 202,000
01-01-18 Impairment loss [P&L] 7,000

Loss allowance 7,000
[Initial recognition of ECL]
31-12-18 Investment 33,610

31-12-18 Cash [200,000 x 10%] 20,000

Investment 20,000
31-12-18 Impairment loss [P&L] [10,000 - 7,000] 3,000

[Subsequent remeasurement of ECL]
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31-12-19 Investment 35,874

31-12-19 Cash 20,000

Investment 20,000

(b) Asset shall be measured at fair value through OCI
Dr. Cr.
-------- Rs. -------
01-01-18 Investment [200,000 x 1.01] 202,000
Cash 202,000

Loss allowance [OCI] 7,000
31-12-18 Investment 33,610

31-12-18 Cash [200,000 x 10%] 20,000

Investment 20,000

31-12-18 Investment (W-1) 44,390

31-12-19 Investment 35,874

31-12-19 Cash 20,000

Investment 20,000
174
NASIR ABBAS FCA

31-12-19 Investment (W-1) 4,126

W-1
Opening Closing Fair Fair value
Date Interest Cashflow OCI
balance balance value reserve
[A] [B = A x 6.6386%] [C] [D = A + B - C] [E] [F = E - D] [Change in F]
31-12-18 202,000 33,610 20,000 215,610 260,000 44,390 44,390

31-12-19 215,610 35,874 20,000 231,484 280,000 48,516 4,126
Solution 4
(a) 2019 2020
----------- Rs. ----------
SOCI - extracts
Interest income (W-1) 45,000 46,500
Expected loss [Change in allowance(W-1)] (13,950) (4,588)
SOFP - extracts
Non-current assets
Investment (W-1) 451,050 462,962
(b)
SOCI - extracts
Expected loss [Change in allowance(W-1)] (16,740) (8,539)
SOFP - extracts
Non-current assets
Investment (W-1) 448,260 456,221
(c)
SOCI - extracts
Expected loss [Change in allowance(W-1)] [25,279 – 16,740 – 1,674] (16,740) (6,865)
SOFP - extracts
Non-current assets
Investment (W-1) 448,260 456,221
175
NASIR ABBAS FCA
W-1 (a) (b) (c)

---------------------- Rs. -------------------
Initial amount [A] 450,000 450,000 450,000
Interest income 45,000 45,000 45,000
[A x 10%] [A x 10%] [A x 10%]
Cashflow (30,000) (30,000) (30,000)
Gross balance 31-12-19 [B] 465,000 465,000 465,000
Loss allowance 31-12-19 (13,950) (16,740) (16,740)
[B x 30% x 10%] [B x 30% x 12%] [B x 30% x 12%]
[C] 451,050 448,260 448,260
Gross balance 01-01-20 465,000 465,000 465,000

Interest income 46,500 46,500 44,826
[B x 10%] [B x 10%] [C x 10%]
Interest adjustment for allowance [16,740 x 10%] - - 1,674
Cashflow (30,000) (30,000) (30,000)
Gross balance 31-12-20 [D] 481,500 481,500 481,500
Loss allowance 31-12-20 (18,538) (25,279) (25,279)
[D x 35% x 11%] [D x 35% x 15%] [D x 35% x 15%]
462,962 456,221 456,221
Solution 5
(a) Dr. Cr.
-------- Rs. -------
01-01-19 Investment [5,000 x 98 + 2,500] 492,500
Cash 492,500

31-12-19 Investment 46,629

31-12-19 Cash 45,000

Investment 45,000

31-12-20 Investment 46,783

176
NASIR ABBAS FCA
31-12-20 Cash 45,000

Investment 45,000

(b) Dr. Cr.

-------- Rs. -------
01-01-19 Investment [5,000 x 98 + 2,500] 492,500
Cash 492,500

31-12-19 Investment 46,629

31-12-19 Cash 45,000

Investment 45,000

31-12-20 Investment 46,783

Loss allowance (W-1) 1,657
31-12-20 Cash 45,000

Investment 45,000
31-12-20 Impairment loss [P&L] [20,000 - 17,500 - 1,657] 843

Loss allowance 843
177
NASIR ABBAS FCA
W-1 (a) (b)

-------------- Rs. -------------
Initial amount [5,000 x 98 + 2,500] [A] 492,500 492,500
Interest income 46,629 46,629
[A x 9.4678%] [A x 9.4678%]
Cashflow [5,000 x 100 x 9%] (45,000) (45,000)
Gross balance 31-12-19 [B] 494,129 494,129
Loss allowance 31-12-19 (17,500) (17,500)
[C] 476,629 476,629
Gross balance 01-01-20 494,129 494,129

Interest income 46,783 45,126
[B x 9.4678%] [C x 9.4678%]
Interest adjustment for allowance [17,500 x 9.4678%] - 1,657
Cashflow (45,000) (45,000)
Gross balance 31-12-20 [D] 495,912 495,912
Loss allowance 31-12-20 (20,000) (20,000)
475,912 475,912
Solution 6
Dr. Cr.
-------- Rs. -------
01-12-19 Trade receivables 500,000
Sales 500,000
01-12-19 Impairment loss [P&L] [500,000 x 80% x 6%] 24,000

31-12-19 Impairment loss [P&L] [500,000 x 80% x 7% - 2 4,000] 4,000

15-01-20 Cash 500,000

Trade receivable 500,000
[Cash received from customer]
15-01-20 Loss allowance 28,000

Impairment loss [P&L] 28,000
[Loss allowance reversed on cash recovery]
Solution 7
Dr. Cr.
-------- Rs. million -------
31-12-19 Impairment loss [P&L] 0.23
Loss allowance 0.23
[Impairment loss for 2019]
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W-1
Gross
Default rate Allowance
amount
(Rs. million) (Rs. million)
Current 15.00 0.30% 0.05
1-30 days 7.50 1.60% 0.12
31-60 days 4.00 3.60% 0.14
61-90 days 2.50 6.60% 0.17
More than 90 days 1.00 10.60% 0.11
0.58
0.23
Solution 8
Dr. Cr.
-------- Rs. -------
01-01-19 Investment 50,000
Cash 50,000

31-12-19 Cash 4,800

P&L 300
31-12-19 Impairment loss [P&L] (W-1) 2,992

[Measurement of ECL]

Loss allowance (W-1) 318
31-12-20 Cash 4,900

P&L 200
31-12-20 Loss allowance [2,992 + 318 - 1,859] 1,451

Impairment gain [P&L] 1,451
179
NASIR ABBAS FCA

Loss allowance 198
31-12-21 Cash 5,300

P&L 200
31-12-21 Loss allowance [1,859 + 198 + 1,665] 3,722


Loss allowance (W-1) 177
31-12-22 Cash 58,000

P&L 235
[Redemption amount received]
W-1 Rs.
Initial
amount 50,000
Interest income [50,000 x 10.627%(W-2)] 5,314
Cashflow (W-2) (5,100)
Gross balance 31-12-19 50,214
Loss allowance 31-12-19 (W-2.1) (2,992)
47,221

Interest income [47,221 x 10.627%] 5,018
Interest adjustment for allowance [2,992 x 10.627%] 318
Loss allowance 31-12-20 (W-.2.2) (1,859)
48,590

Interest adjustment for allowance [1,859 x 10.627%] 198
Loss allowance 31-12-21 (W-.2.2) 1,665
52,376
180
NASIR ABBAS FCA

Interest adjustment for allowance [1,665 x 10.627%] (177)
Cashflow (W-2) (56,100)
Gross balance 31-12-22 -
Loss allowance 31-12-22 (W-.2.2) -
-
W-2
Contractual Recovery Expected
Credit-adjusted effective rate cashflows expected cashflows
(Rs.) (Rs.)
Transaction price (50,000) (50,000)
31-12-19 6,000 85% 5,100
31-12-20 6,000 85% 5,100
31-12-21 6,000 85% 5,100
31-12-22 66,000 85% 56,100
Credit-adjusted effective rate 10.627%
Initial estimate of expected credit loss Rs.

PV of contractual cash flows at credit-impaired effective rate 58,824
PV of expected cash flows at credit-impaired effective rate 50,000
8,824
W-2.1
31-12-19
Contractual Expected
Default PV of loss
Expected credit loss cash flows credit loss
31-12-20 6,000 20% 1,200 1,085
31-12-21 6,000 20% 1,200 981
31-12-22 66,000 20% 13,200 9,750
11,816
Initial estimate of credit loss 8,824
Change in expected credit loss 2,992
W-2.2
31-12-20
Default PV of loss
31-12-21 6,000 18% 1,080 976
31-12-22 66,000 18% 11,880 9,707
10,683
Change in expected credit loss 1,859
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W-2.3
31-12-21
Default PV of loss
31-12-22 66,000 12% 7,920 7,159
7,159
Change in expected credit loss (1,665)
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Dr. Cr.
Purchase transaction --------- Rs. -------
28-09-11 Financial asset [20,000 x 24] 480,000
Payable 480,000
30-09-11 Financial asset [21,000 x 23.5 - 480,000] 13,500

P&L 13,500
30-09-11 Payable [480,000 - 20,000 x 23.50] 10,000

Exchange gain (P&L) 10,000
03-10-11 Financial asset [21,500 x 25 - 21,000 x 23.5] 44,000

P&L 44,000
03-10-11 Payable [20,000 x 23.50] 470,000

Exchange loss (P&L) 30,000
Cash [20,000 x 25] 500,000
Sale transaction
29-09-11 Receivable [35,000 x 23] 805,000
Loss on disposal 4,200
Financial asset 809,200
30-09-11 Receivable [35,000 x (23.5 - 23)] 17,500

04-10-11 Cash [35,000 x 26] 910,000

Receivable [35,000 x 23.5] 822,500

Dr. Cr.
Purchase transaction --------- Rs. -------
30-09-11 Receivable [(21,000 - 20,000) x 23.5] 23,500
P&L 23,500
04-10-11 Financial asset [21,500 x 25] 537,500

Receivable 23,500
P&L 14,000
Cash [20,000 x 25] 500,000
Sale transaction
29-09-11 P&L 4,200
Financial asset [809,200 - 35,000 x 23] 4,200
30-09-11 Financial asset [35,000 x (23.5 - 23)] 17,500

04-10-11 Cash [35,000 x 26] 910,000

Financial asset [809,200 - 4,200 + 17,500] 822,500
183
Q-5 Jun-19 Dr. Cr.
-------- Rs. -------
01-01-15 Investment [15,000 x 96 + 35,000] 1,475,000
Loss on initial recognition [15,000 x 1] 15,000
Cash 1,490,000

31-12-15 Investment 185,850

31-12-15 Cash 180,000

Investment 180,000
31-12-15 No entry required as there is no change in loss allowance (i.e. 11,200)
31-12-16 Investment 186,587

31-12-16 Cash 180,000

Investment 180,000

31-12-17 Investment 187,417

31-12-17 Cash 180,000

Investment 180,000

31-12-18 Investment 188,352

184
31-12-18 Cash 180,000
Investment 180,000

W-1 Rs.
Initial amount [15,000 x 96 + 35,000] 1,475,000
Interest income [1,475,000 x 12.60%] 185,850
Cashflow [1,500,000 x 12%] (180,000)
Gross balance 31-12-15 1,480,850
Loss allowance 31-12-15 (11,200)
1,469,650
Gross balance 01-01-16 1,480,850

Cashflow [1,500,000 x 12%] (180,000)
Gross balance 31-12-16 1,487,437
1,424,837
Gross balance 01-01-17 1,487,437

Cashflow [1,500,000 x 12%] (180,000)
Gross balance 31-12-17 1,494,854
1,423,954
Gross balance 01-01-18 1,494,854

Interest adjustment for allowance [70,900 x 12.60%] 8,933
Cashflow [1,500,000 x 12%] (180,000)
Gross balance 31-12-18 1,503,206
1,432,306
185
IFRS 9 (Re-classification and De-recognition) – Class notes
RE-CLASSIFICATION
Financial assets
1. When and only when an entity changes it business model for managing financial assets, it shall
reclassify all affected financial assets. Such changes are expected to be very infrequent. A change in
entity’s business model will occur only when an entity either begins or ceases to perform an activity
that is significant to its operations.
2. The reclassification shall be applied prospectively from the reclassification date. The entity shall not
restate any previously recognized gains, losses (including impairment gains or losses) or interest.
Reclassification date
The first day of the first reporting period following the change in business model that results in an
entity reclassifying financial assets.
3. The following are not changes in business model:

- A change in intention related to particular financial asset
- The temporary disappear of a particular market for financial assets
- A transfer of financial assets between parts of the entity with different business models.
If a financial asset is reclassified out of AMORTIZED COST measurement:

Reclassified to: Treatment
Fair value through P&L - Loss allowance is derecognized and adjusted against financial asset.
- The asset shall be measured at fair value on reclassification date.
- Any resulting fair value gain or loss shall be recognized in P&L.
Fair value through OCI - The asset shall be measured at fair value on reclassification date.
- Any resulting fair value gain or loss shall be recognized in OCI.
- The effective interest rate and the measurement of expected credit
losses shall not be adjusted as a result of the reclassification.
- The loss allowance, which is currently shown as a contra asset
account, would be de-recognized and recognized as a loss
allowance[OCI].
If a financial asset is reclassified out of FAIR VALUE through P&L measurement:

Fair value through OCI - The asset shall continue to be measured at fair value.
- The effective interest rate is calculated based on the fair value of the
asset at reclassification date.
- For the purpose of initial recognition of loss allowance,
reclassification date is treated as the date of initial recognition.
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186
Amortized cost - The asset shall be measured at fair value on reclassification date.
- Any resulting fair value gain or loss shall be recognized in P&L.
- The fair value at reclassification date becomes its new gross carrying
amount.
- The effective interest rate is calculated based on the fair value of the
asset at reclassification date.
- For the purpose of initial recognition of loss allowance,
reclassification date is treated as the date of initial recognition.
If a financial asset is reclassified out of FAIR VALUE through OCI measurement:

Fair value through P&L - The asset shall continue to be measured at fair value.
- The cumulative gain or loss previously recognized in OCI shall be
reclassified to P&L.
Amortized cost - The asset shall be measured at fair value on reclassification date.
- The cumulative gain or loss previously recognized in OCI shall be
removed from equity and adjusted against the asset.
Dr. Fair value reserve [it is shown in SOCE]

Cr. Financial asset
- The effective interest rate and the measurement of expected credit

losses shall not be adjusted as a result of the reclassification.
- A loss allowance would be recognized as a contra asset account from
the reclassification date.
An entity shall not reclassify any financial liability.
DE-RECOGNITION OF FINANCIAL ASSET
1. An entity shall derecognize a financial asset when, and only when:

(a) the contractual rights to the cash flows from the financial asset expire, or
(b) it transfers the financial asset and the transfer qualifies for derecognition.
2. An entity transfers a financial asset if, and only if, it either:

(a) transfers the contractual rights to receive the cash flows of the financial asset, or
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187
(b) retains the contractual rights to receive the cash flows of the financial asset, but assumes a
contractual obligation to pay the cash flows to one or more recipients in an arrangement that
meets the following conditions:
Conditions
(i) The entity has no obligation to pay amounts to the eventual recipients unless it collects
equivalent amounts from the original asset. Short-term advances by the entity with the right
of full recovery of the amount lent plus accrued interest at market rates do not violate this
condition.
(ii) The entity is prohibited by the terms of the transfer contract from selling or pledging the
original asset other than as security to the eventual recipients for the obligation to pay them
cash flows.
(iii) The entity has an obligation to remit any cash flows it collects on behalf of the eventual
recipients without material delay. In addition, the entity is not entitled to reinvest such cash
flows, except for investments in cash or cash equivalents during the short settlement period
from the collection date to the date of required remittance to the eventual recipients, and
interest earned on such investments is passed to the eventual recipients.
3. When an entity transfers a financial asset:

(a) if the entity transfers substantially all the risks and rewards of ownership
The entity shall derecognize the financial asset and recognize separately as assets or liabilities any
rights and obligations created or retained in the transfer.
Examples
(a) an unconditional sale of a financial asset;
(b) a sale of a financial asset together with an option to repurchase the financial asset at its fair
value at the time of repurchase; and
(c) a sale of a financial asset together with a put or call option that is deeply out of the money
(b) if the entity retains substantially all the risks and rewards of ownership
The entity shall continue to recognize the financial asset and recognize a financial liability for the
consideration received.
Examples
(a) a sale and repurchase transaction where the repurchase price is a fixed price or the sale
price plus a lender’s return;
(b) a securities lending agreement;
(c) a sale of a financial asset together with a total return swap that transfers the market risk
exposure back to the entity;
(d) a sale of a financial asset together with a deep in-the-money put or call option; and
(e) a sale of short-term receivables in which the entity guarantees to compensate the
transferee for credit losses that are likely to occur.
(c) if the entity neither transfers nor retains substantially all the risks and rewards of ownership
[for example sale and repurchase transactions (i.e. repo transactions)]
The entity shall determine whether it has retained control of the financial asset.
(i) if the entity has not retained control, it shall derecognize the financial asset and recognize
separately as assets or liabilities any rights and obligations created or retained in the transfer.
(ii) if the entity has retained control, it shall continue to recognize the financial asset to the extent
of its continuing involvement in the financial asset.
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4. On de-recognition of a financial asset in its entirety, the difference between:

(a) The carrying amount (measured at date of de-recognition); and
(b) The consideration received (including any new asset obtained less any new liability)
Shall be recognized in P&L.
Measurement at date of de-recognition

Before making above entry for de-recognition, the carrying amount is measured at the date of de-
recognition using the same rules as studied earlier for “subsequent measurement”.
5. If the transferred asset is part of a larger financial asset (e.g. when an entity enters into an interest
rate stirp whereby the counterparty obtains the right to the interest cash flows but not the principal
cash flows from a debt instrument), the previous carrying amount of the larger financial asset shall be
allocated between the part that continues to be recognized and the part that is de-recognized, on the
basis of the relative fair values of parts on the date of transfer. The difference between:
(a) The carrying amount (measured at date of de-recognition) allocated to the part derecognized;
and
(b) The consideration received for the part derecognized (including any new asset obtained less any
new liability)
Shall be recognized in P&L.
Re-classification of cumulative gain/loss on debt investment measured at FV through OCI

It has already been discussed earlier in subsequent measurement that cumulative value fair
gain/loss previously recognized in OCI shall be reclassified to P&L on de-recognition.
In the asset, which is being partially de-recognized has cumulative fain/loss in OCI, then the balance
in OCI will also be allocated based on the relative fair values of parts on the date of transfer.
Some important transactions for exams:

Repo transaction
Under repo transaction (i.e. sale and repurchase agreement) an entity sells an asset with a condition
that same asset will be repurchased after some agreed time.
Sale of asset – If terms of sale suggest that substantially all the risks and rewards are transferred then
asset is derecognized (e.g. when repurchase price is based on fair value on repurchase date)
Secured loan – If terms of sale suggest that substantially all the risks and rewards are not transferred
(e.g. when repurchase is either at a fixed price or sale price plus lender’s rate of return). This transaction
is a secured loan in substance. Entity shall not de-recognize the asset rather it shall recognize a loan
and account for accordingly.
Factoring
Factoring means sale of receivables to another party called “factor”. Factor provides debt collection
services and also provide a certain portion as advance. Factor service may be “with recourse” or
“without recourse”.
With recourse – Since bad debt risk is borne by the entity, therefore, any advance received is considered
as a loan and receivables are not derecognized.
Without recourse – Since bad debt risk is borne by the factor, therefore, receivables are derecognized.
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189
Write-off
An entity shall directly reduce the gross carrying amount of a financial asset when the entity has no
reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write-off
constitutes a de-recognition event.
For example, an entity plans to enforce the collateral on a financial asset and expects to recover no
more than 30 per cent of the financial asset from the collateral. If the entity has no reasonable
prospects of recovering any further cash flows from the financial asset, it should write off the remaining
70 per cent of the financial asset.
DE-RECOGNITION OF FINANCIAL LIABILITIES
1. An entity shall remove a financial liability (or a part of a financial liability) from its statement of
financial position when, and only when, it is extinguished—i.e. when the obligation specified in the
contract is discharged (e.g. payment) or cancelled or expires.
2. An exchange between an existing borrower and lender of debt instruments with substantially
different terms shall be accounted for as an extinguishment of the original financial liability and the
recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing
financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor)
shall be accounted for as an extinguishment of the original financial liability and the recognition of a
new financial liability.
Substantial change
The terms are substantially different if the discounted present value of the cash flows under the
new terms, including any fees paid net of any fees received and discounted using the original
effective interest rate, is at least 10 per cent different from the discounted present value of the
remaining cash flows of the original financial liability.
3. The difference between:

(a) the carrying amount of a financial liability (or part of a financial liability) extinguished or
transferred to another party; and
(b) the consideration paid, including any non-cash assets transferred or liabilities assumed
shall be recognized in profit or loss.
4. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment,

any costs or fees incurred are recognized as part of the gain or loss on the extinguishment. If the
exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust
the carrying amount of the liability and are amortized over the remaining term of the modified liability
(i.e. using revised effective interest rate).
IFRIC 19 – Extinguishing financial liabilities with equity instruments

Background
A debtor and creditor might renegotiate the terms of a financial liability with the result that the debtor
extinguishes the liability fully or partially by issuing equity instruments to the creditor. These
transactions are sometimes referred to as ‘debt for equity swaps’.
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Scope
An entity shall not apply this Interpretation to transactions in situations where:
(a) the creditor is also a direct or indirect shareholder and is acting in its capacity as a direct or indirect
existing shareholder.
(b) the creditor and the entity are controlled by the same party or parties before and after the
transaction and the substance of the transaction includes an equity distribution by, or contribution
to, the entity.
(c) extinguishing the financial liability by issuing equity shares is in accordance with the original terms
of the financial liability. (e.g. convertibles)
Consensus
1. When equity instruments issued to a creditor as a consideration paid to extinguish all or part of a
financial liability are recognized initially, an entity shall measure them at:
(a) the fair value of the equity instruments issued, unless that fair value cannot be reliably
measured.
(b) If the fair value of the equity instruments issued cannot be reliably measured then the equity
instruments shall be measured to reflect the fair value of the financial liability extinguished.
2. The difference between:

(i) The carrying amount of the financial liability extinguished; and
(ii) The consideration paid (i.e. amount of equity instruments issued)
Shall be recognized in profit and loss.
3. If only a part of financial liability is extinguished and part of the consideration also relates to the
modification of the remaining portion, then the consideration paid shall be allocated between the
part extinguished and part retained.
MODIFICATION OF FINANCIAL ASSET (Measured at Amortized cost)
Case – I Modification does not result in de-recognition of financial asset:
1. An entity shall recalculate the gross carrying amount of the financial asset and shall recognize a
modification gain or loss in profit or loss.
2. The gross carrying amount of the financial asset shall be recalculated as the present value of the
renegotiated or modified contractual cash flows that are discounted at the financial asset’s original
effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-
impaired financial assets).
3. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are
amortized over the remaining term of the modified financial asset.
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191
4. An entity shall assess whether there has been a significant increase in the credit risk of the financial
instrument by comparing:
(a) the risk of a default occurring at the reporting date (based on the modified contractual terms);
and
(b) the risk of a default occurring at initial recognition (based on the original, unmodified contractual
terms).
5. If the contractual cash flows on a financial asset have been renegotiated or otherwise modified, but
the financial asset is not derecognized, that financial asset is not automatically considered to have
lower credit risk. An entity shall assess whether there has been a significant increase in credit risk
since initial recognition on the basis of all reasonable and supportable information that is available
without undue cost or effort.
Case – II Modification results in de-recognition of financial asset:
1. The modified asset is considered a ‘new’ financial asset. Accordingly, the date of the modification shall
be treated as the date of initial recognition of that financial asset when applying the impairment
requirements to the modified financial asset. This typically means measuring the loss allowance at an
amount equal to 12-month expected credit losses until the credit risk is significantly increased
afterwards.
2. However, in some unusual circumstances following a modification that results in derecognition of the
original financial asset, there may be evidence that the modified financial asset is credit-impaired at
initial recognition, and thus, the financial asset should be recognized as an originated credit-impaired
financial asset.
Nasir Abbas FCA

192
IFRS 9 (Re-classification and De-recognition) – QUESTIONS
PRACTICE QUESTIONS
Question 1
On January 1, 2017, Tokyo Limited (TL) invested Rs. 500,000 (i.e. equal to face value) in 8% debentures. These debentures
would be redeemed at a premium of 10%. The effective interest was 8.6687%.
Initially these debentures were classified as measured at amortized cost. However, on June 30, 2019 management of TL
changed its business model and decided to re-classify these bonds as measured at fair value through P&L.
The fair values of the debentures were as follows:

June 30, 2019 540,000
January 1, 2020 510,000
December 31, 2020 545,000
The debentures have never been credit-impaired and there have been no significant increase in credit risk since initial
recognition. The expected credit losses were determined as follows:
Date 12-month credit losses Lifetime credit losses

(Rs.) (Rs.)
January 1, 2017 5,000 12,500
December 31, 2017 7,000 15,000
December 31, 2018 8,000 16,700
December 31, 2019 9,200 17,000
Required:
Journal entries for the years ending December 31, 2019 and 2020.
Question 2
Sigma Limited (SL) purchased bonds in a company some years ago. The bonds were classified at fair value through profit
or loss since they were held for trading. The bonds have a face value of Rs. 500,000 and coupon rate of 10% per annum.
The bonds would be redeemed at a premium of 20% on December 31, 2025.
On August 1, 2019, SL decided to change the classification from fair value through P&L to amortized cost.
The fair values of the bonds were as follows:

December 31, 2018 545,000
August 1, 2019 570,000
January 1, 2020 590,000

(Rs.) (Rs.)
January 1, 2018 5,000 12,500
January 1, 2019 7,000 15,000
January 1, 2020 8,000 16,700
December 31, 2020 9,200 17,000
Required:
193
NASIR ABBAS FCA
Question 3
Mango Limited (ML) purchased debentures of a company on January 1, 2018 for Rs. 147,408 (i.e. fair value). The face
value of debentures was Rs. 100,000 and coupon rate was 20% per annum. These would be redeemed at a premium of
23% on December 31, 2021. Effective interest rate was 10%.
On August 1, 2019, ML decided to change the classification from fair value through OCI to amortized cost.

December 31, 2018 145,350
August 1, 2019 147,500
December 31, 2019 148,850
December 31, 2020 142,000

(Rs.) (Rs.)
January 1, 2018 5,000 12,500
December 31, 2018 7,000 15,000
December 31, 2019 8,000 16,700
December 31, 2020 9,200 17,000
Required:
Question 4
On April 30, 2020 Alpha Limited (AL) sold 3,000 shares of a company at a price of Rs. 65 per share (fair value of share on
that date was Rs. 68). AL also incurred a transaction cost of Rs. 0.70 per share in sale transaction.
These shares had been purchased last year and were re-measured on December 31, 2019 to Rs. 62 per share.
Required:
Journal entries to record sale of shares on April 30, 2020 if AL measures its investments in shares at:
(a) Fair value through P&L
(b) Fair value through OCI
Question 5
On April 30, 2020 Beta Limited (BL) sold 2,000 debentures of a company at a price of Rs. 115 per debenture (fair value of
debenture on that date was Rs. 118). BL also incurred a transaction cost of Rs. 2.50 per debenture.
These debentures had been purchased on January 1, 2018 for Rs. 105 per debenture and also incurred transaction costs
of Rs. 6,000. The effective rate was 12% whereas annual coupon payment was Rs. 15 per debenture.
December 31, 2018 220,000
December 31, 2019 226,000
Required:
Journal entries to record sale of debentures on April 30, 2020 if BL measures its investments in debentures at:
(a) Amortized cost
(b) Fair value through OCI
194
NASIR ABBAS FCA
Question 6
On January 1, 2019 Zee Limited (ZL) sold 2,000 debentures of a company at a price of Rs. 120 per debenture (equal to fair
value of debenture on that date) to Hexa Finance (HF) in a sale and repurchase agreement. Following terms were agreed
in repo agreement:
- ZL will purchase the debentures on December 31, 2020 at a price of Rs. 132 per debenture (irrespective of fair value)
- Coupon payments for 2019 and 2020 will be received by HF being legal owner of debentures
[It gives an effective rate of return of HF equal to 17.106%]
These debentures had been purchased on January 1, 2018 for Rs. 105 per debenture and ZL also incurred transaction
costs of Rs. 6,000. The effective rate was 12% whereas annual coupon payment was Rs. 15 per debenture.
Required:
Question 7
On December 1, 2019 Wee Limited (WL) sold its receivable to factors as follows:
- Receivables amounting to Rs. 800,000 were sold to Factor Aay and receives an advance of 70% immediately at an
interest of 1% per month. The factor also charged a fee of Rs. 8,000 for the service. Factor Aay will pay the balance
amount, after deducting interest and service fees, on debt settlement by customer (i.e. on December 31, 2019). The
debts are factored with recourse.
- Receivables amounting to Rs. 500,000 were sold to a Factor Bee for an immediate payment of Rs. 400,000 and
remaining Rs. 70,000 will be paid on December 31, 2019. The debts are factored without recourse.
Required:
Journal entries for above transactions assuming that debtors settled their accounts on December 31, 2019.
Question 8
Zalmi Limited (ZL) took a loan from Dolphin Bank amounting to Rs. 800,000 on January 1, 2017 at 10% interest payable
annually. Final maturity of loan is on December 31, 2021. ZL also paid processing and legal charges of Rs. 30,000. As a
result its effective interest rate was 11.015%.
During 2018, ZL faced certain financial difficulties and the bank agreed to modify the existing loan. On January 1, 2019,
new terms were agreed as follows:
o ZL will not pay interest for the years 2019 and 2020
o From 2021 onwards annual interest rate will be charged at 12% (i.e. market interest rate)
o Final maturity date will be extended to December 31, 2023
o Fair value of new loan on that date was Rs. 637,755 and effective interest rate was 12%.
ZL paid Rs. 25,000 on January 1, 2019 relating to modification of the loan contract.
Required:
Journal entries for the year ending December 31, 2019.
Question 9
Kings Limited (KL) took a loan from Sultan Bank amounting to Rs. 800,000 on January 1, 2017 at 10% interest payable
annually. Final maturity of loan is on December 31, 2021. ZL also paid processing and legal charges of Rs. 30,000. As a
result its effective interest rate was 11.015%.
During 2018, ZL faced certain financial difficulties and the bank agreed to modify the existing loan. On January 1, 2019,
new terms were agreed as follows:
o ZL will not pay interest for the years 2019 and 2020
o From 2021 onwards annual interest rate will be charged at 13% (i.e. market interest rate)
o Final maturity date will be extended to December 31, 2023
ZL paid Rs. 40,000 on January 1, 2019 relating to modification of the loan contract.
195
NASIR ABBAS FCA
Required:
Question 10
On January 1, 2017, Sidney Limited (SL) purchased 1 million 5 years debentures issued by Oval Limited (OL) at a premium
of Rs. 5 per debenture. SL also incurred transaction costs of Rs. 1.50 per debenture. Coupon rate was 6% payable annually.
The debentures would be redeemed at par value of Rs. 100 each on December 31, 2021. The effective interest rate was
4.5186%.
Due to certain financial and liquidity issues, OL re-structured the payment plan with effect from January 1, 2020 after due
consultation with debenture holders. Under the revised plan the maturity date was extended by one year. further the
coupon rate was increased to 6.25% for 2020 and 2021 and 6.50% for 2022.
Required:
Question 11
On January 1, 2018, Mosco Limited (ML) issued 1 million debentures at par (i.e. Rs. 100 each) against purchase of a
building. Coupon rate was 12% per annum whereas effective interest was 14.5%.
On January 1, 2020 it was agreed with the creditor to settle the entire remaining liability by issue of ordinary shares of
ML (having face value of Rs. 10 each) and a result 1.8 million shares were issued. The market price of ML’s shares on
that date was Rs. 65 per share.
Required:
Journal entry to record the issue of shares.
196
NASIR ABBAS FCA
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
SOLUTIONS
Solution No. 1
Dr. Cr.
------------ Rs. -----------
31-12-19 Investment (AC) 43,948
Interest income 43,948
31-12-19 Cash 40,000

Investment (AC) 40,000
[Contractual cashflow for 2019]
31-12-19 Impairment loss [9,200 - 8,000] 1,200


Investment (FVPL) 510,000
FV gain [P&L] (W-2) 8,275
[Reclassification adjustment]
31-12-20 Cash 40,000

31-12-20 Investment (FVPL) [545,000 - 510,000] 35,000

FV gain [P&L] 35,000
W-1
Opening Closing
Date Interest Payment
balance balance
[A] [B = A x 8.6687%] [C] [A + B - C]
31-12-17 500,000 43,344 40,000 503,344
31-12-18 503,344 43,633 40,000 506,977
31-12-19 506,977 43,948 40,000 510,925
W-2 Rs.
Gross carrying amount 510,925
Loss allowance (9,200)
501,725
Fair value 510,000
Fair value gain 8,275
197
NASIR ABBAS FCA
Solution 2
Dr. Cr.
------------ Rs. -----------
31-12-19 Investment (FVPL) [590,000 - 545,000] 45,000
Fair value gain [P&L] 45,000
31-12-19 Cash [500,000 x 10%] 50,000

01-01-20 Investment (AC) 590,000

01-01-20 Impairment loss 8,000

[Initial recognition of loss allowance]
31-12-20 Investment (AC) [590,000 x 8.833%(W-1)] 52,115

31-12-20 Cash 50,000

31-12-20 Impairment loss [9,200 - 8,000] 1,200

[Measurement of loss allowance]
W-1 ---------- 5% -------- --------- 10% -------

Cashflows Factor PV Factor PV
FV at reclassification (590,000) 1.000 (590,000) 1.000 (590,000)
Year 1 payment 50,000 0.952 47,600 0.909 45,450
Year 2 payment 50,000 0.907 45,350 0.826 41,300
Year 3 payment 50,000 0.864 43,200 0.751 37,550
Year 4 payment 50,000 0.823 41,150 0.683 34,150
Year 5 payment 50,000 0.784 39,200 0.621 31,050
Year 6 payment 650,000 0.746 484,900 0.564 366,600
111,400 (33,900)
198
NASIR ABBAS FCA
Solution 3
Dr. Cr.
------------ Rs. -----------
31-12-19 Investment (FVOCI) (W-1) 14,215
31-12-19 Cash 20,000

Investment (FVOCI) 20,000

FV reserve [OCI] 9,285
31-12-19 Impairment loss [8,000 - 7,000] 1,000

01-01-20 Loss allowance [OCI] 8,000

01-01-20 Fair value reserve 12,486

01-01-20 Investment (AC) 148,850

31-12-20 Cash 20,000

31-12-20 Investment (AC) (W-1) 13,636

31-12-20 Impairment loss [9,200 - 8,000] 1,200

W-1
Opening Closing Fair value
Date Interest Payment Fair value OCI
balance balance reserve
[A] [B = A x 10%] [C] [A + B - C] [E] [F = E - D] [Change in F]
31-12-18 147,408 14,741 20,000 142,149 145,350 3,201 3,201

31-12-19 142,149 14,215 20,000 136,364 148,850 12,486 9,285
31-12-20 136,364 13,636 20,000 130,000 - - -
199
NASIR ABBAS FCA
Solution 4
Dr. Cr.
(a) ------------ Rs. -----------
30-04-20 Investment [3,000 x (68 – 62)] 18,000
[Remeasurement on the date of de-recognition]
30-04-20 Cash [3,000 x (65 – 0.70)] 192,900

Loss on disposal (P&L) 11,100
Investment [3,000 x 68] 204,000
Dr. Cr.
(b) ------------ Rs. -----------
30-04-20 Investment [3,000 x (68 – 62)] 18,000
30-04-20 Cash [3,000 x (65 – 0.70)] 192,900

Investment [3,000 x 68] 204,000
Solution 5
Dr. Cr.
(a) ------------ Rs. -----------
30-04-20 Investment (W-1) 8,294
[Investment income for 4 months]
30-04-20 Cash [2,000 x (115 - 2.50)] 225,000

Gain on disposal 9,356
Dr. Cr.
(b) ------------ Rs. -----------
30-04-20 Investment (W-1) 8,294
30-04-20 Investment (W-1) 1,706

30-04-20 Cash [2,000 x (115 - 2.50)] 225,000

Loss on disposal [P&L] 11,000
200
NASIR ABBAS FCA

Gain on disposal [P&L] 20,356
[Reclassification of cumulative gain on de-recognition]
W-1
31-12-18 216,000 25,920 30,000 211,920 220,000 8,080 8,080
31-12-19 211,920 25,430 30,000 207,350 226,000 18,650 10,570
30-04-20 207,350 8,294 - 215,644 236,000 20,356 1,706
[207,350 x 12% x 4/12]
* Initial recognition = 105 x 2000 + 6,000 = Rs. 216,000
Solution 6
Dr. Cr.
------------ Rs. -----------
01-01-19 Cash [120 x 2,000] 240,000
Financial liability - repo 240,000
[sale of debentures]
31-12-19 Financial liability - repo [2,000 x 15] 30,000

Investment 30,000
31-12-19 Interest expense [240,000 x 17.106%] 41,055

[Interest expense for 2019]
31-12-19 Investment (W-1) 25,430

[Interest income for 2019]

Investment 30,000
31-12-20 Interest expense [(240,000 + 41,055 - 30,000) x 17.106%] 42,945

31-12-20 Investment (W-1) 24,882

31-12-20 Financial liability - repo 264,000

Cash [132 x 2,000] 264,000
[Repurchase of debentures]
201
NASIR ABBAS FCA
W-1
Opening Closing
balance balance
[A] [B = A x 12%] [C] [A + B - C]
31-12-18 216,000 25,920 30,000 211,920

31-12-19 211,920 25,430 30,000 207,350
31-12-20 207,350 24,882 30,000 202,232
Solution 7
Dr. Cr.
(a) Factor with recourse ------------ Rs. -----------
01-12-19 Cash [800,000 x 70%] 560,000
Financial liability (Factor) 560,000
[70% advance received]
31-12-19 Cash 226,400

Factor finance cost [560,000 x 1%] 5,600
Factor fees [P&L] 8,000
Receivables 800,000
[Cash settlement of receivables]
Dr. Cr.
(b) Factor without recourse ------------ Rs. -----------
01-12-19 Cash 400,000
Financial asset (Factor) 70,000
Loss on sale of receivables 30,000
Receivables 500,000
[Receivables derecognized
31-12-19 Cash 70,000

[Final settlement from factor]
Solution 8
Dr. Cr.
------------ Rs. -----------
01-01-19 Bank loan (existing) (W-1) 780,161
Gain on extinguishment 117,406
Cash 25,000
Bank loan (New) 637,755
[Restructuring of loan]
31-12-19 Interest expense (W-3) 76,531

202
NASIR ABBAS FCA
W-1 Original loan schedule

Opening Closing
balance balance
[A] [B = A x 11.015%] [C] [A + B - C]
31-12-17 770,000 84,816 80,000 774,816

31-12-18 774,816 85,346 80,000 780,161
31-12-19 780,161 85,935 80,000 786,096
31-12-20 786,096 86,588 80,000 792,685
31-12-21 792,685 87,315 880,000 -
W-2 Testing of 10% rule

Cashflow Factor PV
[11.015%]
01-01-19 25,000 1.000 25,000
31-12-19 - 0.901 -
31-12-20 - 0.811 -
31-12-21 96,000 0.731 70,176
31-12-22 96,000 0.658 63,168
31-12-23 896,000 0.593 531,328
PV of new terms at original effective rate 689,672
PV of original terms 780,161
Difference 90,489
11.60%
Since it is more than 10% therefore existing loan is derecognized
W-3 Revised loan schedule

Opening Closing
balance balance
[A] [B = A x 12%] [C] [A + B - C]
31-12-19 637,755 76,531 - 714,286

31-12-20 714,286 85,714 - 800,000
31-12-21 800,000 96,000 96,000 800,000
31-12-22 800,000 96,000 96,000 800,000
31-12-23 800,000 96,000 896,000 -
Solution 9
Dr. Cr.
------------ Rs. -----------
Cash 40,000
[Restructuring cost of loan]

Bank loan (Existing) 66,931
203
NASIR ABBAS FCA

Opening Closing
balance balance
[A] [B = A x 11.015%] [C] [A + B - C]
31-12-17 770,000 84,816 80,000 774,816
31-12-18 774,816 85,346 80,000 780,161
31-12-19 780,161 85,935 80,000 786,096
31-12-20 786,096 86,588 80,000 792,685
31-12-21 792,685 87,315 880,000 -

Cashflow Factor PV
[11.015%]
01-01-19 40,000 1.000 40,000
31-12-19 - 0.901 -
31-12-20 - 0.811 -
31-12-21 104,000 0.731 76,024
31-12-22 104,000 0.658 68,432
31-12-23 904,000 0.593 536,072
Difference 59,633
7.64%
Since it is less than 10% therefore existing loan is not derecognized

Opening Closing
Date Interest (W-4) Payment
balance balance
[A] [B = A x 9.0427%] [C] [A + B - C]
01-01-19 780,161 - 40,000 740,161
31-12-19 740,161 66,931 - 807,092
31-12-20 807,092 72,983 - 880,075
31-12-21 880,075 79,583 104,000 855,657
31-12-22 855,657 77,375 104,000 829,032
31-12-23 829,032 74,968 904,000 -
W-4 Calculation of revised effective rate

Cashflow
01-01-19 (740,161)
31-12-19 -
31-12-20 -
31-12-21 104,000
31-12-22 104,000
31-12-23 904,000
IRR = 9.0427%
204
NASIR ABBAS FCA
Solution 10
Dr. Cr.
--------- Rs. million --------
01-01-20 Investment (W-2) 2.22
Modification gain [P&L] 2.22
[Modification gain recognized]
31-12-20 Investment 4.74

Interest income (W-1) 4.74
31-12-20 Cash 6.25

Investment 6.25
W-1
Opening Closing
Date Modification Interest Cashflow
balance balance
[A] [B] [C = (A + B) x 4.5186%] [D] [A + B + C - D]
31-12-17 106.50 - 4.81 6.00 105.31

31-12-18 105.31 - 4.76 6.00 104.07
31-12-19 104.07 - 4.70 6.00 102.77
31-12-20 102.77 2.22 4.74 6.25 103.49
31-12-21 103.49 - 4.68 6.25 101.91
31-12-22 101.91 - 4.59 106.50 -
W-2 Modification gain/loss

Cashflow Factor PV
[4.5186%]
31-12-20 6.25 0.957 5.98
31-12-21 6.25 0.915 5.72
31-12-22 106.50 0.876 93.29
PV of modified cashflows at original effective rate 104.99
PV of original cashflows 102.77
Modification gain 2.22
Solution 11
Dr. Cr.
------------ Rs. million ----------
-
01-01-20 Debentures (W-1) 105.36
Loss on extinguishment 11.64
Share capital [1.8 x Rs. 10] 18.00
Share premium [1.8 x Rs. 55] 99.00
[Extinguishment of financial liability]
205
NASIR ABBAS FCA
W-1
Opening Closing
balance balance
[A] [B = A x 14.5%] [C] [A + B - C]
31-12-18 100.00 14.50 12.00 102.50

31-12-19 102.50 14.86 12.00 105.36
206
NASIR ABBAS FCA
SOLUTIONS
Solution No. 1
Dr. Cr.
------------ Rs. -----------
31-12-19 Investment (AC) 43,948
31-12-19 Cash 40,000

31-12-19 Impairment loss [9,200 - 8,000] 1,200


FV gain [P&L] (W-2) 8,275
31-12-20 Cash 40,000

31-12-20 Investment (FVPL) [545,000 - 510,000] 35,000

FV gain [P&L] 35,000
W-1
Opening Closing
balance balance
[A] [B = A x 8.6687%] [C] [A + B - C]
31-12-17 500,000 43,344 40,000 503,344
31-12-18 503,344 43,633 40,000 506,977
31-12-19 506,977 43,948 40,000 510,925
W-2 Rs.
Gross carrying amount 510,925
Loss allowance (9,200)
501,725
Fair value 510,000
Fair value gain 8,275
207
NASIR ABBAS FCA
Solution 2
Dr. Cr.
------------ Rs. -----------
31-12-19 Investment (FVPL) [590,000 - 545,000] 45,000
31-12-19 Cash [500,000 x 10%] 50,000

01-01-20 Investment (AC) 590,000

01-01-20 Impairment loss 8,000

[Initial recognition of loss allowance]
31-12-20 Investment (AC) [590,000 x 8.833%(W-1)] 52,115

31-12-20 Cash 50,000

31-12-20 Impairment loss [9,200 - 8,000] 1,200

[Measurement of loss allowance]
W-1 ---------- 5% -------- --------- 10% -------

Cashflows Factor PV Factor PV
FV at reclassification (590,000) 1.000 (590,000) 1.000 (590,000)
Year 1 payment 50,000 0.952 47,600 0.909 45,450
Year 2 payment 50,000 0.907 45,350 0.826 41,300
Year 3 payment 50,000 0.864 43,200 0.751 37,550
Year 4 payment 50,000 0.823 41,150 0.683 34,150
Year 5 payment 50,000 0.784 39,200 0.621 31,050
Year 6 payment 650,000 0.746 484,900 0.564 366,600
111,400 (33,900)
208
NASIR ABBAS FCA
Solution 3
Dr. Cr.
------------ Rs. -----------
31-12-19 Cash 20,000


FV reserve [OCI] 9,285
31-12-19 Impairment loss [8,000 - 7,000] 1,000

01-01-20 Loss allowance [OCI] 8,000

01-01-20 Fair value reserve 12,486

01-01-20 Investment (AC) 148,850

31-12-20 Cash 20,000

31-12-20 Investment (AC) (W-1) 13,636

31-12-20 Impairment loss [9,200 - 8,000] 1,200

W-1
31-12-18 147,408 14,741 20,000 142,149 145,350 3,201 3,201

31-12-19 142,149 14,215 20,000 136,364 148,850 12,486 9,285
31-12-20 136,364 13,636 20,000 130,000 - - -
209
NASIR ABBAS FCA
Solution 4
Dr. Cr.
(a) ------------ Rs. -----------
30-04-20 Investment [3,000 x (68 – 62)] 18,000
30-04-20 Cash [3,000 x (65 – 0.70)] 192,900

Investment [3,000 x 68] 204,000
Dr. Cr.
(b) ------------ Rs. -----------
30-04-20 Investment [3,000 x (68 – 62)] 18,000
30-04-20 Cash [3,000 x (65 – 0.70)] 192,900

Investment [3,000 x 68] 204,000
Solution 5
Dr. Cr.
(a) ------------ Rs. -----------
30-04-20 Investment (W-1) 8,294
30-04-20 Cash [2,000 x (115 - 2.50)] 225,000

Gain on disposal 9,356
Dr. Cr.
(b) ------------ Rs. -----------
30-04-20 Investment (W-1) 8,294
30-04-20 Investment (W-1) 1,706

30-04-20 Cash [2,000 x (115 - 2.50)] 225,000

Loss on disposal [P&L] 11,000
210
NASIR ABBAS FCA

Gain on disposal [P&L] 20,356
[Reclassification of cumulative gain on de-recognition]
W-1
31-12-18 216,000 25,920 30,000 211,920 220,000 8,080 8,080
31-12-19 211,920 25,430 30,000 207,350 226,000 18,650 10,570
30-04-20 207,350 8,294 - 215,644 236,000 20,356 1,706
[207,350 x 12% x 4/12]
* Initial recognition = 105 x 2000 + 6,000 = Rs. 216,000
Solution 6
Dr. Cr.
------------ Rs. -----------
01-01-19 Cash [120 x 2,000] 240,000
[sale of debentures]

Investment 30,000
31-12-19 Interest expense [240,000 x 17.106%] 41,055

31-12-19 Investment (W-1) 25,430


Investment 30,000
31-12-20 Interest expense [(240,000 + 41,055 - 30,000) x 17.106%] 42,945

31-12-20 Investment (W-1) 24,882

31-12-20 Financial liability - repo 264,000

Cash [132 x 2,000] 264,000
[Repurchase of debentures]
211
NASIR ABBAS FCA
W-1
Opening Closing
balance balance
[A] [B = A x 12%] [C] [A + B - C]
31-12-18 216,000 25,920 30,000 211,920

31-12-19 211,920 25,430 30,000 207,350
31-12-20 207,350 24,882 30,000 202,232
Solution 7
Dr. Cr.
(a) Factor with recourse ------------ Rs. -----------
01-12-19 Cash [800,000 x 70%] 560,000
31-12-19 Cash 226,400

Factor finance cost [560,000 x 1%] 5,600
Factor fees [P&L] 8,000
Receivables 800,000
[Cash settlement of receivables]
Dr. Cr.
(b) Factor without recourse ------------ Rs. -----------
01-12-19 Cash 400,000
Loss on sale of receivables 30,000
Receivables 500,000
[Receivables derecognized
31-12-19 Cash 70,000

[Final settlement from factor]
Solution 8
Dr. Cr.
------------ Rs. -----------
Gain on extinguishment 117,406
Cash 25,000
[Restructuring of loan]

212
NASIR ABBAS FCA

Opening Closing
balance balance
[A] [B = A x 11.015%] [C] [A + B - C]
31-12-17 770,000 84,816 80,000 774,816

31-12-18 774,816 85,346 80,000 780,161
31-12-19 780,161 85,935 80,000 786,096
31-12-20 786,096 86,588 80,000 792,685
31-12-21 792,685 87,315 880,000 -

Cashflow Factor PV
[11.015%]
01-01-19 25,000 1.000 25,000
31-12-19 - 0.901 -
31-12-20 - 0.811 -
31-12-21 96,000 0.731 70,176
31-12-22 96,000 0.658 63,168
31-12-23 896,000 0.593 531,328
Difference 90,489
11.60%
Since it is more than 10% therefore existing loan is derecognized

Opening Closing
balance balance
[A] [B = A x 12%] [C] [A + B - C]
31-12-19 637,755 76,531 - 714,286

31-12-20 714,286 85,714 - 800,000
31-12-21 800,000 96,000 96,000 800,000
31-12-22 800,000 96,000 96,000 800,000
31-12-23 800,000 96,000 896,000 -
Solution 9
Dr. Cr.
------------ Rs. -----------
Cash 40,000
[Restructuring cost of loan]

Bank loan (Existing) 66,931
213
NASIR ABBAS FCA

Opening Closing
balance balance
[A] [B = A x 11.015%] [C] [A + B - C]
31-12-17 770,000 84,816 80,000 774,816
31-12-18 774,816 85,346 80,000 780,161
31-12-19 780,161 85,935 80,000 786,096
31-12-20 786,096 86,588 80,000 792,685
31-12-21 792,685 87,315 880,000 -

Cashflow Factor PV
[11.015%]
01-01-19 40,000 1.000 40,000
31-12-19 - 0.901 -
31-12-20 - 0.811 -
31-12-21 104,000 0.731 76,024
31-12-22 104,000 0.658 68,432
31-12-23 904,000 0.593 536,072
Difference 59,633
7.64%
Since it is less than 10% therefore existing loan is not derecognized

Opening Closing
Date Interest (W-4) Payment
balance balance
[A] [B = A x 9.0427%] [C] [A + B - C]
01-01-19 780,161 - 40,000 740,161
31-12-19 740,161 66,931 - 807,092
31-12-20 807,092 72,983 - 880,075
31-12-21 880,075 79,583 104,000 855,657
31-12-22 855,657 77,375 104,000 829,032
31-12-23 829,032 74,968 904,000 -
W-4 Calculation of revised effective rate

Cashflow
01-01-19 (740,161)
31-12-19 -
31-12-20 -
31-12-21 104,000
31-12-22 104,000
31-12-23 904,000
IRR = 9.0427%
214
NASIR ABBAS FCA
Solution 10
Dr. Cr.
--------- Rs. million --------
01-01-20 Investment (W-2) 2.22
Modification gain [P&L] 2.22
[Modification gain recognized]
31-12-20 Investment 4.74

31-12-20 Cash 6.25

Investment 6.25
W-1
Opening Closing
Date Modification Interest Cashflow
balance balance
[A] [B] [C = (A + B) x 4.5186%] [D] [A + B + C - D]
31-12-17 106.50 - 4.81 6.00 105.31

31-12-18 105.31 - 4.76 6.00 104.07
31-12-19 104.07 - 4.70 6.00 102.77
31-12-20 102.77 2.22 4.74 6.25 103.49
31-12-21 103.49 - 4.68 6.25 101.91
31-12-22 101.91 - 4.59 106.50 -
W-2 Modification gain/loss

Cashflow Factor PV
[4.5186%]
31-12-20 6.25 0.957 5.98
31-12-21 6.25 0.915 5.72
31-12-22 106.50 0.876 93.29
PV of modified cashflows at original effective rate 104.99
PV of original cashflows 102.77
Modification gain 2.22
Solution 11
Dr. Cr.
------------ Rs. million ----------
-
01-01-20 Debentures (W-1) 105.36
Loss on extinguishment 11.64
Share capital [1.8 x Rs. 10] 18.00
Share premium [1.8 x Rs. 55] 99.00
[Extinguishment of financial liability]
215
NASIR ABBAS FCA
W-1
Opening Closing
balance balance
[A] [B = A x 14.5%] [C] [A + B - C]
31-12-18 100.00 14.50 12.00 102.50

31-12-19 102.50 14.86 12.00 105.36
216
NASIR ABBAS FCA
DEFINITIONS
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
A financial asset is any asset that is:

(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) to receive cash or another financial asset from another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are
potentially favourable to the entity; or
(d) a contract that will or may be settled in the entity’s own equity instruments and is:
(i) a non‑derivative for which the entity is or may be obliged to receive a variable number of the
entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or
another financial asset for a fixed number of the entity’s own equity instruments.
A financial liability is any liability that is:

(a) a contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavourable to the entity; or
(b) a contract that will or may be settled in the entity’s own equity instruments and is:
(i) a non‑derivative for which the entity is or may be obliged to deliver a variable number of the
entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or
another financial sset for a fixed number of the entity’s own equity instruments.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
PRESENTATION
Liability and Equity

1. The issuer of the financial instrument shall classify the instrument on initial recognition as a financial
liability or an equity instrument in accordance with the substance of the contractual agreement and
the definitions.
2. A critical feature in differentiating a financial liability from an equity instrument is the existence of a
contractual obligation of one party to the financial instrument (the issuer) either to deliver cash or
another financial asset to the other party (the holder) or to exchange financial assets or financial
liabilities with the holder under conditions that are potentially unfavourable to the issuer. Although
the holder of an equity instrument may be entitled to receive a pro rata share of any dividends or
Nasir Abbas FCA

217
other distributions of equity, the issuer does not have a contractual obligation to make such
distributions because it cannot be required to deliver cash or another financial asset to another party.
Compound financial instruments

[e.g. convertible preference shares]
1. An entity recognizes separately the components of a financial instrument that:

(a) creates a financial liability of the entity; and
(b) grants an option to the holder of the instrument to convert it into an equity instrument of the
entity.
For example, a bond or similar instrument convertible by the holder into a fixed number of ordinary
shares of the entity is a compound financial instrument. From the perspective of the entity, such an
instrument comprises two components: a financial liability (a contractual arrangement to deliver
cash or another financial asset) and an equity instrument (a call option granting the holder the right,
for a specified period of time, to convert it into a fixed number of ordinary shares of the entity). The
economic effect of issuing such an instrument is substantially the same as issuing simultaneously a
debt instrument with an early settlement provision and warrants to purchase ordinary shares, or
issuing a debt instrument with detachable share purchase warrants. Accordingly, in all cases, the
entity presents the liability and equity components separately in its statement of financial position.
2. Classification of the liability and equity components of a convertible instrument is not revised as a
result of a change in the likelihood that a conversion option will be exercised, even when exercise of
the option may appear to have become economically advantageous to some holders.
3. The initial carrying amounts of both components are calculated as follows:
Fair value of the instrument as a whole X

Less: Financial liability component [i.e. calculated as PV of contractual cashflows (X)
(ignoring conversion option) discounted at the market rate of interest on similar
debt instruments without conversion options]
Equity component X
Subsequent measurement:
- Financial liability component shall be subsequently measured as already studied earlier. If
amortized cost method is used, then effective interest rate is calculated. However, in absence
of any transaction cost, the market interest rate used in point (3) above will be used as effective
interest rate.
- Equity component shall not be remeasured.
4. Transaction costs that relate to the issue of compound financial instrument are allocated to the
liability and equity components of the instrument in proportion to the allocation of proceeds.
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218
Transaction cost relating to:
Equity: Financial liability:

Shall be accounted for as deduction from Shall be accounted for as already studied for initial
equity. measurement of financial liability.
Dr. Equity component Dr. Financial liability (i.e. amortized cost)
Cr. Cash OR
Dr. P&L (i.e. FV through P&L)
Cr. Cash
5. On redemption date of instrument:
If holder opts for redemption: If holder opts for conversion:

(i) Cash redemption: (i) Conversion of instrument:
Dr. Financial liability (carrying amount) Dr. Financial liability (carrying amount)
Cr. Cash (redemption amount) Cr. Share capital (face value of shares issued)
Cr. Share premium (balancing)
(ii) Transfer of equity component: (ii) Transfer of equity component:

Dr. Equity component (carrying amount) Dr. Equity component (carrying amount)
Cr. Retained earnings Cr. Retained earnings
ALTERNATIVELY
Conversion of instrument
Dr. Financial liability (carrying amount)
Dr. Equity component (carrying amount)
Cr. Share capital (face value of shares issued)
Cr. Share premium (balancing)
6. When an entity extinguishes a convertible instrument before maturity through an early redemption
or repurchase in which the original conversion privileges are unchanged:
(a) the entity allocates the consideration paid for the repurchase or redemption to the liability and
equity components of the instrument at the date of the transaction and account for as follows:
Fair value of the liability component on repurchase date [A] X

[i.e. PV of remaining contractual cashflows (ignoring conversion option)
discounted at the market rate of interest on similar debt instruments
without conversion options on repurchase date]
Less: Carrying amount of liability component (X)
(Gain)/Loss on repurchase of liability component (charged to P&L) X
Total consideration paid X

Less: Consideration for liability component [A] (X)
Consideration for equity component [B] X
Nasir Abbas FCA

219
Dr. Financial liability [Carrying amount]

Dr/Cr. Loss or gain on repurchase of liability component [P&L]
Dr. Equity component [Consideration for equity component i.e. B]
Cr. Cash [Total consideration paid]
(b) Any transaction cost paid is allocated to liability component and equity component in ratio of [A]
and [B] above mentioned in point [6(a)]. This allocated transaction cost is then accounted for as
follows:
Dr. P&L [Portion allocated to liability component]

Dr. Equity component [Portion allocated to equity component]
Cr. Cash [Total transaction cost paid]
(c) Any remaining balance in equity component may be transferred to another line item in equity e.g.
retained earnings.
Treasury shares
If an entity reacquires its own equity instruments, those instruments (‘treasury shares’) shall be deducted
from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation
of an entity’s own equity instruments. Such treasury shares may be acquired and held by the entity or by
other members of the consolidated group.
Interest, dividends, losses and gains

Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial
liability shall be recognized as income or expense in profit or loss. Distributions to holders of an equity
instrument shall be recognized by the entity directly in equity. Transaction costs of an equity transaction
shall be accounted for as a deduction from equity.
Preference shares
Preference shares may be issued with various rights. In determining whether a preference share is a
financial liability or an equity instrument, an issuer assesses the particular rights attaching to the share to
determine whether it exhibits the fundamental characteristic of a financial liability.
Nasir Abbas FCA

220
A summary of various terms relating to preference shares and the resulting accounting treatment is
outlined in the table below:
Preference shares Preference dividend Preference dividend
(Mandatory) (Discretionary)
Redeemable: It is considered as financial It is considered as compound
- Mandatory; OR liability instrument
- Optional for holder
Liability is initially measured at Liability is initially measured at
fair value i.e. present value of PV of the redemption amount
future contractual cashflows only.
Equity is initially measured as
residual.
Unwinding of Preference Preference dividend will be

dividend as well as redemption recognized as a distribution of
amount will be recognized as equity (in SOCIE).
Interest expense in P&L using Unwinding of redemption
effective interest rate method. amount will be recognized as
interest expense in P&L using
effective interest rate method.
Redeemable: It is considered as compound It is considered as equity

- Optional for issuer instrument
Liability is initially measured at Equity is initially measured at

PV of the dividends only. the entire proceeds
residual.
Unwinding of Preference Preference dividend will be

dividend will be recognized as recognized as a distribution of
Interest expense in P&L using equity (in SOCIE).
Non-redeemable It is considered as compound It is considered as equity
instrument
Liability is initially measured at Equity is initially measured at

PV of the dividends only. the entire proceeds
residual.
Unwinding of preference Preference dividend will be

dividend will be recognized as recognized as a distribution of
Interest expense in P&L using equity (in SOCIE).
Nasir Abbas FCA

221
Offsetting a financial asset and a financial liability

1. A financial asset and a financial liability shall be offset and the net amount presented in the statement
of financial position when, and only when, an entity:
(a) currently has a legally enforceable right to set off the recognized amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
2. An entity currently has a legally enforceable right of set‑off if the right of set‑off:
(a) is not contingent on a future event; and
(b) is legally enforceable in all of the following circumstances:
(i) the normal course of business;
(ii) the event of default; and
(iii) the event of insolvency or bankruptcy of the entity and all of the counterparties.
3. Offsetting a recognized financial asset and a recognized financial liability and presenting the net
amount differs from the derecognition of a financial asset or a financial liability. Although offsetting
does not give rise to recognition of a gain or loss, the derecognition of a financial instrument not only
results in the removal of the previously recognized item from the statement of financial position but
also may result in recognition of a gain or loss.
Nasir Abbas FCA

222
PRACTICE QUESTIONS
Question 1
An entity issued 2,000 convertible bonds on January 1, 2020. The bonds have a three-year term, and are issued at par
with a face value of Rs. 1,000 per bond, giving total proceeds of Rs. 2,000,000 but the fair value was Rs. 1,980,000. Interest
is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to
maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without
conversion options is 9 per cent.
Required:
Journal entry at initial recognition of bonds.
Question 2
An entity issued 1,000 convertible bonds on January 1, 2011. The bonds had a 10-year term, and were issued at par with
a face value of Rs. 1,000 per bond, giving total proceeds of Rs. 1,000,000. Interest is payable in arrears at a nominal annual
interest rate of 10% payable every 6-months. Each bond is convertible on maturity into ordinary shares at a conversion
price of Rs. 25 per share. When the bonds were issued, the prevailing market interest rate for similar debt without
conversion options was 11%.
On January 1, 2016 the entity repurchased the bonds at a price of Rs. 1,700 each. On that date market interest rate of
similar non-convertible bonds was 8%.
Required:
Journal entries to record repurchase of bonds.
Question 3
Following transactions relate to Aron Limited (AL):
(a) AL issued one million convertible bonds on January 1, 2018. The bonds had a term of three years and were issued
with a total fair value of Rs. 100 million which is also the par value. Interest is paid annually in arrears at a rate of 6%
per annum and bonds, without the conversion option, attracted an interest rate of 9% per annum on January 1, 2018.
The company incurred issue costs of Rs. 1 million. If the investor did not convert to shares they would have been
redeemed at par. At maturity all of the bonds were converted into 2.5 million ordinary shares of Rs. 10 each of AL.
No bonds could be converted before that date. The directors have been told that the impact of the issue costs is to
increase the effective interest rate to 9.38%.
(b) AL held a 3% holding of the shares in Smart, a public limited company, The investment was classified as an investment
in equity instruments and at December 31, 2020 had a carrying value of Rs. 5 million (brought forward from the
previous period). As permitted by IFRS 9 Financial instruments, AL had made an irrevocable election to recognize all
changes in fair value in other comprehensive income. The cumulative gain to December 31, 2019 recognized in other
comprehensive income relating to the investment was Rs. 400,000. On December 31, 2020, the whole of the share
capital of Smart was acquired by Given, a public limited company, and as a result, AL received shares in Given with a
fair value of Rs. 5.5 million in exchange for its holding in Smart.
(c) AL granted interest free loans to its employees on January 1, 2020 of Rs. 10 million. The loans will be paid back on
December 31, 2021 as a single payment by the employees. The market rate of interest for a two year loan on both of
the above dates is 6% per annum.
Required:
223
NASIR ABBAS FCA
IAS 32 – SOLUTIONS
SOLUTIONS
Solution No. 1
Dr. Cr.
------------ Rs. -----------
01-01-20 Cash 2,000,000
Gain on initial recognition [P&L] 20,000
Financial liability (W-1) 1,848,122
Equity component (W-1) 131,878
[Initial recognition of bonds]
W-1 Rs.
Total fair value of financial instrument 1,980,000
Liability component 1,848,122
[120,000 x annuity factor at 9% + 2,000,000 x discount factor at 9%]
Solution No. 2
Dr. Cr.
------------ Rs. -----------
01-01-16 Financial liability (W-2) 962,312
Loss on redemption of liability [P&L] (W-2) 118,797
Cash 1,700,000
[Repurchase of convertible bonds]
01-01-16 Retained earnings 559,139

[Transfer of remaining balance in equity component]
W-1 Rs.
Initial measurement
Total value of financial instrument 1,000,000
Liability component 940,248
W-2
Loss on repurchase of liability
PV of remaining contractual cashflows at 8% 1,081,109
Carrying amount of liability component 962,312

Loss on repurchase of liability component 118,797
Loss allocated to equity

Consideration paid allocated to equity [1,700,000 - 1,081,109] 618,891
Carrying amount of equity component 59,752
Loss on repurchase of equity component 559,139
224
NASIR ABBAS FCA
Solution No. 3
Dr. Cr.
------------ Rs. million ----------
(a) -
31-12-20 Interest expense (W-2) 9.11
Financial liability 9.11
31-12-20 Financial liability 6.00

Cash 6.00
[Coupon payment for 2020]
31-12-20 Financial liability (W-2) 100.00

Equity component [7.59 - 0.08](W-1) 7.52
Share capital [2.5m x 10] 25.00
Share premium (balancing) 82.52
[Conversion of bonds into shares]
(b)
31-12-20 Investment (Smart) [5.50 - 5] 0.50
FV reserve [OCI] 0.50
[Remeasurement gain on de-recognition]
31-12-20 Investment (Given) 5.50

Investment (Smart) 5.50
[Exchange of shares]
(c)
01-01-20 Financial asset (Loan) [10m x 1.06-2] 8.90
Employee cost (balancing) 1.10
Cash 10.00
[Initial recognition of loan]
31-12-20 Financial asset (Loan) [8.90 x 6%] 0.53

Interest income 0.53
W-1 Rs. million

Initial measurement
Total value of financial instrument 100.00
Liability component 92.41
[6m x 3-year annuity factor at 9% + 100m x discount factor at 9%]
Equity component 7.59
Allocation of transaction cost:

Financial liability component [1m x 92.41/100] 0.92
Equity component [1m x 7.59/100] 0.08
1.00
225
NASIR ABBAS FCA
W-2
Opening Closing
balance balance
[A] [B = A x 9.38%] [C] [A + B - C]
31-12-18 91.48 8.58 6.00 94.06

31-12-19 94.06 8.82 6.00 96.89
31-12-20 96.89 9.11 6.00 100.00
226
NASIR ABBAS FCA
Q-4 Dec-17 Dr. Cr.
------------ Rs. million -----------
Equity component (W-3) 1.23
Gain on liability repurchase [P&L] (W-3) 0.36
Cash [105 x 0.1m] 10.50
[Repurchase of convertible bonds]
01-01-16 P&L (W-4) 0.18

Equity component (W-4) 0.02
Cash [2 x 0.1m] 0.20
[Transaction costs paid]

Financial liability 6.06

Cash 5.40
[Coupon payment for 2016]
W-1 Rs. million

Initial amount (W-2) 95.57
Interest expense [95.57m x 7%] 6.69
Cashflow [100m x 6%] (6.00)
Balance 31-12-15 96.26
Repurchase [96.26 x 10%] (9.63)
86.63
Interest expense [86.63m x 7%] 6.06
Cashflow [90m x 6%] (5.40)
Balance 31-12-16 87.29
W-2
Initial measurement of liability component:
PV of interest cashflows:
2015 - 2019 [6m x 5-year annuity factor at 7% (i.e. KIBOR + 2%)] 24.60
2020 [3m x 1.07-6] 2.00
PV of principal payments:
2019 [50m x 1.07-5] 35.65
2020 [50m x 1.07-6] 33.32
95.57
227
W-3
Loss on repurchase of liability Rs. million
PV of interest cashflows:
2016 - 2019 [6m x 4-year annuity factor at 8% (i.e. KIBOR + 2%)] 19.87
2020 [3m x 1.08-5] 2.04
PV of principal payments:
2019 [50m x 1.08-4] 36.75
-5
2020 [50m x 1.08 ] 34.03
Fair value of liability component on 01-01-16 92.70
Fair value of liability component repurchased [92.70 x 10%] 9.27

Carrying amount of liability component repurchased (W-1) (9.63)
Gain on repurchase of liability component (0.36)
Consideration allocated to equity:

Total consideration [105 x 0.1m] 10.50
Consideration for liability component (9.27)
1.23
W-4
Allocation of transaction cost:
Financial liability component [0.2m x 9.27/10.50] 0.18
Equity component [0.2m x 1.23/10.50] 0.02
0.20
228
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
CONSOLIDATION – SOFP WITH ONE SUBSIDIARY

Consolidated SOFP (or Group SOFP) is line by line addition of all values in SOFPs of Parent (P) and Subsidiary (S), subject
to certain adjustments. Following are basic eliminations / calculations / workings which are essential for a consolidation
question:
(a) GOODWILL / NEGATIVE GOODWILL
Consideration transferred for acquisition of controlling interest is mostly different from value of S’s
identifiable net assets at acquisition date. This difference is called “goodwill” (if +ve) and “negative goodwill
or bargain purchase gain” (if –ve).
IFRS 3 allows to carry NCI in Group SOFP at:

- Proportionate share of fair values of net assets of “S” OR
- Fair value of NCI (i.e. Full goodwill method)
(i) NCI valued at proportionate share (ii) NCI valued at Fair value
Consideration transferred Consideration transferred

Less: P’s share in S’s identifiable net assets at acquisition Fair value of NCI
Less: S’s identifiable net assets at acquisition
Goodwill / (negative goodwill) Goodwill / (negative goodwill)
Irrespective of valuation method of NCI:

Goodwill is shown as a non-current asset in group SOFP
Negative goodwill is added to P’RE
(b) POST ACQUISITION PROFITS AND OTHER RESERVES OF “S”
(i) P’s share in S’s post acquisition profits are ADDED to P’s RE to make it Group RE
(ii) P’s share in S’s post acquisition other reserves (e.g. revaluation reserve) are ADDED to P’s other
reserves in Group reserves
Acquisition related costs:

Acquisition related transactions costs (except for the issue costs relating to debt or equity securities issued as
consideration, in which case such costs are accounted for as IAS 32 and IFRS 9) incurred by P are considered as expense
for the purpose of consolidation.
If in question, such costs are included in cost of investment appearing in P’s SOFP, then:
DEDUCT from Investment in “Goodwill” working
DEDUCT from P’s RE as an expense in “Group RE” working
(c) NON CONTROLLING INTEREST [NCI]
It is shown as a part of equity in Group SOFP and represents portion of S’s net assets that are not owned by P
(a) NCI valued at proportionate share (b) NCI valued at Fair value
NCI is valued at: NCI is valued as:

(i) Proportionate share of S’s net assets at (i) Fair value of NCI at acquisition date PLUS
acquisition date PLUS
(ii) NCI share in S’s post acquisition reserves (ii) NCI share in S’s post acquisition reserves
“S’s reserves” include revaluation reserve raised for group revaluation policy application
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Following adjustments are made for consolidation of statement of financial positions:
1. IMPAIRMENT LOSS
Goodwill on acquisition is tested for impairment annually as a part of CGU. Generally whole “S” is a CGU and
therefore when it is tested for impairment, the impairment loss is allocated to goodwill and other assets of S as
per IAS 36. In questions, impairment loss of goodwill may be:
- Given OR
- Determined by impairment testing of CGU (i.e. S) as follows:
Recoverable amount of whole S X
Less: Carrying amounts of:
Identifiable net assets of S (i.e. after making all fair value adjustments as well) X
Full goodwill on acquisition (Note) X (X)
Total impairment loss X
[This loss is now allocated as per IAS 36 i.e. first to full goodwill and then other assets]
Note:
If NCI is valued at fair value method, then Goodwill calculated at acquisition already reflects “Full
goodwill”.
If NCI is valued at proportionate share method, then goodwill on acquisition represents only the portion of
goodwill attributable to P whereas recoverable amount reflects contribution of total goodwill towards
cashflows of S. Therefore, only for the purpose of calculation of impairment loss, Goodwill is grossed up by
P’s% share to find “Full goodwill”.
Consolidation adjustment:
(1) Impairment loss on CGU allocated to other assets is:
(i) DEDUCTED from relevant assets in Group SOFP

(ii) DEDUCTED from S’s RE in “Group RE working”
(2) Impairment loss on CGU allocated to goodwill is charged as follows:
(a) NCI valued at proportionate share method (b) NCI valued at Fair value method
“Total allocated loss x P% share” is: Total allocated loss is:

(i) DEDUCTED from goodwill in “Goodwill (i) DEDUCTED from goodwill in “Goodwill
Working” Working”
(ii) DEDUCTED from P’s RE in “Group RE (ii) DEDUCTED from S’s RE “Group RE working”
Working”
[Note: If impairment loss of goodwill is given, then use

that given figure and no need to apply P% share]
Memorandum entry:
Dr. Group RE Dr. Group RE (P’s share)
Cr. Goodwill Dr. NCI (NCI share)
Cr. Goodwill (Total)
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230
2. INTER COMPANY BALANCES
Examples:
- Debtor and creditor [due to inter-company trading]
- Loan (asset) and loan (liability) [due to inter-company loan]
- Inter-company current account
- P’s investment (asset) in S’s debentures (liability)
Reconciliation of inter-company balances:

If balances (receivable / payable) do not agree then following may be the reasons alongwith relative
adjustment:
Reason Adjustment
(1.) Error Correct error accordingly in relevant books
(2.) Cash in transit Dr. Cash (i.e. ADD in cash)
Cr. Receivables (i.e. DEDUCT from receivables)
(3.) Goods in transit Dr. Inventory (i.e ADD in inventory)
Cr. Payables (i.e. ADD to payables)
Elimination of inter-company balance:
Since balances have now agreed, these are ELIMINATED
Memorandum entry:
Dr. Payable (Agreed / adjusted balance)
Cr. Receivable
3. UNREALIZED PROFIT IN INVENTORY [URP]
URP is the profit included in the amount of inventory out of inter-company sale. Inventory value may be given
in question or mentioned as a proportion of intercompany sale.
Calculation of URP:
URP = Inventory x GP margin %
OR
Inventory x GP markup / (100 + GP markup)
OR
URP = Total profit earned in the inter-company sale x % goods held in stock
P to S sale S to P sale
URP is DEDUCTED from: URP is DEDUCTED from:

(i) Inventory in Group SOFP (i) Inventory in Group SOFP
(ii) P’ RE in Group RE working (ii) S' RE in Group RE working
Memorandum entry:
Dr. Group RE Dr. Group RE
Cr. Inventory Dr. NCI
Cr. Inventory
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231
4. (a) FAIR VALUE ADJUSTMENT FOR S’s NET ASSETS
IFRS 3 requires recognition of identifiable net assets of S at fair values on acquisition date (except for items
covered in IFRS 2, IFRS 5, IFRS 16, IAS 12 and IAS 19). Therefore, certain fair value adjustments are needed.
Information about fair value adjustments at acquisition date may be available as:
- Difference between fair values and book values is given (e.g. building was overvalued by Rs. 50,000) OR
- Both Fair values and book values of S assets and liabilities are given (i.e. net assets)
Asset/Liability still exists in books of S Asset/Liability was sold / settled after acquisition
For asset: For asset:
FV adjustment (increase) is ADDED to: FV adjustment (increase) is:
(i) S’ net assets in “Goodwill working” (i) ADDED to S’s net assets in “Goodwill working”
(ii) Relevant asset’s NBV in Group SOFP (ii) DEDUCTED from S' RE in Group RE working
For liability: For liability:

FV adjustment (increase) is: FV adjustment (increase) is:
(i) DEDUCTED from S’ net assets in “Goodwill (i) DEDUCTED from S’s net assets in “Goodwill
working” working”
(ii) ADDED to Relevant liability’s NBV in Group (ii) ADDED to S' RE in Group RE working
SOFP
Memorandum entry:
Dr. Relevant Asset Dr. Group RE
Cr. Goodwill Dr. NCI
Cr. NCI Cr. Goodwill
Cr. Relevant liability Cr. NCI
In case of FV adjustment (decrease) to S’s net assets, above adjustments will be reversed
Note – If subsequently S has accounted for any such fair value adjustment in its books, then it must be reversed.
4. (b) EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of S in its books. This adjustment is not applicable if related
asset has been sold / realized after acquisition date.
Calculation of Extra accumulated depreciation:
= FV adjustment ÷ remaining useful life x years since acquisition
(above formula is for straight line method)
Extra Accumulated depreciation is DEDUCTED from:

(i) Relevant asset in Group SOFP
(ii) S’s RE in Group RE working
Memorandum entry:
Dr. Group RE
Dr. NCI
Cr. PPE
In case of negative adjustment to S’s net assets, above adjustments will be reversed
Nasir Abbas FCA

232
5. (a) PROFIT ON INTER-COMPANY SALE OF NON-CURRENT ASSET
Profit in inter-company sale of non-current asset is unrealized unless the asset is fully depreciated by buyer.
Calculation of Profit:
Profit = Sale value of Asset x margin %
OR
Sale value of Asset x markup / (100 + markup)
Profit is DEDUCTED from: Profit is DEDUCTED from:

(i) Relevant Asset in Group SOFP (i) Relevant Asset in Group SOFP
(ii) P’ RE in Group RE working (i.e. seller) (ii) S' RE in Group RE working (i.e. seller)
Memorandum entry:
Cr. Relevant asset Dr. NCI
Cr. Relevant asset
5. (b) EXCESS DEPRECIATION ON INTER-COMPANY SALE OF NON-CURRENT ASSET
As asset is depreciated, a portion of seller’s profit is realized. Therefore excess depreciation on profit is
deducted from seller’s profit on this sale OR added back to seller’s RE.
Calculation of Accumulated excess depreciation:
= Profit x depreciation % x years since sale of asset
[It is calculated using same depreciation basis as of buyer company in its books]
Excess accumulated depreciation is ADDED to: Excess accumulated depreciation is ADDED to:
Memorandum entry:
Dr. Relevant asset Dr. Relevant asset
Cr. Group RE Cr. Group RE
Cr. NCI
ALTERNATIVELY [5 (a) and (b) can be combined as follows]

5. UNREALIZED PROFIT ON INTER-COMPANY SALE OF NON CURRENT ASSET
Unrealized profit is the profit included in carrying amount of a non current asset transferred in inter-company
sale.
Calculation of Unrealized profit:
URP = NBV of Asset x margin %
OR
NBV of Asset x markup / (100 + markup)
OR
URP = Profit on sale – excess depreciation charged by buyer to date
OR
URP = NBV appearing in books of buyer – NBV (ignoring profit)
Nasir Abbas FCA

233
URP is DEDUCTED from: URP is DEDUCTED from:

Memorandum entry:
Cr. Relevant asset Dr. NCI
Cr. Relevant asset
6. S’s INTANGIBLE ASSET RECOGNIZED AT ACQUISITION
IFRS 3 allows to recognize some items (e.g. brand, customer relationship) as intangible asset in Group
SOFP even if it was not recognized by S. Treat this just like a fair value adjustment of an asset which had
“zero” carrying amount in S’s books.
Fair value at acquisition date is:

(i) ADDED to Intangible assets in Group SOFP
(ii) ADDED to S’s net assets in “Goodwill working”
Memorandum entry:
Dr. Intangible assets
Cr. Goodwill
Cr. NCI
Accumulated amortization since acquisition is:

(i) DEDUCTED from relevant asset in Group SOFP
(ii) DEDUCTED from S’s RE in Group RE working
Memorandum entry:
Dr. Group RE
Dr. NCI
Cr. Intangible assets
7. S’s CONTINGENT LIABILITY RECOGNIZED AT ACQUISITION
IFRS 3 allows the recognition of a contingent liability of S if it is a present obligation that arises from past
events and its fair value can be reliably measured.
Initial measurement
Fair value at acquisition date is:
(i) ADDED to liabilities in Group SOFP
(ii) DEDUCTED from S’s net assets in “Goodwill working”
Memorandum entry:
Dr. Goodwill
Dr. NCI
Cr. Liability
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234
Subsequent measurement
After initial recognition and until the liability is settled, cancelled or expires, the liability shall be
measured at the higher of:
(i) the amount initially recognized
(ii) the amount that would be recognized in accordance with IAS 37
If (ii) is higher, then the increase is DEDUCTED from S RE in “Group RE working”
[In other words, subsequent measurement is only needed if initially recognized amount is to be
increased]
Memorandum entry:
Dr. Group RE
Dr. NCI
Cr. Liability
Note – If S has subsequently accounted for this obligation in its books, then reverse the treatment done by S
Provisional amounts
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the
combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the
accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that
existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of
that date. During the measurement period, the acquirer shall also recognize additional assets or liabilities if new
information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have
resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as the
acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or
learns that more information is not obtainable. However, the measurement period shall not exceed one year from the
acquisition date.
8. MODES OF CONSIDERATION GIVEN FOR INVESTMENT [OTHER THAN CASH]
(1) Loan note issue (or debentures, bonds etc.)

In questions, generally, it is unrecorded. Before eliminating investment for consolidation, ensure whether
this mode of consideration has been recorded by “P” in its books
Calculation of cost of investment:

Cost of investment = no. of P’s loan notes issued x issue price
[Here: P’s notes issued = S’s shares acquired x loan note exchange ratio]
Consolidation adjustment: (If still unrecorded)

(i) INCLUDE this amount in P’s investment in “Goodwill working”
(ii) SHOW this amount in “Non-current liabilities” in Group SOFP
If P has already accounted for this issue then no adjustment required in non-current liabilities
(2) Share exchange

In questions, generally, it is unrecorded. Before eliminating investment for consolidation, ensure whether
this mode of consideration has been recorded by “P” in its books

Cost of investment = no. of P’s shares issued x market value of P’s shares at acquisition.
[Here: P’s shares issued = S’s shares acquired x share exchange ratio]
Nasir Abbas FCA

235
In case of consideration only in form of share exchange, if fair value of P’s shares is not reliably
measurable then fair value of S’s shares is used to find cost of investment.

(i) INCLUDE this amount in P’s investment in “Goodwill working”
(ii) ADD nominal value of shares in P’s share capital in Group SOFP
(iii) ADD excess of (i) over (ii), if any, to P’s share premium in Group SOFP
If P has already accounted for this issue then no adjustment required in share capital and premium.
(3) Deferred consideration

In questions, generally, it is unrecorded.

Cost of investment = Present value of deferred consideration at acquisition date discounted at P’s cost of
capital (or any other given discount rate)

(i) INCLUDE above amount in P’s investment in “Goodwill working”
(ii) SHOW present value of deferred consideration at SOFP date as liability in Group SOFP
(iii) DEDUCT excess of (ii) over (i) from P’s RE as finance cost in “Group RE working”
(4) Contingent consideration


Cost of investment = Fair value of contingent consideration at acquisition date

(ii) SHOW fair value of contingent consideration at SOFP date as liability in Group SOFP
(iii) ADD/DEDUCT any decrease/increase in fair value of contingent consideration since acquisition
date (i.e. changes resulting from events after the acquisition date) from P’s RE in “Group RE
working”
[Contingent consideration classified as equity shall not be remeasured]
(5) Other assets (e.g. land)


Cost of investment = Fair value of the asset transferred at acquisition date

(ii) DERECOGNIZE the carrying amount of asset
(iii) ADD/DEDUCT any gain/loss (i.e. fair value – carrying amount) in P’s RE in “Group RE working”
[If shares were acquired from “S” instead of its former owners and the asset transferred as
consideration remains with S, then “cost of investment” includes carrying amount of that asset and no
derecognition is required.]
If P has recorded investment in S as per IFRS 9, then do not forget to reverse any fair value gain/loss recorded
Nasir Abbas FCA

236
9. ACQUISITION DURING THE YEAR
Only effect is on the calculation of Pre and Post acquisition reserves as follows:
Pre acq. reserves = S’s reserves at SOFP date – income for the year x n/12
(n = no. of months from acquisition to year end)
Post acq. reserves= S’s reserves at SOFP date – pre acquisition reserves
OR
Income for the year x n/12
10. DEFERRED TAX ADJUSTMENTS
(i) Additional Deferred tax asset/liability shall be recognized on fair value adjustments in S net assets at
acquisition date and INCLUDED in:
- S net assets in goodwill working
- DTA/DTL in Group SOFP
(ii) Additional Deferred tax shall be calculated for all consolidation adjustments in P as well as S net assets
after acquisition and:
- CHARGED in respective RE column in Group RE working
- ADDED to or DEDUCTED from DTA/DTL in Group SOFP
11. ADJUSTMENT FOR GROUP ACCOUNTING POLICIES
Group member should follow uniform accounting policies. However, if S follows different accounting
policies, then adjustments are made while consolidation to convert figures from S financial position in
accordance with group policies.
(i) If inventory valuation method is changed

ADD / (DEDUCT) any increase / (decrease) in inventory value due to policy change effect from:
- “Inventory” in Group SOFP
- “S post acquisition RE” in Group RE working
(ii) If Group follows revaluation model and S follows cost model
ADD post acquisition increase in fair value of relevant assets to:
- “relevant asset” in Group SOFP [Total increase]
- “P’s revaluation surplus [P’s share of increase]
- “Share in S’s other reserves” in NCI working [NCI’s share of increase]
12. DIVIDEND PAID / PAYABLE BY “S”
Types of dividends:
Pre acq. dividend: Dividend paid / payable (after acquisition) out of pre-acquisition profits
Post acq. dividend: Dividend paid / payable out of post-acquisition profits
Consolidation adjustment of pre-acquisition dividend

If P has recognized it as an income, then:
(i) DEDUCT it from Investment in “Goodwill working” AND
(ii) DEDUCT if from P’s RE in “Group RE working”
Consolidation adjustment of post-acquisition dividend

Adjustments are tabulated on last page of these notes using following example:
Example
S declares a dividend of Rs. 100
P owns 80% shares of S
Nasir Abbas FCA

237
FORMATS AND WORKINGS

P Group
Consolidated Statement of Financial Position
As at …………………..
Rs.
NON-CURRENT ASSETS:
PPE XXX
(P’s + S’s + FV adj. at acquisition – Acc. extra dep. on FV adj. – URP on asset sale + revaluation
policy application +/- any other adjustment)
Intangible assets XXX

(P’s + S’s + NBV of Identifiable asset recognized at acquisition)
Goodwill (W – 1) XXX
Investment XXX
(P’s + S’s – P’s investment in S eliminated)
CURRENT ASSETS:
Inventory XXX
(P’s + S’s – URP [P to S / S to P] + Goods in transit)
Receivables XXX
(P’s + S’s +/- correction of error– cash in transit – intercompany balance + any other asset recognized at acquisition)
Dividend receivables XXX

(P’s + S’s + unrecorded dividend – intercompany receivable)
Cash / Bank XXX

(P’s + S’s + Cash in transit +/- correction of error)
XXX
Rs.
CAPITAL AND RESERVES:
Share capital XXX

(P’s + unrecorded P’s shares issued as purchase consideration)
Share premium XXX

(P’s + unrecorded premium on P’s shares issued as purchase consideration)
Other reserves (W – 2) XXX
Retained earnings (W – 3) XXX
Non-controlling interest (W – 4) XXX
NON-CURRENT LIABILITIES:
Loan notes / Debentures XXX

(P’s + S’s – Intercompany balance + unrecorded P’s loan notes issued as purchase consideration)
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238
Deferred consideration XXX

(Present value at SOFP date)
Contingent consideration XXX

(Fair value at SOFP date)
Deferred tax XXX

(P’s + S’s +/- deferred tax on consolidation adjustments)
CURRENT LIABILITIES:
Payables XXX
(P’s + S’s + goods in transit +/- correction of error – intercompany balance + contingent liab. recognized)
Dividend payable XXX

(P’s + S’s + unrecorded dividend – intercompany payable)
XXX
WORKINGS
(W – 1) Goodwill
Case I – NCI is valued at Fair value Rs. Rs.
Consideration transferred for ordinary shares:

Cash paid XXX
Loan notes issued XXX
Share exchange XXX
Any other non-cash asset transferred XXX
Contingent consideration XXX XXX
Fair Value of NCI (Note 1) XXX
XXX
Less: S’s net assets at acquisition:
S’s Capital XXX
Add: S’s Premium XXX
Add: S’s Pre-acquisition other reserves XXX
Add: S’s Pre-acquisition RE XXX
Add/Less: Fair value adjustment XXX
Less: Liabilities recognized (XXX)
Add: Assets recognized at acquisition XXX
(XXX)
Goodwill at acquisition XXX
Less: Accumulated impairment loss (Total) (XXX)
Carrying amount of goodwill XXX
Note 1: Fair value of NCI can be determined as follows in exam questions:
1) Fair value of NCI is given in question.
2) Share price of S at acquisition date is given then:
Fair value of NCI = no. of shares held by NCI x Share price
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Case II – NCI is valued at proportionate share Rs. Rs.
Consideration transferred:
Cash paid XXX
Loan notes issued XXX
Share exchange XXX
Any other non-cash asset transferred XXX
Contingent consideration XXX XXX
Proportionate value of NCI [S’s net assets at acquisition x NCI%] XXX
XXX
Less: S’s net assets at acquisition:
S’s Capital XXX
Add: S’s Premium XXX
Add: S’s Pre-acquisition other reserves XXX
Add: S’s Pre-acquisition RE XXX
Add/Less: Fair value adjustment XXX
Less: Liabilities recognized (XXX)
Add: Assets recognized at acquisition XXX
(XXX)
Less: Accumulated impairment loss (Total) (XXX)
Carrying amount of goodwill XXX
(W – 2) Other reserves
Rs. Rs.
P’s other reserves XXX
Add: S’s Other reserves XXX
Less: S’s other reserves at acquisition date (XXX)
XXX
Group share @ (% share in ordinary shares) XXX
XXX
(W – 3) Retained earnings
Rs. Rs.
P’s RE XXX
Less: Accumulated impairment loss of goodwill [Note 2] (XXX)
Less: URP on goods [ P to S ] (XXX)
Less: URP on asset sale [ P to S ] (XXX)
Less: Finance cost on deferred consideration (XXX)
Less: change in fair value of contingent consideration (XXX)
Add / Less: correction of error XXX
Add: negative goodwill (total) XXX
Add: Unrecorded income (including dividend from S) XXX
XXX
Add: S’s RE XXX
Less: Pre-acquisition RE (XXX)
Less: Acc. Impairment loss of goodwill [Note 2] (XXX)
Less: URP on goods [ S to P ] (XXX)
Less: Profit on asset sale [ S to P ] (XXX)
Less: FV adjustment of asset sold after acquisition (XXX)
Less/Add: Extra depreciation on FV adjustment (XXX)
Nasir Abbas FCA
240
Less: Amortization on asset recognized at acq. (XXX)

Less: change in value of contingent liab. recognized (XXX)
Less: unrecorded post acquisition dividend (XXX)
Add: unrecorded income XXX
XXX
XXX
Note 2:
NCI is valued at fair value: Impairment loss of goodwill is deducted from S RE
NCI is valued at proportionate basis: Impairment loss of goodwill is deducted from P RE
(W – 4) Non-controlling interest
Case I – NCI is valued at Fair value Rs.
Fair value of NCI at acquisition date XXX
Add: Share in S’s post acquisition other reserves (W – 2) XXX

[NCI % share in ordinary shares]
Add: Share in S’s post acquisition RE (W – 3) XXX

XXX
Case II – NCI is valued at proportionate share Rs.
Proportionate value of NCI at acquisition date (W – 1) XXX
Add: Share in S’s post acquisition other reserves (W – 2) XXX

Add: Share in S’s post acquisition RE (W – 3) XXX

XXX
Nasir Abbas FCA

241
POST AQCUISITION DIVIDEND
PAID NOT YET PAID [Declared before year end]
1-Recorded by both 2-Recorded by both 3-Not recorded by (P) 4-Not recorded by (S) 5-Not recorded by both
Entries which have been made in separate books:
P S P S P S P S P S
Cash 80 R.E. 100 D.R. 80 R.E. 100 R.E. 100 D.R. 80
Income 80 Cash 100 Income 80 D.P. 100 D.P. 100 Income 80
Consolidation adjustments required – In Group SOFP:
No adjustment required. Eliminate Inter company (i). Add P’s share in S’s (i). Deduct S’s total dividend (i). Add P’s share in S’s
balance of 80 dividend to P’s RE in “Group from S’s post acquisition dividend to P’s RE in “Group
RE working” profits RE working”
Dividend Payable 80
Dividend Receivable 80 Dividend Receivable 80 Group RE 80 Dividend Receivable 80
Group RE 80 NCI 20 Group RE 80
Dividend Payable 100
(ii). Then eliminate inter (ii). Deduct S’s total dividend
company balance of 80 (ii). Then eliminate inter from S’s post acquisition
company balance of 80 profits
Dividend Payable 80 Group RE 80
Dividend Receivable 80 Dividend Payable 80
NCI 20
Dividend Receivable 80 Dividend Payable 100
(iii). Then eliminate inter

company balance of 80
Dividend Payable 80
Dividend Receivable 80
Nasir Abbas FCA
242
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
PRACTICE QUESTIONS
Question No. 1
Following are the balance sheets as at June 30, 2019:

P S
---------- Rs.--------
Non-current assets
Property, plant & equipment 65,000 75,000
Investments 50,000 10,000
Current assets
Inventories 12,000 11,000
Debtors 12,000 13,000
Cash & bank 7,000 8,000
146,000 117,000
Equity
Share capital (Rs. 10 per share) 45,000 32,000
Share premium 5,000 3,000
Other reserves 14,000 7,000
Retained earnings 61,000 53,000
- - -
Current liabilities
Creditors 21,000 22,000
146,000 117,000
Following further information is available:

(i) P acquired 90% shares of S some years ago for Rs. 47,000 when other reserves were Rs. 3,000 and retained
earnings were Rs. 7,500.
(ii) Fair value of non-controlling interest at acquisition date was Rs. 16 per share.
(iii) At year end, goodwill is impaired by Rs. 1,000.
(iv) During the year P sold some goods to S in respect of which, Rs. 6,000 is still included in debtors. This balance does
not agree with S records due to a cash in transit of Rs. 1,000.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 2

P S
---------- Rs.--------
Non-current assets
Investments 40,000 -
Current assets
Debtors 12,000 10,000
Cash & bank 4,000 7,000
126,000 89,000
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NASIR ABBAS FCA
P S
Equity ---------- Rs.--------
Debentures - 20,000
Current liabilities
Creditors 18,000 11,000
126,000 89,000

(i) P acquired 1800 shares of S some years ago for Rs. 31,000 when other reserves were Rs. 3,000 and retained
(ii) At year end, goodwill is impaired by Rs. 1,000.
(iii) During the year P sold goods to S for Rs. 9,000 at a profit margin of 20%. Half of these goods are still included in
S stock.
(iv) In respect of above sales, P debtors include Rs. 7,000. This balance does not agree with S records due to a
payment of Rs. 500 double recorded by S.
(v) P investments also include investment in 20% of S debentures.
Required:
Question No. 3
P S
---------- Rs. ----------
Non-current assets
Current assets
S current account 5,000 -
Debtors 11,000 10,000
Cash & bank 5,000 8,000
125,000 93,000
Equity
Other reserves 13,000 -
Bank loan - 20,000
Current liabilities
Creditors 16,000 11,000
P current account - 7,000
125,000 93,000
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NASIR ABBAS FCA

(i) P acquired 80% shares of S some years ago for Rs. 21,000 when retained earnings had a debit balance of
Rs.4,000.
(ii) Fair value of non controlling interest at acquisition date was Rs. 9.5 per share.
(iii) During the year S sold goods to P for Rs. 10,000. Profit included in this sale was Rs. 1,000. P still has worth Rs.
5,000 of these goods held in its inventory.
(iv) There is no intercompany balance included in debtors and creditors at year end. P provides certain management
services to S in respect of which intercompany current account is maintained. The difference in current account
balances at year end is due to an error when P recorded a receipt of Rs. 1,000 as Rs. 3,000.
Required:
Question No. 4
P S
----------- Rs.-----------
Non-current assets
Current assets
S current account 8,000 -
Debtors 10,000 11,000
Cash & bank 5,000 8,000
204,000 98,000
Equity
- - -
Current liabilities
Creditors 16,000 18,000
P current account - 5,000
204,000 98,000
(i) P acquired 3600 shares of S last year for Rs. 75,000 when other reserves were 6,000 and retained
(ii) At acquisition date, fair value of land of S was Rs. 2,000 higher than its carrying amount. Fair values of
other nets assets were approximately equal to their carrying amounts.
(iii) At year end, recoverable amount attributable to goodwill is Rs. 1,200.
(iv) During the year P sold goods, costing Rs. 9,000, to S for Rs. 12,000. 40% of these goods are still held in
stock of S at year end.
(v) P provides certain management services to S in respect of which intercompany current account is
maintained. The difference in current account balances at year end is due to an invoice for such services
amounting to Rs. 3,000 sent and recorded by P but not received and recorded by S.
Required:
245
NASIR ABBAS FCA
Question No. 5

P S
---------- Rs.--------
Non-current assets
Investment 41,000 -
Current assets
Debtors 10,000 12,000
Cash & bank 5,000 5,000
158,000 97,000
Equity
Other reserves - -
- - -
Current liabilities
Creditors 21,000 16,000
158,000 97,000
(i) P acquired 60% shares of S some years ago when retained earnings were Rs. 11,000.
(ii) At acquisition date, land of S was undervalued by Rs. 2,000. This land was sold last year. Fair values of other
nets assets were approximately equal to their carrying amounts at acquisition date.
(iii) Fair value of non-controlling interest at acquisition date was Rs. 25,600.
(iv) At year end, impairment loss of goodwill is Rs. 1,600.
(v) During the year S sold goods to P for Rs. 5,000 at a profit markup of 25% on credit. By year end, these goods
were not received by P and therefore not recorded in its books.
Required:
Question No. 6
P S
------------ Rs.----------
Non-current assets
Investment 38,000 -
Current assets
Debtors 21,000 13,000
Cash & bank 5,000 7,000
136,000 105,000
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NASIR ABBAS FCA
Equity P S
---------- Rs.--------
Share premium 5,000 -
Other reserves - 5,000
Current liabilities
Creditors 14,000 17,000
136,000 105,000

(i) P acquired 55% shares of S on July 1, 2017 when other reserves were Rs. 2,000 and retained earnings were Rs.
18,000.
(ii) At acquisition date, fair value of total net assets was Rs. 60,000. The excess of fair value was attributable to
plant and machinery. At that date, remaining life of plant and machinery was 5 years.
(iii) Fair value of non controlling interest at acquisition date was Rs. 18 per share.
(v) P had been selling goods to S on credit throughout the year at a markup of 20%. Following information has been
extracted from their books:
Books of P:
Goods sold to S Rs. 35,000
Receivable from S (included in debtors) Rs. 7,000
Books of S:
Goods purchased from P Rs. 32,000
Payable to P (included in creditors) Rs. 8,000
Some goods were dispatched by P on June 29th. These goods were not received and therefore not recorded by
S b year end. Any remaining difference in intercompany balance, after adjusting for goods in transit, is due to
double recording by P in respect of a receipt from S.
Required:
Question No. 7
P S
---------- Rs.----------
Non-current assets
Investment 42,500 -
Loan to S 15,000
Current assets
Debtors 11,000 18,000
Cash & bank 5,000 3,000
164,500 111,000
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NASIR ABBAS FCA
P S
Equity ---------- Rs.--------
Loan from P - 12,000
Current liabilities
Creditors 21,000 15,000
164,500 111,000

(i) P acquired 70% shares of S on July 1, 2017 when other reserves were Rs. 2,500 and retained earnings were Rs.
14,000.
(ii) At acquisition date, a building of S was overvalued by Rs. 3,000. At that date, remaining life of building was 5
years.
(iii) On July 1, 2018, S obtained a loan of Rs. 15,000 from P at an annual interest of 10%. On June 30, 2019 S made
a total payment of Rs. 4,500 including interest for the year to P. However, P did not receive this payment by
year end. P has also not accrued the interest income for the year.
(iv) On January 1, 2019, P sold a machine costing Rs. 15,000 to S for Rs. 17,000. S depreciates its plant and machinery
@ 20% on straight line basis.
(v) At year end, impairment loss of goodwill is Rs. 1,100.
Required:
Question No. 8
P S
---------- Rs.--------
Non-current assets
Current assets
Debtors 11,000 6,000
Cash & bank 5,000 2,000
172,000 88,000
Equity
- - -
Current liabilities
Creditors 17,000 11,000
172,000 88,000
248
NASIR ABBAS FCA

(i) P acquired 2700 shares of S on January 1, 2018 for Rs. 54,000 when other reserves were Rs. 1,000 and retained
(ii) At acquisition date, fair value of an internally generated brand of S was Rs. 5,000. Useful life of this brand is
estimated at 5 years.
(iii) Fair value of non controlling interest at acquisition date was Rs. 5,700.
(iv) To date, consolidated goodwill is impaired by 40%.
1
(v) During the year S sold goods to P for Rs. 16,000 at a markup of 33 % on cash. By year end, P has sold only 40%
3
of these goods to its customers.
Required:
Question No. 9
P S
---------- Rs.--------
Non-current assets
Investment 16,000 -
Current assets
Debtors 9,000 12,000
Cash & bank 7,000 6,000
120,000 80,000
Equity
Loan notes 16,000 -
Current liabilities
Creditors 9,500 11,600
120,000 80,000
(i) P acquired 80% shares of S on July 1, 2018. The purchase consideration consisted of two elements: a share
exchange of three shares in P for every five acquired shares in S and the issue of Rs. 100 8% loan note for every
20 shares acquired. The share issue has not yet been recorded by P but the issue of the loan notes has been
recorded. At acquisition date, shares in P had a market value of Rs. 18 each and the shares in S had a market
value of Rs. 14 each.
(ii) At acquisition date, the fair value of property of S was Rs. 4,000 below its carrying amount. This would lead to
a reduction of depreciation charge of Rs. 400 in 2019. Fair values of other nets assets were approximately equal
to their carrying amounts.
(iii) It is group’s policy to value non controlling interest at fair value.
(v) During the year S sold goods to P for Rs. 5,000 at a profit markup of 25%. By year end, half of these goods were
held in P’s stock.
(vi) Net profit for the year 2019 earned by S was Rs. .9,000. There has been no increase in other reserves from last
year.
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NASIR ABBAS FCA
Required:
Question No. 10

P S
---------- Rs.--------
Non-current assets
Current assets
Debtors 11,000 11,000
Cash & bank 5,000 4,500
167,000 97,500
Equity
- - -
Current liabilities
Creditors 22,000 12,000
167,000 97,500

(i) P acquired 75% shares of S on January 1, 2019 for Rs. 58,000.
(ii) Following were the net assets of S at June 30, 2018:
Rs.
Share capital (Rs. 10 per share) 40,000
Share premium 4,000
Other reserves 3,000
(iii) At acquisition date, fair value of an internally generated brand of S was Rs. 4,500. This brand can be assumed
to have indefinite useful life.
(iv) After acquisition, P sold certain raw material to S at their cost of Rs. 7,000. S processed all of this material at an
additional cost of Rs. 3,000 and sold back the finished goods to P at a markup of 25%. At year end 40% of these
goods are still included in stock of P.
Required:
250
NASIR ABBAS FCA
Question No. 11
P S
---------- Rs.--------
Non-current assets
Current assets
Debtors 11,000 9,000
Cash & bank 5,000 6,000
162,000 90,000
Equity
Other reserves 12,000 -
- - -
Current liabilities
Creditors 17,000 14,000
162,000 90,000

(i) P acquired 80% shares of S on November 1, 2018 for Rs. 25 per share.
(ii) At acquisition date, fair value of an internally generated brand of S was Rs. 6,000. Useful life of this brand is
estimated at 5 years.
(iii) Fair value of non controlling interest at acquisition date was Rs. 24 per share.
(iv) On January 1, 2019 S sold an owned machine to P earning a profit of Rs. 4,000. Cost of this machine was Rs.
Rs. 30,000 and at the date of sale it had been depreciated to Rs. 18,000. P is depreciating this machine at 20%
on straight line basis.
(v) S earned a net profit of Rs. 21,000 for the year.
Required:
Question No. 12
P S
---------- Rs.--------
Non-current assets
Current assets
Debtors 11,000 12,000
Cash & bank 7,000 8,000
170,000 116,000
251
NASIR ABBAS FCA
Equity P S
---------- Rs.--------
- - -
Current liabilities
Creditors 14,500 12,000
Dividend payable 4,500 -
170,000 116,000

(i) P acquired 60% shares of S on July 1, 2018 for Rs. 15 per share when other reserves were Rs. 4,000 and retained
(ii) At acquisition date, fair value of plant and machinery was Rs. 4,000 less than the carrying amount. Remaining
life of plant and machinery at that date was 5 years.
(iii) On June 30, 2019 S declared a dividend of Re. 1 per share. Neither P nor S has recorded this dividend.
(iv) At year end, goodwill is impaired by Rs. 2,000.
Required:
Question No. 13
P S
---------- Rs.--------
Non-current assets
Current assets
Debtors 10,000 8,000
Cash & bank 4,000 5,000
173,000 100,000
Equity
Revaluation surplus 8,000 -
- - -
Current liabilities
Creditors 14,500 9,500
173,000 100,000

(i) P acquired 70% shares of S some years ago for Rs. 50,000 when retained earnings were Rs. 10,000.
(ii) At acquisition date, fair value of non controlling interest was Rs. 14 per share.
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NASIR ABBAS FCA
(iii) At acquisition date, fair value of land of S had a fair value higher than book value by Rs. 3,000. Since acquisition
this fair value has further increased by Rs. 4,000.
(iv) S follows cost model for all of its fixed assets whereas group’s policy is to carry land at revaluation model.
(v) On June 30, 2019 P and S both declared a dividend of Re. 1 per share. Neither P nor S has recorded any dividend.
(vi) At year end, goodwill is impaired by Rs. 500.
Required:
Question No. 14
The following summarized statements of financial position pertain to Alpha Limited (AL) and its subsidiary Delta Limited
(DL) as at 30 June 2014.
AL DL
----------- Rs. in million --------
Property plant and equipment 460 200
Investment (2 million shares of DL) 340 -
Long term loan granted to DL 30 -
Current assets 595 400
1,425 600
Share capital (Rs. 100 each) 600 250

Retained earnings 325 200
Long term borrowings 200 72
Current liabilities 300 78
1,425 600
Following relevant information is available:

(i) AL acquired investment in DL on 1 July 2013 when retained earnings of DL were Rs. 140 million and the fair value
of DL's net assets was equal to their carrying values.
(ii) Both the companies depreciate equipment at 10%, on straight line basis. On 30 June 2014, AL sold certain
equipment to DL as detailed below:
Rs. in million
Cost 40
Accumulated depreciation 30
Sale proceeds 25
(iii) Inter-company sales of goods are invoiced at a mark-up of 20%. The relevant details are as under:
Rs. in million
AL’s inventory includes goods purchased from DL 27
DL’s inventory includes goods purchased from AL 24
Receivable from DL on June 30, 2014 as per AL’s books 19
Payable to AL on June 30, 2014 as per DL’s books 19
(iv) Long term loan was granted to DL on 1 July 2013. It is repayable after five years and carries interest at 12% per
annum, payable on 30 June and 31 December, each year.
(v) 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 June 2014 in accordance with the requirements of
International Financial Reporting Standards. (15)
(Autumn 2014,Q#6)
253
NASIR ABBAS FCA
Question No. 15
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 year ended 30 June 2015:
GL BL
----------- Rs. in million --------
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 purchase remained unsold at year end 9 5
Inter-company current account balances [Dr. / (Cr.)] 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.

(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. (15)
(Autumn 2015,Q#6)
Question No. 16
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
254
NASIR ABBAS FCA
(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 office 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:
Sales Included in buyer’s

closing stock 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 installments 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:
Prepare a consolidated statement of financial position as at 30 June 2016 in accordance with the requirements of
(Autumn 2016, Q#1)
Question No. 17
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
GL SL
------------ Rs. in million ----------
Building 1,600 500
Plant & machinery 1,465 690
Investment in SL 327 -
Current assets 2,068 780
5,460 1,970

Share premium 730 150
Retained earnings 3,150 210
4,860 810
Liabilities 600 1,160
5,460 1,970
(i) 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. 2 each;
Cash amounting to Rs. 87 million, which includes consultancy charges of Rs. 10 million and legal expenses of
Rs. 5 million.
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NASIR ABBAS FCA
The market value of each share of GL and SL on acquisition date was Rs. 25 and Rs. 11 respectively. At acquisition
date, retained earnings of SL were Rs. 100 million.
(ii) 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)
(iii) 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.
(iv) On 30 September 2016, GL acquired a plant from SL in exchange of a building which was currently not in use of
GL. The details of plant and building are as follows:
Cost Accumulated *Exchange
depreciation price
----------------- Rs. in million ----------------
Building 240 130 120
Plant 200 80 120
* Equivalent to fair value
Both companies follow cost model for subsequent measurement of property, plant and equipment and charge
depreciation on building and plant at 5% and 20% respectively on cost.
(v) SL paid an interim cash dividend of 10% on 31 July 2016.
(vi) 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
(Spring 2017, Q#5)
Question No. 18
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 premium 240 -
Retained earnings 720 410
Loan from SL 96 -
Current liabilities 324 235
2,080 845
256
NASIR ABBAS FCA
(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.
(iv) JL and SL showed a net profit of Rs. 200 million and Rs. 60 million respectively for the year ended
31 December 2017.
(v) 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)
(Spring 2018, Q#3)
257
NASIR ABBAS FCA
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
SOLUTIONS TO PRACTICE QUESTIONS

Solution No. 1
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non-current assets
PPE [65 + 75] 140,000
Investments [50 - 47 + 10] 13,000
Goodwill [W-1] 5,620
Current assets
Inventories [12 + 11] 23,000
Debtors [12 + 13 - 1 - 5] 19,000
Cash and bank [7 + 8 + 1] 16,000
216,620
Equity
Share
capital 45,000
Share premium 5,000
Other reserves [W-2] 17,600
Retained earnings [W-3] 101,050
Non-controlling interest [W-4] 9,970
Current liabilities
Creditors [21 + 22 - 5] 38,000
216,620
Workings
W-1 Goodwill Rs. Rs.
Investment 47,000
Fair value of NCI [320 x 16] 5,120
Less: net assets at acq.:
Share capital 32,000
Share premium 3,000
Pre-acq RE 7,500 (45,500)
Goodwill at acquisition 6,620
Impairment loss (1,000)
5,620
W-2 Other reserves Rs. Rs.

P Other reserves 14,000
Add: S Other reserves 7,000
Less: Pre-acq. (3,000)
4,000
90% 3,600
17,600
258
NASIR ABBAS FCA
W-3 Retained earnings Rs. Rs.

P RE 61,000
Add: S RE 53,000
Less: Pre-acq (7,500)
Less: Impairment loss (1,000)
44,500
90% 40,050
101,050
W-4 NCI Rs.

FV of NCI 5,120
Other reserves [4 x 10%] 400
RE [44.5 x 10%] 4,450
9,970
Solution No. 2
P Group
as at June 30, 2019
Rs.
Non-current assets
PPE [60 + 60] 120,000
Investments [40 - 31 - 4] 5,000
Current assets
Inventories [10 + 12 - 0.9] 21,100
Debtors [12 + 10 - 7] 15,000
Cash and bank [4 + 7 + 0.5] 11,500
174,400
Equity
Share
capital 45,000
Share premium 4,500
Debentures [20 - 4] 16,000
Current liabilities
Creditors [18 + 11 + 0.5 - 7] 22,500
174,400
259
NASIR ABBAS FCA
Workings
Investment 31,000
Value of NCI [37,600 x 25%] 9,400
Share premium 2,400
Pre-acq RE 8,200
(37,600)
1,800

3,000
75% 2,250
11,250

P RE 49,500
Less: URP [9 x 20% x 1/2] (900)
Add: S RE 25,600
17,400
75% 13,050
60,650
W-4 NCI Rs.

Value at acq. 9,400
RE [17.4 x 25%] 4,350
14,500
260
NASIR ABBAS FCA
Solution No. 3
P Group
as at June 30, 2019
Non current assets Rs.
PPE [65 + 60] 125,000
Investments [30 - 21 + 5] 14,000
Current assets
Inventories [9 + 10 - 0.5] 18,500
Current account [5 + 2 - 7] -
Debtors [11 + 10] 21,000
Cash and bank [5 + 8 - 2] 11,000
189,500
Equity
Share premium 4,000
Non current liabilities
Bank loan 20,000
Current liabilities
Creditors [16 + 11] 27,000
Current account [7 - 7] -
189,500
Workings
Investment 21,000
Fair value of NCI [600 x 9.5] 5,700
Share premium 3,000
Pre-acq RE (4,000) (29,000)
(2,300)

P RE 52,000
Add: Negative goodwill 2,300
Add: S RE 22,000
Less: Pre-acq 4,000
Less: URP [1 x 5/10] (500)
25,500
80% 20,400
74,700
W-3 NCI Rs.
Fair value 5,700
RE [25.5 x 20%] 5,100
10,800
261
NASIR ABBAS FCA
Solution No. 4
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [90 + 64 + 2] 156,000
Investments [80 - 75 +5] 10,000
Current assets
Inventories [11 + 10 - 1.2] 19,800
Current account [8 - 8] -
Debtors [10 + 11] 21,000
Cash and bank [5 + 8] 13,000
221,000
Equity
Share premium 5,000
Current liabilities
Creditors [16 + 18] 34,000
Current account [5 + 3 - 8] -
221,000
-
Workings
Investment 75,000
Value of NCI [80,000 x 10%] 8,000
Share premium 4,000
Pre-acq RE 28,000
Fair value adj. 2,000
(80,000)
1,200

-
90% -
9,000
262
NASIR ABBAS FCA

P RE 94,000
Less: URP [3 x 40%] (1,200)
Add: S RE 25,000
Less: Management fees (3,000)
(6,000)
90% (5,400)
85,600
W-4 NCI Rs.

Value at acq. 8,000
RE [6 x 10%] (600)
7,400
Solution No. 5
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [90 + 70] 160,000
Current assets
Inventories [12 + 10 + 5 - 1] 26,000
Debtors [10 + 12 - 5] 17,000
Cash and bank [5 + 5] 10,000
221,000
Equity
Share premium 6,000
Current liabilities
Creditors [21 + 16 + 5 - 5] 37,000
221,000
Workings
Investment 41,000
Fair value of NCI 25,600
Less: net assets at acq:
Share premium 4,000
Pre-acq RE 11,000
Fair value adj. 2,000 (57,000)
8,000
263
NASIR ABBAS FCA

P RE 71,000
Add: S RE 37,000
Less: Fair value adj. (2,000)
Less: URP [5 x 25/125] (1,000)
21,400
60% 12,840
83,840
W-3 NCI Rs.

Fair value 25,600
RE [21.4 x 40%] 8,560
34,160
Solution No. 6
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [60 + 70 + 4 - 1.6] 132,400
Current assets
Inventories [12 + 15 + 3 - 0.5] 29,500
Debtors [21 + 13 + 4 - 11] 27,000
Cash and bank [5 + 7 - 4] 8,000
202,060
Equity
Share premium 5,000
Current liabilities
Creditors [14 + 17 + 3 - 11] 23,000
202,060
Workings
Investment 38,000
Pre-acq RE 18,000
FV adjustment - P&M 4,000 (60,000)
5,160
264
NASIR ABBAS FCA

P Other reserves
3,000
55% 1,650
1,650
P RE 63,000
Less: URP [3 x 20/120] (500)
Add: S RE 47,000
Less: Extra depreciation [4 x 2/5] (1,600)
25,400
55% 13,970
76,470
W-4 NCI Rs.
FV of NCI 29,160
Other reserves [3 x 45%] 1,350
RE [25.4 x 45%] 11,430
41,940
W-5 Intercompany Debtor / Creditor Rs. Rs.

P S
Given balance 7,000 8,000
Goods in transit [35 - 32] - 3,000
Wrong receipt 4,000 -
Correct balance 11,000 11,000
Solution No. 7
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [75 + 75 - 3 + 1.2 - 2 + 0.2] 146,400
Loan to S [15 - 3 - 12] -
Current assets
Inventories [16 + 15] 31,000
Debtors [11 + 18] 29,000
Cash and bank [5 + 3 + 4.5] 12,500
223,900
265
NASIR ABBAS FCA
Equity Rs.
Share premium 4,000
Loan from P [12 - 12] -
Current liabilities
Creditors [21 + 15] 36,000
223,900
Workings

Investment 42,500
Value of NCI [52,000 x 70%] 15,600
Share premium 3,500
Pre-acq RE 14,000
Fair value adj. (3,000)
(52,000)
5,000

3,500
70% 2,450
13,450

P RE 78,500
Add: Interest income [15 x 10%] 1,500
Less: Profit on machine (2,000)
Add: Excess dep. [2 x 20% x 6/12] 200
Add: S RE 39,500
Add: Extra dep. [3 x 2/5] 1,200
26,700
70% 18,690
95,790
266
NASIR ABBAS FCA
W-4 NCI Rs.

Value at acq. 15,600
Other reserves [3.5 x 30%] 1,050
RE [26.7 x 30%] 8,010
24,660
Solution No. 8
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [80 + 60] 140,000
Brand [5 - 1.5] 3,500
Investments [60 - 54 + 10] 16,000
Current assets
Inventories [16 + 10 - 2.4] 23,600
Debtors [11 + 6] 17,000
Cash and bank [5 + 2] 7,000
210,520
Equity
Share premium 5,000
Current liabilities
Creditors [17 + 11] 28,000
210,520
Workings
Investment 54,000
Fair value of NCI 5,700
Share premium 3,000
Pre-acq RE 15,000
Brand 5,000 (54,000)
3,420
W-2 Other reserves
4,000
[2700 / 3000] 90% 3,600
15,600
267
NASIR ABBAS FCA

P RE 88,000
Add: S RE 39,000
Less: Amortization [5 x 1.5/5] (1,500)
Less: URP [16 x 60% x 1/4] (2,400)
17,820
90% 16,038
104,038
W-4 NCI Rs.
FV of NCI 5,700
RE [17.82 x 10%] 1,782
7,882
Solution No. 9
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [80 + 57 - 4 + 0.4] 133,400
Current assets
Inventories [8 + 5 - 0.5] 12,500
Debtors [9 + 12] 21,000
Cash and bank [7 + 6] 13,000
185,260
Equity
Share capital [45 + 3.2 x 3/5 x Rs. 10] 64,200
Share premium [5 + 3.2 x 3/5 x Rs. 8] 20,360
Loan notes 16,000
Current liabilities
Creditors [9.5 + 11.6] 21,100
185,260
Investment:
Shares [3200 x 3/5 x 18] 34,560
Loan notes 16,000
Share premium 4,000
FV adj. (4,000)
Pre-acq RE [23.4 - 9] 14,400 (55,400)
5,360
268
NASIR ABBAS FCA

-
80% -
3,000
P RE 41,500
Add: S RE 23,400
Add: Extra dep. 400
Less: URP [5 x 25/125 x 50%] (500)
7,900
80% 6,320
47,820
W-4 NCI Rs.

FV of NCI 11,200
RE [7.9 x 20%] 1,580
12,780
Solution No. 10
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [75 + 65] 140,000
Investments [60 - 58 + 8] 10,000
Brand 4,500
Current assets
Inventories [16 + 9 - 1] 24,000
Debtors [11 + 11] 22,000
Cash and bank [5 + 4.5] 9,500
210,000
Equity
Share premium 5,000
Current liabilities
Creditors [22 + 12] 34,000
210,000
-
Investment 58,000
Value of NCI [81,000 x 25%] 20,250
269
NASIR ABBAS FCA

Share premium 4,000
Pre-acq RE [20.5 + 18 x 6/12] 29,500
Brand 4,500
(81,000)
(2,750)

-
75% -
15,000

P RE 75,000
Add: Negative goodwill 2,750
Add: S RE 38,500
Less: URP [(7 + 3) x 25% x 40%] (1,000)
8,000
75% 6,000
83,750
W-4 NCI Rs.

RE [8 x 25%] 2,000
22,250
Solution No. 11
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [70 + 60 - 4 + 0.4] 126,400
Investment 5,000
Brand [6 - 0.8] 5,200
Current assets
Inventories [16 + 10] 26,000
Debtors [11 + 9] 20,000
Cash and bank [5 + 6] 11,000
200,000
Equity Rs.
Share premium 6,000
270
NASIR ABBAS FCA

Current liabilities
Creditors [17 + 14] 31,000
200,000
-
Workings
Investment [2,400 x 25] 60,000
Share premium 3,000
Pre-acq RE [43 - 21 x 8/12] 29,000
Brand 6,000 (68,000)
6,400

P RE 67,000
Add: S RE 43,000
Less: Profit on machine (4,000)
Add: Excess dep. [4 x 20% x 6/12] 400
Less: Amortization [6 x 1/5 x 8/12] (800)
9,600
80% 7,680
74,680
W-3 NCI Rs.

FV of NCI 14,400
RE [9.6 x 20%] 1,920
16,320
Solution No. 12
P Group
as at June 30, 2019
Non current assets Rs.

PPE [90 + 80 - 4 + 0.8] 166,800
Investments [50 - 45 + 5] 10,000
Current assets
Inventories [12 + 11] 23,000
Debtors [11 + 12] 23,000
Cash and bank [7 + 8] 15,000
241,200
Equity Rs.
Share premium 5,000
271
NASIR ABBAS FCA

Current liabilities
Creditors [14.5 + 12] 26,500
Dividend payable [4.5 + 2] 6,500
241,200
Workings
Investment [3,000 x 15] 45,000
Value of NCI [66,000 x 40%] 26,400
Share premium 5,000
Pre-acq RE 11,000
FV adj. - P&M (4,000)
(66,000)
5,400
3,400

3,000
60% 1,800
16,800

P RE 81,000
Add: Dividend income [3,000 x 1] 3,000
Add: S RE 42,000
Less: Dividend [5,000 x 1] (5,000)
Add: Extra dep. [4 x 1/5] 800
26,800
60% 16,080
98,080
272
NASIR ABBAS FCA
W-4 NCI Rs.

Other reserves [3 x 40%] 1,200
RE [26.8 x 40%] 10,720
38,320
Solution No. 13
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [100 + 70 + 3 + 4] 177,000
Investments 10,000
Current assets
Inventories [9 + 7] 16,000
Debtors [10 + 8] 18,000
232,500
Equity
Share premium 6,000
Revaluation surplus [W-2] 10,800
Current liabilities
Creditors [14.5 + 9.5] 24,000
Dividend payable [6 + 1.5] 7,500
232,500
-
Workings
Investment 50,000
Fair value of NCI [1,500 x 14] 21,000
Share premium 5,000
Pre-acq RE 10,000
FV adj. - land 3,000 (68,000)
Impairment loss (500)
2,500
273
NASIR ABBAS FCA
W-2 Revaluation surplus Rs.

P surplus 8,000
Add: S post acq. Surplus [4 x 70%] 2,800
10,800

P RE 84,500
Add: Dividend income [3,500 x 1] 3,500
Less: Dividend declared (6,000)
Add: S RE 35,500
Less: Dividend declared (5,000)
Less: Impairment loss (500)
20,000
70% 14,000
96,000
W-4 NCI Rs.

FV of NCI 21,000
Revaluation surplus [4 x 30%] 1,200
RE [20 x 30%] 6,000
28,200
Solution No. 14
AL group
as at June 30, 2014
Rs. in million
Non current assets
PPE [460 + 200 - 15] 645.00
Goodwill [W-1] 30.00
Current assets [W-2] 967.50
1,642.50
Equity
Share capital 600.00
Retained earnings [W-3] 350.40
Non controlling interest [W-4] 91.10
Non current liabilities [200 + 72 -30] 242.00
Current liabilities [300 + 78 - 19] 359.00
1,642.50
Workings [All figures in Rs. million]
W-1 Goodwill
Investment 340.00
FV of NCI 80.00
Less: net assets
Capital 250.00
Retained earnings 140.00 (390.00)
30.00
274
NASIR ABBAS FCA
W-2 Current assets Rs. in million Rs. in million

AL current assets 595.00
DL current assets 400.00
Inter-company balance (19.00)
URP [(27 + 24) x 20/120] (8.50)
967.50
W-3 Retained earnings

AL RE 325.00
Less: URP on goods [24 x 20/120] (4.00)
Less: URP on equipment [25 - (40 - 30)] (15.00)
DL RE 200.00
Less: Pre acq. (140.00)
Less: URP [27 x 20/120] (4.50)
55.50
[2 m / 2.5m shares] 80% 44.40
350.40
W-4 NCI
Fair value 80.00
Share in RE [55.5 x 20%] 11.10
91.10
Solution 15
Galaxy Group
as at June 30, 2015
Goodwill
Investment 50.00
Fair value of NCI 35.00
Less: net assets
Capital 50.00
Impairment of plant (10.00)
Fair value adj. – land 20.00 (78.00)
7.00
Less: Impairment loss [10%] (0.70)
6.30
275
NASIR ABBAS FCA
Retained earnings Rs. Rs.

GL RE [40 + 20] 60.00
Less: URP on goods [(5 + 7 - 4) x 20/120] (1.33)
BL RE [18 + 6] 24.00
Add: Impairment of plant 10.00
Less: Impairment loss of GW (0.70)
13.80
[300 / 500 shares] 60% 8.28
66.95
NCI
NCI share in post acq. Profits [13.8 x 40%] 5.52
40.52
Solution No. 16
Notes:
- Depreciation rate of 5% must be used for remaining life of building after acquisition
- Final dividend of 20% for 2016 was declared during 2017, therefore, not accounted for in 2016
Yasir Limited
as at June 30, 2016
Rs.
(million)
Non current assets
Fixed assets [180 + 470 + 12 - 1.2] 660.80
Current assets
Stock in trade [160 + 150 - 4.62 - 4.8] 300.58
Other current assets [71 + 50] 121.00
Cash and bank [63 + 151 + 5.92] 219.92
1,492.65
Equity
Non-controlling interest [W-4] 210.46
Current liabilities
Creditors [75 + 51] 126.00
1,492.65
276
NASIR ABBAS FCA
Workings
Rs. Rs.
W-1 Goodwill (million) (million)
Investment 675.00
Fair value of NCI [50 x 25% x 15] 187.50
Pre-acq RE [W-2] 139.00
FV adj. (building) 12.00 (651.00)
Goodwill at acquisition 211.50
Impairment loss (10%) (21.15)
190.35
W-2 Pre acq. RE

RE as at June 30, 2016 258.00
PAT 2016 (11.00)
PAT 2015 (168.00)
Dividend 2015 [500 x 12%] 60.00
139.00

YL RE 340.00
Less: URP [20 x 30/130] (4.62)
Add: Interest not recorded [16 x 12%] 1.92
Add: BL RE 258.00
Less: Pre-acq [W-2] (139.00)
Less: Impairment loss [W-1] (21.15)
Less: URP [32 x 15/100] (4.80)
Less: Extra dep. [12 x 5% x 2] (1.20)
91.85
75% 68.89
406.19
W-4 NCI
FV of NCI 187.50
Share in post acq RE [91.85 x 25%] 22.96
210.46
277
NASIR ABBAS FCA
Solution No. 17
Notes:
- Remaining life should have been given for depreciation on fair value adjustment on building. However,
in absence of remaining life, same 5% rate has been used for extra depreciation.
- It is assumed that assets requiring fair value adjustments still exist at year end. Therefore, effect of value
adjustment has been taken to balance sheet instead of SL's retained earnings.
- It is assumed that accrual in respect of management fees receivable on April 1, 2017 has been made.
Golden Limited
as at December 31, 2016
Rs. (million)
Non-current assets
Building [1,600 + 500 - 80 - 10 + 0.13 + 3] 2,013.13
Plant [1,465 + 690] 2,155.00
Current assets
Current assets [2,068 + 780 - 50 - 9 - 50 x 3/12] 2,776.50
7,153.63
Equity
Share premium [730 + 20 x 13] 990.00
Retained earnings [W-2] 3,192.93
Current liabilities
Current liabilities [600 + 1,160 - 50 x 3/12] 1,747.50
7,153.63
Workings
Rs. Rs.
W-1 Goodwill (million) (million)
Investment:
Cash [87 - 15] 72.00
Shares [20 x 25] 500.00 572.00
Share premium 150.00
Pre-acq RE 100.00
FV adj. (building) (80.00)
FV adj. (stock) (50.00)
FV adj. (debtors) (9.00) (561.00)
278
NASIR ABBAS FCA
Rs. Rs.
W-2 Retained earnings (million) (million)
GL RE 3,150.00
Less: acquisition expenses (15.00)
Less: Profit on sale of building [120 - (240 - 130)] (10.00)
Add: Excess dep. on profit [10 x 5% x 3/12] 0.13
Add: SL RE 210.00
Less: Pre-acq [W-2] (100.00)
Add: Extra dep. on FV adj. [80 x 5% x 9/12] 3.00
Less: Profit on plant [120 - (200 - 80)] -
113.00
60% 67.80
3,192.93
W-3 NCI
FV of NCI 198.00
Share in post acq RE [113 x 40%] 45.20
243.20
Solution No. 18
Jasmine Limited
Non current assets

PPE [880 + 330 - 8(W-3)] 1,202.00
Intangible assets [40 + 50 + 15(W-1) - 3(W-2) - 4(W-2)] 98.00
Current assets
Current assets [640 + 345 + 30 - 52 - 25 - 20 x 75%] 923.00
2,328.00
Equity
Current liabilities
Current liabilities [324 + 235 - 52 - 20 x 75%] 492.00
2,328.00
-
279
NASIR ABBAS FCA
Workings
W-1 Goodwill ----- Rs. (million) ----
Investment:
Cash [280 - 10] 270.00
Shares [10 x 24] 240.00 510.00

Less: net assets acquired:
Pre-acq RE [410 - 60 + 20] 370.00
FV adj. (brand) [40 - 25] 15.00 (585.00)

GL RE 720.00
Less: acquisition expenses (10.00)
Less: URP on goods [250 x 60% x 20/120] (25.00)
Add: SL RE 410.00
Less: Pre-acq [W-2] (370.00)
Less: Extra amort. on FV adj. [15 / 5] (3.00)
Less: Impairment [(40 - 40/5) - 28] (4.00)
Add: Interest on loan [120 x 10% x 6/12] 6.00
Less: URP on machine [W-3] (8.00)
31.00
75% 23.25
708.25
W-3 URP on machine

Profit on machine 12.00
Excess dep. [12 x 8/24] (4.00)
8.00
W-4 NCI
FV of NCI 180.00
Share in post acq RE [31 x 25%] 7.75
187.75
280
NASIR ABBAS FCA
Question
Pulp Seed
-------------- Rs.--------------
Non-current assets
Investment in Seed 21,000 -
Current assets
Debtors 22,000 24,000
Other receivables 11,000 8,000
Cash & bank 9,000 9,000
206,000 175,000
Pulp Seed
Equity ------------- Rs.-----------
Deferred tax 13,000 16,000
Current liabilities
Creditors 16,000 15,000
Other payables 14,000 19,000
206,000 175,000

(1) Pulp acquired 70% shares of Seed on July 1, 2018 when its other reserves were Rs. 4,500 and retained earnings
were Rs. 14,000. Following purchase consideration was agreed:
An immediate cash payment of Rs. 7 per share.

A deferred cash payment of Rs. 4 per share payable on June 30, 2022.
A contingent cash payment of Rs. 3 per share payable on September 30, 2020 if sale of a new product
achieves its promised benchmark till June 30, 2020. The said target was duly achieved in June 2020.
A share exchange of 2 shares of Pulp for every 5 shares of Seed. Market shares prices at acquisition date
were Rs. 32 (Pulp) and Rs. 26 (Seed).
A plot of Land with fair value at acquisition date of Rs. 10,000 (carrying value was Rs. 8,000).
Pulp only recorded immediate cash payment plus commission paid to investment banker as cost of investment.
Land transferred as consideration is still appearing in Pulp’s books. Fair value of contingent consideration at
the date of acquisition was Rs. 1.25 per share. Pulp’s cost of capital is 10%.
(2) At acquisition date, carrying amounts of all assets and liabilities of Seed were equal to fair values except
following:
----------- Rs. ----------
Land 15,000 17,000
Plant 24,000 27,000
281
Remaining useful life of Plant at acquisition date was 5 years. The land was sold by Seed during 2020 for Rs.
19,500.
(3) At acquisition date there was an internally generated brand of Seed, however, its fair value could not be
estimated reliably at that date due to insufficient information. Though its remaining life was estimated to be 5
years. The financial consultant provided with reliable estimate of fair value at Rs. 12,000 on receipt of sufficient
information 4 months later.
(4) At acquisition date there was a pending court case against Seed for which no provision was recognized in its
books as outflow of economic resources was not probable. At that date fair value of the contingent liability
was determined at Rs. 7,000. In respect of this claim, on June 30, 2019 Seed recognized a provision for Rs.
9,000 as outflow of economic resources became probable. The claim was finally settled during 2020 for Rs.
10,000.
(5) It is PL’s policy to value non-controlling interest at proportionate share in identifiable net assets.
(6) There was no need for impairment test in 2019, however, recoverable amount of CGU of Seed (i.e. comprising
of PPE and Goodwill) on June 30, 2020 was Rs. 114,000.
(7) The following intercompany sales were made during the year 2020:
Sales Included in buyer’s Gross

------------------- Rs. --------------
Pulp to Seed 20,000 5,000 20%
Seed to Pulp 36,000 8,000 25%
In respect of above intercompany sales, Seed’s books show a net balance owed to Pulp is Rs. 9,000. However,
it differs from balance as per Pulp’s books due to goods sold by Pulp for Rs. 4,000 on June 28, 2020 but were
received and recorded by Seed on July 3, 2020.
(8) On January 1, 2020 Seed sold a machine to Pulp for Rs. 38,000 at a profit of Rs. 8,000. Pulp charged depreciation
on that machine for Rs. 1,900.
(9) During June 2020, Pulp and Seed declared ordinary dividend of 5% and 10% respectively which would be
payable in next month. Both companies have duly recorded the dividends.
(10) Deferred tax liabilities are calculated on all temporary differences at a tax rate of 25%. Gain on sale of land is
not taxable. No tax deduction will be allowed on deferred consideration and contingent consideration.
Required:
Prepare consolidated statement of financial position as at June 30, 2020.
282
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] – Class notes
CONSOLIDATION – SOCI WITH ONE SUBSIDIARY

Consolidated statement of comprehensive income (or Group statement of comprehensive income) is line by line
addition of all values from “Sales” to “Total comprehensive income” of “P” and “S”, subject to certain adjustments.
BASIC PRESENTATION
After line by line addition till Total comprehensive income, “Profit after tax” and “Total comprehensive
income” is attributed to:
- Shareholders of “P”
- NCI
We have already studied consolidation adjustments in sufficient detail in “Consolidation of SOFP”. In this chapter will
discuss the effect of those adjustments in Consolidated SOCI for the year as follows:
Note – In case of 1st year, If P has recorded investment in S as per IFRS 9, then do not forget to reverse any fair value
gain/loss recorded.
1. IMPAIRMENT LOSS FOR THE YEAR
(1) Impairment loss for the current year attributable to other assets shall be:
- ADDED to “Admin expenses/Cost of sales”
- DEDUCTED from “S’s PAT” in NCI working
(2) Impairment loss attributable to goodwill shall be treated as follows:
(a) NCI valued at proportionate share (b) NCI valued at Fair value
Impairment loss is ADDED to “Admin Impairment loss is:

expenses” (i) ADDED to “Admin expenses”
(ii) DEDUCTED from S PAT in “NCI working”
2. ACQUISITION RELATED COSTS
In case of first year of acquisition, acquisition related costs which were capitalized by P in its cost of
investment, shall be adjusted as follows:
Acquisition related transactions costs (except for the issue costs relating to debt or equity
securities issued as consideration, in which case such costs are accounted for as IAS 32 and IFRS 9)
shall ADDED to “Finance cost” OR “Admin expenses”
3. INTER COMPANY SALES
Either sales are from “P to S” or “S to P”, these transactions are adjusted in the same manner
“Sales value” is ELIMINATED from:

(i) Sales
(ii) Cost of sales (or Purchases, if breakup of Cost of sales is given)
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NASIR ABBAS FCA
4. INTER COMPANY MANAGENT FEES
P or S may provide management services to other and charge certain fees. This fee is an inter-company
transaction and must be eliminated.
“Management fees” is DEDUCTED from:

(i) Other income of “P”
(ii) Admin expenses of “S”
URP is the profit included in the amount of inventory out of inter-company sale. Inventory value may be given
in question or mentioned as a proportion of intercompany sale.
Calculation of URP:
OR
OR
URP = Total profit in the inter company sale x % goods held in stock
URP is ADDED to “Cost of sales” URP is:

(i) ADDED to “cost of sales”
(ii) DEDUCTED from S’s PAT in “NCI working”
6. EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of S in its books
Calculation of Extra depreciation for the year:

= FV adjustment ÷ remaining useful life
Extra depreciation for the year is:

(i) ADDED to “cost of sales” or “admin expenses”
(ii) DEDUCTED from S’s PAT in “NCI working”
In case of negative adjustment to S’s net assets, above adjustments will be reversed
Note – If subsequently S has accounted for any such fair value adjustment in its books, then its effect in current year
SOCI must be reversed.
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NASIR ABBAS FCA
7. INTER COMPANY SALE OF NON-CURRENT ASSET DURING THE YEAR
Calculation of Profit:
Profit = Sale value of asset x margin %
OR
Sale value of asset x markup / (100 + markup)
In the year of disposal:
(1) If seller recorded this sale of asset as “Sales”

- DEDUCT sale price from “Sales”
- DEDUCT cost from “Cost of sales”
In case of S to P sale, also DEDUCT the profit on sale from S’s PAT in NCI working
(2) If seller recorded profit on sale of asset as “Other income”
Profit is DEDUCTED from “Other income” Profit is DEDUCTED from:

(i) “Other income”
(ii) S's PAT in “NCI working”
8. EXCESS DEPRECIATION FOR INTER-COMPANY SALE OF DEPRECIABLE ASSET
When asset is depreciated, seller’s profit is realized, therefore, this adjustment is made in seller’s profits. It is
calculated using same depreciation basis as of buyer company in its books
Calculation of Excess depreciation during the year:

= Profit x depreciation %
Excess depreciation is DEDUCTED from Excess depreciation is:

“cost of sales” or “admin expenses” (i) DEDUCTED from “cost of sales” or “admin
expenses”
(ii) ADDED to S’s PAT in “NCI working”
9. INTEREST ON DEBENTURES / DIVIDEND ON PREFERENCE SHARES
First ensure whether both entities have recorded the interest / dividend as per accrual concept. If not
properly recorded, then accordingly account for it.
Consolidation adjustment (After proper recording):
P’s share in the interest / dividend is DEDUCTED from:

(i) Other income
(ii) Finance cost
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10. ORDINARY DIVIDEND BY “S”
First ensure whether both entities have recorded the dividend as per relevant IAS. If not properly recorded,
then accordingly account for it.
P’s share in Post-acquisition dividend is DEDUCTED from “other income”
11. NEGATIVE GOODWILL
It is recognized as income and generally shown as a separate line item of income on Group statement of
comprehensive income ONLY in the year of acquisition.
12. S’s INTANGIBLE ASSET RECOGNIZED AT ACQUISITION
Amortization for the year, if any, is ADDED to “admin expenses” and DEDUCTED from S’s PAT in NCI
working
13. S’s CONTINGENT LIABILITY RECOGNIZED AT ACQUISITION
Any change for the year in value of contingent liability of S recognized at acquisition, is ADDED to “admin
expenses” and DEDUCTED from S’s PAT in NCI working
Note – If S has subsequently accounted for this obligation in its books, then reverse its effect in SOCI for
the year accounted for by S.
14. DEFERRED CONSIDERATION
Calculation for finance cost for the year:

= Present value of deferred consideration at year end – present value of deferred consideration at year start
OR
= Present value of deferred consideration at year start x discount rate
Consolidation adjustment (if still unrecorded):
Finance cost on deferred consideration for the year will be ADDED to the finance cost for the year in
Group SOCI.
15. CONTINGENT CONSIDERATION
Calculation for adjustment for the year:

= Fair value of contingent consideration at year end – fair value of contingent consideration at year start
Consolidation adjustment (if still unrecorded):
Fair value change on contingent consideration for the year will be ADDED to the Admin expenses for the
year in Group SOCI.
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NASIR ABBAS FCA
If sufficient data is available to prepare separate SOCI of S for post-acquisition period then use this specific
period SOCI for consolidation purposes. However generally in questions such data is not available ,therefore,
all incomes and expenses of S are assumed to occur evenly throughout the year unless any specific expense
or income is mentioned to be exceptional and specifically relates to a particular period. In which case
following adjustments are made:
Acquisition during the year has following effects on consolidated figures:
Effect on: Adjustment:

All items of S’s SOCI Figures are time apportioned as per months since acquisition,
except specific period related items (see note below)
Intercompany eliminations Intercompany transactions in post-acquisition period are
eliminated.
Extra depreciation on FV adjustment Calculated for post-acquisition period in the year
For NCI working, S’s PAT is adjusted as: [S’PAT +/- specific period related item (see note below)] x n/12
–/+ specific period related item
Note:
Generally all expenses and incomes of S are assumed to occur evenly throughout the year therefore all these items are
time apportioned according to post acquisition months. However there may be certain expenses and incomes which are
mentioned to be exceptional and they specifically relate to pre or post acquisition period.
Example:
P acquired controlling interest in S on August 1, 2013. S’s PAT for the year is Rs. 74,000. Its other income for the year
includes Rs. 2,000 which specifically relates to December 2013. Now S’s PAT in NCI working will be as [(74,000 - 2,000) x
5/12 + 2,000 = 32,000]
17. DEFERRED TAX
Tax effect of consolidation adjustments for the year shall be accounted in deferred tax expense for the year.
Deferred tax on P’s adjustments Deferred tax on S’s adjustments
It is INCLUDED in “Tax expense” It is:

(i) INCLUDED in “Tax expense”
(ii) CHARGED to S’s PAT in “NCI working”
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NASIR ABBAS FCA

P Group
Consolidated Statement of Comprehensive income
For the year ended …………………..
Rs.
Sale XXX
(P’s + S’s x n/12 – Inter-company transaction)
Cost of sales (XXX)
(P’s + S’s x n/12 – Inter-company transaction + URP on goods [P or S] + Extra depreciation
on Fair value adjustment – Excess depreciation on asset sale)
Gross profit (Cast down) XXX
Distribution cost (XXX)
(P’s + S’s x n/12)
Administrative expenses (XXX)
(P’s + S’s x n/12 + unrecorded expense – Inter-company transaction – Excess depreciation
on asset sale + Extra depreciation on fair value adjustment + Amortization on asset
recognized at acquisition + total impairment loss of goodwill for the year + value increase
of contingent liability of S + fair value change in contingent consideration)
Finance cost (XXX)
(P’s + S’s x n/12 – Intercompany finance cost + finance cost on deferred consideration)
Other income XXX
(P’s + S’s x n/12 – Intercompany interest / dividend – Profit [P or S] on asset sale during
the year + unrecorded income)
Profit before tax (Cast down) XXX
Tax (XXX)
(P’s + S’s x n/12 + tax on consolidation adjustments)
Profit after tax (Cast down) XXX
Revaluation gain / (loss) XXX
(P’s + S’s)
Fair value gain / (loss) XXX
(P’s + S’s)
Total comprehensive income for the year XXX
Profit for the year attributable to:
Shareholders of Parent XXX
Non-controlling interest (W – 1) XXX
XXX
Total comprehensive income attributable to:
Shareholders of Parent XXX
Non-controlling interest XXX
(“Answer of W – 1” + NCI % x S’s other comprehensive income)
XXX
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NASIR ABBAS FCA
WORKINGS
(W – 1) Non controlling interest

Rs.
S’s profit after taxation (Notes) XXX

Less: URP on goods [ S to P ] (sale during the year) (XXX)
Less: Profit on assets [ S to P ] (sale during the year) (XXX)
Less: Extra depreciation for the period on FV adjustment (XXX)
Less: Amortization for the period on asset recognized (XXX)
Less: Value change in contingent liability of S (XXX)
Less: unrecorded expense (XXX)
Less: Impairment loss for the year on other assets of CGU (XXX)
Less: Impairment loss for the year on goodwill [If NCI is at fair value] (XXX)
Add: unrecorded income XXX
Add: Excess dep. for the period on asset sale [S to P] XXX
XXX
NCI share @ (% share in ordinary shares) XXX
Notes:
1. Intercompany eliminations have nothing to do with NCI working
2. Also see note on page no. 5
“n” means number of months from acquisition date to year end, in case of acquisition during the year.
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NASIR ABBAS FCA
3
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions
PRACTICE QUESTIONS
Question No. 1
Following are the statements of comprehensive income for the year ending June 30, 2019:
P S
---------- Rs.--------
Sales 120,000 100,000
Cost of sales (75,000) (65,000)
Gross profit 45,000 35,000
Distribution cost (12,000) (8,000)
Admin expenses (10,000) (6,000)
Finance cost (3,000) (2,000)
Other income 1,500 500
Profit before tax 21,500 19,500
Tax (7,000) (5,500)
Profit after tax 14,500 14,000
Revaluation gain - 1,200
Total comprehensive income 14,500 15,200
Following additional information is available:

(i) P acquired 70% shares of S some years ago.
(ii) Impairment loss of goodwill for the year was Rs. 3,000.
(iii) Non-controlling interest is valued at fair value.
(iv) During the year P sold goods to S for Rs. 9,000.
Required:
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
Question No. 2
P S
---------- Rs.--------
Sales 125,000 90,000
Cost of sales (82,000) (57,000)
Finance cost (4,000) (1,000)
Other income 6,000 -
Tax (7,500) (3,200)
Revaluation gain - -

(ii) During the year S sold goods to P for Rs. 8,200.
(iii) Since acquisition, P has been providing management services to S and charging fees for those
services. During the year P invoiced Rs. 3,500 for such services to S.
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NASIR ABBAS FCA
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Required:
Question No. 3
P S
---------- Rs.--------
Sales 90,000 80,000
Cost of sales (54,000) (42,000)
Finance cost (3,000) (1,200)
Tax (6,000) (7,200)
Revaluation gain 1,500 2,000

(iv) During the year S sold goods to P for Rs. 7,000 charging a margin of 20%. At year end 30% of these
goods are still held in P’s inventory.
Required:
Question No. 4
P S
---------- Rs.--------
Sales 110,000 95,000
Cost of sales (82,000) (62,000)
Finance cost (2,000) (1,500)
Tax (6,000) (6,050)
Revaluation gain / (loss) 1,000 (300)

(i) P acquired 90% shares of S on January 1, 2018. At acquisition date, office building of S was
undervalued by Rs. 3,000. Its remaining useful life at that date was 10 years.
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NASIR ABBAS FCA
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(iii) Non controlling interest is valued at proportionate share.
(iv) During the year P sold goods to S for Rs. 8,000 at a markup of 25%. One-fourth of these goods are
still held in S’s stock.
Required:
Question No. 5
P S
---------- Rs.--------
Sales 150,000 120,000
Cost of sales (96,000) (74,000)
Finance cost (4,000) (3,000)
Other income 1,000 4,200
Tax (7,500) (7,000)
Revaluation gain (500) 200

(i) P acquired 85% shares of S some years ago. At acquisition date plant and machinery of S was
overvalued by Rs. 15,000. Its remaining life at that date was 10 years.
(iv) On July 1, 2018 S sold a machine to P at a profit of Rs. 2,500. Carrying amount of that machine in
S books was Rs. 35,500. P depreciated this machine on straight line basis over a life of 5 years.
Both companies include depreciation on plant and machinery in cost of sales.
Required:
Question No. 6
P S
---------- Rs.--------
Sales 140,000 120,000
Cost of sales (85,000) (70,000)
Finance cost (5,000) (6,300)
Tax (8,500) (7,000)
Revaluation gain 200 400
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NASIR ABBAS FCA
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(i) P acquired 5000 shares out of a total of 8000 shares of S some years ago.
(ii) On January 1, 2019 P gave a loan of Rs. 50,000 to S. Interest on this loan is 4% per annum payable every
six months.
(iii) During the year S sold goods to P for Rs. 20,000 at a margin of 30%. One-fifth of these goods are still
included in P’s stock.
(iv) During the year S paid ordinary dividend of Re. 0.5 per share. Both companies have properly recorded
this dividend.
Required:
Question No. 7
P S
---------- Rs.--------
Sales 100,000 90,000
Cost of sales (70,000) (58,000)
Finance cost (3,000) (2,000)
Tax (4,200) (6,000)
Revaluation gain 100 300

(i) P acquired 80% shares of S on July 1, 2018 for Rs. 30,800.
(ii) At acquisition date fair value of total net assets of S was Rs. 40,000. Included in this value was an
internally generated brand of S having a fair value of Rs. 5,000 and estimate life of 5 years.
(iii) During the year S paid total ordinary dividend of Rs. 400 to its shareholders.
Required:
Question No. 8
P S
---------- Rs.--------
Sales 140,000 120,000
Cost of sales (75,000) (84,000)
Finance cost (3,000) (6,000)
Tax (11,200) (3,000)
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(i) P acquired 70% shares of S on November 1, 2018.
(ii) At acquisition date fair value of delivery vans of S were higher than book value by Rs. 4,500.
Remaining life of vans at acquisition date was 3 years. Depreciation of these vans is charged in
distribution cost.
(iii) P had been selling goods to S for some years. Average sales were Rs. 1,000 per month. Out of the post-
acquisition sales, goods costing Rs. 2,000 and having sales value Rs. 3,000 were still held by S at year
end.
(iv) Profits are assumed to occur evenly throughout the year.
Required:
Question No. 9
P S
---------- Rs.--------
Sales 150,000 120,000
Cost of sales (80,000) (72,000)
Finance cost (3,000) (3,800)
Tax (13,500) (9,000)
- - -

(i) P acquired 60% shares of S on September 1, 2018.
(ii) At acquisition date office building was undervalued. This fair value adjustment would result in an
increase of Rs. 400 in the depreciation for the post acquisition period of the year.
(iii) Immediately after acquisition P advanced a loan of Rs. 30,000 to S at an annual interest of 8%. Both
companies have properly accounted for this interest.
(iv) S had been selling goods to P for some years. Average sales were Rs. 1,000 per month. Out of the post-
acquisition sales, some goods were still held by P at year end, in which profit of Rs. 900 was included.
(v) S other income includes an exceptional item of Rs. 300 which was earned in July 2018.
(vi) All incomes and expenses, except for those mentioned in points (iii) and (v), are assumed to occur
evenly throughout the year.
Required:
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Question No. 10
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
Dr. Cr. Dr. Cr.
-------------- 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:
In accordance with the requirements of International Financial Reporting Standards, prepare:
(a) Consolidated Statement of Comprehensive Income for the year ended 31 December 2014. (11)
(b) Consolidated Statement of Financial Position as at 31 December 2014. (06)
(Ignore tax effects on the adjustments) [Spring 2015, Q#1]
Question No. 11
The summarized trial balances of Oscar Limited (OL) and United Limited (UL) as at 31 December 2015 are as follows:
OL UL
Dr. Cr. Dr. Cr.
-------------- Rs. in million -----------
Sales - 835 - 645
Cost of sales 525 - 396 -
Operating expenses 115 - 102 -
Share capital (Rs. 10 each) - 600 - 250
Share premium - 150 - 60
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Retained earnings – 1 January 2015 - 265 - 179

Property, plant and equipment 390 - 350 -
Cost of investment 500 - - -
Stock in trade 125 - 115 -
Trade receivables 140 - 125 -
Cash and bank 105 - 103 -
1,965 1,965 1,239 1,239
(i) On 1 May 2015, OL acquired 80% shares of UL. UL has not recognized 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 purchase of machine, it 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 Profit %
------------ Rs. in million ---------
OL to UL 60 20 25% of cost
UL to OL 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)
[Spring 2016, Q#1]
Question No. 12
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
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(i) PL acquired 65% shares of FL on 1 September 2016 against the following consideration:
Cash payment of Rs. 900 million.
Issuance of shares having nominal value of Rs. 1,000 million.
The fair value of each share of PL and FL on acquisition date was Rs. 16 and Rs. 12 respectively. Retained earnings
of PL and FL on the acquisition date were Rs. 1,671 million and Rs. 506.5 million respectively.
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.
(i) 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.
(ii) 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.
(iii) Both companies paid interim cash dividend at the rate of 5% in May 2017.
(iv) An impairment test carried out at year end has indicated that goodwill of FL has been impaired by 10%.
(v) 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)
[Autumn 2017, Q#4]
Question No. 13
The following summarized trial balances pertain to Arrow Limited (AL) and its subsidiary Box Limited (BL) for the year
ended 31 December 2018:
AL BL
Debit Credit Debit Credit
--------------- Rs. in million ---------------
Sales - 5,177 - 3,996
Cost of sales 3,255 - 2,448 -
Operating expenses 713 - 636 -
Other income - 350 - 18
Share capital (Rs. 10 each) - 3,720 - 1,600
Share premium - 1,430 - 322
Retained earnings as at January 1, 2018 - 2,293 - 516
Property, plant and equipment 5,418 - 1,934 -
Investments 1,600 - - -
Loan to BL’s director 10 - - -
Current assets 2,284 - 1,797 -
13,683 13,683 7,103 7,103
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(i) AL acquired 96 million shares of BL on 1 May 2018 at following consideration:
Cash payment of Rs. 450 million
Issuance of 40 million shares of AL at Rs. 25 each
(ii) On acquisition date, carrying values of BL's net assets were equal to fair value except the following:
A building whose fair values and value-in-use were Rs. 390 million and Rs. 520 million respectively as against
carrying value of Rs. 480 million. The group follows cost model for subsequent measurement of property,
plant and equipment. The remaining life of building on acquisition date was 20 years. Fair value of the
building has increased to Rs. 440 million at 31 December 2018.
A brand which had not been recognized by BL. The fair value of the brand was assessed at Rs. 162 million. It
is estimated that benefit would be obtained from the brand for the next 6 years.
(iii) AL measures the non-controlling interest at fair value. On the date of acquisition, the market price of BL's shares
was Rs. 14 per share.
(iv) On 1 July 2018 AL sold an equipment to BL for Rs. 250 million at a gain of Rs. 20 million. BL has charged
depreciation of Rs. 12.5 million on this equipment.
(v) In each month of 2018, BL sold goods costing Rs. 40 million to AL at cost plus 20%. At year end, 75% of the goods
purchased in December were included in stock of AL.
(vi) BL's credit balance of Rs. 38 million in AL’s books does not agree with BL's books due to Rs. 7 million charged by
AL for management service on 26 December 2018. Total management fee charged by AL to BL since acquisition
amounted to Rs. 16 million.
(vii) BL declared interim cash dividend of Re. 0.50 per share in December 2018. AL has correctly recorded the dividend
in its books. However, BL has not yet accounted for the dividend.
(viii) The incomes and expenses of BL may be assumed to have accrued evenly during the year.
Required:
Prepare the following:
consolidated statement of profit or loss for the year ended 31 December 2018. (15)
consolidated statement of financial position as at 31 December 2018. (10)
[Spring 2019, Q#2]
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions

Solution No. 1
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [120 + 100 - 9] 211,000
Cost of sales [75 + 65 - 9] (131,000)
Gross profit 80,000
Distribution cost [12 + 8] (20,000)
Admin expenses [10 + 6 + 3] (19,000)
Finance cost [3 + 2] (5,000)
Other income [1.5 + 0.5] 2,000
Profit before tax 38,000
Tax [7 + 5.5] (12,500)
Profit after tax 25,500
Revaluation gain 1,200
Total comprehensive income 26,700
Profit attributable to:

Shareholders of P 22,200
NCI [W-1] 3,300
25,500
TCI attributable to:
NCI [3.3 + 1.2 x 30%] 3,660
26,700
W-1 NCI
S PAT 14,000
11,000
30.00% 3,300
Solution No. 2
P Group
Rs.
Sales [125 + 90 - 8.2] 206,800
Cost of sales [82 + 57 - 8.2] (130,800)
Gross profit 76,000
Admin expenses [12 + 14 - 3.5] (22,500)
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Rs.
Finance cost [4 + 1] (5,000)
Other income [6 - 3.5] 2,500
Tax [7.5 + 3.2] (10,700)
Profit / TCI attributable to:

NCI [5.8 x 25%] 1,450
18,300
Solution No. 3
P Group
Rs.
Sales [90 + 80 - 7] 163,000
Cost of sales [54 + 42 - 7 + 0.42] (89,420)
Gross profit 73,580
Admin expenses [7 + 7.8 + 2] (16,800)
Finance cost [3 + 1.2] (4,200)
Other income [1 + 0.8] 1,800
Tax [6 + 7.2] (13,200)
Revaluation gain [1.5 + 2] 3,500

NCI [W-1] 4,472
24,180
NCI [4.472 + 2 x 40%] 5,272
27,680
W-1 NCI
S PAT 13,600
Less: URP on goods [7 x 30% x 20%] (420)
11,180
40.00% 4,472
300
NASIR ABBAS FCA
Solution No. 4
P Group
Rs.
Sales [110 + 95 - 8] 197,000

Cost of sales [82 + 62 - 8 + 0.4] (136,400)
Gross profit 60,600
Distribution cost [6.4 + 8] (14,400)
Admin expenses [4.2 + 7.1 + 1 + 0.3] (12,600)
Finance cost [2 + 1.5] (3,500)
Other income [1.6 + 0.7] 2,300
Tax [6 + 6.05] (12,050)
Revaluation gain [1 - 0.3] 700

NCI [W-1] 1,075
20,350
NCI [1.075 - 0.3 x 10%] 1,045
21,050
W-1 NCI
S PAT 11,050
Less: Extra dep on FV adj. [3 / 10] (300)
10,750
10.00% 1,075
301
NASIR ABBAS FCA
Solution No. 5
P Group
Rs.
Sales [150 + 120] 270,000

Cost of sales [96 + 74 - 1.5 - 0.5] (168,000)
Gross profit 102,000
Distribution cost [12 + 9.5] (21,500)
Admin expenses [10 + 7 + 1.2] (18,200)
Finance cost [4 + 3] (7,000)
Other income [1 + 4.2 - 2.5] 2,700
Tax [7.5 + 7] (14,500)
Revaluation loss [0.2 - 0.5] (300)

NCI [W-1] 3,300
43,500
NCI [3.3 + 0.2 x 15%] 3,330
43,200
W-1 NCI
S PAT 23,700
Less: Profit on PPE (2,500)
Add: Extra dep on FV adj. [15 / 10] 1,500
Add: Excess dep on PPE sale 500
22,000
15.00% 3,300
302
NASIR ABBAS FCA
Solution No. 6
P Group
Rs.
Sales [140 + 120 - 20] 240,000

Cost of sales [85 + 70 - 20 +1.2] (136,200)
Admin expenses [13 + 11.4] (24,400)
Finance cost [5 + 6.3 - 1] (10,300)
Other income [4.5 + 1 - 1 - 2.5] 2,000
Tax [8.5 + 7] (15,500)
Revaluation gain [0.2 + 0.4] 600

NCI [W-1] 6,038
35,600
NCI [6.038 + 0.4 x 37.5%] 6,188
36,200
W-1 NCI
S PAT 17,300
Less: URP of goods [20 x 30% x 1/5] (1,200)
16,100
37.50% 6,038
303
NASIR ABBAS FCA
Solution No. 7
P Group
Rs.
Sales [100 + 90] 190,000

Cost of sales [70 + 58] (128,000)
Gross profit 62,000
Distribution cost [9.5 + 9] (18,500)
Admin expenses [8 + 10 + 1] (19,000)
Finance cost [3 + 2] (5,000)
Other income [2 + 2.8 + 1.2 (W-2) - 0.32] 5,680
Tax [4.2 + 6] (10,200)
Revaluation gain [0.1 + 0.3] 400

NCI [W-1] 1,360
14,980
NCI [1.36 + 0.3 x 20%] 1,420
15,380
W-1 NCI
S PAT 7,800
Less: Amortization of brand [5 x 1/5] (1,000)
6,800
20.00% 1,360
W-2 Negative goodwill
Investment 30,800
Fair value of net assets [40 x 80%] (32,000)
(1,200)
304
NASIR ABBAS FCA
Solution No. 8
P Group
Rs.
Sales [140 + 120 x 8/12 - 8] 212,000
Cost of sales [75 + 84 x 8/12 - 8 + 1] (124,000)
Gross profit 88,000
Distribution cost [13.5 + 9 x 8/12 + 1] (20,500)
Admin expenses [7.2 + 12 x 8/12] (15,200)
Finance cost [3 + 6 x 8/12] (7,000)
Other income [1.5 + 3.6 x 8/12] 3,900
Tax [11.2 + 3 x 8/12] (13,200)

NCI [W-1] 1,620
36,000
W-1 NCI
S PAT [9.6 x 8/12] 6,400
Less: Extra dep on FV adj. [4.5 x 1/3 x 8/12] (1,000)
5,400
30.00% 1,620
Solution No. 9
P Group
Rs.
Sales [150 + 120 x 10/12 - 10] 240,000
Cost of sales [80 + 72 x 10/12 - 10 + 0.9] (130,900)
Distribution cost [12 + 9.6 x 10/12] (20,000)
Admin expenses [11 + 10.8 x 10/12 + 0.4] (20,400)
Finance cost [3 + (3.8 - 2) x 10/12 + 2 - 2] (4,500)
Other income [4.6 + (1.8 - 0.3) x 10/12 - 2] 3,850
Tax [13.5 + 9 x 10/12] (21,000)
305
NASIR ABBAS FCA
Profit / TCI attributable to: Rs.

NCI [W-1] 4,780
47,050
W-1 NCI
S PAT [(16.6 - 0.3 + 2) x 10/12 - 2] 13,250
Less: Extra dep on FV adj. (400)
Less: URP on goods (900)
11,950
40.00% 4,780
Solution No. 10
Rivera Group
for the year ending December 31, 2014
Rs. in million
Sales [285 + 320 - 60 - 48] 497.00
Cost of sales [186 + 240 - 60 - 48 + 2.8 (W-2) + 1.6 (W-2)] (322.40)
Gross profit 174.60
Selling and distribution expense [27 + 25] (52.00)
Administration expenses [17 + 15 + 1.2 (W-3) + 4.68 (W-1)] (37.88)
Finance cost [8 + 10] (18.00)
Profit before tax 66.72
Tax [19 + 12] (31.00)
Profit after tax 35.72
Shareholders of RL 32.92
Non-controlling interest (W-4) 2.80
35.72
Rivera Group
Non current assets
PPE [190 + 263 + 18 - 1.2] 469.80
Current assets [W-2] 53.60
565.52
Equity
Current liabilities [35 + 44] 79.00
565.52
306
NASIR ABBAS FCA

W-1 Goodwill ------------------ Rs in million ------------------
Investment 250.00
Less: net assets
Capital 200.00
Fair value adj – building 18.00
254.00
[1.6 m / 2 shares] 80% (203.20)
46.80
Less: Impairment loss [10%] (4.68)
42.12
W-2 Current assets
RL current assets 23.00
CL current assets 35.00
URP on RL stock [16.8 x 20/120] (2.80)
URP on CL stock [9.6 x 20/120] (1.60)
53.60
RL RE (W-6) 78.00
Less: URP on goods [9.6 x 20/120] (1.60)
Less: Impairment loss (4.68)
CL RE (W-6) 54.00
Less: Extra depreciation [18/15] (1.20)
14.00
80% 11.20
82.92
Alternatively: [It is applicable on in 1st year of acquisition]
RL RE at start of year 50.00
Profit attributable to shareholders of RL 32.92
82.92
W - 4 NCI (SCI)
PAT (W-6) 18.00
Less: Extra depreciation [18/15] (1.20)
14.00
20% 2.80
-------------- Rs in million ----------

307
NASIR ABBAS FCA
W-5 NCI
NCI share in net assets acquired [254 (W-1) x 20%] 50.80
NCI share in post acq. Profits [14 (W-3) x 20%] 2.80
53.60

RL CL
Opening RE 50.00 36.00
Profit for the year:
Sales 285.00 320.00
Cost of sales (186.00) (240.00)
Selling and distribution (27.00) (25.00)
Admin expense (17.00) (15.00)
Finance cost (8.00) (10.00)
Tax (19.00) (12.00)
28.00 18.00
Closing RE 78.00 54.00
Solution No. 11
Notes:
- It is assumed that inter-company sales given are for full year.
- It is assumed that depreciation on machine is included in operating expenses.
- Elimination of inter company management services is ignored as it would have a net effect of zero.
Oscar Group
Non current assets Rs. in million
PPE [390 + 350 - 3.2 (W-4) + 0.1 (W-4)] 736.90
Intangible asset [45 – 2 (W-5)] 43.00
Goodwill (W-1) 46.40
Current assets
Stock in trade [125 + 115 - 4 - 1] 235.00
Trade receivables [140 + 125 - 30] 235.00
Cash and bank [105 + 103 + 30] 238.00
1,534.30
Capital and reserves
Retained earnings (W-2) 438.92
NCI (W-3) 125.38
Current liabilities
1,534.30
Oscar Group
308
NASIR ABBAS FCA

for the year ended December 31, 2015
Rs. in million
Sales [835 + 645 x 8/12 - 60 x 8/12 - 30 x 8/12 - 3.2(W-4)] 1,201.80
Cost of sales [525 + 396 x 8/12 - 60 x 8/12 - 30 x 8/12 + 4(W-2) + 1(W-5)] (734.00)
Gross profit 467.80
Operating expenses [115 + 102 x 8/12 + 2(W-5) - 0.1 (W-4)] (184.90)
Tax [65 + 48 x 8/12] (97.00)

Shareholders of OL 173.92
NCI (W-4) 11.98
185.90
Workings:
W - 1 Goodwill ----- Rs in million -----
Investment 500.00
Share premium 60.00
Retained earnings
[179 + 99 (W-2.1) – 66 (W-5)] 212.00
Brand 45.00
567.00
80% (453.60)
46.40
W - 2 Retained earnings
OL RE [265 + 130] 395.00
Add: Share in post acq RE of UL [59.9(W-5) x 80%] 47.92
438.92
Alternatively:
OL opening RE 265.00
Add: Profit attributable to shareholders of OL 173.92
438.92
309
NASIR ABBAS FCA
W - 2.1 ----- Rs in million -----

OL UL
Sales 835.00 645.00
Cost of sales (525.00) (396.00)
Operating expense (115.00) (102.00)
Tax expense (65.00) (48.00)
Profit after tax 130.00 99.00
W - 3 NCI (SOFP)
Share in net assets acquired [ 567(W-1) x 20%] 113.40
Share in post acq. RE 11.98
125.38
W-4 Sale of machine

Profit on machine [24 - 26 x 8/10] 3.20
Excess depreciation [3.2/8 x 3/12] 0.10
W - 5 NCI (SCI)
Post acq. PAT [99(W-2.1) x 8/12] 66.00
Less: Profit on machine (W-4) (3.20)
Add: Excess depreciation (W-4) 0.10
Less: URP on goods [5 x 20%] (1.00)
Less: Amortization of brand [45/15 x 8/12] (2.00)
59.90
20% 11.98
310
NASIR ABBAS FCA
Solution No. 12
Assumptions
- Dividend relates to post acquisition profits only.
- Retained earnings given are after including current year profits
- Loss on plant was only due to inter company price agreement and no impairment on plant is required
(a)
PL Group
Consolidated Income Statement
------------ Rs in million ------------
Sales [2,060 + 1,524 x 10/12 - 60] 3,270.00

Cost of sales [1,300 + 846 x 10/12 - 60 + 3 (W-1) + 1 (W-2)] (1,949.00)
Gross profit 1,321.00
Selling and admin expenses [350 + 225 x 10/12 + 39.55 (W-3) + 7.5 (W-5)] (584.55)
Investment income [190 - 84.5 (W-4)] 105.50
Gain on disposal of fixed assets [35 + 12 (W-2)] 47.00
Tax [80 + 60 x 10/12] (130.00)

Shareholders of PL 661.84
NCI (W-5) 97.11
758.95
(b)
Consolidated retained earnings
as at June 30, 2017
PL RE 1,996.00
Add: Loss on plant 12.00
Less: Depreciation on loss (1.00)
Add: FL RE 704.00
Less: Pre acq. RE (506.50)
Less: Impairment loss (39.55)
Less: URP on goods (3.00)
Less: Amortization of brand [90/10 x 10/12] (7.50)
147.45
65% 95.84
2,102.84
Alternatively
PL retained earnings as at 01-07-16 [1,996 – 555 (W-6)] 1,441.00
Profit attributable to shareholders of PL 661.84
2,102.84
Non-controlling interest
as at June 30, 2017
Fair value at acq. Date [260 x 35% x Rs. 12] 1,092.00
Share in FL post RE [147.45 x 35%] 51.61
1,143.61
311
NASIR ABBAS FCA
WORKING
W-1 URP on goods ------------ Rs in million ------------
[100 x 60% x 20% x 33.33/133.33] 3.00
W-2 URP on plant

Loss on sale (12.00)
Depreciation on loss [12/6 x 6/12] 1.00
Note
It is assumed that loss was only due to inter-company agreed price and there was no need of impairment testing
for that plant
W-3 Goodwill impairment

Investment:
Cash 900.00
Shares [100 x Rs. 16] 1,600.00
Fair of NCI 1,092.00
Less: net assets at acquisition
Share capital 2,600.00
Brand 90.00 (3,196.50)
Goodwill at acq. 395.50
Impairment loss 10% 39.55
W-4 Inter company dividend

[2,600 x 65% x 5%] 84.50
W-5 NCI (I/S)

FL PAT [(443 (W-6) - 50) x 10/12] 327.50
Amortization (7.50)
Impairment loss (39.55)
URP on goods (3.00)
277.45
35% 97.11
W-6 PAT
PL FL
Sales 2,060.00 1,524.00
Cost of sales (1,300.00) (846.00)
Selling & admin (350.00) (225.00)
Investment income 190.00 50.00
Gain on disposal 35.00 -
Tax (80.00) (60.00)
PAT 555.00 443.00
312
NASIR ABBAS FCA
Solution No. 13
AL Group
Consolidated balance sheet
Rs. million
Non current assets
PPE [5,418 + 1,934 - 90 + 3 - 19 (W-9)] 7,246.00
Investments [1,600 - 1,450] 150.00
Brand [162 - 18] 144.00
Loan to BL's director 10.00
Current assets [2,284 + 1,797 - 80 x 60% - 7 - 38 - 6] 3,982.00

11,532.00
Equity
Share premium 1,430.00
Non controlling interest [W-3] 1,024.00
Current liabilities [713 + 651 + 80 - 80 x 60% - 38] 1,358.00

11,532.00
-
AL Group
Rs. million
Sales [5,177 + 3,996 x 8/12 - 384] 7,457.00
Cost of sales [W-4] (4,509.00)
Operating expenses [W-5] (1,142.00)
Other income [W-6] 656.00
Profit before tax 2,462.00
Tax [403 + 288 x 8/12] (595.00)
Profit after tax 1,867.00

Shareholders of AL 1,707.00
NCI [W-7] 160.00
1,867.00
W-1
Goodwill
Investment:
Cash 450.00
Shares [40 x 25] 1,000.00
Fair value of NCI [64 x 14] 896.00
Less: net assets:
Capital 1,600.00
Premium 322.00
RE [516 + 642 x 4/12] 730.00
Building [390 - 480] (90.00)
Brand 162.00 (2,724.00)
(378.00)
313
NASIR ABBAS FCA
------------ Rs in million ------------

PL's RE [2,293 + 1,156 (W-8)] 3,449.00
Less: URP on equipment [W-9] (19.00)
Add: negative goodwill 378.00
Add: SL's RE [516 + 642(W-8)] 1,158.00
Less: Pre-acquisition profits (730.00)
Less: Dividend [160 x 0.5] (80.00)
Less: Unrecorded management fees (7.00)
Less: URP on goods [40 x 75% x 20%] (6.00)
Add: Dep on FV adj. [90/20 x 8/12] 3.00
Less: Amortization on brand [162/6 x 8/12] (18.00)
320.00
60.00% 192.00
4,000.00
W-3 NCI (Balance sheet)
FV of NCI 896.00
Post-acq RE [320 x 40%] 128.00
1,024.00
W-4 Cost of sales

AL 3,255.00
BL [2,448 x 8/12] 1,632.00
Inter-company purchase [40 x 1.2 x 8] (384.00)
URP on goods 6.00
4,509.00
W-5 Operating expenses

AL 713.00
BL [636 x 8/12] 424.00
Unrecorded management fee expense 7.00
Inter-company management fee (16.00)
Excess dep on equipment (1.00)
Amortization of brand 18.00
Dep on FV adj (3.00)
1,142.00
W-6 Other income
AL 350.00
BL [18 x 8/12] 12.00
Inter-company management fee (16.00)
Negative goodwill (W-1) 378.00
Dividend [80 x 60%] (48.00)
Profit on equipment (20.00)
656.00
W-7 NCI (Income statement)

SL's PAT [642 x 8/12(W-8)] 428.00
Less: Unrecorded management fees (7.00)
Less: URP on goods [40 x 75% x 20%] (6.00)
Add: Dep on FV adj. [90/20 x 8/12] 3.00
Less: Amortization on brand [162/6 x 8/12] (18.00)
400.00
40% 160.00
314
NASIR ABBAS FCA
W-8 Separate Income statement AL BL

Sales 5,177.00 3,996.00
Cost of sales (3,255.00) (2,448.00)
Operating expenses (713.00) (636.00)
Other income 350.00 18.00
Tax (403.00) (288.00)
PAT 1,156.00 642.00
W-9 URP on equipment

Profit 20.00
Excess depreciation [12.5/250 x 20] (1.00)
19.00
315
NASIR ABBAS FCA
Solution
Pulp Group
as at June 30, 2020
Rs.
Non current assets
PPE [125 + 120 - 8 + 3 - 1.2 - 7.6 - 7.8] 223,400
Intangible asset [12 - 4.8] 7,200
Goodwill [W-1] -
Current assets
Inventories [18 + 14 + 4 - 1.8 - 2] 32,200
Debtors [22 + 24 - 13] 33,000
Other receivables [11 + 8 - 2.8] 16,200
Cash and bank [9 + 9] 18,000
330,000
Equity
Share capital [70 + 2.8 x 2/5 x 10] 81,200
Share premium [10 + 2.8 x 2/5 x 22] 34,640
Deferred consideration [7,650 x 1.12] 9,256
Deferred tax (W-5) 26,100
Current liabilities
Contingent consideration [2,800 x 3] 8,400
Creditors [14 + 19 + 4 - 13] 24,000
Other payables [16 + 15 - 2.8] 28,200
330,000
-
Workings
- Cash [7 x 2,800] 19,600
- Share exchange [2,800 x 2/5 x 32] 35,840
- Deferred consideration [2,800 x 4 x 1.1-4] 7,650
- Contingent consideration [2,800 x 1.25] 3,500
- Land 10,000
Value of NCI [84,500 x 30%] 25,950
Share premium 20,000
316
RE 14,000
FV adj. - Land 2,000
FV adj. - Plant 3,000
Brand 12,000
Contingent liability (7,000)
DTL [(3,000 + 12,000 - 7,000) x 25%] (2,000) (86,500)
Impairment loss [22,914(W-3.1) x 70%] (16,040)
-
W-2 Other reserves Pulp Seed

--------- Rs. --------
Less: Pre-acq - (4,500)
2,500
Add: Share in Seed [2,500 x 70%] 1,750
10,750
W-3 Retained earnings Pulp Seed

--------- Rs. --------
RE 74,000 58,000
Less: Finance cost [7,650 x 1.12 - 7,650] (1,606) -
Less: Change in value of contingent cons. [2,800 x 1.75] (4,900) -
Add: Gain on land transfer 2,000 -
Less: Acquisition related cost [21,000 - 19,600] (1,400) -
Less: Extra dep. on FV adj. of plant [3,000 x 2/5] - (1,200)
Less: FV adj. of land - (2,000)
Less: Amortization of brand [12,000 x 2/5] - (4,800)
Add: Contingent liability settled - 7,000
Less: URP on goods [(4,000 + 5,000) x 20%] [8,000 x 25%] (1,800) (2,000)
Less: URP on machine [8,000 - 8,000 x 1,900/38,000] - (7,600)
Less: Impairment loss of GW (16,040) -
Less: Impairment loss of PPE (W-3.1) - (7,800)
Add: Deferred tax expense (W-5) 800 4,100
29,700
Add: Share in S [29,700 x 70%] 20,790
71,844
317
W-3.1 Impairment loss Rs.
Carrying amount as per question:
PPE 120,000
Fair value adjustment of Plant [3,000 - 1,200] 1,800
Goodwill [16,040 ÷ 0.7] 22,914
144,714
Impairment loss 30,714
Allocation of impairment loss:

- Goodwill 22,914
- PPE [30,714 - 22,914] 7,800
W-4 NCI Rs.

Value of NCI (W-1) 25,950
Other reserves [2,500 x 30%] 750
RE [29,700 x 30%] 8,910
35,610
W-5 Deferred tax

Pulp Seed
--------- Rs. --------
Adjustments in carrying amounts of net assets:
Acquisition related cost (1,400) -
Extra dep. on FV adj. of plant - (1,200)
Amortization of brand - (4,800)
Contingent liability settled - 7,000
URP on goods (1,800) (2,000)
URP on machine - (7,600)
Impairment loss of PPE - (7,800)
[A] (3,200) (16,400)
Tax on adjustments after acquisition [A x 25%] (800) (4,100)

Tax on acquisition (W-1) - 2,000
Balance as per question 13,000 16,000
12,200 13,900
318
Question
Pulp Seed
---------- Rs.--------
Sales 140,000 141,000
Cost of sales (80,000) (82,000)
Finance cost (4,000) (5,000)
Tax (15,000) (18,000)
Revaluation gain 1,800 1,500

(1) Pulp acquired 70% shares of Seed on July 1, 2018 when its other reserves were Rs. 4,500 and retained earnings
were Rs. 14,000. Following purchase consideration was agreed:
An immediate cash payment of Rs. 7 per share.

A deferred cash payment of Rs. 4 per share payable on June 30, 2022.
A contingent cash payment of Rs. 3 per share payable on September 30, 2020 if sale of a new product
achieves its promised benchmark till June 30, 2020. The said target was duly achieved in June 2020.
A share exchange of 2 shares of Pulp for every 5 shares of Seed. Market shares prices at acquisition date
were Rs. 32 (Pulp) and Rs. 26 (Seed).
A plot of Land with fair value at acquisition date of Rs. 10,000 (carrying value was Rs. 8,000).
Pulp only recorded immediate cash payment plus commission paid to investment banker as cost of investment.
Land transferred as consideration is still appearing in Pulp’s books. Fair value of contingent consideration at
the date of acquisition was Rs. 1.25 per share. It did not change on June 30, 2019. Pulp’s cost of capital is 10%.
(2) At acquisition date, carrying amounts of all assets and liabilities of Seed were equal to fair values except
following:
----------- Rs. ----------
Land 15,000 17,000
Plant 24,000 27,000
Remaining useful life of Plant at acquisition date was 5 years. The land was sold by Seed during 2020 for Rs.
19,500.
(3) At acquisition date there was an internally generated brand of Seed, however, its fair value could not be
estimated reliably at that date due to insufficient information. Though its remaining life was estimated to be 5
years. The financial consultant provided with reliable estimate of fair value at Rs. 12,000 on receipt of sufficient
information 4 months later.
(4) At acquisition date there was a pending court case against Seed for which no provision was recognized in its
books as outflow of economic resources was not probable. At that date fair value of the contingent liability
was determined at Rs. 7,000. In respect of this claim, on June 30, 2019 Seed recognized a provision for Rs.
319
9,000 as outflow of economic resources became probable. The claim was finally settled during 2020 for Rs.
10,000.
(5) It is PL’s policy to value non-controlling interest at proportionate share in identifiable net assets.
(6) There was no need for impairment test in 2019, however, recoverable amount of CGU of Seed (i.e. comprising
of PPE and Goodwill) on June 30, 2020 was Rs. 114,000.
Sales Included in buyer’s Gross

------------------- Rs. --------------
Pulp to Seed 20,000 5,000 20%
Seed to Pulp 36,000 8,000 25%
In respect of above intercompany sales, Seed’s books show a net balance owed to Pulp is Rs. 9,000. However,
it differs from balance as per Pulp’s books due to goods sold by Pulp for Rs. 4,000 on June 28, 2020 but were
received and recorded by Seed on July 3, 2020.
(8) On January 1, 2020 Seed sold a machine to Pulp for Rs. 38,000 at a profit of Rs. 8,000. Pulp charged depreciation
on that machine for Rs. 1,900. Both companies include the depreciation on plant and machinery in cost of
sales.
(9) During June 2020, Pulp and Seed declared ordinary dividend of 5% and 10% respectively which would be
payable in next month. Both companies have duly recorded the dividends.
(10) Deferred tax liabilities are calculated on all temporary differences at a tax rate of 25%. Gain on sale of land is
not taxable. No tax deduction will be allowed on deferred consideration and contingent consideration.
Required:
Prepare consolidated statement of comprehensive income and consolidated statement of changes in equity for the
year ending June 30, 2020.
320
Solution
Pulp Group
Rs.
Sales [140 + 141 - 20 - 36] 225,000
Cost of sales (W-1) (110,000)
Admin expenses (W-2) (55,140)
Finance cost (W-3) (9,842)
Other income (W-4) 9,200
Tax (W-7) (27,450)
Revaluation gain [1.8 + 1.5] 3,300
Proft attributable to:

- Shareholders of Pulp 7,159
- NCI (W-6) 2,610
9,769

- Shareholders of Pulp 10,009
- NCI [2.61 + 1.5 x 30%] 3,060
13,069
Workings
W-1 Cost of sales Rs.
Pulp 80,000
Seed 82,000
Intercompany sales [36,000 + 20,000] (56,000)
URP on goods [(4,000 + 5,000) x 20% + 8,000 x 25%] 3,800
Extra depreciation on FV adjustment of Plant [3,000 x 1/5] 600
Excees depreciation on sale of plant [8,000 x 1,900/38,000] (400)
110,000
W-2 Admin expenses

Pulp 11,000
Seed 13,000
Change in fair value of contingent consideration 4,900
Impairment loss of GW (W-5) 16,040
Impairment loss of PPE (W-5.1) 7,800
Amortization of brand [12,000 x 1/5] 2,400
55,140
321
W-3 Finance cost Rs.
Pulp 4,000
Seed 5,000
Finance cost on deferred cost [7,650 x 1.1 x 10%] 842
9,842
W-4 Other income

Pulp 9,000
Seed 13,000
Dividend income [40,000 x 10% x 70%] (2,800)
Profit on sale of machine (8,000)
FV adjustment (land) (2,000)
9,200

- Cash [7 x 2,800] 19,600
- Land 10,000
Value of NCI [84,500 x 30%] 25,950
RE 14,000
Brand 12,000
DTL [(3,000 + 12,000 - 7,000) x 25%] (2,000) (86,500)
Impairment loss [22,914(W-5.1) x 70%] (16,040)
-
W-5.1 Impairment loss Rs.

PPE 120,000
Fair value adjustment of Plant [3,000 - 1,200] 1,800
Goodwill [16,040 ÷ 0.7] 22,914
144,714
Impairment loss 30,714
Allocation of impairment loss:

- Goodwill 22,914
- PPE [30,714 - 22,914] 7,800
322
W-6 NCI Rs.
Seed's PAT 26,000
Less: Extra dep. on FV adj. of plant [3,000 x 1/5] (600)
Less: FV adj. of land (2,000)
Less: Amortization of brand [12,000 x 1/5] (2,400)
Less: URP on goods [8,000 x 25%] (2,000)
Less: URP on machine [8,000 - 8,000 x 1,900/38,000] (7,600)
Less: Impairment loss of PPE (W-3.1) (7,800)
(22,400)
Add: Deferred tax expense [(22,400 - 2,000) x 25%] 5,100
8,700
30% 2,610
W-7 Tax
Pulp 15,000
Seed 18,000
Tax on P's adjustments [URP on goods i.e. 1,800 x 25%] (450)
Tax on S's adjustments (W-6) (5,100)
27,450
323
Pulp Group
Consolidated Statement of changes in equity
for the year ending June 30, 2020
Attributable to shareholders of P Non-

Share Share Other Retained controlling Total
Total
capital premium reserves earnings interest
------------------------------------------- Rs. ------------------------------------------------
Balance as on 01-07-19 81,200 34,640 7,900 68,185 191,925 33,750 225,675
Dividend * - - - (3,500) (3,500) (1,200) (4,700)
Total comprensive income for the year - - 2,850 7,159 10,009 3,060 13,069
Balance as on 30-06-20 81,200 34,640 10,750 71,844 198,434 35,610 234,044
* Dividend in RE column = 70,000 x 5% = 3,500

Dividend in NCI column = 40,000 x 10% x 30% = 1,200
324
Solution
Workings
- Cash [7 x 2,800] 19,600
- Land 10,000
Value of NCI [84,500 x 30%] 25,950
RE 14,000
Brand 12,000
DTL [(3,000 + 12,000 - 7,000) x 25%] (2,000) (86,500)
W-2 Other reserves Pulp Seed

--------- Rs. --------
1,000
Add: Share in Seed [1,000 x 70%] 700
7,900
W-3 Retained earnings Pulp Seed

--------- Rs. --------
RE [Closing - PAT + Dividend] 50,500 36,000
Less: Finance cost [7,650 x 1.1 - 7,650] (765) -
Add: Gain on land transfer 2,000 -
Less: Acquisition related cost [21,000 - 19,600] (1,400) -
Less: Extra dep. on FV adj. of plant [3,000 x 1/5] - (600)
Less: Amortization of brand [12,000 x 1/5] - (2,400)
Less: Contingent liability - (2,000)
Add: Provision recognized by S - 9,000
Add: Deferred tax expense (W-4) 350 (1,000)
25,000
Add: Share in S [25,000 x 70%] 17,500
68,185
325
W-4 NCI Rs.
Value of NCI (W-1) 25,950
Other reserves [1,000 x 30%] 300
RE [25,000 x 30%] 7,500
33,750
W-5 Deferred tax

Pulp Seed
--------- Rs. --------
Adjustments in carrying amounts of net assets:
Acquisition related cost (1,400) -
Extra dep. on FV adj. of plant - (600)
Amortization of brand - (2,400)
Contingent liability settled - (2,000)
Provision reversal - 9,000
[A] (1,400) 4,000
Tax on adjustments after acquisition [A x 25%] (350) 1,000
326
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
CONSOLIDATION – SOFP WITH ONE ASSOCIATE

Equity method is applied for investment in associate in consolidated statement of financial position (or Group statement
of financial position). Under this method “Investment in associate” is shown at investor’s share in net assets of
associate. Following are various adjustments to be made for application of equity method in consolidated balance
sheet:
1. POST ACQUISITION PROFITS AND OTHER RESERVES OF “A”
P’s shares in A’s post-acquisition retained earnings and post-acquisition other reserves are:
(i) ADDED to P’s RE in “Group RE working” and P’s other reserves in “Group other reserves working”
respectively.
(ii) both ADDED to “Investment in associate”
(Also include the adjustment for uniform accounting policies, if required. E.g. the If A does not follow
revaluation model BUT group follows it, then for consolidation purpose you will have to make
revaluation adjustments.)
Memorandum entry:
Dr. Investment in A
Cr. Group RE (Group’s share in A’s post acquisition profits)
Cr. Group other reserves (Group’s share in A’s post acquisition other reserves)
Notes:
– In case of losses, “investment in A” will not be taken below zero.
– If P measures its investment in A as per IFRS 9, then do not forget to reverse any gain or loss recognized
2. IMPAIRMENT OF INVESTMENT IN ASSOCIATE

In questions, impairment loss of investment in associate may be:
- Given OR
- Determined by deducting “recoverable amount” from “carrying amount” of investment
Total accumulated impairment loss is DEDUCTED from:

(i) P’s RE in Group RE working
(ii) “Investment in A”
Memorandum entry:
Dr. Group RE
Cr. Investment in A
3. INTER COMPANY BALANCES
No elimination:
Since there is no consolidation of receivables and payables of A, therefore, there is no need to eliminate any
intercompany balance
Inventory value may be given in question or mentioned as a proportion of intercompany sale.
Calculation of URP:
OR
OR
327
NASIR ABBAS FCA
P to A sale A to P sale
P’s share of URP is DEDUCTED from: P’s share of URP is DEDUCTED from:
(i) Investment in A (i) Inventory in Group SOFP
(ii) P’ RE in Group RE working (ii) P’ RE in Group RE working
Memorandum entry:
Cr. Investment in A Cr. Inventory
5. (a) FAIR VALUE ADJUSTMENT FOR A’s NET ASSETS
Information about fair value adjustments at acquisition date may be given as follows:
- Difference between fair values and book values is given (e.g. building was overvalued by Rs. 50,000) OR
- Both Fair values and book values of A’s assets and liabilities are given (i.e. net assets)
No adjustment for fair values is accounted for in Group SOFP as no consolidation of assets is being made.
However, these are considered for calculation of goodwill and adjustment of “extra depreciation”.
5. (b) EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of A in its books
Calculation of Extra accumulated depreciation:

= FV adjustment ÷ remaining useful life x years since acquisition
Extra Accumulated depreciation is DEDUCTED from A’s RE in “Group RE working”
Memorandum entry:
Dr. Group RE
Cr. Investment in A
In case of negative adjustment to A’s net assets, above adjustments will be reversed
6. UNREALIZED PROFIT ON SALE OF NON-CURRENT ASSET DURING THE YEAR
Unrealized profit is the profit included in carrying amount of a non-current asset sold in an inter-company
transaction.
Calculation of URP:
URP = NBV of asset x margin %
OR
NBV of asset x markup / (100 + GP markup)
OR
URP = Profit on sale – excess depreciation charged by buyer
328
NASIR ABBAS FCA
P’s% share of URP is DEDUCTED from: P’s% share of URP is DEDUCTED from:
(i) Investment in A (i) Relevant asset in Group SOFP
(ii) P’s RE in Group RE working (ii) P’s RE in Group RE working
Memorandum entry:
Cr. Investment in A Cr. PPE
Do calculate goodwill just like it is done in case of subsidiary where NCI is valued on proportionate basis. If the
answer is positive then leave it there but if answer is negative then make following adjustment:
Negative goodwill is ADDED to:
(i) P’s RE in Group RE working
(ii) Investment in A
Memorandum entry:
Dr. Investment in A
Cr. Group RE
8. OTHER INVESTMENT BY “P” IN “A”
Group may have other long term investments such as:

- Investment in preference shares / debentures of A
- Loan to A
Such investments are also considered as and included in “Investment in associates”
Only effect is on the calculation of Pre and Post acquisition reserves as follows:
Pre acq. reserves = A’s reserves at balance sheet date – income for the year x n/12
(n = no. of months from acquisition to year end)
Post acq. reserves= A’s reserves at balance sheet date – pre acquisition reserves
OR
Income for the year x n/12
329
NASIR ABBAS FCA
CONSOLIDATION – SOCI WITH ONE ASSOCIATE

Equity method is applied for investment in associate in consolidated statement of comprehensive income (or Group
statement of comprehensive income). Under this method, two line items, namely “Share of profit from associate” and
“share of other comprehensive income from associate” are included in consolidated statement of comprehensive
income. Following are various adjustments to be made for application of equity method in consolidated statement of
comprehensive income:
1. IMPAIRMENT OF INVESTMENT IN ASSOCIATE
In questions, impairment loss for the year on investment in associate may be:
- Given OR
- Determined by deducting “recoverable amount of current year” from “recoverable amount of previous year”
of investment.
Impairment loss for the year is DEDUCTED from share of profit from associate in “Share of profit from associate
working” (W – 1)
2. INTER COMPANY SALES / INTER COMPANY MANAGEMENT SERVICES / INTET COMPANY INTEREST
No elimination:
Since there is no consolidation of incomes and expenses of A, therefore, there is no need to eliminate any
intercompany transaction.
Inventory value may be given in question or mentioned as a proportion of intercompany sale.
Calculation of URP:
OR
OR
P’s % share of URP is ADDED to “Cost of sales” P’s % share of URP is DEDUCTED in “Share of profit from
associate” working (W – 1)
4. EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of A in its books
Calculation of Extra depreciation for the year:

= FV adjustment ÷ remaining useful life
Extra depreciation for the year is DEDUCTED from A’s PAT in “Share of profit from associate working”
In case of negative adjustment to A’s net assets, above adjustments will be reversed
330
NASIR ABBAS FCA
5. UNREALIZED PROFIT ON SALE OF NON-CURRENT ASSET
Following adjustment is required only in case of sale of non-current asset during the current year:
Calculation of URP:
URP = NBV of asset x margin %
OR
NBV of asset x markup / (100 + GP markup)
OR
URP = Profit on sale – excess depreciation charged by buyer
P’s % share of URP is DEDUCTED from “Other P’s % share of URP is DEDUCTED in “Share of profit from
income” associate” working
[If P accounted for this sale as a “sale of goods”,
then adjustment number 3 will be followed]
Adjustment for negative goodwill is only made in 1st year of purchase of investment in A.
Negative goodwill is ADDED to “share of profits from associate working”
7. ORDINARY DIVIDEND BY “A”
P’s share in A’s dividend recorded by P is DEDUCTED from P’s other income as share in total profit of associate is
separately included as a separate line item.
A’s PAT in “share of profit from associate working” and A’s other comprehensive income in “share of
other comprehensive income from associate working” are time apportioned as per number of months
after acquisition.
331
NASIR ABBAS FCA

P Group
Consolidated Statement of Financial Position
As at …………………..
Rs.
NON-CURRENT ASSETS:
PPE XXX
[Same as studied earlier – P’s % share x URP on PPE (A to P)]
Intangible assets XXX

(Same as studied earlier)
Goodwill XXX
Investment XXX
Investment in associates (W – 1) XXX
CURRENT ASSETS:
Inventory XXX
(Same as studied earlier – P’s% share x URP (A to P))
Receivables XXX
Dividend receivables XXX

Cash / Bank XXX

XXX
Rs.
CAPITAL AND RESERVES:
Share capital XXX

Share premium XXX

Other reserves XXX
Retained earnings (W – 2) XXX
Non-controlling interest XXX
NON-CURRENT LIABILITIES:
Loan notes / Debentures XXX

332
NASIR ABBAS FCA

Contingent consideration XXX

Deferred tax XXX

CURRENT LIABILITIES: Rs.
Payables XXX
Dividend payable XXX

XXX
WORKINGS
(W – 1) Investment in associates
Rs.
Investment in associate [Calculated same as for S] XXX

Add: Share of profits from A [(b) from (W – 2)] XXX
Add: Share in A’s post-acquisition other reserves (e.g. Revaluation) XXX
Less: P’s % share x URP on goods or PPE [ P to A ] (XXX)
XXX
(W – 2) Retained earnings
Rs. Rs.
Parent’s RE XXX
------ same adjustments as studied earlier ----- |
|
XXX
Add: S’s RE XXX
------ same adjustments as studied earlier ----- |
|
XXX
Add: A’s RE XXX

Less: Pre-acquisition RE (XXX)
Less: Extra depreciation on fair value adjustment (XXX)
[a] XXX
Share in A’s post RE [a x P’s % share] XXX
Add: Negative goodwill XXX
Less: Impairment loss on A (XXX)
Share of profit from A [b] XXX
Less: P’s% share x URP on goods or PPE [P to A] [A to P] (XXX)
XXX
333
NASIR ABBAS FCA

P Group
Consolidated Statement of Comprehensive income
For the year ended …………………..
Rs.
Sale XXX
Cost of sales (XXX)
[Same as studied earlier + P’s % share x URP on goods (P to A)]
Gross profit (Cast down) XXX
Distribution cost (XXX)
Administrative expenses (XXX)
Finance cost (XXX)
Other income XXX
(Same as studied earlier – P’s% share x URP on PPE (P to A) – Dividend from A)
Share of profit from associate (W – 1) XXX
Profit before tax (Cast down) XXX
Tax (XXX)
Profit after tax (Cast down) XXX
Revaluation gain / (loss) XXX
(P’s + S’s x n/12)
Fair value gain / (loss) XXX
(P’s + S’s x n/12)
Share of other comprehensive income from associate XXX
(P’s% x A’s other comprehensive income x n/12)
Total comprehensive income for the year XXX
Profit for the year attributable to:

- Shareholders of Parent XXX
- Non-controlling interest XXX
XXX
- Shareholders of Parent XXX
- Non-controlling interest XXX
XXX
334
NASIR ABBAS FCA
(W – 1) Share of profit from associates

Rs. Rs.
A’s Profit after taxation X n/12 XXX
Less: Extra depreciation for the year on fair value adjustment (XXX)
[a] XXX
Share in A’s PAT [a x Ps’% share] XXX
Add: Negative goodwill XXX
Less: URP on goods or PPE x P’s% share [A to P] (XXX)
Less: Impairment loss for the year (XXX)
XXX
335
NASIR ABBAS FCA
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Questions
PRACTICE QUESTIONS
Question No. 1
P S
---------- Rs.--------
Non-current assets
Investment in Alpha 11,000 -
Current assets
Debtors 15,000 13,000
Cash & bank 1,500 1,000
109,500 68,000
Equity
Retained earnings – at July 1, 2018 20,000 18,000
– for the year ended June 30, 2019 18,000 8,000
8% Loan notes 5,000 -
Current liabilities
Creditors 16,500 22,000
109,500 68,000
(i) On April 1, 2019 P acquired 75% shares of S by means of a share exchange of two shares in P for every three
shares of S acquired. On that date, further consideration was also issued to the shareholders of S in the form of
four Rs. 100 8% loan notes for every 100 shares acquired in S. None of the purchase consideration, nor the
outstanding interest on these loan notes at June 30, 2019, has yet been recorded by P. At the date of acquisition,
the share price of P and S is Rs. 30 and Rs. 22 respectively.
(ii) At the date of acquisition, the fair values of S’s assets were equal to their carrying amounts. However, S operates
a mine which requires to be decommissioned in five years’ time. No provision has been made for these
decommissioning costs by S. The present value (discounted at 8%) of the decommissioning is estimated at Rs.
4,000 and will be paid five years from the date of acquisition (i.e. the end of the mine’s life).
(iii) It is group’s policy to value non-controlling interest at fair value.
(iv) The inventory of S includes goods bought from P for Rs. 2,100. P applies a consistent mark-up on cost of 40%
when arriving at its selling prices. On June 28, 2019, P dispatched goods to S with a selling price of Rs. 700. These
were not received by S until after the year end and so have not been included in the above inventory at June
30, 2019.
At June 30, 2019, P’s records showed a receivable due from S of Rs. 5,000, this differed to the equivalent payable
in S’s records due to the goods in transit.
(v) The investment in Alpha represents 30% of its voting share capital acquired on July 1, 2018 and P uses equity
accounting to account for this investment. Alpha’s profit for the year ended June 30, 2019 was Rs. 6,000 and
Alpha paid total dividends during the year ended June 30, 2019 of Rs. 2,000. P has recorded its share of the
dividend received from Alpha in investment income (and cash).
(vi) All profits and losses accrued evenly throughout the year.
(vii) At June 30, 2019, investment in Alpha is impaired by Rs. 200.
Required:
336
NASIR ABBAS FCA
Question No. 2
P S A
---------------------- Rs.--------------------
Non-current assets
Property, plant & equipment 80,000 50,000 40,000
Intangible assets 8,000 - -
Investments:
- in S 43,200 - -
- in A 10,000 - -
- other 5,000 - 2,000
Current assets
Inventories 12,000 8,000 10,000
Debtors 9,000 11,000 5,000
Cash & bank 4,000 6,000 4,000
171,200 75,000 61,000
Equity
Share capital (Rs. 10 per share) 70,000 20,000 10,000
Retained earnings – at July 1, 2018 36,000 19,000 21,000
– for the year ended June 30, 2019 18,000 12,000 9,000
Loan notes 25,000 15,000 5,000
Current liabilities
Creditors 22,200 9,000 16,000
171,200 75,000 61,000
(i) On July 1, 2018 P acquired 1,600 shares of S in consideration of a cash payment of Rs. 27 per share. At the date
of acquisition, the share price of S was Rs. 25 per share.
(ii) At the date of acquisition, the fair values of S’s property, plant and equipment were equal to their carrying
amounts except for a plant which had a fair value of Rs. 4,000 above its carrying amount. At that date, the plant
had a remaining life of four years. S uses straight-line depreciation for plant assuming a nil residual value.
Also at the date of acquisition, P valued S’s customer relationships as a customer base intangible asset at fair
value of Rs. 3,000. S has not accounted for this asset. Trading relationships with S’s customers last on average
for six years.
(iv) Following information is relevant to inter-company transactions and balances:
P’s records: S A
Purchases from Rs. 40,000 Rs. 12,000
Year-end payable to Rs. 4,000 Rs. 3,000
Year-end stock held out inter-company purchase Rs. 7,000 Rs. 6,000
Profit margin earned by seller 20% 25%
(v) The investment in A represents 25% of its voting share capital purchased on January 1, 2019. P uses equity
accounting to account for this investment.
(vii) At June 30, consolidated goodwill has been impaired by Rs. 1,200 and investment in A has been impaired by Rs.
200.
(viiI)P’s other investments are equity investments measured at fair value through profit and loss. At June 30, 2019
fair value of these investments has moved to Rs. 6,000 but no entry has been made in books by P.
Required:
337
NASIR ABBAS FCA
Question No. 3
P S A
---------------------- Rs.--------------------
Non-current assets
Property, plant & equipment 40,000 25,000 22,000
Investments 40,000 - -
Current assets
Inventories 10,000 8,000 5,000
Debtors 7,000 2,000 3,000
Cash & bank 2,000 4,000 1,000
99,000 39,000 31,000
Equity
Share capital (Rs. 10 per share) 20,000 10,000 8,000
Share premium 10,000 - -
Retained earnings – at July 1, 2018 26,000 8,000 7,000
– for the year ended June 30, 2019 18,000 6,000 3,000
Loan notes 15,000 - 5,000
Current liabilities
Creditors 10,000 15,000 8,000
99,000 39,000 31,000
(i) On July 1, 2018 P acquired 75% shares of S in a share exchange of two shares in P for every three shares acquired
in S. At the date of acquisition, the market prices of P’s and S’s shares were Rs. 30 and Rs. 18 respectively.
(ii) At the date of acquisition, the fair values of S’s property, plant and equipment were equal to their carrying
amounts except for a plant which had a fair value of Rs. 2,000 below its carrying amount. As a result, the
differential amount of depreciation would be Rs. 100 per year.
Also at the date of acquisition, S had a software costing Rs. 500 in its statement of financial position. P’s directors
believed the software to have no recoverable value at the date of acquisition and S wrote it off shortly after its
acquisition.
(iv) On January 1, 2019 P acquired 40% of the equity shares of A paying a cash of Rs. 17 per share and issuing at par
one Rs. 100 loan note for every 20 shares acquired in A. The consideration has been correctly accounted for by
P.
(v) Following information is relevant to inter-company transactions and balances:
P’s records: S A
Sales to Rs. 20,000 Rs. 10,000
Year-end receivable from Rs. 2,000 Rs. 1,000
Year-end stock out of inter-company sale held with Rs. 3,000 Rs. 2,000
Profit margin earned by P 30% 25%
(vii) At June 30, consolidated goodwill has been impaired by 20%.
Required:
338
NASIR ABBAS FCA
Question No. 4
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. million ---------------
Property, plant & equipment 850 750 500
Investment in ML at cost 900 - -
Investment in JL at cost 170 - -
Inventories 300 340 200
Debtors 240 200 150
Cash & bank 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
(i) Details of PL's investments are as follows:
Retained
Date of investment Holding % Investee earnings of
investee
(Rs. million)
01-Jan-19 25% JL 200
01-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 February 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 year-end, the said target has been 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.
(xi) PL’s discount rate is 14%.
Required:
Prepare PL’s consolidated statement of financial position as at 31 December 2019 in accordance with the requirements
of IFRSs. (18)
[Q-6 Spr-20]
339
NASIR ABBAS FCA
Question No. 5
P S
---------- Rs.--------
Sales 180,000 150,000
Cost of sales (120,000) (80,000)
Finance cost (2,000) (3,000)
Tax (15,000) (18,000)
Revaluation (loss)/gain on land (2,200) 3,000

(i) On January 1, 2019, P acquired 1,800 of S’s 3,000 Rs. 10 equity shares. The acquisition was achieved through
a share exchange of one share in P for every three shares in S. At that date the stock market prices of P’s and
S’s shares were Rs. 42 and Rs. 22 per share respectively. Additionally, P also paid Rs. 10 cash for each share
acquired. The retained earnings of S brought forward at July 1, 2018 were Rs. 21,000.
(ii) A fair value exercise conducted on January 1, 2019 concluded that the carrying amounts of S’s net assets
were equal to their fair values with the following exceptions:
– the fair value of S’s land was Rs. 2,000 in excess of its carrying amount
– an item of plant had a fair value of Rs. 3,000 in excess of its carrying amount. The plant had a remaining
life of two years at the date of acquisition. Plant depreciation is charged to cost of sales.
– P placed a value of Rs. 2,000 on S’s good trading relationships with its customers. P expected, on average,
a customer relationship to last for a further five years. Amortisation of intangible assets is charged to
administrative expenses.
(iii) P’s group policy is to revalue land to market value at the end of each accounting period. Prior to its
acquisition, S’s land had been valued at historical cost, but it has adopted the group policy since its
acquisition. In addition to the fair value increase in S’s land of Rs. (see note (ii)), it had increased by a further
Rs. 1,000 since the acquisition.
(iv) On July 1, 2018, P acquired 30% of V’s equity shares. V’s profit after tax and other comprehensive income for
the year ended June 30, 2019 were Rs. 10,000 and Rs. 2,000 respectively. During June 2019 V paid a dividend
of Rs. 6,000. P uses equity accounting in its consolidated financial statements for its investment in V. At June
30, 2019, the investment in V is impaired by Rs. 900.
(v) After the acquisition P sold goods to S for Rs. 20,000. S had one fifth of these goods still in inventory at June
30, 2019. In June 2019 P sold goods to V for Rs. 15,000, all of which were still in inventory at June 30, 2019.
All sales to S and V had a mark-up on cost of 25%.
(vi) It is P’s policy to value non-controlling interest at the date of acquisition at its fair value.
(vii) Net profits are deemed to accrue evenly over the year.
Required:
(a) Calculate the consolidated goodwill as at January 1, 2019.
(b) Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
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NASIR ABBAS FCA
Question No. 6
Following are the statements of comprehensive income for the year ending September 30, 2019:
P S
---------- Rs.--------
Sales 90,000 80,000
Cost of sales (50,000) (60,000)
Finance cost (500) (800)
Tax (7,000) (4,000)
Equity as at October 1, 2018:


(i) On January 1, 2019, P acquired 90% of the equity share capital of S in a share exchange in which P issued two
new shares for every three shares it acquired in S. Additionally, P paid cash of Rs. 8 per share acquired. At
that date the stock market prices of P’s and S’s shares were Rs. 30 and Rs. 26 per share respectively.
(ii) At the date of acquisition, the carrying amounts of S’s net assets were equal to their fair values with the
following exceptions:
– an item of plant had a fair value of Rs. 3,000 in excess of its carrying amount. The plant had a remaining
life of three years at the date of acquisition. Plant depreciation is charged to cost of sales.
– S had a contingent liability which P estimated to have a fair value of Rs. 500. This has not changed as at
September 30, 2019.
(iii) Although S has been profitable since its acquisition by P, the market for S’s products has been badly hit in
recent months and P has calculated that goodwill has been impaired by Rs. 2,000 as at September 30, 2019.
(iv) P’s other income is the dividend received from its investment in a 40% owned associate M, which it has held
for several years. Net profit of M for the year ending September 30, 2019 amounts to Rs. 10,000.
(v) P purchased goods throughout the year 2019 from S and M amounting to Rs. 18,000 and Rs. 12,000
respectively. 30% of the goods purchased from S and half of the goods purchased from M were still held in
inventory of P at September 30, 2019. S earned 25% margin and M earned 20% margin on their respective
sales.
(vi) It is P’s policy to value non-controlling interest at the date of acquisition at its fair value.
Required:
(a) Calculate the consolidated goodwill as at January 1, 2019.
(b) Prepare consolidated statement of comprehensive income for the year ending September 30, 2019.
341
NASIR ABBAS FCA
Question No. 7
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 60 - 20
equipment during the year
Investment in SL – at cost 1,400 - -
Investment in BL – at cost 2,500 - -
Retained earnings as at June 30, 2019 8,000 3,500 2,200
(i) Details of GL’s investments are as follows:
Share capital Retained earnings

Date of investment Holding % Investee (Rs. 10 each) 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 175 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.
(v) Following inter-company sales at cost plus 15% were made during the year ended 30 June 2019:
Sales Included in buyer’s

closing stock
-------------- 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.
342
NASIR ABBAS FCA
(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.
(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)
{Autumn 2019, Q#6}
343
NASIR ABBAS FCA
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions

Solution No. 1
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [70 + 35 + 4 - 0.2 (W-3)] 108,800
Investment in Alpha [W-2] 12,000
Current assets
Inventories [12 + 19 + 0.7 - 0.8 (W-3)] 30,900
Debtors [15 + 13 - 5] 23,000
Cash and bank [1.5 + 1] 2,500
180,200
Equity
Share capital [50 + 1.5 x 2/3 x Rs. 10] 60,000
Share premium [1.5 x 2/3 x Rs. 20] 20,000

Loan notes [5 + 6] 11,000
Provision for dismantling [4 + 0.08 (W-3)] 4,080
Current liabilities
Accrued interest (W-3) 120
Creditors [16.5 + 22 + 0.7 - 5] 34,200
180,200
-
Workings
Investment:
Shares [1,500 x 2/3 x Rs. 30] 30,000
Loan notes [1,500 x 4/100 x Rs. 100] 6,000
Fair value of NCI [500 x Rs. 22] 11,000
RE [18 + 8 x 9/12] 24,000
FV adj. - Mine 4,000
FV adj. - dismantling prov. (4,000) (44,000)
3,000
W-2 Investment in Alpha Rs. Rs.

Investment at cost 11,000
Share in profits (W-5) 1,000
12,000
344
NASIR ABBAS FCA

P RE [20 + 18] 38,000
Less: Interest [6 x 8% x 3/12] (120)
Less: URP [(2.1 + 0.7) x 40/140] (800)
Add: S RE 26,000
Less: Extra dep [4/5 x 3/12] (200)
Less: Interest [4 x 8% x 3/12] (80)
1,720
75% 1,290
Add: Share in Alpha (W-5) 1,000
39,370
W-4 NCI
FV of NCI 11,000
RE [1.72 x 25%] 430
11,430
W-5 Share in Alpha

Post acquisition profits 6,000
Dividend (2,000)
4,000
Share of P 1,200
1,000
Solution No. 2
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [80 + 50 + 4 - 1] 133,000
Intangibles [8 + 3 - 0.5] 10,500
Investment in A [W-2] 10,925
Other equity investment 6,000
Current assets
Inventories [12 + 8 – 1.4 – 0.375] 18,225
Debtors [9 + 11 - 4] 16,000
Cash and bank [4 + 6] 10,000
210,650
Equity
Non current liabilities Rs. Rs.

Loan notes [25 + 15] 40,000
Current liabilities
Creditors [22.2 + 9 - 4] 27,200
210,650
345
NASIR ABBAS FCA
346
NASIR ABBAS FCA
Workings Rs. Rs.

W-1 Goodwill
Investment [1,600 x Rs. 27] 43,200
RE 19,000
FV adj. - customer relationship 3,000 (46,000)
7,200
6,000
W-2 Investment in A
Investment at cost 10,000
Share in profits (W-5) 925
10,925

P RE [36 + 18] 54,000
Add: fair value gain [6 - 5] 1,000
Less: URP on A to P sale [ 6 x 25% x 25%] (375)
Add: S post RE 12,000
Less: Extra dep [4/4] (1,000)
Less: Amort. [3/6] (500)
Less: Impairment loss of GW (1,200)
Less: URP [7 x 20%] (1,400)
7,900
80% 6,320
Add: Share in A (W-5) 925
61,870
W-4 NCI
FV of NCI 10,000
RE [7.9 x 20%] 1,580
11,580
W-5 Share in A
Year end RE 30,000
Pre-acquisition RE [21 + 9 x 6/12] (25,500)
4,500
Share of P 25% 1,125
925
347
NASIR ABBAS FCA
Solution No. 3
P Group
as at June 30, 2019
Rs.
Non current assets
PPE [40 + 25 - 2 + 0.1] 63,100
Investment in A [W-2] 7,440
Other investment [40 - 15 - 7.04] 17,960
Current assets
Inventories [10 + 8 - 0.9] 17,100
Debtors [7 + 2 - 2] 7,000
121,800
Equity
Premium 10,000

Loan notes 15,000
Current liabilities
Creditors [10 + 15 - 2] 23,000
121,800
-
Workings
W-1 Goodwill Rs.
Investment [750 x 2/3 x Rs. 30] 15,000
RE 8,000
FV adj. - Plant (2,000)
Software writen off (500) (15,500)
4,000
3,200
W-2 Investment in A
Investment at cost:
Cash [320 x Rs. 17] 5,440
Loan notes [320 x 1/20 x Rs. 100] 1,600
7,040
URP on P to A sale [2 x 25% x 40%] (200)
Share in profits (W-3) 600
7,440
348
NASIR ABBAS FCA

P RE [26 + 18] 44,000
Less: URP on P to S sale [3 x 30%] (900)
Less: URP on P to A sale [2 x 25% x 40%] (200)
Add: S post RE 6,000
Add: Extra dep 100
Add: software written off 500
Less: Impairment loss of GW (800)
5,800
75% 4,350
Add: Share in A [3 x 6/12 x 40%] 600
47,850
W-4 NCI
FV of NCI 4,500
RE [5.8 x 25%] 1,450
5,950
Solution No. 4
PL Group
Consolidated balance sheet
Rs. million
Non current assets
PPE [850 + 750 - 88 - 9(W-2)] 1,503.00
Investment in associates (W-4) 203.80
Current assets
Inventories [300 + 340 + 50 x 20%] 650.00
Trade receivables [240 + 200] 440.00
Cash & bank [60 + 170] 230.00
3,134.80
Equity
Current liabilities:
Contingent consideration 115.00
Other liabilities [340 + 180] 520.00
3,134.80
-
349
NASIR ABBAS FCA

W-1 Goodwill
Investment:
Cash 900.00
Freehold 108.00
Contingent consideration 70.00
Fair value of NCI [14 x 18] 252.00
Less: net assets:
Capital 700.00
Premium 100.00
RE 360.00
FV adj. (inventory) 50.00 (1,210.00)
120.00
Less: impairment loss (12.00)
108.00

PL's RE 780.00
Add: Gain on transfer of land [108 - 88] 20.00
Less: Increase in contingent consideration [115 - 70] (45.00)
Add: ML's RE 480.00
Less: Pre-acquisition profits (360.00)
Less: Impairment loss of GW (W-1) (12.00)
Less: FV adj. (inventory sold) [50 x 80%] (40.00)
Less: URP on machine [10 - 10/5 x 6/12] (9.00)
59.00
80.00% 47.20
Add: Share in JL's RE [(340 - 200) x 25%] 35.00
Less: URP on goods [72 x 20/120 x 40% x 25%] (1.20)
836.00
W-3 NCI
FV of NCI 252.00
Post-acq RE [59 x 20%] 11.80
263.80
W-4 Investment in JL
Investment as per books 170.00
Share in JL's RE (W-2) 35.00
URP on goods (W-2) (1.20)
203.80
350
NASIR ABBAS FCA
Solution No. 5
(a)
Goodwill Rs. Rs.
Investment:
Shares [1,800 x 1/3 x Rs. 42] 25,200
Cash [1,800 x Rs. 10] 18,000
Fair value of NCI [1,200 x Rs. 22] 26,400
RE [21 + 15 x 6/12] 28,500
FV adj. – land 2,000
FV adj. – plant 3,000
Customer relationship 2,000 (65,500)
4,100
(b)
P Group
Rs.
Sales [180 + 150 x 6/12 - 20] 235,000

Gross profit 92,550
Distribution cost [18 + 20 x 6/12] (28,000)
Admin expenses [12 + 16 x 6/12 + 2/5 x 6/12] (20,200)
Finance cost [2 + 3 x 6/12] (3,500)
Other income [5 + 2 x 6/12 - 6 x 30%] 4,200
Share of profit from associate (W-2) 2,100
Tax [15 + 18 x 6/12] (24,000)
Revaluation gain [-2.2 + 1] (1,200)
share of OCI from associate [2 x 30%] 600

NCI [W-3] 2,620
23,150
NCI [2.62 + 1 x 40%] 3,020
22,550
W-1 Cost of sales

P's cost of sales 120,000
S's cost of sales [80 x 6/12] 40,000
Inter company purchase (20,000)
351
NASIR ABBAS FCA
Extra depreciation [3/2 x 6/12] 750

URP on sales to S [20 x 25/125 x 1/5] 800
URP on sales to A [15 x 25/125 x 30%] 900
142,450
W-2 Share of profit from V

V PAT 10,000
Share in PAT 3,000
2,100
W-3 NCI
S PAT [15 x 6/12] 7,500
Less: Extra depreciation (750)
Less: Amort. of customer relationship (200)
6,550
40.00% 2,620
Solution No. 6
(a) Goodwill Rs. Rs.
Investment:
Shares [1,800 x 2/3 x Rs. 30] 36,000
Cash [1,800 x Rs. 8] 14,400
RE [22 + 6.8 x 3/12] 23,700
FV adj. - plant 3,000
Contingent liability (500) (46,200)
9,400
(b) P Group
for the year ended September 30, 2019
Sales [90 + 80 x 9/12 - 18 x 9/12] 136,500
Gross profit 52,900
Distribution cost [9 + 4 x 9/12] (12,000)
Admin expenses [11 + 6 x 9/12 + 2] (17,500)
Finance cost [0.5 + 0.8 x 9/12] (1,100)
Other income [1.6 x 9/12] 1,200
Share of profit from associate (W-2) 3,520
Tax [7 + 4 x 9/12] (10,000)
Profit/TCI attributable to:
NCI [W-3] 100
17,020
W-1 Cost of sales
P's cost of sales 50,000
S's cost of sales [60 x 9/12] 45,000
Inter company purchase [18 x 9/12] (13,500)
352
NASIR ABBAS FCA
Extra depreciation [3/3 x 9/12] 750

URP on S to P sales [18 x 25% x 30%] 1,350
83,600
W-2 Share of profit from M
M PAT 10,000
Less: URP on A to P sales [12 x 50% x 20%] (1,200)
8,800
Share in PAT 40.00% 3,520
W-3 NCI Rs.

S PAT [6.8 x 9/12] 5,100
Less: Extra depreciation (750)
Less: URP on goods (1,350)
1,000
10.00% 100
Solution No. 7
(a)
- Inter-company interest income and interest expense have been accrued by all companies in their books.
- Surplus arising on revaluation relates to current year only and thus shown in OCI for the year.
GL Group
Consolidated Statement of comprehensive income
for the year ended June 30, 2019 Rs. million
Sales [2,500 + 2,050 - 506] 4,044.00
Cost of Sales [1,550 + 1,150 - 506 + 18(W-1) + 3.15(part b)] (2,215.15)
Gross Profit 1,828.85
Operating expenses [810 + 520 + 20 + 30(W-1) - 40] (1,340.00)
Other income [350 + 180 + 438.22 (W-2) - 9(W-3)] 959.22
Finance cost [90 + 60 + 711.78(W-2) x 12% - 9(W-3)] (226.41)
Share of profit from Associate (W-4) 47.95
Profit for the year 1,269.61
Other Comprehensive income:
Revaluation gain [60 + 35] 95.00
Share of OCI from Associate [20 x 35%] 7.00
Total Comprehensive income 1,371.61
Profit Attributable to :
Group 1,122.01
NCI (W-1) 147.60
1,269.61
Total Comprehensive income attributable to :
Group 1,213.51
NCI [147.60 + 35 x 30%] 158.10
1,371.61
Workings (all figures in million rupees)

(W-1) NCI Share
SL Profit [2,050 - 1,150 - 520 + 180 - 60] 500.00
353
NASIR ABBAS FCA
Extra Amortization [150/5] (30.00)

URP- Stock [138 x 15/115] (18.00)
Reversal of liability 40.00
492.00
30% 147.60
(W-2) Goodwill Calculation
Investment:
Cash [1,400 - 20] 1,380.00
Deferred payment [1,000 x 1.12-3] 711.78
Shares [175 x 20] 3,500.00
Fair value of NCI [6,000/10 x 30% x 17] 3,060.00
8,651.78
Software 150.00
Contingent Liability (60.00)
RE 3,000.00 (9,090.00)
Goodwill/(bargain purchase gain) (438.22)
(W-3)
Inter company interest = 150 x 12% x 6/12 = 9.00
(W-4)
Profit for the year of BL
Sales 1,000.00
Cost of Sales (590.00)
Operating expenses (288.00)
Other income 50.00
Finance Cost (35.00)
137.00
35% 47.95
(b)
Investment in Associate as on 30th June 2019:
Rs. million
Cost 2,500.00
Post acquisition RE [(2,200 - 1,800) x 35%] 140.00
URP on goods [69 x 15/115 x 35%] (3.15)
Share in revaluation surplus [20 x 35%] 7.00
2,643.85
354
NASIR ABBAS FCA
IFRS 11 – Joint Arrangements – Class notes
Joint arrangement
An arrangement of which two or more parties have joint control. A joint arrangement has following
characteristics:
(a) The parties are bound by a contractual arrangement
(b) The contractual arrangement gives two or more of those parties joint control of the arrangement.
A joint arrangement is either a:

(i) Joint Operation
(ii) Joint Venture
Joint operation Joint venture
It is a joint arrangement whereby the parties that It is a joint arrangement whereby the parties that
have joint control of the arrangement have rights have joint control of the arrangement have rights
to the assets, and obligations for the liabilities, to the net assets of the arrangement.
relating to the arrangement.
A party to a joint operation that has joint control A party to a joint venture that has a joint control
of that operation is called a Joint Operator of that venture is called a Joint Venturer
A joint arrangement that is not structured through A joint arrangement in which the assets and
a separate vehicle is a joint operation. liabilities relating to the arrangement are held in a
separate vehicle can either be a joint operation or
a joint venture.
Joint control
The contractually agreed sharing of control of an arrangement, which exists only when decisions about
the relevant activities require the unanimous consent of the parties sharing control.
An arrangement can be a joint arrangement even though not all of its parties have joint control of the
arrangement.
Separate vehicle
A separately identifiable financial structure, including separate legal entities or entities recognized by
statute, regardless of whether those entities have a legal personality.
Nasir Abbas FCA

355
FINANCIAL STATEMENTS OF PARTIES TO A JOINT ARRANGEMENT
Joint Operations
A joint operator shall recognize in relation to its interest in a joint operation:
(a) its assets, including its share of any assets held jointly;
(b) its liabilities, including its share of any liabilities incurred jointly;
(c) its revenue from the sale of its share of the output arising from the joint operation;
(d) its share of the revenue from the sale of the output by the joint operation; and
(e) its expenses, including its share of any expenses incurred jointly.
[It is done by eliminating the investment appearing in the books of Joint operator]
Nasir Abbas FCA

356
Example – Accounting for a joint operation

On 1 January 20X7, X and Y entered into a joint operation to purchase and operate an oil pipeline. Both
entities contributed equally to the purchase cost of Rs.20 million and this was financed by a joint loan of
Rs.20,000,000.
Contract terms
Y carries out all maintenance work on the pipeline but maintenance expenses are shared between X and
Y in the ratio 40%: 60%.
Both entities use the pipeline for their own operations and share any income from third parties 50%: 50%.
Sales to third parties are invoiced by Y.
The full interest on the loan is initially paid by X but the expense is to be shared equally.
During the year ended 31 December 20X7

Y carried out maintenance at a cost of Rs. 1,200,000.
Income from third parties was Rs. 900,000, all paid to Y.
Interest of Rs. 1,500,000 was paid for the year on 31 December by X.
Required
Show the relevant figures that would be recognized in the financial statements of X and Y for the year to
31 December 20X7.
Nasir Abbas FCA

357
When an entity acquires an interest in joint operation, it shall apply, to the extent of its share (as studied
above) all the principles on business combinations accounting in IFRS 3. It is summarized as follows:
- Fair values of identifiable assets and liabilities (other than exceptions as per IFRS 3) will be used for
accounting for share.
- Goodwill will be calculated and accounted for by comparing consideration transferred and net assets
acquired.
- Recognize acquisition related costs as expense.
- All intercompany eliminations are made proportionately.
This guidance is applicable to acquisition of both the initial interest and additional interests in joint
operations. However, in case of additional interest, the previously held interests are not remeasured.
Joint Ventures
A joint venturer shall recognize its interest in a joint venture as an investment and shall account for that
investment using the equity method in accordance with IAS 28 Investments in Associates and Joint
Ventures unless the entity is exempted from applying the equity method as specified in that standard.
A party that participates in, but does not have joint control of, a joint venture shall account for its interest
in the arrangement in accordance with IFRS 9 Financial Instruments, unless it has significant influence over
the joint venture, in which case it shall account for it in accordance with IAS 28
Nasir Abbas FCA

358
Solution [Q-1 Jun-10] Question should be changed as follows:
- Delete point (v) as it is obsolete treatment. As a result ICAP solution is irrelevant.
PL Group
Rs. million
Non current assets
PPE [120 + 40 + 3 -1] 162.00
Investment in JCEL (W-3) 37.60
Current assets
Stock in trade [20 + 17 - 0.4] 36.60
Trade and other receivables [25 + 5] 30.00
Cash and bank [3 + 1] 4.00
281.20
Equity
Share capital 50.00

Long term loan [75 + 12] 87.00
Current liabilities
281.20
PL Group -
Rs. million
Sales [1,267 + 276 - 10] 1,533.00
Cost of sales (W-5) (1,081.80)
Gross profit 451.20
Selling expenses [174 + 68] (242.00)
Administrative expenses [88 + 30 + 1] (119.00)
Other income 10.00
Financial charges [12 + 4] (16.00)
Share of profit from JV [(18 -2) x 50%] 8.00
Tax [26 + 5] (31.00)
Profit for the year 61.20

- Shareholders of PL 60.20
- NCI (W-4) 1.00
61.20
359
Workings
W-1 Goodwill ----- Rs. million -----
Consideration transferred 35.00
Value of NCI [30 x 20%] 6.00
Less: net assets at acquisition:
Share capital 15.00
RE [18 - 8] 10.00
FV adj. - Equipment [15 - 12] 3.00
FV adj. - Inventory [12 - 10] 2.00 (30.00)
W-2 Retained earnings PL SL JCEL

------------------ Rs. million ----------------
RE 78.00 18.00 28.00
Less: Pre-acq - (10.00) -
Less: Extra dep. on FV adj. of Equipment [3/3] - (1.00) -
Less: FV adj. - Inventory - (2.00) -
Less: Policy adjustment - inventory [16 - 14] - - (2.00)
Less: URP on goods [2 x 25/125] (0.40) - -
5.00 26.00
Add: Share in SL [5 x 80%] 4.00
Add: Share in JCEL [26 x 50%] 13.00

Share in URP of goods [4 x 25/125 x 50%] (0.40)
12.60
94.20
W-3 Investment in JCEL Rs. million

Investment 25.00
RE (W-2) 12.60
37.60
W-4 NCI Rs. million

Value at acquisition (W-1) 6.00
RE [5 x 20%] 1.00
7.00
W-5 Cost of sales Rs. million

PL 928.00
SL 161.00
Intercompany sale (10.00)
FV adjustment - inventory 2.00
URP on goods [0.4 + 0.4] 0.80
1,081.80
360
Solution [Q-1 Dec-16] Difference in ICAP solution:
- Full amount of 350 was eliminated from sales instead of its 80%
Alpha Limited
as at June 30, 2016
Rs. million
Non current assets
PPE [2,650 + 750 x 80%] 3,250.00
Investment in SV-2 [W-3] 241.50
Current assets
Stock in hand [695 + 250 x 80% - 17.60 - 36 - 2.85] 838.55
Other assets [570 + 180 x 80% - 320 x 80% - 150 x 80%] 338.00
4,679.05
Equity

10% bank loan [500 + 320 x 80%] 756.00
Current liabilities
Current liabilities [665 + 405 x 80% - 320 x 80% - 150 x 80%] 613.00
4,679.05
-
Alpha Limited
Rs. million
Sales [4,250 + 650 x 80% - (350 + 190) x 80%] 4,338.00
Cost of sales [W-4] (3,009.60)
Expenses [657 + 145 x 80% + 3] (776.00)
Share of profits from SV-2 [50 x 50% - 2.85(W-2)] 22.15
Workings
RE [55 - 25] 30.00
430.00
[50% x 60%] 30% (129.00)
361
W-2 Retained earnings AL SV-1 (new) SV-1 (old) SV-2
---------------------- Rs. million ------------------------
RE 1,193.00 55.00 30.00 305.00
Less: Pre-change - (30.00) - -
Less: Acquisition related costs (3.00) - - -
Less: URP share [22 x 80%] (17.60) - - -
25.00 30.00 305.00
Add: Share in SV-1:

[25 x 80%] 20.00
[30 x 50%] 15.00
URP share [45 x 80%] (36.00)
Add: Share in SV-2 [305 x 50%] 152.50

URP share [22 x 50%] (11.00)
141.50
URP share [5.70 x 50%] (2.85)
1,310.05
W-2.1 URP on goods Rs. million

AL to SV-1 [220 x 10%] 22.00
AL to SV-2 [110 x 20%] 22.00
SV-1 to AL [150 x 30%] 45.00
SV-2 to AL [38 x 15%] 5.70
W-3 Investment in SV-2 Rs. million

Investment [200 x 50%] 100.00
Share in RE (W-2) 141.50
241.50
W-4 Cost of sales Rs. million

AL 2,993.00
SV-1 [480 x 80%] 384.00
Intercompany sales [(350 + 190) x 80%] (432.00)
URP on goods [17.60 + 36 + 11] (W-2) 64.60
3,009.60
362
COMPLEX GROUPS [SOFP & SOCI] – Class notes
TYPES OF COMPLEX GROUPS

1. Vertical group
Here a subsidiary [S] of the parent [P] holds controlling interest in another entity (often called sub-
subsidiary [SS]). As a result P controls S as well as SS.
Example:
holds 70% shares
holds 60% shares
SS
2. Mixed group [i.e. D-shaped group]
In addition to S shareholding in SS, P also has a direct holding in SS (which is less than 50%). In this case it
is not necessary that S must hold controlling interest in SS rather P controls SS if combined share of P and
S in SS forms a controlling interest (i.e. more than 50%) even if S holds less than 50% in SS.
P P
holds 70% shares holds 70% shares
S holds 20% shares S holds 25% shares
holds 60% shares holds 40% shares
SS SS
Hence P must consolidate all subsidiaries and sub-subsidiaries.
If A has a subsidiary then it is not considered as a sub-subsidiary for the group
ACQUISITION DATE FOR SUB-SUBSIDIARIES

Acquisition date for SS is the date when P obtains control over SS. In exam questions it may be found as the
later of:
(i) When P acquires shares of S; and
(ii) When S acquires shares of SS
363
NASIR ABBAS FCA
EFFECTIVE SHAREHOLDING %
For calculation of Group and NCI shares in equity items of SS, the effective shareholding % are used. It is
explained with the help of following example:
Example
P holds 60% in S and 10% in SS whereas S holds 80% in SS. Effective shareholding % are calculated as follows:
%
P’s direct holding in SS 10
P’s indirect holding through S [60% + 80%] 48
Effective Group shareholding % 58
Effective NCI% [i.e. 100 – Effective group shareholding] 42
Effective shareholding % are used only for calculation and are NOT used for determining the “control” e.g.
effective group shareholding % in SS may be less than 50%.
GOODWILL IN SS
Goodwill on SS is calculated on acquisition date using following working and added with goodwill in S and
presented as total goodwill on SOFP.
Rs.
P’s prior direct investment in SS (Note) XXX
Investment through S [S’s investment in SS x P’s % in S] XXX
Value of NCI [i.e. Value of effective NCI] XXX
Less: SS’s net assets at acquisition (XXX)
Less: Impairment loss (XXX)
Carrying amount of Goodwill XXX
Note – In case of P’s prior direct investment in SS, this investment will be included at its fair value on date of
acquisition of SS in above working. Any resulting change is recognized in P’s profits.
GROUP STATEMENT OF FINANCIAL POSITION

1. Since P controls S and SS both, therefore, assets and liabilities of SS are fully consolidated following same
techniques and adjustments/eliminations as studied for S.
2. In Group other reserves and Group retained earnings workings, effective group shareholding % to post
acquisition reserves of SS.
3. NCI is calculated as follows and total NCI is reported on SOFP:
NCI in S NCI in SS
Value of NCI at acquisition XXX XXX
Add: Other reserves XXX XXX
[Other reserves x NCI%] [Other reserves x effective NCI%]
Add: Retained earnings XXX XXX
[Retained earnings x NCI%] [Retained earnings x effective NCI%]
Less. Investment in SS (XXX) -
[S’s investment in SS x NCI%]
XXX XXX
364
NASIR ABBAS FCA
GROUP STATEMENT OF COMPREHENSIVE INCOME

1. Since P controls S and SS both, therefore, incomes and expenses of SS are fully consolidated following
same techniques and adjustments/eliminations as studied for S.
2. In NCI workings, NCI for both S (using normal NCI%) and SS (using effective NCI%) is calculated and added
together to show total NCI on face of SOCI. While calculating NCI for S, deduct “dividend income”
received from SS from S’s PAT.
Sub associate
If S has an investment in associate, then there is no effective shareholding% in sub-associate and Investment
in sub-associate is shown in SOFP as per equity method using S’% holding in sub-associate on post-acquisition
reserves/retained earnings and that share is added to S column in group reserves/retained earnings
workings.
365
NASIR ABBAS FCA
Solution [Q-1 Jun-14]
DL Group
Rs. million
Non current assets
PPE [10,000 + 6,100 + 5,400] 21,500.00
Current assets
Current assets [6,325 + 7,100 + 3,100] 16,525.00
38,377.50
Equity
Equity component (W-2.1) 12.01
Non-controlling interest [W-3] 3,882.50
Non-current liabilities [6,000 + 3,000 + 1,000 - 250(W-2.1) + 241.55(W-2.1)] 9,991.55
Current liabilities
Current liabilities [3,500 + 3,210 + 1,400] 8,110.00
38,377.50
-
Workings
GL SL
- Direct [SL: 9 x 200] 7,500.00 1,800.00
- Indirect [SL: 2,800 x 75%(W-1.1)] - 2,100.00
Value of NCI [9,530 x 25%] [6,010 x 35%(W-1.2)] 2,382.50 2,103.50
Share capital 7,000.00 3,000.00
RE 2,500.00 3,010.00
FV adj. - Land 30.00 -
9,530.00 6,010.00
Goodwill at acquisition 352.50 (6.50)
W-1.1 % holding in GL
52.50m shares / 70m shares = 75.00%
366
W-1.2 Effective holding in SL
Effective holding of SL = 9/30 + 14/30 x 75% = 65.00%
Effective holding of NCI [1 - 0.65] = 35.00%
W-2 Retained earnings DL GL SL

------------------ Rs. million ----------------
RE 7,500.00 2,790.00 3,100.00
Less: Pre-acq - (2,500.00) (3,010.00)
Add: Negative goodwill (W-1) 6.50 - -
Less: Loss on investment in SL [2,175 - 1,800] (375.00) - -
Less: Fair value adjustment (land) - (30.00) -
Less: Additional finance cost on TFC [28.56 - 25] (W-2.1) (3.56) - -
260.00 90.00
Add: Share in GL [260 x 75%] 195.00
Add: Share in SL [90 x 65%(W-1.2)] 58.50
7,381.44
W-2.1 Convertible debt

Rs. million
Liability component:
- Coupon [250 x 10% x 3-year annuity factor at 12%] 60.05
- Redemption [250 x 3-year discount factor at 12%] 177.95
237.99
Total fair value of compound instrument 250.00
Initial liability 237.99

Interest expense [237.99 x 12%] 28.56
Cashflow [250 x 10%] (25.00)
W-3 NCI GL SL
--------- Rs. million --------
Value at acquisition (W-1) 2,382.50 2,103.50
RE [GL: 260 x 25%] [SL: 90 x 35%(W-1.1)] 65.00 31.50
Share in investment in CL [2,800 x 25%] (700.00) -
1,747.50 2,135.00 3,882.50
367
BL Group
Rs. million
Non current assets
PPE [25,370 + 14,288 + 7,900 - 663.16(W-3.1)] 46,894.84
Goodwill [170 + 609(W-1)] 779.00
Investment in PL (W-6) 582.00
Current assets
Current assets [17,480 + 4,800 + 2,800] 25,080.00
73,335.84
Equity
Revaluation surplus [W-2] 6,175.00
Liabilities
Liabilities [12,000 + 8,800 + 6,400 - 694.21(W-3.1)] 26,505.79
73,335.84
-
Workings
OL CL
- Direct [CL: 912 x 0.35/0.24] 5,400.00 1,330.00
- Indirect [CL: 912 x 75%] - 684.00
Value of NCI [6,600(W-1.1) x 25%] [3,500 x 47%(W-1.2)] 1,650.00 1,645.00
Share capital 5,000.00 1,200.00
Share premium 2,000.00 1,100.00
RE [OL: balancing] (700.00) 1,200.00
FV adj. - Building 300.00 -
6,600.00 3,500.00
Goodwill at acquisition 450.00 159.00 609.00
W-1.1 Net assets of OL

Net assets of OL = x
5,400 + 0.25x - x = 450
Solving: x = 6,600
368
W-1.2 Effective holding in CL
Effective holding of CL = 35% + 24% x 75% = 53.00%
W-2 Revaluation surplus BL OL

--------- Rs. million --------
Revaluation surplus 5,500.00 1,200.00
Less: Fair value adjustment (building) - (300.00)
900.00
Add: Share in OL [900 x 75%] 675.00
6,175.00
W-3 Retained earnings BL OL CL PL

------------------------ Rs. million -----------------------
RE [PL: 800 + 400 - 220 - 360 ÷ 0.6] 9,500.00 3,000.00 2,000.00 380.00
Less: Pre-acq - 700.00 (1,200.00) -
Add: Gain on Investment in CL [1,330 - 1,220] 110.00 - - -
Add: Adjustment of lease [694.21 - 663.16](W-3.1) - 31.05 - -
3,731.05 800.00 380.00
Add: Share in OL [3,731.05 x 75%] 2,798.29
Add: Share in CL [800 x 53%(W-1.1)] 424.00
Add: Share in PL [380 x 60%] 228.00

Less: Share in URP of goods [50 x 0.25/1.25 x 60%] (6.00)
13,054.29
W-3.1 Lease
Since it was an operating lease and related machine is already included in PPE of BL, therefore, we will
remove ROU asset and related lease liability.
ROU Lease liab.
--------- Rs. million --------
Initital [400 x 3-year annuity factor at 10%] 994.74 994.74
Depreciation [994.74/3] (331.58) -
Finance cost [994.74 x 10%] - 99.47
Lease payment - (400.00)
663.16 694.21
369
W-4 NCI OL CL
--------- Rs. million --------
Value at acquisition (W-1) 1,650.00 1,645.00
Revaluation surplus [900 x 25%] 225.00 -
RE [OL: 3,731.05 x 25%] [CL: 800 x 47%(W-1.1)] 932.76 376.00
Share in investment in CL [912 x 25%] (228.00) -
2,579.76 2,021.00 4,600.76
W-6 Investment in PL Rs. million

Investment 360.00
Share in RE (W-3) 228.00
URP on goods (W-3) (6.00)
582.00
370
Question [Complex group]
Following are the financial statements of group companies for the year ended June 30, 2020:

Pure Sure Cure
Non-current assets ----------------- Rs. ------------------
Property, plant and equipment 58,750 53,000 100,000
Investment in Sure (at cost) 64,000 - -
Investment in Cure (at cost) 5,250 44,000 -
Current assets
Inventory 18,000 14,000 10,000
Debtors 22,000 24,000 18,000
Cash & bank 9,000 9,000 9,000
177,000 144,000 137,000
Equity
Share capital (Rs. 10 each) 70,000 40,000 35,000
Share premium 10,000 20,000 12,000
Other reserves 9,000 7,000 8,000
Retained earnings 74,000 58,000 64,000
Current liabilities
Creditors 14,000 19,000 18,000
177,000 144,000 137,000

Pure Sure Cure
----------------- Rs. ------------------
Sales 140,000 141,000 120,000
Cost of sales (80,000) (82,000) (70,000)
Gross profit 60,000 59,000 50,000
Distribution cost (12,000) (10,000) (8,000)
Admin expenses (11,000) (13,000) (9,000)
Finance cost (4,000) (5,000) (3,000)
Other income 9,000 13,000 12,000
Profit before tax 42,000 44,000 42,000
Tax (10,000) (9,000) (8,000)
Profit after tax 32,000 35,000 34,000
Revaluation gain 1,800 1,500 1,000
Total comprehensive income 33,800 36,500 35,000

(1) Pure acquired 80% shares of Sure on July 1, 2017 when its other reserves were Rs. 2,000 and retained earnings
were Rs. 10,000. At that date the fair values of net assets of Sure were equal to the carrying amounts except
for a building which was undervalued by Rs. 2,000. Its remaining life was 10 years.
Pure also acquired 10% shares of Cure on the same date when its other reserves were Rs. 1,000 and retained
(2) On July 1, 2018 Sure acquired 60% shares of Cure when its other reserves were Rs. 3,000 and retained earnings
were Rs. 11,000. At that date, carrying amounts of all assets and liabilities of Sure were equal to fair values
371
except for a plant whose fair value was higher than carrying amount by Rs. 4,000. Its remaining life was 8 years.
Fair value of Cure’s shares on that date was Rs. 20 per share.
(3) During 2020 companies paid following dividends:

Pure 10%
Sure 15%
Cure 20%
(4) It is Pure’s policy to value non-controlling interest at proportionate share in identifiable net assets.
(5) There was no need for impairment test in 2019, however, on June 30, 2020 goodwill in Sure was impaired by
Rs. 1,000 and goodwill in Cure was impaired by Rs. 1,500.
Included in Included in Gross

Sales receivables buyer’s closing Profit %
stock
-------------------------- Rs. -------------------------------
Pure to Sure 40,000 5,000 7,000 20%
Sure to Pure 30,000 - 6,000 25%
Cure to Sure 10,000 3,000 4,000 15%
Required:
Prepare consolidated statement of financial position and consolidated statement of comprehensive income for the
year ended June 30, 2020.
372
STEP ACQUISITION [SOFP & SOCI] – Class notes
SITUATIONS
1. Equity investment to S
2. A/JV to S
3. Further investment in S
Subsequent purchase of shares under each of the above situation is discussed in detail as follows:
1) Equity investment to Subsidiary

1st investment was accounted for as an investment (as per IFRS 9). Control is obtained on 2nd investment,
therefore, acquisition date is the date of 2nd investment. Treatment after 2nd investment is discussed separately
for SOFP and SOCI.
STATEMENT OF FINANCIAL POSITION
(i) Full consolidation of assets and liabilities will be made at year end.
(ii) Goodwill working:
Fair value of 1st investment at acquisition date X
Additional investment X
Value of NCI X
Less: Net assets of S at acquisition date (X)
Goodwill at acquisition X
Less: Impairment loss (X)
Goodwill carrying amount X
(iii) “Other reserves” working will be made as studied earlier.
(iv) “Retained earnings” working will be made as studied earlier except that a gain/(loss) on derecognition of
earlier investment is recognized in P’s column calculated as follows:

Less: Carrying amount of 1st investment (X)
Gain / (loss) X
Note – If entity has classified earlier investment at “fair value through OCI” then this gain/(loss) is
recognized in Other reserves. However, it may still be included in RE, giving a note that cumulative gain/loss
recognized can be transferred to RE on de-recognition as per IFRS 9.
(v) NCI working will be made as studied earlier.
STATEMENT OF COMPREHENSIVE INCOME
SOCI is better understood if we assume 2nd investment made during the current year (i.e. control achieved
during the current year).
(i) Time proportionate consolidation of incomes and expenses will be made for the year.
(ii) Profit on de-recognition of earlier investment is recognized in “Other income” (if classified as FV through
P&L) or “Other comprehensive income (if classified as FV through OCI).
(iii) NCI working is made on time proportionate basis as studied earlier in basic consolidation.
373
NASIR ABBAS FCA
2) A/JV to Subsidiary
1st investment was accounted for as per equity method. Control is obtained on 2nd investment, therefore,
acquisition date is the date of 2nd investment. Treatment after 2nd investment is discussed separately for SOFP
and SOCI.
(ii) Goodwill working:

Additional investment X
Value of NCI X
Less: Net assets of S at acquisition date (X)
Goodwill at acquisition X
Less: Impairment loss (X)
Goodwill carrying amount X
(iii) In “Other reserves” working, S other reserves will be split into:
1) Other reserves between 1st investment and 2nd investment [it will be considered as share from
Associate/JV and old% will be applied].
2) Other reserves after 2nd investment [it will be considered as share from S and new% will be applied]
(iv) In “Retained earnings” working, S RE will be split into:

1) RE between 1st investment and 2nd investment [it will be considered as share from Associate/JV and
old% will be applied].
2) RE after 2nd investment [it will be considered as share from S and new% will be applied]
Moreover a gain/(loss) on derecognition of earlier investment is recognized in P’s column calculated as follows:

Less: Cost of 1st investment X
Share in Other reserves [as per (iii) (1) above] X
Share in RE [as per (iv) (1) above] X
(X)
Gain/(loss) X
(v) NCI working will be made as studied earlier in basic consolidation.
SOCI is better understood if we assume 2nd investment made during the current year (i.e. control obtained
during the current year).
(i) Time proportionate consolidation of incomes and expenses will be made for the year.
(ii) “Share of profit/OCI from associate/JV” shall be calculated on S’s PAT/OCI between year start and 2nd
investment date.
(iii) Profit on de-recognition of earlier investment is recognized in “Other income”.
(iv) NCI working is made on time proportionate basis as studied earlier in basic consolidation.
374
NASIR ABBAS FCA
2) Further investment in Subsidiary

Control was obtained in 1st investment, therefore, acquisition date is the date of 1st investment. 2nd investment
is just considered as a transaction within equity. Treatment after 2nd investment is discussed separately for
SOFP and SOCI.
(ii) Goodwill is calculated at the date of 1st investment and it is not recalculated on 2nd investment.

1) Other reserves between 1st investment and 2nd investment [old% will be applied to this portion].
2) Other reserves after 2nd investment [new% will be applied to this portion.]

1) RE between 1st investment and 2nd investment [old% will be applied to this portion].
2) RE after 2nd investment [new% will be applied to this portion]
(v) An adjustment in equity is calculated as follows:

Decrease in NCI:
- In Value of NCI at acquisition [Value at acquisition x decrease%/old NCI%] X
- In Other reserves [(iii) (1) above x decrease%] X
- In RE [(iv) (1) above x decrease%] X X
Consideration paid for 2nd investment (X)
Adjustment in equity [+/-] X
This adjustment shall be made in P column in “Other reserves” or “Retained earnings”. [IFRS 10 has just
mentioned the word “equity” and not specified the account. However, some books use “other reserves”
while some use “Retained earnings”].
(vi) NCI working will be made as follows:
Value at acquisition [Value at acquisition x new NCI%/old NCI%] X

Other reserves [Total post after 1st investment x new NCI%] X
Retained earnings [Total post after 1st investment x new NCI%] X
X
SOCI is better understood if we assume subsequent acquisition during the current year.
(i) Full consolidation of incomes and expenses will be made for the year.
(ii) NCI working is made on time proportionate basis in following two components:
S’s PAT [from year start to 2nd investment date x old NCI %] X
S’s PAT [from 2nd investment date to year end x new NCI %] X
X
375
NASIR ABBAS FCA
SOFP Question (Step acquisition)
Following statements of financial positions relate to Peru and Solid as at June 30, 2020:
Peru Solid
--------------- Rs. ----------
PPE 87,000 89,000
Current assets 20,000 25,000
167,000 124,000
Shar capital (Rs. 10 each) 70,000 40,000
Current liabilities 14,000 19,000
167,000 124,000
Peru made investments in Solid twice; fist on July 1, 2015 and second on July 1, 2017. Following
information relates to Solid on these dates:
01-07-15 01-07-17
Market price of Solid’s shares Rs. 14 Rs. 16
Other reserves Rs. 1,500 Rs. 4,500
Retained earnings Rs. 3,200 Rs. 8,000
At June 30, 2020 impairment review shows that goodwill is impaired by 10%. It is Peru’s policy to follow
full goodwill method.
Required:
Prepare group SOFP as at June 30, 2020 under each of the following situations:
(a) Peru acquired 10% shares on July 1, 2015 at market price and 70% shares on July 1, 2017 at a price of
Rs. 17 per share.
(b) Peru acquired 25% shares on July 1, 2015 at market price and 55% shares on July 1, 2017 at a price of
Rs. 17 per share.
(c) Peru acquired 70% shares on July 1, 2015 at a price of Rs. 15 per share and 10% shares on July 1, 2017
at market price.
376
SOCI Question (Step acquisition)
Following statements of comprehensive income relate to Blue and Green for the year June 30, 2020:
Peru Solid
--------------- Rs. ----------
Sales 140,000 120,000
Cost of sales (105,000) (90,000)
Operating expenses (14,000) (12,000)
Tax (8,000) (9,000)
Blue made investments in Green twice; fist on July 1, 2018 and second on October 1, 2019. Following
information relates to Green on these dates:
01-07-18 01-10-19
Market price of Green’s shares Rs. 25 Rs. 30
Fair value adjustment on building Rs. 4,800 Rs. 4,400
Remaining useful life of building 4 years 2.75 years
Share capital (Rs. 10 each) Rs. 40,000 Rs. 40,000
Green earned profit after tax of Rs. 12,000 in the year 2019. During the year 2020, Green sold goods for
Rs. 1,000 every month to Blue. Out of intercompany sale, unrealized profit included in Blue’s stock at June
30, 2020 amounts to Rs. 500.
Required:
Prepare group SOCI for the year ended June 30, 2020 under each of the following situations:
(a) Blue acquired 10% shares on July 1, 2018 at market price and 70% shares on October 1, 2019 at a
price of Rs. 32 per share.
(b) Blue acquired 30% shares on July 1, 2018 at market price and 50% shares on October 1, 2019 at a
price of Rs. 32 per share.
(c) Blue acquired 70% shares on July 1, 2018 at a price of Rs. 27 per share and 10% shares on October 1,
2019 at market price.
377
OGL Group
as at March 31, 2011
Rs. million
Non current assets
PPE [700 + 200 + 25] 925.00
Current assets
Current assets [350 + 150 - 1.25 - 15] 483.75
1,429.75
Equity
Non-current liabilities [150 + 40] 190.00
Current liabilities
Current liabilities [182 + 130 - 15] 297.00
1,429.75
Workings -
Fair value of earlier investment 28.00
RE 60.00
FV adj. - Land 25.00 (185.00)
W-2 Retained earnings OGL RGL

--------- Rs. million --------
RE 550.00 80.00
Less: Pre-acq - (60.00)
Less: Professional fees for acquisition (4.00) -
Add: Cummulative fair value gain transferred to RE 3.00
Add: Profit on earlier investment [28 - 23] 5.00 -
Less: URP on goods [5 x 25%] - (1.25)
18.75
Add: Share in RGL [18.75 x 55%] 10.31

564.31
W-3 NCI Rs. million

RE [18.75 x 45%] 8.44
78.44
378
Solution [Q-1 Jun-16] Difference in ICAP solution:
- Modification loss is mentioned as impairment loss (i.e. old IAS 39 concept)
THL Group
Rs. million
Non current assets
PPE [481 + 735 - 60 + 16 - 46] 1,126.00
Investments [(1,420 - 100 - 82.64 - 327.75 - 54 - 260) + (10 + 5)] 610.61
Long term receivable (W-3.1) 20.36
Current assets
Disposal group held for sale [60 + 25 - 20(W-3)] 65.00
Other current assets [2,142 + 1,636 - 25] 3,753.00
5,590.96
Equity
Other reserves [W-2] 156.52
Non-current liabilities [263 + 248] 511.00
Current liabilities
Current liabilities associated with disposal group 10.00
Current liabilities [1,514 + 954 - 10 + 6] 2,464.00
5,590.96
-
Workings
- Cash 100.00
- Deferred cash [100 x 1.1-2] 82.64
- Share exchange [28.5 x 11.50] 327.75
- Land 54.00
Fair value of NCI [24 x 16.50] 396.00
Other reserves 26.00
RE 299.00
FV adj. - Land 16.00
Contingent liability (6.00) (935.00)
Less: Impairment loss (W-3.2) (9.39)
16.00
379
W-2 Other reserves THL ZFL
--------- Rs. million --------
Other reserves 102.00 137.00
Less: Pre acquisition - (26.00)
Add: Adjustment in equity (W-2.1) (12.08) -
111.00
Add: Share in ZFL [111 x 60%] 66.60
156.52
W-2.1 Adjustment in equity

Rs. million
Decrease in NCI:
- Value at acquisition [396 x 20/40] 198.00
- Other reserves [111(W-2) x 20%] 22.20
- RE [138.61(W-3) x 20%] 27.72
247.92
Consideration paid 260.00
(12.08)
W-3 Retained earnings THL FZL

--------- Rs. million --------
RE 1,066.00 442.00
Less: Excess gain recorded on land transfer (46.00) -
Add: Fair value gain on investments [15 - 10] - 5.00
Less: Modification loss on loan to CEO (W-3.1) (1.64) -
Less: Loss on disposal group [55 - (60 + 25 - 10)] (20.00) -
Less: Impairment loss of goodwill (W-3.2) - (9.39)
138.61
Add: Share in FZL [138.61 x 60%] 83.16
1,081.52
W-3.1 Modification of loan to CEO Rs. million
Present value of modified cashflows [8 x 3-year annuity factor at 8.7%] 20.36

Carrying amount of loan 22.00
Modification loss (1.64)
380
W-3.2 Impairment loss Rs. million
Net assets [600 + 442 + 137] 1,179.00
Fair value gain on investment 5.00
Contingent liability (6.00)
Goodwill 25.39
1,219.39
W-4 NCI Rs. million

Value at acquisition [396 x 20/40] 198.00
Other reserves [111 x 20%] 22.20
RE [138.61 x 20%] 27.72
247.92
381
- Contingent liability of FL was reduced from 50 to 40
AL Group
Rs. million
Non current assets
PPE [3,510 + 2,835 + 2,200 - 20 + 1.50 + 4.50] 8,531.00
Investment property [130 + 45 + 5 + 8] 188.00
Current assets
Current assets [2,120 + 1,420 + 2,800] 6,340.00
15,346.50
Equity
Gratuity (W-3.1) 33.00
Current liabilities
Current liabilities [1,775 + 1,386 + 1,500 + 50] 4,711.00
15,346.50
-
Workings
BL FL
- Direct 3,100.00 -
- Indirect [FL: 2,400 x 75%] - 1,800.00
Value of NCI [4,400 x 35%] [3,600 x 55%(W-1.1)] 1,575.00 1,980.00
Share capital 4,000.00 2,500.00
RE 520.00 1,150.00
Fair value adj. - Plant (20.00) -
Contingent liability - (50.00)
4,500.00 3,600.00
Goodwill at acquisition 175.00 180.00
Less: Impairment loss (W-3) - (67.50)
175.00 112.50 287.50
382
W-1.1 Effective holding in FL
Effective holding of AL = 75% x 60% = 45.00%
W-2 Other reserves Rs. million

Re-measurement gain 10.00
Adjustment for change in shareholding (W-2.1) 39.95
49.95
Decrease in NCI:
- Value at acquisition [1,575 x 10/35] 450.00
- Post acquisition RE [299.50(W-3) x 10%] 29.95
479.95
39.95
W-3 Retained earnings AL BL (new) BL (old) FL

------------------------ Rs. million -----------------------
RE 2,000.00 1,314.00 815.00 1,000.00
Less: Pre-acq - (815.00) (520.00) (1,150.00)
Add: Extra dep. Plant [20 x 0.75/10] [20 x 2.25/10] - 1.50 4.50 -
Less: URP on building * - - - -
Less: Depreciation of building ** [50 ÷ 5 x 6/12] - 5.00 - -
Add: Fair value gain [58 - 50] - 8.00 - -
Add: Reversal of contributions paid 70.00
Less: Employee cost [41.40 + 85 - 38.40] (W-3.1) (88.00)
Less: Impairment loss of goodwill [150(W-3.2) x 45%] (67.50) - - -
513.50 299.50 (150.00)
Add: Share in BL
[513.50 x 75%] 385.13
[299.50 x 65%] 194.68
Add: Share in FL [150 x 45%(W-1.1)] (67.50)
2,426.80
* Since Investment property is valued upwards subsequently therefore URP is not reversed.
** Since investment property is to be measured at fair value model as per group policy, therefore, depreciation
charged by BL shall be reversed
383
W-3.1 Gratuity
PV of DBO Plan assets
--------- Rs. million --------
Bal. at 01-01-17 [320 + 25] 345.00 320.00
Interest [Opening bal. x 12%] 41.40 38.40
Current service cost 85.00 -
Contributions - 70.00
Benefits paid (55.00) (55.00)
Remeasurement gain (10.00) -
406.40 373.40
Net gratuity balance 33.00
W-3.2 Impairment loss Rs. million

Net assets [2,500 + 1,000] 3,500.00
Goodwill [180 ÷ 0.45] 400.00
3,850.00
W-4 NCI BL FL
--------- Rs. million --------
Value at acquisition [BL: 1,575(W-1) x 0.25/0.35] 1,125.00 1,980.00
RE [BL: (513.50 + 299.50) x 25%] [FL: 150 x 55%(W-1.1)] 203.25 (82.50)
Share in investment in CL [2,400 x 25%] (600.00) -
728.25 1,897.50 2,625.75
384
RL Group
Rs. million
Non current assets
PPE [7,450 + 3,000 - 300 + 70 + 180 - 24] 10,376.00
Investment in YL (W-5) 1,128.00
Current assets
Current assets [650 + 500 - 15 - 37.50] 1,097.50
12,976.99
Equity
Bank loan [1,700 + 800 + 182.87(W-1.1)] 2,682.87
Deferred tax [244.75 + 145.42](W-4) 390.17
Current liabilities
Current liabilities [950 + 355 + 40] 1,345.00
12,976.99
-
Workings
- Cash 1,300.00
- Land 450.00
- Bank loan (W-1.1) 179.89
Value of NCI [1,943 x 20%] 388.60
RE 750.00
FV adj. - Building 180.00
DTL [(180 - 40) x 30%] (42.00) (1,943.00)
385
W-1.1 Bank loan Rs. million
Value at 01-01-18:
Interest [Rs. 24m x 5-year annuity factor at 15%] 80.45
Redemption [Rs. 200m x 5-year discount factor at 15%] 99.44
Initial recognition 179.89
Interest expense [179.89 x 15%] 26.98
Cashflow (24.00)
W-2 Retained earnings RL TL YL

------------------ Rs. million ----------------
RE 2,300.00 1,200.00 380.00
Less: Pre-acq - (750.00) -
Less: Finance cost on loan [26.98 - 24.00] (2.98) -
Add: Gain on land transfer [450 - 300] 150.00 -
Less: Extra dep. on FV adj. of Building [180 / 7.5] - (24.00)
Less: URP on goods [100 x 15%] [150 x 25%] (15.00) (37.50)
Add: Deferred tax expense (W-4) 5.25 16.58
405.08 380.00
Add: Share in TL [405.08 x 80%] 324.06
Add: Share in YL [380 x 60%] 228.00
2,989.33
W-3 NCI Rs. million

RE [405.08 x 20%] 81.02
469.62
W-4 Deferred tax

RL TL
--------- Rs. million --------
Tax on adjustments:
Finance cost [2.98 x 25%] (0.75) -
Extra dep. on FV adj. of building [24 x 30%] - (7.20)
URP on goods [15 x 30%] [37.50 x 25%] (4.50) (9.38)
(5.25) (16.58)
Tax on acquisition (W-1) - 42.00
Balance as per question 250.00 120.00
244.75 145.42
W-5 Investment in YL Rs. million

Investment 900.00
RE (W-2) 228.00
1,128.00
386
Replacement rewards
Example 1
Acquiree awards Vesting period completed before the business combination
Replacement awards Additional employee services are not required after the acquisition date
Discussion
AC issues replacement awards of CU110 (market-based measure) at the acquisition date for TC awards of
CU100 (market-based measure) at the acquisition date. No post-combination services are required for the
replacement awards and TC’s employees had rendered all of the required service for the acquiree awards
as of the acquisition date.
The amount attributable to pre-combination service is the market-based measure of TC’s awards (CU100)
at the acquisition date; that amount is included in the consideration transferred in the business
combination. The amount attributable to post-combination service is CU10, which is the difference
between the total value of the replacement awards (CU110) and the portion attributable to pre-
combination service (CU100). Because no post-combination service is required for the replacement
awards, AC immediately recognizes CU10 as remuneration cost in its post-combination financial
statements.
Example 2
Acquiree awards Vesting period completed before the business combination
Replacement awards Additional employee services are required after the acquisition date
Discussion
AC exchanges replacement awards that require one year of post-combination service for share-based
payment awards of TC, for which employees had completed the vesting period before the business
combination. The market-based measure of both awards is CU100 at the acquisition date. When originally
granted, TC’s awards had a vesting period of four years. As of the acquisition date, the TC employees
holding unexercised awards had rendered a total of seven years of service since the grant date.
Even though TC employees had already rendered all of the service, AC attributes a portion of the
replacement award to post-combination remuneration cost in accordance with paragraph B59 of IFRS 3,
because the replacement awards require one year of post-combination service. The total vesting period
is five years—the vesting period for the original acquiree award completed before the acquisition date
(four years) plus the vesting period for the replacement award (one year).
The portion attributable to pre-combination services equals the market-based measure of the acquiree
award (CU100) multiplied by the ratio of the pre-combination vesting period (four years) to the total
vesting period (five years). Thus, CU80 (CU100 × 4/5 years) is attributed to the pre-combination vesting
period and therefore included in the consideration transferred in the business combination. The
remaining CU20 is attributed to the post-combination vesting period and is therefore recognized as
remuneration cost in AC’s post-combination financial statements in accordance with IFRS 2.
387
Example 3
Acquiree awards Vesting period not completed before the business combination
Replacement awards Additional employee services are required after the acquisition date
Discussion
AC exchanges replacement awards that require one year of post-combination service for share-based
payment awards of TC, for which employees had not yet rendered all of the service as of the acquisition
date. The market-based measure of both awards is CU100 at the acquisition date. When originally
granted, the awards of TC had a vesting period of four years. As of the acquisition date, the TC employees
had rendered two years’ service, and they would have been required to render two additional years of
service after the acquisition date for their awards to vest. Accordingly, only a portion of the TC awards is
attributable to pre-combination service.
The replacement awards require only one year of post-combination service. Because employees have
already rendered two years of service, the total vesting period is three years. The portion attributable to
pre-combination services equals the market-based measure of the acquiree award (CU100) multiplied by
the ratio of the pre-combination vesting period (two years) to the greater of the total vesting period (three
years) or the original vesting period of TC’s award (four years). Thus, CU50 (CU100 × 2/4 years) is
attributable to pre-combination service and therefore included in the consideration transferred for the
acquiree.
The remaining CU50 is attributable to post-combination service and therefore recognised as
remuneration cost in AC’s post-combination financial statements.
Example 4
Acquiree awards Vesting period not completed before the business combination
Replacement awards Additional employee services are not required after the acquisition date
Discussion
Assume the same facts as in Example 3 above, except that AC exchanges replacement awards that require
no post-combination service for share-based payment awards of TC for which employees had not yet
rendered all of the service as of the acquisition date. The terms of the replaced TC awards did not
eliminate any remaining vesting period upon a change in control. (If the TC awards had included a
provision that eliminated any remaining vesting period upon a change in control, the guidance in Example
1 would apply.) The market-based measure of both awards is CU100. Because employees have already
rendered two years of service and the replacement awards do not require any post-combination service,
the total vesting period is two years.
The portion of the market-based measure of the replacement awards attributable to pre-combination
services equals the market-based measure of the acquiree award (CU100) multiplied by the ratio of the
pre-combination vesting period (two years) to the greater of the total vesting period (two years) or the
original vesting period of TC’s award (four years). Thus, CU50 (CU100 × 2/4 years) is attributable to pre-
combination service and therefore included in the consideration transferred for the acquiree. The
remaining CU50 is attributable to post-combination service. Because no post-combination service is
required to vest in the replacement award, AC recognises the entire CU50 immediately as remuneration
cost in the post-combination financial statements.
388
DISPOSAL [SOFP & SOCI] – Class notes
SITUATIONS
Control is lost
1. Full disposal [i.e. S to 0]
2. Part disposal [S to Equity investment]
3. Part disposal [S to Associate]
Control is retained
4. S to S
Following discussions are made in respect of the “subsidiary sold” in consolidated financial statements
because there are other subsidiaries as well for which consolidated financial statements are prepared.

1) Full disposal [i.e. S to 0]
(i) No consolidation of assets and liabilities will be made at year end.
(ii) “Other reserves” working will include share in post-acquisition other reserves till the date of disposal.
(iii) “Retained earnings” working will include following adjustments:

(a) Reverse any profit on derecognition already recognized in P’s RE
(b) Include share in post-acquisition RE till the date of disposal
(c) Include “Gain/Loss on disposal of subsidiary” calculated as follows:
Consideration received X
Less: Share of net assets derecognized:
Carrying amount of net assets at the date of disposal X
Consolidation adjustments in assets & liabilities X
Carrying amount of goodwill X
X
Less: NCI derecognized:
Value at acquisition X
Other reserves [Post-acq. till disposal x NCI%] X
RE [Post-acq. till disposal x NCI%] X
(X)
(X)
Gain / (loss) on disposal X
(iv) No NCI working will be made as there is no consolidation.
2) Part disposal [S to Equity investment]
(ii) “Other reserves” working will include share in post-acquisition other reserves till the date of disposal.
(iii) “Retained earnings” working will include following adjustments:

(b) Include share in post-acquisition RE till the date of disposal
389
NASIR ABBAS FCA
(c) Include “Gain/Loss on disposal of subsidiary” calculated as follows:
Fair value of investment retained X
X
Other reserves [Post-acq. till disposal x NCI%] X
RE [Post-acq. till disposal x NCI%] X
(X)
(X)
(d) Include any fair value gain/loss on application of IFRS 9 at year end on investment retained (if not
already done by P).
3) Part disposal [S to Associate]
(ii) In “Other reserves” working, S other reserves will be split into:

1) Post-acquisition Other reserves till disposal [it will be considered as share from S and old% will be
applied].
2) Other reserves after disposal till year-end [it will be considered as share from A and new% will be
applied]
(iii) In “RE” workings, S RE will be split into:

1) Post-acquisition RE till disposal [it will be considered as share from S and old% will be applied].
2) RE after disposal till year-end [it will be considered as share from A and new% will be applied]
Following further adjustments are made:

(b) Include “Gain/Loss on disposal of subsidiary” calculated as follows:
Fair value of investment retained X
X
Other reserves [(ii) (1) x NCI%] X
390
NASIR ABBAS FCA
RE [(iii) (1) x NCI%] X

(X)
(X)
(v) Investment retained will be accounted for as per equity method as follows:
Fair value of investment retained [as used in (iii)(b)] X

Other reserves [(ii)(2)] X
RE [(iii)(2)] X
X
4) Control is retained [i.e. S to S]

(ii) Goodwill is not recalculated on the date of disposal.

1) Post-acquisition Other reserves till disposal [old% will be applied to this portion].
2) Other reserves after disposal till year-end [new% will be applied to this portion.]

1) Post-acquisition RE till disposal [old% will be applied to this portion].
2) RE after disposal till year-end [new% will be applied to this portion]
(v) An adjustment in equity is calculated as follows:

Increase in NCI:
- In Value of NCI at acquisition [Value at acquisition x Increase%/old NCI%] X
- In Other reserves [(iii) (1) above x Increase%] X
- In RE [(iv) (1) above x Increase%] X (X)
Adjustment in equity [+/-] X
This adjustment shall be made in P column in “Other reserves” or “Retained earnings”. [IFRS 10 has just
mentioned the word “equity” and not specified the account. However, some books use “other reserves”
while some use “Retained earnings”].
(vi) NCI working will be made as follows:
Value at acquisition [Value at acquisition x new NCI%/old NCI%] X

Other reserves [Total post x new NCI%] X
Retained earnings [Total post x new NCI%] X
X
391
NASIR ABBAS FCA

[SOCI is better understood if we assume that disposal was made during the current year.]
CASE I – DISCLOSURES OF DISCONTINUED OPERAIONS (AS PER IFRS-5) ARE TO BE IGNORED
(i) Time proportionate (i.e. year start till disposal) consolidation of incomes and expenses will be made for
the year.
(ii) Profit on sale of shares already recognized in SOCI of P shall be reversed.
(iii) “Gain/(loss) on disposal of S” shall be recognized in Group SOCI.
(iv) NCI working is made on time proportionate basis (i.e. year start till disposal)
2) Part disposal [Subsidiary to Equity investment]
the year.
(iv) Recognize fair value gain/(loss) as per IFRS 9 in SOCI on equity investment retained.
(v) NCI working is made on time proportionate basis (i.e. year start till disposal).
3) Part disposal [Subsidiary to Associate]
the year.
(iv) “Share of profit/OCI from associate” shall be calculated on S’s PAT/OCI between disposal date and year
end.
(i) Full consolidation of incomes and expenses will be made for the year.
(iii) NCI working is made on time proportionate basis in following two components:
S’s PAT [from year start to disposal date x old NCI %] X

S’s PAT [from disposal date to year end x new NCI %] X
X
392
NASIR ABBAS FCA
CASE II – DISCLOSURES OF DISCONTINUED OPERAIONS ARE REQUIRED [default case]
(i) No line by line consolidation of incomes and expenses will be made for the year.
(iii) A separate line item “Profit from discontinued operations” will be shown which is calculated as follows:
Profit from discontinued operations:
S PAT (time proportionate basis) X
Gain/(loss) on disposal of subsidiary X
X
(iv) NCI working is made on time proportionate basis (i.e. year start till disposal)
(v) Profit/TCI attributable to shareholders of P and NCI is split into:
- Profit/TCI from continuing operations
- Profit/TCI from discontinued operations
2) Part disposal [Subsidiary to Equity investment]
(iii) A separate line item “Profit from discontinued operations” will be shown.
(iv) Recognize fair value gain/(loss) as per IFRS 9 in SOCI on equity investment retained.
(vi) Profit/TCI attributable to shareholders of P and NCI is split into:
3) Part disposal [Subsidiary to Associate]
(iii)A separate line item “Profit from discontinued operations” will be shown.
(iv) “Share of profit/OCI from associate” shall be calculated on S’s PAT/OCI between disposal date and year
end.
(vi) Profit/TCI attributable to shareholders P and NCI is split into:
It is same as studied in case-I
393
NASIR ABBAS FCA
SOFP Question (Disposal)
Following statements of financial positions relate to Solid, Liquid and Gas as at June 30, 2020:
Solid Liquid Gas

------------------- Rs. ------------------
PPE 75,000 89,000 70,000
Investments (at cost) 70,000 10,000 5,000
Current assets 20,000 25,000 20,000
165,000 124,000 95,000
Shar capital (Rs. 10 each) 50,000 40,000 30,000
Other reserves 14,000 7,000 5,000
Retained earnings 82,000 58,000 44,000
Current liabilities 19,000 19,000 16,000
165,000 124,000 95,000
Gas earned Profit after tax of Rs. 12,000 and no other comprehensive income for the year ending June 30,
2020.
Solid acquired 80% shares in Liquid on July 1, 2017 for Rs. 48,000 [Fair value of NCI at that date was Rs.
11,200] and 70% shares in Gas on July 1, 2018 for Rs. 33,600 [Fair value of NCI at that date was Rs. 13,500].
Following information relates to Liquid and Gas:

Liquid Gas
(01-07-17) (01-07-18)
Other reserves Rs. 4,500 Rs. 2,000
Retained earnings Rs. 8,000 Rs. 10,000
Fair values relating to office buildings were higher than book values as follows:
Liquid Gas
01-07-17 by Rs. 3,000 -
(remaining life 8 years)
01-07-18 - by Rs. 2,000
01-01-20 - by Rs. 1,300
(remaining life 6.5 years)
Goodwill of each company was impaired by 10% on June 30, 2019. It is Solid’s policy to follow full goodwill
method.
Required:
Prepare group SOFP as at June 30, 2020 under each of the following situations:
(a) Solid sold its entire shareholding in Gas for Rs. 28 per share on January 1, 2020.
(b) Solid sold 60% shares of Gas for Rs. 28 per share on January 1, 2020. Market price of remaining shares
of Gas on that date was Rs. 27. Moreover this market price moved to Rs. 29 per share on June 30,
2020.
(c) Solid sold 40% shares of Gas for Rs. 27 per share on January 1, 2020 (i.e. market price at that date).
(d) Solid sold 10% shares of Gas for Rs. 27 per share on January 1, 2020 (i.e. market price at that date).
394
- Fair value of contingent liability was ignored in CL's net assets
BL Group
Rs. million
Non current assets
PPE [75,600 + 2,800] 78,400.00
Investment in TL (W-4) 660.00
Current assets
Stock in trade [24,100 + 1,700 - 2.56] 25,797.44
Trade and other receivables [16,400 + 2,900 - 12] 19,288.00
Cash and bank [800 + 700] 1,500.00
126,609.61
Equity
Long term loan 36,400.00
Current liabilities
Trade and other payables [24,600 + 4,100 - 12] 28,688.00
126,609.61
-
Workings
CL TL
Consideration transferred 3,900.00 1,200.00
Value of NCI [3,143 x 10%] [1,100 x 20%] 314.30 220.00
Share capital 2,800.00 1,000.00
RE 350.00 100.00
Contingent liability (7.00) -
3,143.00 1,100.00
Goodwill at acquisition 1,071.30 320.00
Less: Impairment loss [1,071.30 x 10%] (107.13) -
964.17 320.00
395
W-2 Retained earnings BL CL
--------- Rs. million ---------
RE 15,800.00 1,200.00
Add: Gain on sale of TL (W-3) 850.00 -
Less: Reversal of profit on disposal TL [2,000 - 1,200 x 75%] (1,100.00) -
Add: Contingent liability settled - 7.00
Less: Impariment of goodwill (W-1) (107.13) -
Less: URP on goods [32 x 40% x 25/125] - (2.56)
854.44
Add: Share in CL [854.44 x 90%] 769.00
Add: Share in TL:

Subsidiary [(900 - 200 x 3/12 - 100) x 80%] 600.00
Associate [200 x 3/12 x 20%] 10.00
16,821.87
W-3 Gain on disposal of TL --------- Rs. million ---------

Consideration received 2,000.00
Fair value of investment retained 650.00
Less:
Carrying amount of net assets derecognized as at 01-10-11:
RE [900 - 200 x 3/12] 850.00
Goodwill 320.00
2,170.00
- Value at acquisition (W-1) (220.00)
- Post acquisition RE [(850 - 100) x 20%] (150.00)
(370.00)
1,800.00
Gain on disposal of TL 850.00
W-4 Investment in TL Rs. million

Fair value of investment 650.00
RE (W-2) 10.00
660.00
W-5 NCI Rs. million

Value at acquisition 314.30
RE [854.44 x 10%] 85.44
399.74
396
- Adjustment in equity was recognized in RE
HL Group - URP on machine is wrongly calculated
as at June 30, 2009
Rs. million
Non current assets
PPE [978 + 595 - 3.5] 1,569.50
Current assets
Stock in trade [210 + 105 - 5] 310.00
Trade and other receivables [122 + 116 - 24] 214.00
Cash and bank [20 + 38 + 500] 558.00
2,680.40
Equity

12% debentures 270.00
Current liabilities
Short term loan 124.00
Trade and other payables [172 + 140 - 24] 288.00
2,680.40
-
Workings
FL ML
Consideration transferred 400.00 300.00
Value of NCI [610 x 40%] [360 x 30%] 244.00 108.00
Share capital 360.00 100.00
RE 250.00 260.00
610.00 360.00
Less: Impairment loss [34 x 15%] (5.10) -
28.90 48.00

Adjustment for change in shareholding (W-2.1) 32.00
32.00
397
Decrease in NCI:
- Value at acquisition [244 x 20/40] 122.00
- Post acquisition RE [150(W-3) x 20%] 30.00
152.00
32.00
W-3 Retained earnings HL FL (new) FL (old)

--------- Rs. million ---------
RE 784.00 354.00 400.00
Less: Pre-acq - (400.00) (250.00)
Add: Gain on sale of ML (W-4) 84.50 - -
Less: Impariment of goodwill (W-1) (5.10) - -
Less: URP on machine [4 - 4/4 x 6/12] - (3.50) -
Less: URP on goods [75 x 20/120 x 40%] (5.00) - -
(49.50) 150.00
Add: Share in FL:

[49.50 x 80%] (39.60)
[150 x 60%] 90.00
Add: Share in ML [(450 - 260 - 50 x 6/12) x 70%] 115.50
1,024.30
W-4 Gain on disposal of ML --------- Rs. million ---------

Consideration received 500.00
Less:
RE [450 - 50 x 6/12] 425.00
Goodwill 48.00
573.00
- Value at acquisition (W-1) (108.00)
(157.50)
415.50
Gain on disposal of ML 84.50
W-5 NCI Rs. million

Value at acquisition [244 x 20/40] 122.00
RE [(150 - 49.50) x 20%] 20.10
142.10
398
SOCI Question (Disposal)
Following statements of comprehensive income for the year ending June 30, 2020:
Alpha Bravo Charlie

------------------- Rs. ------------------
Sales 250,000 150,000 120,000
Cost of sales (160,000) (110,000) (90,000)
Gross profit 90,000 40,000 30,000
Operating expenses (25,000) (13,000) (12,000)
Other income 40,000 7,000 6,000
Tax (30,000) (11,000) (9,000)
Profit after tax 75,000 23,000 15,000
Charlie earned Profit after tax of Rs. 12,000 for the year ending June 30, 2019.
Alpha acquired 60% shares in Bravo on July 1, 2017. There were no fair value adjustments necessary at
acquisition.
Alpha acquired 80% shares in Charlie on July 1, 2018 for Rs. 80,000 when its retained earnings were Rs.
48,000 and share capital was Rs. 40,000 (Rs. 10 each).
Fair values relating to office building of Charlie were higher than book values as follows:
01-07-18 by Rs. 4,800
01-01-20 by Rs. 4,000
(remaining life 2.5 years)
It is Alpha’s policy to value NCI using proportionate share method.
Required:
Prepare group SOCI for the year ending June 30, 2020 under each of the following situations:
(a) Alpha sold its entire shareholding in Charlie for Rs. 35 per share on January 1, 2020.
(b) Alpha sold 70% shares of Charlie for Rs. 35 per share on January 1, 2020. Market price of remaining
shares of Charlie on that date was Rs. 34. Moreover this market price moved to Rs. 36 per share on
June 30, 2020.
(c) Alpha sold 50% shares of Charlie for Rs. 35 per share on January 1, 2020. Market price of remaining
shares of Charlie on that date was Rs. 34.
(d) Alpha sold 10% shares of Charlie for Rs. 34 per share on January 1, 2020 (i.e. market price at that
date).
399
P Group
Attributable to shareholders of P
Non-
Share Other Retained controlling Total
Share capital Total
premium reserves earnings interest
------------------------------------------- Rs. ------------------------------------------------

Balance as on 01-07-19 X X X X X X X
Dividend - - (X) (X) (X) (X)
Issue of shares X X - - X X X
Purchase of subsidiary * - - X - - X X
Sale of subsidiary ** - - X - - (X) (X)
Total comprehensive income for the year - - X X X X X
Transfers - - (X) X - - -
Balance as on 30-06-20 X X X X X X X
* It relates to acquisition for subsidiary acquired during the year:

- Other reserves column :- It is the adjustment in equity figure we calculate on S to S acquisition
- NCI column :- It is the "Value of NCI" at acquisition
** It relates to disposal of subsidiary during the year:

- Other reserves column :- It is the adjustment in equity figure we calculate on S to S disposal
- NCI column :- It is the "Total NCI" derecognized as determined in "gain/(loss) on disposal" working
400
- Dividend from LL was also eliminated from NCI share
TL Group - Disposal of PL was shown in RE column
Rs. million
Sales [6,760 + 426 - 50 x 1.20] 7,126.00
Cost of sales [4,370 + 218 - 50 x 1.20 + 4] (4,532.00)
Operating expenses [1,270 + 132 + 7] (1,409.00)
Profit from operations 1,185.00
Other income [730 + 10 - (1,300 - 1,000) - 60 x 70%] 398.00
Profit before tax 1,583.00
Tax [400 + 17] (417.00)
Profit for the year from continuing operations 1,166.00
Profit for the year from discontinued operations (W-1) 185.80
Profit for the year 1,351.80

- Shareholders of TL
from continuing operations 1,146.50
from discontinued operations 178.00
- NCI (W-2) 1,324.50
from continuing operations 19.50
from discontinued operations 7.80
27.30
1,351.80
TL Group
Attributable to shareholders of TL
Share Retained NCI Total
Total
capital earnings
------------------------------ Rs. million --------------------------------
Balance at 01-07-11 (W-3)/(W-4) 10,000.00 2,502.00 12,502.00 214.00 12,716.00
Dividend [NCI: 60 x 30%] - (1,000.00) (1,000.00) (18.00) (1,018.00)
Profit for the year - 1,324.50 1,324.50 27.30 1,351.80
Purchase of subsidiary (W-1.2) - - - 201.00 201.00
Disposal of subsidiary (W-1.1) - - - (221.80) (221.80)
Balance at 30-06-12 10,000.00 2,826.50 12,826.50 202.50 13,029.00
401
Workings
W-1 Profit from discontinued operations Rs. million
Profit for the year [78 x 6/12] 39.00
Gain disposal of PL (W-1.1) 146.80
185.80
W-1.1 Gain on disposal of PL --------- Rs. million ---------

Consideration received 1,300.00
Less:
RE [270 + 78 x 6/12] 309.00
1,375.00
- Value at acquisition (W-1.2) (171.00)
(221.80)
1,153.20
Gain on disposal of PL 146.80
PL LL
W-1.2 Goodwill ----- Rs. million -----
Consideration transferred 1,000.00 550.00
Value of NCI [855 x 20%] [670 x 30%] 171.00 201.00
Share capital 800.00 600.00
RE 55.00 70.00
855.00 670.00
Less: Impairment loss (50.00) (7.00)
266.00 74.00
W-2 NCI PL LL
--------- Rs. million --------
PAT 39.00 69.00
URP on goods [50 x 40% x 20%] - (4.00)
39.00 65.00
20% 30%
7.80 19.50
402
W-3 Opening Retained earnings TL PL
--------- Rs. million --------
RE 2,380.00 270.00
Less: Impairment loss of goodwill (50.00) -
215.00
Add: Share in PL [215 x 80%] 172.00
2,502.00
W-4 NCI opening balance Rs. million

Value at acquisition (W-1.2) 171.00
RE [215 x 20%] 43.00
214.00
403
IAS 7 – CASHFLOW STATEMENT [REVISION] – Class notes
[Indirect method]
Company name
Statement of cash flows
For the year ended -----------------
Rs.’000 Rs.’000
Cash flow from operating activities:
Profit before tax (W-1) XXX
Add: Depreciation (W-8) / Amortization (W-9) XXX
Loss on disposal of asset (W-8, W-9) XXX
Impairment loss (W-8, W-9) XXX
Total interest expense / Finance cost (W-2) XXX
Bad debt expense (W-3) XXX
Retirement benefits cost (e.g. gratuity) (W-4) XXX
Fair value loss [P&L] (W-12, W-14) XXX
Less: Interest income / Investment income (W-5) (XXX)
Dividend income (W-6) (XXX)
Fair value gain [P&L] (W-12, W-14) (XXX)
Grant income (W-13) (XXX)
Profit on sale of asset (W-8, W-9) (XXX)
Operating profit before working capital changes: XXX
(Increase) / Decrease in debtors (Note-1) (XXX) / XXX
(Increase) / Decrease in stocks (XXX) / XXX
(Increase) / Decrease in advances (XXX) / XXX
(Note-2)
(Increase) / Decrease in prepayments (XXX) / XXX
Increase / (Decrease) in creditors XXX / (XXX)
Increase / (Decrease) in accruals XXX / (XXX)
Increase / (Decrease) in short term provisions XXX / (XXX)
Cash generated from operations XXX
Tax paid / Tax refund (W-7) (XXX) / XXX
Retirement benefits paid (W-4) (XXX)
Interest / Finance cost paid (W-2) (XXX)
Cash inflow / (Outflow) from operating activities (A) XXX
Cash flow from investing activities:

Purchase of PPE (W-8) (XXX)
Sale of PPE (W-8) XXX
Purchase of investment property (W-12) (XXX)
Sale of investment property (W-12) XXX
Purchase of intangible asset (W-9) (XXX)
Sale of intangible asset (W-9) XXX
Expenditure on capital WIP (W-11) (XXX)
Long term deposits (XXX)
Govt. grant received (W-13) XXX
Govt. grant repaid (W-13) (XXX)
Purchase of investment (W-14) (XXX)
Sale of investment (W-14) XXX
404
NASIR ABBAS FCA
Interest received (W-5) XXX

Dividend received (W-6) XXX
Cash inflow / (outflow) from investing activities (B) XXX
Cash flow from financing activities:

Issue of shares (W-15) (including share premium) XXX
Proceeds from loan (W-16) (short term / long term) XXX
Dividend paid (W-10) (XXX)
Repayment / redemption of loan (W-16) (short term / long term) (XXX)
Repayment of lease liabilities (W-17) (XXX)
Cash inflow / (outflow) from financing activities (C) XXX
Net cash inflow / (outflow) during the year (A + B + C) XXX
Cash and cash equivalents at start of year XXX
Cash and cash equivalents at end of year XXX
CASH AND CASH EQUIVALENTS:

Opening Closing
Cash in hand XXX XXX
Bank balance XXX XXX
Bank overdraft / running finance (XXX) (XXX)
Short term investments (e.g. treasury bills) XXX XXX
XXX XXX
EXAM NOTES:
1. Increase / decrease in debtors can be determined in following two ways:
(a) Movement in gross debtors (as done in above format)
= closing gross debtors + bad debt written off during the year – opening gross debtors
(b) Movement in net debtors
= closing debtors (net of provision) – opening debtors (net of provision)
Tips:
If (b) is used then bad debt expense line will not appear in adjustments to profit before tax
(a) is more practically used treatment however (b) is also acceptable in exams
2. Changes in all current assets and current liabilities are shown in this section except for followings:
(i) cash and cash equivalents
(ii) tax assets and liabilities
(iii) Dividend payable and receivable
(iv) Interest payable and receivable
(v) Any other asset or liability which is shown under investing or financing activities e.g. short-term finance,
investment, payable for purchase of a PPE and current portion of loan etc.
These items may be hidden in other current assets or liabilities (e.g. interest payable may be hidden in
“accrued expenses”). In this case exclude above items first while calculating working capital changes.
405
NASIR ABBAS FCA
3. IAS 7 allows to show: Under Under

Dividend received Operating activities Investing activities
OR
Interest received Operating activities Investing activities
Dividend paid Operating activities Financing activities

OR
Interest paid Operating activities Financing activities
WORKINGS
W–1 Profit before tax
Retained earnings
Cash dividend declared (W – 10) XXX Opening balance XXX

Bonus dividend declared XXX PAT XXX
Transfer to general reserve XXX Transfer from surplus XXX
Closing balance XXX
PBT = PAT + Tax expense (W – 7)

W–2 Finance cost or Interest expense / paid
Interest payable
Finance cost paid XXX Opening balance XXX

Closing balance XXX Finance cost for the year XXX
(Excluding unwinding of discount in IAS 37)
W–3 Provision for doubtful debts

Provision for doubtful debts
Bad debts written off XXX Opening balance XXX

Closing balance XXX Bad debt expense for the year XXX
W–4 Retirement benefits

Retirement benefit obligation
Retirement benefits paid [contributions] XXX Opening balance XXX

Closing balance XXX Retirement benefits expense for the year XXX
W–5 Interest income / Investment income

Interest receivable
Opening balance XXX Interest received XXX

Interest income for the year XXX Closing balance XXX
W–6 Dividend income / Dividend received

Dividend receivable
Opening balance XXX Dividend received XXX

Dividend income for the year XXX Closing balance XXX
406
NASIR ABBAS FCA
W–7 Tax
Tax
Opening balance (DTA) XXX Opening balance (DTL) XXX

Opening balance (Advance tax) XXX Opening balance (tax payable) XXX
Tax income (total) ------------------- OR --------- XXX ------ Tax expense (total) XXX
Tax paid -------------------- OR ---------------------- XXX ------ Tax refund XXX
Closing balance (DTL) XXX Closing balance (DTA) XXX
Closing balance (tax payable) XXX Closing balance (Advance tax) XXX
W–8 Property, plant and equipment [PPE]

PPE at NBV
Opening balance (NBV) XXX Disposal (NBV) XXX

Addition: Revaluation loss XXX
Cash XXX Depreciation XXX
Non cash XXX Impairment loss XXX
Transfer from capital WIP (W – 11) XXX Closing balance (NBV) XXX
Revaluation gain XXX
Leased during the year (W – 17) XXX
Examples of non-cash additions – Trade in allowance, provision for dismantling, and credit purchase.
PPE Disposal
NBV XXX Sale price (net of disposal expenses) OR XXX

Profit on disposal XXX Trade in allowance XXX
Loss on disposal XXX
Note – While working for PPE, do not forget to prepare accounts for “Lease liability”, “Capital WIP” and “Revaluation
surplus”
W–9 Intangible assets
Intangible asset at NBV

Cash XXX Amortization XXX
Non cash XXX Impairment loss XXX
Revaluation gain XXX Closing balance (NBV) XXX
Disposal
NBV XXX Sale price (net of disposal expenses) OR XXX

Profit on disposal XXX Trade in allowance XXX
Loss on disposal XXX
407
NASIR ABBAS FCA
W – 10 Dividend payable
Dividend payable
Dividend paid XXX Opening balance XXX

Closing balance XXX Cash dividend declared (W – 1) XXX
Note – Even if there is no information regarding dividend paid / declared in other information do not forget to prepare
“Retained earnings” account as it may give cash dividend declared as a balancing figure on debit side.
W – 11 Capital WIP
Capital WIP
Opening balance XXX Transfer to PPE (W – 8) XXX

Expenditure during the year XXX Closing balance XXX
W – 12 Investment property (carried at fair value model)

Investment property
Open. Balance (Fair value) XXX Disposal (Carrying amount) XXX

Fair value gain XXX Fair value loss XXX
Addition XXX Clos. Balance (Fair value) XXX
Disposal
Carrying amount XXX Sale price XXX

Profit on disposal XXX Loss on disposal XXX
W – 13 Government grant (deferred income method)
Govt. grant
Taken to income XXX Open. Balance (non current) XXX

Grant repaid during the year XXX Open. Balance (current) XXX
Clos. Balance (current) XXX Grant received during the year XXX
Clos. Balance (non current) XXX
W –14 Investments
Investment
Opening balance XXX Disposal XXX

Addition XXX Fair value loss XXX
Fair value gain XXX Closing balance XXX
W –15 Issue of shares
Share capital
Closing balance XXX Opening balance XXX

Share issue (cash) XXX
Bonus issue XXX
408
NASIR ABBAS FCA
Share premium
Closing balance XXX Opening balance XXX

Bonus issue (only if issued out of premium) XXX Share issue (cash) XXX
Note – Bonus issue is by default made out of retained earnings (i.e. bonus dividend)
W –16 Loans
Loans
Loan repaid (principal only) XXX Opening balance (Non current) XXX
Closing balance (non current) XXX Opening balance (current) XXX
Closing balance (current) XXX New loan XXX
W –17 Lease liability
Lease liability
Lease payments (principal only) XXX Opening balance (Non current) XXX
Closing balance (non current) XXX Opening balance (current portion) XXX
Closing balance (current portion) XXX Asset leased during the year (W – 8) XXX
409
NASIR ABBAS FCA
[Direct method]
Company name
Rs.’000 Rs.’000
Receipts from customers (W-1) XXX
Payments to suppliers (W-2) (XXX)
Payment for other operating expenses (W-3) (XXX)
``
``
Remaining format after “cash generated from operations” is exactly
same as Indirect method
``
``
W–1 Receipts from customers

Debtors
Opening balance (Gross) XXX Bad debts written off XXX

Sales (Total) XXX Receipts (balancing) XXX
Closing balance (Gross) XXX
W–2 Payments to suppliers

Creditors
Payments (balancing) XXX Opening creditors (Note) XXX

Closing creditors (Note) XXX Purchases (from COS a/c) XXX
Note – If accrued interest is included, then exclude it first before using here.
Cost of sales / Inventory
Opening stock XXX Cost of sales (Note) XXX

Purchases (balancing) XXX Closing balance XXX
Note – If depreciation is included, then exclude it first before using here.
W–3 Payment for other operating expenses

Operating expenses
Opening advances & prepayments (Note-1) XXX Opening accrued expenses (Note-2) XXX
Payments (balancing) XXX Operating expenses (Note-3) XXX
Closing accrued expenses (Note-2) XXX Closing advances & prepayments (Note-1) XXX
Notes:
1. If advance income tax is included, then exclude it first before using here.
2. If accrued interest is included, then exclude it first before using here.
3. Operating expenses = Admin expenses + Distribution cost + Other expenses – Depreciation – Amortization
– Bad debt expense – Impairment loss – retirement benefit expense – loss on disposal of
asset – fair value loss – exchange loss
410
NASIR ABBAS FCA
Question No. 1
The following information has been extracted from the draft financial statements of Alpha Limited for the year
ended 31 December 2015.
2015 2014 2015 2014
ASSETS Equity & Liabilities
Property, plant & equipment 223 193 Share capital (Rs. 10 each) 180 150
Intangible assets 68 23 Share premium 15 -
Trade receivables 45 33 Retained earnings 114 53
Advances and prepayments 84 70 Long term loan 40 -
Inventories 60 46 Deferred liabilities 15 10
Short-term investments 12 9 Trade payables 42 56
Cash at bank 8 7 Accrued expenses 60 70
Tax payable 34 42
500 381 500 381
Following relevant information is available:

(i) Depreciation has been provided on straight line basis. Estimated useful lives are as under:
Building 20 years
All other fixed assets 10 years
(ii) On 1 September 2015, the company purchased new machinery costing Rs. 65 million.
(iii) A portion of building costing Rs. 20 million which was purchased on 1 July 2013 was sold for Rs. 20 million
on 30 June 2015.
(iv) Trade receivables written off during the year amounted to Rs. 5 million. It is the policy of the company to
maintain the provision for doubtful debts at 5% of trade receivables.
(v) Advances and prepayments include advance tax of Rs. 8 million (2014: Rs. 6 million).
(vi) Long term loan was obtained on 1 August 2015. Interest on loan @ 13% is payable on 31st July each year.
Interest payable for 5 months has beenaccrued.
(vii) Deferred liabilities comprise of unfunded gratuity of Rs. 6 million (2014: Rs. 3 million) and deferred tax of
Rs. 9 million (2014: Rs. 7 million). During the year, the company paid gratuity of Rs. 6.5 million to outgoing
employees.
(viii) Tax expense for the year was Rs. 17 million. (2014: Rs. 8 million).
(ix) Right shares were issued on 1 December 2015 at Rs. 15 per share in the ratio of 1 right share for every 5
shares held.
Required:
Prepare statement of cash flows for the year ended 31 December 2015 in accordance with the requirements of
International Financial Reporting Standards using theindirect method. (15)
(Q5, Spring 2016)
411
Question No. 2
Following are the extracts from the financial statements of Universal Limited (UL) for the year ended 30 June 2017:
Statement of financial position as on 30 June 2017
2017 2 2016 2017 2016
Assets Equity & liabilities
Rs. in ‘000 Rs. in ‘000
Property, plant and equipment 158,500 120,000 Share capital (Rs. 10 each) 175,000 150,000
Deferred tax asset 8,500 - Revaluation surplus 10,000 -
Stock in trade 58,000 45,000 Debentures (Rs. 100 each) 18,000 20,000
Trade receivables 68,000 56,000 Deferred tax liability - 6,000
Cash 39,434 48,000 Interest payable 1,000 2,500
Trade payables 42,000 39,000
Accrued liabilities 20,000 18,000
Unearned maintenance 2,000 4,000
Provision for taxation 10,000 8,000
332,434 269,000 332,434 269,000
Statement of profit or loss for the year ended 30 June 2017
Rs. in '000’
Sales 273,000
Cost of sales (187,500)
Gross profit 85,500
Operating expenses (46,766)
Other income 11,200
Profit before interest and tax 49,934
Interest expense (2,000)
Tax expense (15,000)
(i) 60% of sales were made on credit.
(ii) UL maintains a provision for doubtful receivables at 6%. During the year, trade receivables of Rs. 7 million
were written off.
(iii) Depreciation expense for the year was Rs. 22.5 million. 70% of the depreciation was charged to cost of
sales.
(iv) Other income comprises of:
gain of Rs. 3 million on disposal of vehicles for Rs. 12 million;
maintenance income of Rs. 8 million; and
discount of Rs. 10 per debenture which were redeemed during the year.
Required:
Prepare UL’s statement of cash flows for the year ended 30 June 2017 using direct method. (15)
(Q1, Autumn 2017)
412
Solution No. 1
Alpha Limited
For the year ended December 31, 2015
Rs in million
Cash flows from operating activities
Profit before tax (114 – 53 + 17) 78.00
Adjustments for:
Interest expense (40 × 0.13 × 5 ÷ 12) 2.17
Depreciation (W-1) 17.00
Gain on sale of building (20 – 18) (2.00)
Bad debts expense (W-2) 5.63
Provision for gratuity (6 + 6.5 – 3) 9.50
32.30
Operating profit before working capital changes 110.30
(Increase)/decrease in current assets

Increase in trade debts (W-2) (17.63)
Increase in inventories (60 - 46) (14.00)
Increase in advance, and prepayments [(84 – 8) – (70 – 6)] (12.00)
Increase/(decrease) in current liabilities
Decrease in trade payables (42 - 56) (14.00)

Decrease in accrued expense [(60 – 2.17) – 70] (12.17)
(69.80)
Cash flows from operations 40.50
Tax paid (W-3) (25.00)
Gratuity paid (6.50)
(31.50)
Net cash flows from operating activities 9.00
Cash flows from investing activities

Purchase of machinery (65.00)
Sale proceeds from disposal of plant 20.00
Acquisition of intangibles (68 – 23) (45.00)
Net cash used in investing activities (90.00)
Cash flows from financing activities

Proceeds from issuance of right shares (150 × 0.2 × 1.5) 45.00
Proceeds from long term loan 40.00
Net cash flow from financing activities 85.00
Net increase in cash and cash equivalents 4.00
Cash and cash equivalents at the beginning of the year (9+7) 16.00
Cash and cash equivalents at the end of the year (12+8) 20.00
413
Workings:
W-1: Computation of depreciation
Rs. in million
Property, plant & equipment – Opening WDV 193
Purchases during the year 65
NBV of assets disposed off during the year (18)
Property, plant & equipment – Closing WDV (223)
Depreciation expense
for the year 17
W-2: Computation of bad debts expense

Trade Provision for bad
receivable debts
-------- Rs. in million --------
Closing balance [45 / 0.95] [47.37 – 45] 47.37 2.37
Opening balance [33 / 0.95] [34.74 – 33] (34.74) (1.74)
Written off 5.00 5.00
17.63 5.63
W-3: Computation of tax paid

Rs. in million
Opening liability 42
Opening deferred tax liability 7
Closing Advance tax 8
Tax expense for the year 17
Less: Closing liability (34)

Closing deferred tax liability (9)
Opening advance tax (6)
25
414
Solution No. 2
Universal Limited
Cash flow statement
Cash flow from operating activities Rs.'000 Rs.'000

Receipt from customers [W-1] 253,234
Payment to suppliers [W-2] (181,750)
Payment for operating expenses [W-3] (30,250)
Cash generated from operations 41,234
Finance cost paid [2.5 + 2 - 1] (3,500)
Tax paid [W-4] (27,500)
Maint. Income received [2 + 8 - 4]* 6,000
Cash inflow from operating activities 16,234
Cash flow from investing activities
Purchase of PPE [W-5] (60,000)
Sale of PPE 12,000
Cash outflow from investing activities (48,000)
Cash flow from financing activities
Issue of shares [175 - 150] 25,000
Redemption of debentures [W-6] (1,800)
Cash inflow from financing activities 23,200
Net cash outflow during the year (8,566)
Cash & cash equivalent at start of year 48,000
Cash & cash equivalent at end of year 39,434
-
* Alternatively it can be shown before cash generated from operations
W-1 Customers
Rs.'000 Rs.'000
b/d 59,574 Receipts (bal.) 253,234
Sales 273,000 Write off 7,000
c/d 72,340
332,574 332,574
W-2 Suppliers
Rs.'000 Rs.'000
Payments (bal.) 181,750 b/d 39,000
c/d 42,000 Purchases 184,750
223,750 223,750
Inventory
Rs.'000 Rs.'000
b/d 45,000 COS [187.5 - 22.5 x 70%] 171,750
Purchases (bal.) 184,750 c/d 58,000
229,750 229,750
415
W-3 Operating expenses
Rs.'000 Rs.'000
Payments (bal.) 30,250 b/d 18,000
c/d 20,000 Exp. [W-3.1] 32,250
50,250 50,250
W-3.1
Cash expenses = Operating exp - Dep - Bad debts [W-3.2]
= 32,250
W-3.2 Prov. for bad debts

Rs.'000 Rs.'000
Write off 7,000 b/d 3,574
c/d 4,340 Exp. (bal.) 7,766
11,340 11,340
W-4 Tax
Rs.'000 Rs.'000
Payments (bal.) 27,500 b/d [6 + 8] 14,000
c/d 10,000 Expense 15,000
c/d 8,500
37,500 37,500
W-5 PPE
Rs.'000 Rs.'000
b/d 120,000 Disposal [12 - 3] 9,000
Revaluation 10,000 Depreciation 22,500
Addition (bal.) 60,000 c/d 158,500
190,000 190,000
W-6 Rs.'000
Other income 11,200
Gain on vehicle (3,000)
Maintenance income (8,000)
Discount on redemption [A] 200
Total redemption payment [A x 90/10] 1,800
W-7 RE
Rs.'000 Rs.'000
Dividends (bal.) - b/d 21,500
c/d 54,434 PAT 32,934
54,434 54,434
416
IAS 7 – CASHFLOW STATEMENT [Consolidated] – Class notes
[Indirect method]
Group name
Consolidated Statement of cash flows
Rs.’000 Rs.’000
Profit before tax XXX
Add: Depreciation / Amortization XXX
Loss on disposal of asset XXX
Loss on disposal of subsidiary/associate XXX
Impairment loss XXX
Impairment loss of goodwill (W-1) XXX
Total interest expense / Finance cost XXX
Bad debt expense XXX
Retirement benefits cost (e.g. gratuity) XXX
Fair value loss [P&L] XXX
Less: Interest income / Investment income (XXX)
Dividend income (XXX)
Fair value gain [P&L] (XXX)
Grant income (XXX)
Share or profit from associate [Share of PAT – URP (P to A)] (W-2) (XXX)
Profit on derecognition of earlier investment [i.e. direct investment in SS] (XXX)
Gain on disposal of subsidiary/associate (XXX)
Profit on sale of asset (XXX)
Operating profit before working capital changes: XXX
(Increase) / Decrease in debtors (XXX) / XXX
(Increase) / Decrease in stocks (XXX) / XXX
(Increase) / Decrease in advances (XXX) / XXX
(Note-2)
(Increase) / Decrease in prepayments (XXX) / XXX
Increase / (Decrease) in creditors XXX / (XXX)
Increase / (Decrease) in accruals XXX / (XXX)
Increase / (Decrease) in short term provisions XXX / (XXX)
Tax paid / Tax refund (XXX) / XXX
Retirement benefits paid (XXX)
Interest / Finance cost paid (XXX)
Cash inflow / (Outflow) from operating activities (A) XXX
Cash flow from investing activities:

Purchase of PPE (XXX)
Sale of PPE XXX
Purchase of investment property (XXX)
Sale of investment property XXX
Purchase of intangible asset (XXX)
Sale of intangible asset XXX
Expenditure on capital WIP (XXX)
417
NASIR ABBAS FCA
Long term deposits (XXX)

Govt. grant received XXX
Govt. grant repaid (XXX)
Purchase of subsidiary (W-3) (XXX)
Sale of subsidiary (W-4) XXX
Purchase of associate (W-2) (XXX)
Sale of associate XXX
Purchase of investment (XXX)
Sale of investment XXX
Interest received XXX
Dividend received from associate (W-2) XXX
Dividend received XXX
Cash inflow / (outflow) from investing activities (B) XXX
Cash flow from financing activities:

Issue of shares XXX
Issue of shares to NCI XXX
Proceeds from loan XXX
Dividend paid (XXX)
Dividend paid to NCI (W-5) (XXX)
Repayment / redemption of loan (XXX)
Repayment of lease liabilities (XXX)
Cash inflow / (outflow) from financing activities (C) XXX
Net cash inflow / (outflow) during the year (A + B + C) XXX
Cash and cash equivalents at start of year XXX
Cash and cash equivalents at end of year XXX
CASH AND CASH EQUIVALENTS:

Opening Closing
Cash in hand XXX XXX
Bank balance XXX XXX
Bank overdraft / running finance (XXX) (XXX)
Short term investments (e.g. treasury bills) XXX XXX
XXX XXX
Exchange gain / (loss) on cash & cash equivalent XXX -
XXX XXX
OTHER EXAM NOTES:

1. Inter-company receipts and payments are eliminated (i.e. not shown on consolidated cashflow statement)
2. While calculating working capital changes DEDUCT:
- Value (at acquisition date) of relevant asset/liability of S acquired during the year FROM year-end
balance of corresponding asset/liability
- Value (at disposal date) of relevant asset/liability of S disposed during the year FROM year-start
balance of corresponding asset/liability.
418
NASIR ABBAS FCA
3. In all other workings we studied in revision, put values at acquisition date and values at disposal date of
assets/liabilities arising on purchase of subsidiary and disposal of subsidiary respectively during the year in relevant
accounts as non-cash items. For example:
PPE at NBV

- Cash (balancing) XXX Depreciation XXX
- Non cash XXX Impairment loss XXX
Recognized on acquisition of subsidiary XXX Derecognized on disposal of subsidiary XXX
Transfer from capital WIP (W – 11) XXX Closing balance (NBV) XXX
Revaluation gain XXX
Leased during the year (W – 17) XXX
WORKINGS
W–1 Impairment loss of goodwill
Goodwill
Opening balance XXX Carrying amount of goodwill derecognized XXX

on disposal of subsidiary during the year
Goodwill arising on acquisition of subsidiary XXX Impairment loss XXX

during the year
Closing balance XXX
W–2 Investment in associates

Investment in associates
Opening balance XXX Share of dividend declared by associate XXX

during the year
New investment in associate made during XXX Carrying amount of investment in associate XXX
the year derecognized during the year
Share of PAT for the year XXX URP on goods/PPE [P to A] XXX
Share of OCI for the year XXX Closing balance XXX
Dividend received from associate

= Opening dividend receivable + Share of dividend declared by associate – Closing dividend receivable
W–3 Purchase of subsidiary
Purchase of subsidiary = Cash consideration paid – Cash & cash equivalents of S at acquisition date
W–4 Sale of subsidiary
Sale of subsidiary = Cash consideration received – Cash & cash equivalents of S at disposal date
419
NASIR ABBAS FCA
W–5 Dividend paid to NCI

NCI
NCI share of dividend declared by S during XXX Opening balance XXX

the year
NCI derecognized on disposal of subsidiary XXX TCI attributable to NCI XXX

during the year
Closing balance XXX NCI recognized at acquisition of subsidiary XXX

during the year
Dividend paid to NCI

= Opening dividend payable + NCI share of dividend declared by S – Closing dividend payable
[Direct method]
Group name
Consolidated Statement of cash flows
Rs.’000 Rs.’000
Receipts from customers (W-1) XXX
Payments to suppliers (W-2) (XXX)
Payment for other operating expenses (W-3) (XXX)
``
``
Remaining format after “cash generated from operations” is exactly
same as Indirect method
``
``
W–1 Receipts from customers
Debtors
Opening balance (Gross) XXX Bad debts written off XXX

Recognized on acquisition of subsidiary XXX Derecognized on disposal of subsidiary XXX
Sales XXX Receipts (balancing) XXX
Closing balance (Gross) XXX
W–2 Payments to suppliers

Creditors
Payments (balancing) XXX Opening creditors XXX

Derecognized on disposal of subsidiary XXX Recognized on purchase of subsidiary XXX
Closing creditors (Note) XXX Purchases (from Inventory account) XXX
Inventory
Opening stock XXX Cost of sales XXX

Recognized on purchase of subsidiary XXX Derecognized on disposal of subsidiary XXX
Purchases (balancing) XXX Closing stock XXX
420
NASIR ABBAS FCA
W–3 Payment for other operating expenses

Operating expenses
Opening advances & prepayments XXX Opening accrued expenses XXX

Accrued expenses derecognized on disposal XXX Accrued expenses recognized on purchase of XXX
of subsidiary subsidiary
Recognition of prepayments on purchase of XXX Derecognition of prepayments on disposal XXX
subsidiary of subsidiary
Payments (balancing) XXX Operating expenses (Note) XXX
Closing accrued expenses XXX Closing advances & prepayments XXX
Notes – Operating expenses = Admin expenses + Distribution cost + Other expenses – Depreciation – Amortization
– Bad debt expense – Impairment loss – retirement benefit expense – loss on disposal of
asset/subsidiary – fair value loss – exchange loss
DISCLOSURES
1. When subsidiary is purchased or disposed during the year, following shall be disclosed:
- Total consideration paid or received
- Portion of consideration consisting of cash and cash equivalents
- Amount of cash and cash equivalents in subsidiaries purchased or disposed
- Amount of assets and liabilities other than cash and cash equivalents in subsidiaries purchased or
disposed
2. Non-cash transactions in investing and financing activities such as:
- Acquisition of assets assuming directly related liabilities (e.g. loan)
- Leases
- Acquisition of an entity by an equity issue
- Conversion of debt to equity
3. Components of cash and cash equivalents.
421
NASIR ABBAS FCA
APL Group - Suppliers, operating expenses and incomes are combined.
Consolidated cashflow statement - Interest income on loans was netted against finance cost
for the year ended September 30, 2011
-------- Rs. million -------
Cashflow from operating activities
Receipts from customers (W-1) 62,759.00
Payment to suppliers (W-2) (60,786.00)
Receipts from other operating income (W-3) 1,824.00
Payment for operating expenses (W-4) (2,866.00)
Cash generated from operations 931.00
Finance cost paid [30 + 890 - 35] (885.00)
Loan recovery from employees [33 - 27] 6.00
Tax paid [10 + 25 + 1,200 - 210 - 200] (825.00)
Cash inflow from operating activities (773.00)
Cashflow from investing activities
Purchase of PPE (W-5) (40.00)
Cash outflow from investing activities (40.00)
Cashflow from financing activities
Dividend paid [10 + 500 x 2/10 - 8] (102.00)
Dividend paid to NCI (W-6) (185.00)
Long term loan [440 - 250 - 145] 45.00
Cash inflow from financing activities (242.00)
Net cash inflow for the year (1,055.00)
Cash and cash equivalent at start of the year (2,970.00)
Cash and cash equivalent at end of the year (4,025.00)
Notes to accounts
1 - Property, plant and equipment
During the year property, plant and equipment amounting to Rs. 250 million was acquired against
a long term loan
2 - Cash and cash equivalents 2011 2010

-------- Rs. million -------
Cash and bank balances 2,645.00 2,980.00
Short term borrowings* (6,670.00) (5,950.00)
(4,025.00) (2,970.00)
* It is assumed to be bank overdraft
W-1 Receipts from customers Rs. million

Opening balance 5,421.00
Sales [65,000 - 140] 64,860.00
Bad debts expense* (44.00)
Receipts (balancing) (62,759.00)
Closing balance [7,534 - 140 x 40%] 7,478.00
* Since debtors account is given net of provision, therefore, no entry of write off is needed
422
W-2 Payment to suppliers
Opening balance [3,970 - 10] 3,960.00
Purchases (W-2.1) 61,450.00
Payments (balancing) (60,786.00)
Closing balance [4,688 - 140 x 40% - 8] 4,624.00
W-2.1 Inventory
Opening balance 4,280.00
Purchases (balancing) 61,450.00
Cost of sales [59,110 - 140 + 8.40*] (58,978.40)
Closing balance [6,760 - 8.40] 6,751.60
* URP on goods = 140 x 25/125 x 30% = 8.40
W-3 Receipts from other income

Operating income [2,000 - 1*] 1,999.00
Receipts (balancing) (1,824.00)
* Interest income = 24 + 6 -29 = 1.00
W-4 Payment for operating expenses

Opening balance -
Operating expense [3,000 - 44 - 75 - 15] 2,866.00
Payments (balancing) (2,866.00)
Closing balance -
W-5 PPE
Addition (balancing) 40.00
Loan 250.00
Depreciation [75 + 15] (90.00)
Closing balance 1,100.00
W-4 NCI
TCI attributable to NCI 300.00
Dividend paid (balancing) (185.00)
423
- Short term deposit was considered as cash equivalent
- Use of proceeds of loan to purchase PPE was considered non-cash
KGL - Slight differences in notes
Consolidated cashflow statement
-------- Rs. million -------
Depreciation 70.00
Finance cost 14.00
Impairment loss of trademark [6 x 50%] 3.00
Loss on exchange of machine [(7 - 1) - 6.50] 0.50
Share of profit from associate (5.00)
Operating profit 262.50
Working capital changes: (W-2)
Increase in inventories (51.00)
Increase in trade and other receivables (10.00)
Increase in short term deposits (10.00)
Decrease in trade and other payables (42.00)
Cash generated from operations 149.50
Finance cost paid [5 + 14 - 8] (11.00)
Tax paid [50 + 65 - 60] (55.00)
Cash inflow from operating activities 83.50

Purchase of PPE (W-3) (60.00)
Purchase of subsidiary [30 - 6] (24.00)
Dividend from associate (W-4) 3.00
Cash outflow from investing activities (81.00)

Dividend paid [200 x 15%] (30.00)
Dividend paid to NCI (W-5) (2.50)
Bank loan [125 + 20 - 120] 25.00
Cash inflow from financing activities (7.50)
Net cash inflow for the year (5.00)
Cash and cash equivalent at start of the year 25.00
Cash and cash equivalent at end of the year 20.00
424
Notes to accounts
1 - Purchase of AEWL Rs. million
Total consideration paid 30.00
Assets and liabilities at acquisition:
PPE 20.50
Inventories 10.00
Trade debts and other receivables 8.00
Cash and bank balances 6.00
Trade creditors and other payables (17.00)
27.50
2 - PPE Rs. million

During the year following non-cash transactions took place under property, plant and equipment:
Trade in allowance for new machine 6.00
Acquisition of subsidiary 20.50
WORKINGS
W-1 Intangible assets Rs. million
Goodwill on acquisition (W-1.1) 8.00
Impairment of trademark (3.00)
Impairment loss of goodwill (balancing) -
W-1.1 Goodwill on AEWL

Value of NCI [27.50 x 20%] 5.50
Less: Net assets at acquisition (27.50)
W-2 Changes in working capital

Inventories [261 - 10 - 200] (51.00)
Trade and other receivables [180 - 8 - 162] (10.00)
Short term deposits (10.00)
Trade and other payables [262 - 17 - 287] (42.00)
W-3 PPE
Acquisition of AEWL 20.50
Addition (balancing) 60.00
Trade in allowance [7 - 1] 6.00
Depreciation (70.00)
Disposal (6.50)
425
W-4 Investment in associate
Share of profit 5.00
Dividend (3.00)
W-5 NCI
TCI attributable to NCI 15.00
Acquisition of AEWL 5.50
Dividend paid (balancing) (2.50)
426
PURPOSE OF RELATED PARTY DISCLOSURES

- A related party relationship could have an effect on the profit or loss and financial position of an
entity. For example, an entity that sells goods to its parent at cost might not sell on those terms to
another customer.
- The profit or loss and financial position of an entity may be affected by a related party relationship
even if related party transactions do not occur. For example, a subsidiary may terminate relations
with a trading partner on acquisition by the parent of a fellow subsidiary engaged in the same activity
as the former trading partner.
- One party may refrain from acting because of the significant influence of another—for example, a
subsidiary may be instructed by its parent not to engage in research and development.
For these reasons, knowledge of an entity’s transactions, outstanding balances, including commitments,
and relationships with related parties may affect assessments of its operations by users of financial
statements, including assessments of the risks and opportunities facing the entity.
DEFINITIONS
A related party is a person or entity that is related to the entity that is preparing its financial statements
(in this Standard referred to as the ‘reporting entity’).
(a) A person or a close member of that person’s family is related to a reporting entity if that person:
(i) has control or joint control of the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the
reporting entity.
(b) An entity is related to a reporting entity if any of the following conditions applies:
(i) The entity and the reporting entity are members of the same group (which means that each
parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture
of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third
entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself such
a plan, the sponsoring employers are also related to the reporting entity.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
(viii) The entity, or any member of a group of which it is a part, provides key management personnel
services to the reporting entity or to the parent of the reporting entity.
In above definition, Associate/Joint venture also includes its subsidiaries.
Nasir Abbas FCA

427
Important
In the context of this Standard, the following are not related parties:
(a) two entities simply because they have a director or other member of key management
personnel in common or because a member of key management personnel of one entity has
significant influence over the other entity.
(b) two joint venturers simply because they share joint control of a joint venture.
(c)
(i) providers of finance,
(ii) trade unions,
(iii) public utilities, and
(iv) departments and agencies of a government that does not control, jointly control or
significant influence the reporting entity, simply by virtue of their normal dealings with an
entity (even though they may affect the freedom of action of an entity or participate in its
decision‑making process).
(d) a customer, supplier, franchisor, distributor or general agent with whom an entity transacts a
significant volume of business, simply by virtue of the resulting economic dependence.
A related party transaction is a transfer of resources, services or obligations between a reporting entity
and a related party, regardless of whether a price is charged.
Close members of the family of a person are those family members who may be expected to influence,
or be influenced by, that person in their dealings with the entity and include:
(a) that person’s children and spouse or domestic partner;
(b) children of that person’s spouse or domestic partner; and
(c) dependants of that person or that person’s spouse or domestic partner.
Key management personnel are those persons having authority and responsibility for planning, directing
and controlling the activities of the entity, directly or indirectly, including any director (whether executive
or otherwise) of that entity.
A government‑related entity is an entity that is controlled, jointly controlled or significantly influenced by

a government.
DISCLOSURES
1. Relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there
have been transactions between them. An entity shall disclose the name of its parent and, if different,
the ultimate controlling party. If neither the entity’s parent nor the ultimate controlling party
produces consolidated financial statements available for public use, the name of the next most senior
parent that does so shall also be disclosed.
Nasir Abbas FCA

428
2. An entity shall disclose key management personnel compensation in total and for each of the
following categories:
(a) short‑term employee benefits;
(b) post‑employment benefits;
(c) other long‑term benefits;
(d) termination benefits; and
(e) share‑based payment.
3. If an entity has had related party transactions during the periods covered by the financial statements,
it shall disclose, at a minimum:
(a) the amount of the transactions;
(b) the amount of outstanding balances, including commitments, and their terms and conditions,
including whether they are secured, and the nature of the consideration to be provided in
settlement and details of any guarantees given or received;
(c) provisions for doubtful debts related to the amount of outstanding balances; and
(d) the expense recognised during the period in respect of bad or doubtful debts due from related
parties.
Above disclosures shall be made separately for each of the categories of related parties.
Nasir Abbas FCA

429
PRACTICE QUESTIONS
QUESTION NO. 1
During the year ended 30 June 2013, Uzair Limited (UL), a listed company, undertook the following transactions:
(i) All the raw materials were supplied by Hamid Limited for Rs. 180 million.
(ii) Goods costing Rs. 15 million were sold by UL for Rs. 18 million to its subsidiary Tania (Pvt.) Limited as against its
normal policy of adding 30% margin on cost. At the year end, the amount receivable in respect of this sale was Rs.
5.5 million.
(iii) A machine costing Rs. 20 million was purchased from Perveen Limited, one of whose executive director is a director
in UL.
(iv) UL’s approved gratuity fund is administered by the trustees appointed by the company. During the year, contribution
made to the approved gratuity fund amounted to Rs. 3.2 million.
(v) During the year, UL sold goods amounting to Rs. 12 million to Gohar Limited, which is controlled by the uncle of Mr.
Haris, a key shareholder and a member of UL’s board of directors.
(vi) An interest free loan of Rs. 4 million was granted to the Chief Financial Officer (CFO) of the company under the terms
of employment. During the year, Rs. 0.5 million were repaid by the CFO.
Required:
In the light of International Financial Reporting Standards:
(a) Comment as to whether or not the above entities are related parties of Uzair Limited. (06)
(b) Prepare a note on related party transactions for inclusion in Uzair Limited’s financial statements for the year ended 30
June 2013. (Ignore corresponding figures) (07)
{Autumn 2013, Q # 1}
QUESTION NO. 2
On 1 July 2009, Metal Limited (ML) acquired 80% shareholdings in Copper Limited (CL), 90% shareholdings in Zinc Limited
(ZL) and 55% shareholdings in Steel Limited (SL). The following transactions took place among these companies, during
the period up to 30 June 2011:
(i) On 1 May 2010, ML sold a machine to CL at 20% above the carrying amount of Rs. 16 million. CL paid the entire
amount on 15 July 2010. The useful life of the machine is 10 years.
(ii) On 1 July 2010, ZL awarded a contract of Rs. 15 million to Iron Builders and Developers (IBD) for the extension of
its existing factory. One of the directors of ML is also a partner in IBD.
(iii) Since the date of acquisition, ML has been providing management services to CL and ZL. ML did not charge
management fee for its services during the first year. However, with effect from 1 July 2010, management fee
has been charged from each company at the rate of Rs. 0.5 million per month. Payment is made on the 10th day
of the next month.
(iv) On 1 January 2011, ML sold goods amounting to Rs.10 million to Gold Limited (GL). The wife of chief financial
officer of ZL is a major shareholder in GL.
Required:
Prepare a note on related party disclosure including comparative figures, for inclusion in the individual financial
statements of ML, CL, ZL and SL, for the year ended 30 June 2011. (18)
{Autumn 2011, Q # 3}
QUESTION NO. 3
The following related party transactions were carried out by Golden Limited (GL) during the first year of its operation i.e.
year ended December 31, 2009.
(i) Inventory costing Rs. 15 million was sold for Rs. 18 million to Platinum Limited (PL) which owns 60% shares in GL.
It is GL’s policy to add 30% margin on cost. Outstanding liability at year end, in respect of these purchases was
Rs. 6.5 million.
(ii) PL provided administrative services to GL. The cost of these services, if billed in the open market, would have
amounted to Rs. 350,000. No entries were made to record these transactions, as it was agreed that the services
would be provided free of charge.
(iii) A property was sold to Silver Limited (SL), an associated company, at its fair market value of Rs. 10 million. 50%
of the amount was settled prior to year end. GL reimbursed Rs. 500,000 to SL on account of transfer and other
incidental charges related to this property.
(iv) An interest free loan of Rs. 2 million was granted to an executive director of the company under the terms of
employment. During the year, Rs. 200,000 were repaid by the executive director.
(v) On July 1, 2009 GL obtained a short term loan of Rs. 25 million from one of its major shareholder, at the prevailing
annual interest rate of 12%. The principal as well as the accrued mark-up were outstanding at the close of the
year.
430
NASIR ABBAS FCA
Required:
Prepare a note on related party transactions for inclusion in GL’s financial statements for the year ended December 31,
2009 showing disclosures as required under IAS - 24 (Related Party Disclosures). (15)
{Spring 2010, Q # 2}
QUESTION NO. 4
During the year ended June 30, 2008, Baber Limited (BL) has carried out several transactions with the following individuals
/ entities:
(i) AK Associates provides information technology services to BL. One of the directors of BL is also the partner in AK
Associates.
(ii) SS Bank Limited is the main lender. By virtue of an agreement it has appointed a nominee director on the Board
of BL.
(iii) Mr. Zee who supplies raw materials to BL, is the brother of the Chief Executive Officer of the company.
(iv) JB Limited is the distributor of BL’s products and have exclusive distribution rights for the province of Punjab.
(v) Mr. Tee is the General Manager-Marketing of BL and is responsible for all major decisions made in respect of
sales prices and discounts.
(vi) BL’s gratuity fund is administered by the Trustees appointed by the company.
(vii) MM Limited is the leading supplier of BL and supplies 60% of BL’s raw materials.
(viii) Ms. Vee who conducted various training programmes for the employees of the company, is the wife of BL’s Chief
Executive Officer.
Required:
Comment as to whether the above individuals/entities are ‘related parties’ of the company or not. Support your
arguments with references from International Accounting Standards. (15)
{Autumn 2008, Q # 4}
QUESTION NO. 5
Fazal Limited is engaged in the manufacturing of specialized spare parts for automobile assemblers. During the year 2007,
the company has undertaken the following transactions with its related parties:
(i) Sales of Rs. 500 million were made to its only subsidiary M/s Sami Motors Limited (SML). Being the subsidiary, a
special discount of Rs. 25 million was allowed to SML.
(ii) SML returned spare parts worth Rs. 5.5 million.
(iii) Raw materials of Rs. 5 million were purchased from Jalal Enterprises, which is owned by the wife of the CFO of
Fazal Limited.
(iv) Equipment worth Rs. 3 million was purchased from Khan Limited (KL). The wife of the Production Director of the
company is a director in KL.
(v) The company awarded a contract for supply of two machines amounting to Rs. 7 million per machine to an
associated company.
(vi) In 2005, an advance of Rs. 2 million was given to the Chief Executive of the company. During the year 2007, he
repaid Rs. 0.3 million. The balance outstanding as on December 31, 2007 was Rs. 1,100,000.
Required:
In accordance with the requirement of IAS-24 “Related Party Disclosures”, prepare a note to the financial statements, for
inclusion in the company’s financial statements. (12)
{Spring 2008, Q # 4}
QUESTION NO. 6
Following transactions were carried out by Yellow Limited during the year ended June 30, 2006.
(i) Mr. Sharp, a well-known management consultant was hired, to conduct a three weeks workshop on time
management for the staff of the company at a fee of Rs. 0.5 million. Mr. Sharp is the son of the Chief Executive
Officer.
(ii) A loan of Rs. 30 million was obtained from Blue Bank Limited. The loan was negotiated by Mr. Slim, General
Manager Finance of Yellow Limited, who was formerly a senior executive of the Bank.
(iii) Three used delivery trucks of the company were sold to Red Supplies Limited, which supplies approximately 60%
of the total raw material used by the company.
(iv) Granted interest bearing loan to its Chief Executive Officer for construction of house in accordance with the
company’s policy relating to employees’ benefit.
431
NASIR ABBAS FCA
(v) Paid mobilization advance of Rs. 9 million against a construction contract to Orange Limited which is owned by
Mr. Clear, a member of a reputed business family. Two influential directors of the company are nephews of Mr.
Clear.
(vi) The company awarded a contract for plant maintenance services to its subsidiary Brown (Pvt.) Limited effective
August 01, 2007.
Required:
For each case, discuss the requirement of IAS 24 (Related Party Disclosures) as regards the following disclosures in the
financial statements for the year ended June 30, 2006:
(a) Related party relationship; and
(b) Related party transactions. (14)
{Spring 2007, Q # 6}
432
NASIR ABBAS FCA
SOLUTIONS
(a)
(i) UL and Hamid Limited are not related parties. According to IFRS, significant volume of transactions between two
parties even it results in economic dependence does not create related party relationship.
(ii) Tania (Private) Limited is a related party of UL because both the companies have parent-subsidiary relationship.
(iii) They are not related parties. According to IFRS, having common director does not necessarily create a related party
relationship.
(iv) A post-employment benefit plan for the benefits of employees is treated as related party.
(v) The uncle of Mr. Haris is not related party of UL because an uncle is not considered as a close member of a person's
family.
(vi) CFO is a related party as he is the key management personnel of the company.
(b)

Financial Statements of Metal Limited
Subsidiaries:
(a) Copper Limited:
(i) Rs. In million
Receivable balance on 01 July 2010 19.2
Less: Recovered 19.2
Outstanding balance 0
The balance represented sale of machinery at 20% above its carrying amount.
(ii) Additionally, management services were provided to Copper Limited during the year as follows:
Rs. In million
Fee for services 6.0
Less: Recovered 5.5
433
NASIR ABBAS FCA
Outstanding balance 0.5

In the previous year, services were given without any charges.
(b) Zinc Limited:
Management services were provided to Zinc Limited during the year as follows:
Rs. In million
Less: Recovered 5.5
(c) Steel Limited:
There was no transaction with Steel Limited.
Note: Gold Limited is a related party of Zinc Limited, not of Metal Limited.
Financial Statements of Copper Limited

Parent:
(a) Metal Limited:
(i) Rs. In million
Payable balance on 01 July 2010 19.2
Less: Paid 19.2
Outstanding balance 0
The balance represented sale of machinery at 20% above its carrying amount.
(ii) Additionally, management services were provided by Metal Limited during the year as follows:
Rs. In million
Less: Paid 5.5
Financial Statements of Zinc Limited

Parent:
(a) Metal Limited:
Management services were provided by Metal Limited during the year as follows:
Rs. In million
Less: Paid 5.5
Others:
(a) Iron Builders and Developers:
Rs. In million
Contract awarded for extension of building 15
Note: Iron Builders and Developers is a related party of Metal Limited, not of Zinc Limited.
Financial Statements of Steel Limited

Parent:
(a) Metal Limited:
There was no transaction with Metal Limited.

A) Holding company:
Nature of relationship: Platinum Limited (PL) is a Holding company of Golden Limited.
Inventory was sold to PL at 20% mark-up on cost where as normal mark-up rate is 30%. Movement of
the account is as under:
Sale value 18 millions
Amount received 11.5 millions
434
NASIR ABBAS FCA
Amount outstanding 6.5 millions

PL provided administrative services to GL free of cost. The market value of these services is Rs. 350,000.
B) Associate company:
Nature of relationship: Silver Limited (SL) is an associate company of Golden limited (GL).
A property was sold to SL at Rs. 10 millions. Additionally, transfer and other incidental charges were
paid by GL amounting to Rs. 0.5 million. Movement of the account is as under:
Total amount receivable 10 millions
Amount settled prior to year end 5 millions
Amount receivable at year end 5 millions
C) Key management personal:
Nature of relationship: Executive director is a related party to Golden Limited (GL).
An interest free loan was granted to executive director under the terms of employment. Movement of
Amount of loan 2 millions
Amount repaid by director 0.2 million
Amount outstanding 1.8 millions
D) Others:
Nature of relationship: Related party is a major shareholder of Golden Limited (GL).
GL obtained a short term loan @ 12% rate of interest from this related party on 01.07.09. Movement of
Amount of loan obtained 25 millions
Mark-up payable (25 x 12% x 6 / 12) 1.5 millions
Total amount payable 26.5 millions
Note: Assuming that major shareholder is having significant influence in the entity.
(i) AK associates are related party to BL because director of BL has joint control over AK associates.
(ii) SS Bank ltd. is not a related party to BL due to the reason that two entities simply because they have a director
or other member of key management personnel in common.
(iii) As Mr. Zee is the brother of CEO of the company and brother does not fall under close members of the family of
an individual and include only those family members who may be expected to influence, or be influenced by,
that individual in their dealings with the entity so Mr. Zee is not a related party to BL.
(iv) JB is only a distributor of BL’s products and according to IAS-24 a customer, supplier, franchisor, distributor
with whom an entity transacts a significant volume of business, merely by virtue of the resulting economic
dependence are not related party.
(v) Mr. Tee is a related party to BL as he has a key management personnel which include those persons having
authority and responsibility for planning, directing and controlling the activities of the entity, directly or
indirectly.
(vi) A party is related to an entity if the party is a post-employment benefit plan for the benefit of employees of the
entity. So, gratuity fund is a related party to BL.
(vii) MM is only a major supplier and according to IAS-24, a customer, supplier or distributor with whom an entity
transacts a significant volume of business by virtue of the resulting economic dependence are not related parties.
(viii) Ms. Vee is a related party as she is a close family member of an individual which includes only those family
members who may be expected to influence or be influenced by that C.E.O of BL in their dealings with the entity.
A) SUBSIDIARIES:
Nature of Relationship: Sami Motors Limited (SML) is a subsidiary of Fazal Limited.
Sales of Rs. 500 million were made to SML after allowing a special discount of Rs. 25 million.
Amount outstanding 500 millions
Provision of balance Nil
SML returned spare parts worth Rs. 5.5 million.
B) ASSOCIATES:
Nature of relationship: It is an associate of the Fazal Limited.
435
NASIR ABBAS FCA
A contract for the supply of two machines amounting to RS. 7 million per machine was awarded to this
subsidiary.
C) KEY MANAGEMENT PERSONNEL:
Nature of Relationship: Chief Executive is a related party to Fazal Limited.
Advance of Rs 2 million was given to him during 2005.
Amount of transaction: 2.0 millions
Amount outstanding at start: 1.4 millions
Amount repaid during 2007: 0.3millions
Amount outstanding at end: 1.1 millions
Provision: Nil
Guarantee: Nil
D) OTHERS:
(i) Nature of Relationship: Jalal Enterprises is owned by the wife of CFO of Fazal Limited.
Raw mateials worth Rs 5 million were purchased from Jalal Enterprises.
Amount of transaction: 5 millions
Amount outstanding: 5 millions
Provision: Nil
Guarantee: Nil
(ii) Nature of Relationship: Equipment purchased from Khan limited whose director is the wife of
Production Director of Fazal Limited.
Amount of transaction: 3 millions

Amount outstanding: 3 millions
Provision: Nil
Guarantee: Nil
Note: It is stated in the question that all parties are related parties.

(i) (a) Mr. Sharp is a related party because he is a close member of the family of an individual i.e. son of CEO
who may influence in his son’s dealing with the entity.
(b) Transaction with Mr. Sharp i.e. fee of Rs. 0.5 million for training paid to Mr. Sharp will be disclosed.
(ii) (a) Blue Bank Ltd. is not a related party as Mr. Slim G.M. of yellow Ltd. does not have any relation with the
bank now.
(b) No disclosure of transaction with Blue Bank Ltd. is required as per IAS-24. However, loan will be
disclosed according to other relevant disclose requirements.
(iii) (a) Red Supplies Ltd. is not necessarily a related party because it does not have significant influence.
(b) Sale of delivery trucks to Red Supplies Ltd. is a routine transaction, not a related party transaction.
(iv) (a) CEO is a key management personnel so he is a related party.
(b) Loan given to CEO will be disclosed alongwith terms and conditions and the respective interest rate.
Additionally the balance of loan will also be disclosed.
(v) (a) Orange Ltd. is not a related party because nephews are not considered close members of Mr. Clear.
(b) No transaction with Orange Ltd. is to be disclosed.
(vi) (a) Brown (Pvt.) Ltd. is a subsidiary of Yellows Ltd. Therefore, it is a related party.
(b) Transactions with Brown (Pvt.) Ltd. regarding plant maintenance services are to be disclosed.
436
NASIR ABBAS FCA
FOREIGN OPERATION [SOFP & SOCI] – Class notes
FOREIGN OPERATION
Foreign operation is an entity that is a subsidiary, associate, joint arrangement or a branch of a reporting entity,
the activities of which are based or conducted in a country or currency other than those of the reporting entity.
FOREIGN OPERATION IN CONSOLIDATED FINANCIAL STATEMENTS

1) Subsidiary
1) Ensure that all errors are corrected and application of IFRSs is made in individual SOFPs of P and FS.
2) Also incorporate fair value adjustments at acquisition date and post-acquisition effects of these
adjustments (except for goodwill and its impairment) in FS’s SOFP in foreign currency.
3) Now translate FS’s adjusted SOFP (as per 2 above) into functional currency of P as follows:
(a) All assets and liabilities at closing rate
(b) Share capital and pre-acquisition reserves at acquisition date rate
(c) Post-acquisition profits/OCI at actual or average rate of each year separately
(d) Post-acquisition dividends at actual rates of the respective dates
(e) Any balancing figure in such translated SOFP will be an equity reserve named “Exchange
reserve/Translation reserve”
4) Calculate goodwill and its impairment loss in foreign currency. Then translate impairment loss of each year
at average rate or closing rate for that year and translate closing carrying amount of goodwill at end of
every year at closing rate. Any resulting balancing figure is the exchange gain/loss on goodwill for each
year. Such exchange gain/loss is also taken to Exchange reserve as discussed below in 5.
5) “Exchange reserves” to be shown in equity is calculated as follows:
Exchange gain/(loss) on translation of SOFP as per 3(e) [Exchange gain/loss x Group %] X

Cumulative Exchange gain/(loss) on goodwill as per 4 (Note) X
X
Note:
If NCI is valued at fair value If NCI is valued at proportionate share
Exchange gain/(loss) on GW x Group % Exchange gain/(loss) on GW
6) Now consolidate P’s SOFP (as per 1) and FS’s translated SOFP (as per 3) normally as studied earlier. In this
respect following is important:
(i) Fair value adjustments have already made in 2 above therefore no need to perform such adjustments
again, however, inter-company eliminations will be performed.
(ii) URP will be calculated at actual rate of transaction date.
(iii) Exchange reserve (as per 5) shall be shown in equity.
(iv) Any exchange gain/(loss) on investment in foreign operation already included in P’s RE shall be
reversed.
(v) NCI will also include:
- Its share in Exchange gain/(loss) on translation of FS’s SOFP [as per 3(e)].
- Its share in Exchange gain/(loss) of goodwill (as per 5) ONLY if NCI is valued at fair value.
437
NASIR ABBAS FCA
Disposal of foreign subsidiary

All guidance is same as studied earlier in “disposal” chapter except here the cumulative balance in
“exchange reserve” shall be reclassified to P&L and included in “Gain/loss on disposal of subsidiary”.
Portion of exchange reserve attributable to NCI shall not be reclassified to P&L.
2) Associate/JV]
Same rules are used for translation of foreign operations as studied above for application of equity method.

1) Subsidiary
1) Ensure that all errors are corrected and application of IFRSs is made in individual SOCIs of P and FS.
2) Also incorporate post-acquisition effects of these adjustments (except for goodwill and its impairment) in
FS’s SOCI in foreign currency.
3) Now translate FS’s adjusted SOCI (as per 2 above) into functional currency of P by applying actual or
average rate to all incomes and expenses and OCI items.
4) Now consolidate P’s SOCI (as per 1) and FS’s translated SOCI (as per 3) normally as studied earlier. In this
respect following is important:
(i) Fair value adjustments have already made in 2 above therefore no need to perform such adjustments
again, however, inter-company eliminations will be performed.
(ii) URP will be calculated at actual rate of transaction date.
(iii) Any exchange gain/(loss) on investment in foreign operation for the year already recognized in P’s SOCI
shall be reversed.
(iv) “Exchange gain or loss/Translation gain or loss on foreign operation” for the year shall be recognized
in OCI which is calculated as follows:
Closing net assets of FS translated at closing rate X
Opening net assets FS translated at opening rate (X)

[OR Net assets of FS at acquisition at acquisition date rate (in case of 1st year)]
PAT/OCI for the year translated at actual rate or average rate (X)
Dividend for the year translated at actual transaction date rate X

Exchange gain/(loss) on translation for the year [A] X
Exchange gain/(loss) on goodwill for the year [B] X
X
(v) NCI share in OCI will also include:
- Its share in Exchange gain/(loss) on translation of FS’s SOCI [as per (iv)[A]].
- Its share in Exchange gain/(loss) of goodwill [as per (iv)[B]] ONLY if NCI is valued at fair value.
438
NASIR ABBAS FCA
Disposal of foreign subsidiary

All guidance is same as studied earlier in “disposal” chapter except here the cumulative balance in
“exchange reserve” shall be reclassified to P&L and included in “Gain/loss on disposal of subsidiary”. It
is shown as a negative in OCI for the year.
Portion of exchange reserve attributable to NCI shall not be reclassified to P&L.
2) Associate/JV]
Same rules are used for translation of foreign operations as studied above for application of equity method.
439
NASIR ABBAS FCA
Question [Foreign subsidiary]
Following are the financial statements of group companies for the year ended June 30, 2020:

LP FS
Non-current assets Rs. million $ million
Property, plant and equipment 30,000 200
Investment in FS [$ 160 million] 20,800 -
Current assets
Inventory 4,000 40
Debtors 8,000 20
Cash & bank 3,000 10
65,800 270
Equity
Share capital 25,000 100
Retained earnings 31,000 120
Current liabilities
Creditors 9,800 50
65,800 270

LP FS
Rs. million $ million
Sales 35,000 220
Cost of sales (18,000) (130)
Gross profit 17,000 90
Operating cost (4,000) (30)
Exchange gain 1,600 -
Profit before tax 19,600 68
Tax (4,000) (20)
Profit after tax 15,600 48

(1) LP acquired 80% shares of FS on July 1, 2018. At that date the fair values of net assets of FS were equal to the
carrying amounts except for a building which was undervalued by $ 18 million. Its remaining life was 6 years.
At that date fair value of NCI was $ 50 million.
(2) FS paid ordinary dividend of 10% and 20% on January 1, 2019 and January 1, 2020 respectively.
(3) Goodwill was not impaired in 2019 however, it was impaired by $ 5 million at June 30, 2020.
(4) On January 1, 2020 LP sold goods to FS for Rs. 12,500 million invoiced in PKR at a profit margin of 30%. Half of
the amount is still owed by FS on June 30, 2020. Moreover, 40% of these goods are held in FS inventory at year
end. In this respect FS has not yet recorded exchange gain/loss on this foreign currency payable at year end.
(5) FS earned a net profit of $ 40 million for the year ending June 30, 2019.
440
(6) Following exchange rates are available:
Rs. per $
01-07-18 100
01-01-19 112
30-06-19 120
Average for 2019 116
01-01-20 125
30-06-20 130
Average for 2020 128
Required:
Prepare consolidated statement of financial position and consolidated statement of comprehensive income for the
year ended June 30, 2020.
441
PCL Group
as at June 30, 2014
Rs. million
Non current assets
PPE [4,200 + 3,500 + 4,325(W-2.1)] 12,025.00
Goodwill (W-1) 2,526.00
Current assets
Current assets [3,500 + 4,000 + 7,785(W-2.1)] 15,285.00
29,836.00
Equity
Exchange reserves [W-2] 799.65
Current liabilities
Current liabilities [4,700 + 4,800 + 5,190(W-2.1)] 14,690.00
29,836.00
PCL Group
Consolidated statement of other comprehensive income
Rs. million
Exchange gain on translation of foreign operation (W-2) 250.80
Workings LS FS Exchange FS
W-1 Goodwill Rs. million CU million rate Rs. million
Consideration transferred 2,000.00 300.00
Value of NCI 540.00 90.00
Share capital [LS: 1,800 x 100/120] 1,500.00 120.00
RE 250.00 160.00
Contingent liability (6.00) -
1,744.00 280.00
Goodwill at acquisition 796.00 110.00 15.00 1,650.00
Exchange gain (balancing) - - 198.00
796.00 110.00 16.80 1,848.00
Impairment loss - (10.00) 17.30 (173.00)
Exchange gain (balancing) - - 55.00
Carrying amount of goodwill 796.00 100.00 17.30 1,730.00
442
W-2 Exchange reserves Rs. million
Exchange gain on GW (W-1) [(198 + 55) x 75%] 189.75
Exchange gain on foreign operation [463.05 + 195.80(W-2.2) x 75%] 609.90
799.65
W-2.1 Translation of foreign operation FS Exchange FS

CU million rate Rs. million
PPE 250.00 17.30 4,325.00
Current assets 450.00 17.30 7,785.00
Current liabilities 300.00 17.30 5,190.00
W-2.2 Exchange gain Rs. million

Closing net assets [400 x 17.30] 6,920.00
Opening net assets [(400 - 30 + 18*) x 16.80] (6,518.40)
Dividend [18 x 16.90] 304.20
PAT [30 x 17] (510.00)
Exchange gain on translation 195.80
Exchange gain on GW 55.00
250.80
* Dividend = 120 x 15% = 18
W-3 Retained earnings PCL LS FS

--------- Rs. million ---------
RE [FS: (W-3.1)] 3,500.00 900.00 4,306.80
Less: Pre-acq [FS: 160(W-1) x 15] - (250.00) (2,400.00)
Add: Contingent liability settled - 6.00 -
Add: Bonus issue out of RE [1,500 x 20%] - 300.00 -
Less: Impairment of goodwill (W-1) - - (173.00)
956.00 1,733.80
Add: Share in LS [956 x 80%] 764.80
Add: Share in FS [1,733.80 x 75%] 1,300.35
5,565.15
W-3.1 Closing RE
Rs. million
Closing net assets [400 x 17.30] 6,920.00
Share capital [120 x 15] (1,800.00)
Translation reserves [609.90(W-2) / 0.75] (813.20)
4,306.80
W-4 NCI LS FS
--------- Rs. million --------
Value at acquisition [FS: 90 x 15] 540.00 1,350.00
Exchange reserves [FS: 799.65 x 25/75] - 266.55
RE [LS: 956 x 20%] [FS: 1,733.80 x 25%] 191.20 433.45
731.20 2,050.00 2,781.20
443
- Revaluation surplus was recorded in WL books
WL Group - Depreciation on property was charged in WL books
Rs. million
Non current assets
PPE [14,900 + 3,000 + 6,500 + 800] 25,200.00
Goodwill (W-1) 1,134.00
Investment property [800 - 800] -
Current assets
Current assets [6,660 + 2,500 + 6,100] 15,260.00
41,594.00
Equity
Exchange reserves [W-2] 1,270.65
Revaluation surplus [{800 - (650 - 32.50)} x 90%] 164.25
Current liabilities
Current liabilities [6,360 + 2,300 + 3,900] 12,560.00
41,594.00
-
Workings
GL YL Exchange YL
W-1 Goodwill Rs. million T$ million rate Rs. million
- Direct [YL: 4.5 x 23] 4,200.00 103.50
- Indirect [YL: 270 x 90%] - 243.00
Value of NCI [5,000 x 10%] [315 x 8%(W-1.1)] 500.00 25.20
Share capital 1,500.00 225.00
RE 3,500.00 90.00
5,000.00 315.00
Goodwill at acquisition (300.00) 56.70 17.00 963.90
Exchange gain (balancing) - 170.10
Carrying amount of goodwill 56.70 20.00 1,134.00
W-1.1 Effective holding in YL
Effective holding of WL = 20% + 80% x 90% = 92.00%
444
W-2 Exchange reserves Rs. million
Exchange gain on GW (W-1) 170.10
Exchange gain on foreign operation [1,196.25(W-2.1) x 92%] 1,100.55
1,270.65
W-2.1 Translation of foreign operation YL Exchange YL

T$ million rate Rs. million
PPE 325.00 20.00 6,500.00
Current assets 305.00 20.00 6,100.00
630.00 12,600.00
Share capital 225.00 17.00 3,825.00
Pre-acquisition RE 90.00 17.00 1,530.00
Post-acquisition profit [210 - 90 + 22.5] 142.50 18.00 2,565.00
Dividend (22.50) 18.50 (416.25)
210.00 3,678.75
Exchange reserve (balancing) - 1,196.25
Current liabilities 195.00 20.00 3,900.00
630.00 12,600.00
- -
W-3 Retained earnings WL GL YL
--------- Rs. million ---------
RE [YL: (W-2)] 9,500.00 7,900.00 3,678.75
Less: Pre-acq [YL: (W-2)] - (3,500.00) (1,530.00)
Less: Reversal of exchange gain on investment:
WL's investment in YL [1,500 - 75 x 17] (225.00) - -
GL's investment in YL [5,400 - 270 x 17] - (810.00) -
Add: Profit on earlier investment [(103.50 - 75) x 17] 484.50 - -
Add: Negative goodwill on WL 300.00 - -
Less/Add: Rent on property* 60.00 (60.00)
Less: Depreciation on property* [650/20] - (32.50) -
Less: Reversal of fair value gain on investment property* [800 - 650] - (150.00) -
3,347.50 2,148.75
Add: Share in GL [3,347.50 x 90%] 3,012.75
Add: Share in YL [2,148.75 x 92%] 1,976.85
15,109.10
* Since it is a PPE from group's viewpoint, therefore, IAS 40 accounting is reversed.
W-4 NCI GL YL
--------- Rs. million --------
Value at acquisition [YL: 25.20(W-1) x 17] 500.00 428.40
Revaluation surplus [{800 - (650 - 32.50)} x 10%] 18.25 -
Exchange reserves [YL: 1,196.25 x 8%] - 95.70
RE [GL: 3,347.50 x 10%] [YL: 2,148.75 x 8%] 334.75 171.90
Share in investment in YL [270 x 17 x 10%] (459.00) -
394.00 696.00 1,090.00
445
RTL Group
Rs. million
Sales [1,000 + 568.75(W-2) - 30] 1,538.75
Cost of sales [450 + 341.25(W-2) - 30 + 1 x 22.50 x 20%] (765.75)
Gross profit 773.00
Selling and administrative expenses [250 + 117.16(W-2) + 25.26(W-1)] (392.43)
Exchange gain (W-2) 0.66
Finance cost [25 + 22.75(W-2)] (47.75)
Tax [100 + 22.75(W-2)] (122.75)
Exchange gain on foreign operation (W-3) 25.13
Total comprehensive income 235.86

- Shareholders of TL 191.08
- NCI (W-4) 19.65
210.73

- Shareholders of TL 210.61
- NCI [19.65 + 18.68(W-3) x 30%] 25.25
235.86
WORKINGS FDL Exchange FDL

W-1 Goodwill FC million rate Rs. million
Value of NCI [11 x 30%] 3.30
Share capital 5.00
RE 3.00
FV adj. - leasehold property 3.00
11.00
Goodwill at acquisition 4.30 22.00 94.60
Impairment loss (1.08) 23.50 (25.26)
Exchange gain (balancing) - 6.45
Carrying amount of goodwill 3.23 23.50 75.79
446
W-2 Translation of foreign operation FDL Exchange FDL
FC million rate Rs. million
Sales 25.00 22.75 568.75
Cost of sales (15.00) 22.75 (341.25)
Gross profit 10.00 227.50
Selling and administrative expenses [5 + 3/20] (5.15) 22.75 (117.16)
Exchange gain [30/22.5 - 30/23] 0.03 22.75 0.66
Finance cost (1.00) 22.75 (22.75)
Profit before tax 3.88 88.25
Tax (1.00) 22.75 (22.75)
Profit after tax 2.88 65.50
W-3 Exchange gain

Rs. million
Closing net assets [(11 + 2.88) x 23.50] 326.18
Net assets at acquisition [11 x 22] (242.00)
PAT (W-2) (65.50)
Exchange gain on translation 18.68
Exchange gain on GW 6.45
25.13
W-4 NCI FDL

Rs. million
PAT 65.50
30%
19.65
447
VL Group
Consolidated cashflow statement
-------- Rs. million -------
Profit before tax [817(W-5) + 223(W-6)] 1,040
Depreciation 480
Finance cost [189(W-1.1) x 8%] 15
Exchange loss on deferred consideration [223 - 189 - 15] 19
Impairment loss of goodwill (W-1) 65
Gain on disposal of subsidiary [1,600 - 1,250 - 200] (150)
Gain on sale of PPE [(350 - 170) - (250 - 230)] (160)
Income from associate (W-4) [160 - 12] (148)
Operating profit 1,161
Working capital changes (W-2) (951)
Cash generated from operations 210
Tax paid -
Cash inflow from operating activities 210

Purchase of PPE (W-3) (1,043)
Purchase of subsidiary [495 - 1 x 110] (385)
Sale of PPE 350
Sale of subsidiary [1,600 - 100] 1,500
Dividend received from associate (W-4) 78
Purchase of investment in associate (600)
Cash outflow from investing activities (100)

Sale of partial investment in subsidiary 450
Issue of shares [2,800 + 300 - 2,500 - 375(W-1.1)] 225
Cash inflow from financing activities 675
Net cash inflow for the year 785
Cash and cash equivalent at start of the year 783
Cash and cash equivalent at end of the year 1,568
Cash and cash equivalents Opening Closing

-------- Rs. million -------
Cash & bank 770 1,568
Exchange gain 13 -
783 1,568
448
W-1 Goodwill Rs. million
Opening balance 639
Acquisition (W-1.1) 179
Exchange gain on GW of FL (W-1.1) 16
Disposal (200)
Impairment loss (balancing) (65)
Closing balance 569
W-1.1 Goodwill on FL $ million Exchange Rs. million

Consideration transferred: rate
- Cash 4.500 495
- Share [15 x 25] [375/110] 3.409 375
- Deferred [2 x 1.08-2] [1.715 x 110] 1.715 189
Value of NCI [10 x 20%][1,100 x 20%] 2.000 220
Less: Net assets at acquisition [10 x 110] (10.000) (1,100)
Goodwill at acquisition 1.624 179
Exchange gain (balancing) - 16
Goodwill at year end 1.624 120.00 195
W-2 Changes in working capital Opening Closing

-------- Rs. million -------
Trade and other receivables 823 957
Trade and other payables (1,630) (912)
Receivable for PPE - (230)
Acquisition of FL [3.5 x 110] - (385)
Exchange gain on FL - (36)
Disposal of SL 150 -
393 1,344
Increase in working capital (951)
W-3 PPE Rs. million

Acquisition of FL [5.5 x 110] 605
Exchange gain on FL [122(W-7) - 13 - 16 - 36] 57
Addition (balancing) 1,043
Depreciation (480)
Disposal [250 + 170] (420)
Disposal of SL (1,300)
449
W-4 Investment in associate Rs. million
Opening balance -
Addition 600
Share of profit [800 x 6/12 x 40%] 160
URP on goods [400 x 30% x 25% x 40%] (12)
Dividend received (balancing) (78)
Closing balance 670

Profit attributable to shareholders of VL (balancing) 817
Exchange reserve [106(W-7) x 80% + 16] 101
Adjustment in equity on sale of WL [450 - 1,000 x 30%] 150
W-6 NCI Rs. million

Opening balance 874
Acquisition of FL W-1.1) 220
Profit attributable to NCI (balancing) 223
Exchange reserve [106(W-7) x 20%] 21
Increase on partial sale of WL [1,000 x 30%] 300
W-7 Exchange reserves

Rs. million
Closing net assets [(10 + 1.5) x 120] 1,380
Net assets at acquisition (W-1.1) (1,100)
PAT [1.5 x 116] (174)
Exchange gain on translation 106
Exchange gain on GW (W-1.1) 16
122
450
IFRS 16 [Lessor] – Class notes
Lease
A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a
period of time in exchange for consideration.
A contract conveys the right to control the use of an identified asset for a period of time if the customer
has, throughout the period, both of the following:
(a) The right to obtain substantially all of the economic benefits from use of the identified asset; and
(b) The right to direct the use of the identified asset
A customer does not have the right to use an identifiable asset if the supplier has the substantive right
to substitute the asset throughout the period of use.
Nasir Abbas FCA

451
BOOKS OF LESSOR
Lessor
An entity that provides the right to use an underlying asset for a period of time in exchange for
consideration.
IMPORTANT TERMS
1. Types of leases
- A finance lease is a lease that transfers substantially all the risks and rewards incidental to
ownership of an underlying asset. [Title may or may not eventually be transferred]
- An operating lease is a lease that does not transfer substantially all the risks and rewards
incidental to ownership of an underlying asset.
2. The inception of the lease is the earlier of the date of a lease agreement and the date of commitment
by the parties to the principal terms and conditions of the lease.
3. The commencement date of lease is the date on which a lessor makes an underlying asset available
for use by a lessee.
4. The lease term is the non-cancellable period for which a lessee has the right to use an underlying
asset, together with both:
(a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise
that option; and
(b) periods covered by an option to terminate the lease if the lessee is reasonably certain NOT to
exercise that option.
5. Lease modification is a change in the scope of a lease, or the consideration for a lease that was not
part of the original terms and conditions of the lease (e.g. extending or shortening the contractual
lease term).
6. Lease payments [LP] are the payments made by a lessee to a lessor relating to the right to use an
underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives;
In-substance fixed payments exist, for example, if:
(a) payments are structured as variable lease payments, but there is no genuine variability in
those payments. Those payments contain variable clauses that do not have real economic
substance. Examples of those types of payments include:
(i) payments that must be made only if an asset is proven to be capable of operating during
the lease, or only if an event occurs that has no genuine possibility of not occurring; or
(ii) payments that are initially structured as variable lease payments linked to the use of
the underlying asset but for which the variability will be resolved at some point after
the commencement date so that the payments become fixed for the remainder of the
lease term. Those payments become in-substance fixed payments when the variability
is resolved.
(b) there is more than one set of payments that a lessee could make, but only one of those sets
of payments is realistic. In this case, an entity shall consider the realistic set of payments to
be lease payments.
Nasir Abbas FCA

452
(c) there is more than one realistic set of payments that a lessee could make, but it must make
at least one of those sets of payments. In this case, an entity shall consider the set of
payments that aggregates to the lowest amount (on a discounted basis) to be lease
payments.
Lease incentives are the payments made by a lessor to a lessee associated with a lease, or the
reimbursement or assumption by a lessor of costs of a lessee.
(b) variable lease payments that depend on an index (e.g. consumer index) or a rate (e.g. KIBOR);
(c) the exercise price of a purchase option [i.e. BPO price] if the lessee is reasonably certain to
exercise that option; and
(d) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.
Lease payments also include any residual value guarantees [GRV] provided to the lessor by the lessee,
a party related to the lessee or a third party unrelated to the lessor.
7. Residual value guarantee [GRV] is a guarantee made to a lessor by a party unrelated to the lessor
that the value (or part of the value) of an underlying asset at the end of a lease will be at least a
specified amount.
8. Unguaranteed residual value [UGRV] is that portion of the residual value of the underlying asset, the
realization of which by a lessor is not assured or is guaranteed solely by a party related to the lessor.
i.e. UGRV = Total expected RV – GRV
9. Initial direct costs [IDC] are Incremental costs of obtaining a lease that would not have been incurred
if the lease had not been obtained.
10. Gross investment in the lease [GIL] is the sum of:

(a) The lease payments receivable by the lessor under a finance lease, and
(b) Any unguaranteed residual value accruing to the lessor.
i.e. GIL = LP receivable + UGRV
11. Net investment in lease [NIL] is the gross investment in the lease discounted at the interest rate
implicit in the lease.
12. Unearned finance income [UFI] is the difference between:

(a) the gross investment in the lease, and
(b) the net investment in the lease.
i.e. UFI = GIL – NIL
13. The interest rate implicit in the lease is the rate of interest that causes the present value of:
(a) the lease payments; and
(b) the unguaranteed residual value to equal the sum of;
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453
(i) the fair value of the underlying asset; and

(ii) any initial direct cost of the lessor.
Calculation of implicit rate:

GIL comprises of down payment and equal GIL comprises of down payment, rentals and
rentals: BPO / RV:
Annuity factor = [NIL – Down payment] ÷ Rental Assume any two discount rates of your choice
and apply following formula:
Now look for this factor in annuity table against Implicit rate = LR + [PVL / (PVL – PVH)] x (HR – LR)
relevant “n”. Implicit rate will be the rate under Here:
which this factor or closest to this factor is - LR = lower rate (say 10%)
appearing in table. - HR = higher rate (say 15%)
- PVL = “PV of GIL @ LR” – “NIL”
- PVH = “PV of GIL @ HR” – “NIL”
Types of lessors:
For better understanding, following types of lessors can be described in case of finance lease:
Financier lessor Dealer / manufacturer lessor
A lessor who technically provides loan as it A lessor who provides asset out of its stock because
purchases asset from market for leasing e.g. it also sells such assets earning some selling profit.
banks, leasing companies e.g. a car dealer who sells cars on cash as well as on
lease.
CLASSIFICATION OF LEASES
1. A lessor shall classify each of its leases as either an operating lease or a finance lease. Whether lease
is a finance lease or an operating lease depends on the substance of the transaction rather than form
of the contract. Examples of situations that individually or in combination would normally lead to a
lease being classified as a finance lease are:
(a) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
(b) The lessee has the option to purchase the underlying asset at a price that is expected to be
sufficiently lower than fair value at the date the option becomes exercisable for it to be reasonably
certain, at inception date, that the option will be exercised [called Bargain Purchase Option];
(c) The lease term is for the major part of the economic life of the underlying asset even if title is not
transferred. [Generally it is 75% of economic life or may be considered as 2/3 of economic life];
or
(d) At the inception of the lease, the present value of the lease payments amounts to at least
substantially all of the fair value of the underlying asset. [Here substantially means 90 % or more];
(e) The underlying asset is of such a specialized nature that only the lessee can use it without major
modifications.
2. Indicators of situations that individually or in combination could also lead to a lease being classified
as a finance lease are:
(a) If the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by
the lessee;
(b) Gains or losses form the fluctuation in the fair value of the residual value accrue to the lessee (for
example proceeds at the end of the lease); and
Nasir Abbas FCA

454
(c) The lessee has the ability to continue the lease for a secondary period at a rent that is substantially
lower than market rent.
OPERATING LEASE

1. A lessor shall recognize lease payments from operating leases as income on either a straight-line basis
or another systematic basis. The lessor shall apply another systematic basis if that basis is more
representative of the pattern in which benefit from the use of the underlying asset is diminished.
2. A lessor shall add initial direct costs incurred in obtaining an operating lease to the carrying amount
of the underlying asset and recognize those costs as an expense over the lease term on the same basis
as the lease income.
3. The depreciation policy for depreciable underlying assets subject to operating leases shall be
consistent with the lessor’s normal depreciation policy for similar assets.
4. A lessor shall account for a modification to an operating lease as a new lease from the effective date
of modification. The original lease is considered cancelled and any prepaid/accrued lease payments
of the original lease shall be considered as part of the lease payments for the new lease.
Disclosures
1. A lessor shall disclose lease income for the reporting period.
2. For items of PPE subject to an operating lease, a lessor shall apply the disclosure requirements of IAS
16.
3. A lessor shall disclose a maturity analysis of undiscounted lease payments to be received on an annual
basis for a minimum of each of the first five years and a total of the amounts for the remaining years.
FINANCE LEASE
Recognition and initial measurement

Financier lessor Manufacturer or dealer lessor
1) At commencement date, a lessor shall 1) At commencement date, a lessor shall
recognize the lease receivable at an amount recognize following:
equal to net investment in lease.
Dr. Net investment in lease [NIL]
Dr. Net investment in lease [NIL] Dr. Cost of sales [Cost/NBV – PV of UGRV]
Cr. Cash Cr. Sales [NIL – PV of UGRV]
(If a lessor provides any of its PPE on finance Cr. Inventory [Cost]
lease then NBV of PPE is credited instead of
cash and a profit/loss on disposal is recorded)
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455
Exam note: Exam note:

NIL = PV of GIL discounted at implicit rate NIL = Fair value (i.e Sale price – trade discount)
OR OR
NIL = fair value of asset + IDC NIL = PV of GIL discounted at higher of market
interest rate or implicit rate
2) IDCs incurred by lessor are included in the 2) IDC type expenses incurred by lessor are
initial measurement of NIL. When NIL is recognized as expense at the commencement
determined by discount GIL at implicit rate of lease. d former employees.
then IDCs are automatically in the amount of
NIL therefore no need to add them separately.
IDCs reduce the finance income over the lease
term.
Calculation of lease rental

Lease rental may be required to calculated in exam question. It will be calculated using following
equation:
NIL = Rental x annuity factor at implicit rate + PV of other items of GIL discounted at implicit rate
Here: NIL = Fair value of asset + IDC (only in case of financier lessor)
Exam note:
In case of dealer/manufacturer lessor, if implicit rate and market interest rate both are available then:
Implicit rate will be used for rental calculation, if required
For all other calculations and accounting, higher of the both rates will be used.
1. A lessor shall recognize finance income over the lease term, based on a pattern reflecting a constant
periodic rate of return on the lessor’s NIL.
2. Finance income is calculated using a lease amortization schedule which starts from initial
measurement amount of net investment in lease.
Payment Lease Interest Principal Balance
date payment [B = Opening balance x interest [C = A – B] [Opening balance – C]
[A] %]
X
X X X X
When finance income for the period is accrued

Dr. Net investment in lease
Cr. Finance income [SOCI]
When lease payment is received

Dr. Cash
Cr. Net investment in lease
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456
3. A lessor shall review regularly estimated unguaranteed residual values used in computing the GIL. If
there has been a reduction, the lessor shall revise the income allocation over the lease term.
Lease modification
Case I – Modification shall be accounted for as a new lease

A lessor shall account for a modification to a finance lease as a separate lease if both:
(a) the modification increases the scope of the lease by adding the right to use one or more underlying
assets; and
(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for
the increase in scope and any appropriate adjustments to that stand-alone price to reflect the
circumstances of the particular contract.
Case II – Modification shall not be accounted for as a new lease

If the lease would have been classified as an Otherwise:
operating lease had the modification been in
effect at the inception:
At the effective date of modification, a PPE is The lessor shall apply the modification
recognized with remaining balance in NIL: requirements of IFRS 9 which are as follows:
Dr. PPE (i.e. underlying asset) - lessor shall recalculate net investment in lease
Cr. Net investment in lease as PV of modified contractual cashflows that
are discounted at original implicit rate.
Onwards the lease shall be accounted for a new - Any modification gain/loss shall be recognized
operating lease. in P&L
Disclosures
1. A lessor shall disclose following amounts for the reporting period in a tabular format:
- Selling profit or loss
- Finance income on the net investment in lease
- Income relating to variable lease payments not included in the measurement of the net
investment in lease.
2. A lessor shall disclose a maturity analysis of undiscounted lease payments to be received on an annual
basis for a minimum of each of the first five years and a total of the amounts for the remaining years.
3. A lessor shall reconcile the undiscounted lease payments to the net investment in lease. The
reconciliation shall identify the unearned finance income relating to the lease payments receivable
and any discounted unguaranteed residual value.
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LEASE OF LAND AND BUILDING
1. When a lease includes both land and building elements, a lessor shall assess the classification of each
element as finance lease or operating lease.
2. Whenever necessary in order to classify and account for a lease of land and buildings, a lessor shall
allocate lease payments (including any lump-sum upfront payments) between the land and the
buildings elements in proportion to the relative fair values of the leasehold interests in the land
element and buildings element of the lease at the inception date.
3. If the lease payments cannot be allocated reliably between these two elements, the entire lease is
classified as a finance lease, unless it is clear that both elements are operating leases, in which case
the entire lease is classified as an operating lease.
4. For a lease of land and buildings in which the amount for the land element is immaterial to the lease,
a lessor may treat the land and buildings as a single unit for the purpose of lease classification and
classify it as a finance lease or an operating lease. In such a case, a lessor shall regard the economic
life of the buildings as the economic life of the entire underlying asset.
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LEASES (IFRS-16) [Lessor] – QUESTIONS
PRACTICE QUESTIONS
Question 1
On 1 January 2019, French Vanilla Leasing Limited (FVLL) purchased a machine costing Rs. 200 million having useful life
of 8 years. Residual value of the machine at end of its useful life is estimated at Rs. 16 million.
On 1 February 2019, FVLL entered into a lease agreement for this machine with Cotton Candy Limited (CCL) for a non-
cancellable period of 2.5 years with effect from 1 March 2019. Under the agreement, eight instalments of Rs. 12 million
are to be paid quarterly in arrears commencing from the end of 3rd quarter i.e. 30 November 2019.
FVLL has incorporated an implicit rate of 15% per annum which is not known to CCL. Incremental borrowing rate of CCL
is 16% per annum.
On 1 April 2019, CCL completed installation of the machine at a cost of Rs. 4 million and put it into use.
Both companies follow straight line method for charging depreciation.
Required:
Prepare journal entries for the year ended 31 December 2019 in the books of FVLL to record the above transactions.
(15)
[Spr-20, Q-5]
Question 2
Neptune Limited (NL) had established its business in December 2008 as a supplier of plant and machinery. During the year
ended December 31, 2009 the company sold two machines under lease arrangements. The details are as under:
A B
Date of commencement of lease January 1, 2009 January 1, 2009
Lease term 6 years 3 years
Lease installments payable annually in advance Rs. 2,000,000 Rs. 4,000,000
(to be reduced annually by 5%)
Cost of machine Rs. 6,963,448 Rs. 15,000,000
Economic life 6 years 6 years
NL sells machines on cash at cost plus 25%. It depreciates its assets under straight line method with no residual value. Fair
market annual interest rate is 15%.
Required:
(a) Prepare journal entries to record the above transactions.
(b) Prepare notes to the financial statements for the year ended December 31, 2009 in accordance with the
requirements of IFRS - 16 (Leases). (19)
(Ignore taxation and comparative figures) {Spring 2010, Q # 1}
Question 3
Galaxy Leasing Limited (GLL) has leased certain equipment to Dairy Products Limited on 1 July 2013. In this respect, the
following information is available:
Rs. in million
Cost of equipment 28.69
Amount received on 1 July 2013 3.00
Four annual installments payable in arrears on 30 June, each year 7.80
Guaranteed residual value on expiry of the lease 5.00
Useful life of the equipment is estimated at 5 years. Rate of interest implicit in the lease is 14%.
Required:
(a) Prepare accounting entries for the year ended 30 June 2014 in the books of GLL to record the transactions related
to the above lease arrangement in accordance with the requirements of International Financial Reporting
Standards. (07)
(b) Prepare a note for inclusion in GLL's financial statements for the year ended 30 June 2014, in accordance with
the requirements of International Financial Reporting Standards. (10)
{Autumn 2014, Q # 5}
459
NASIR ABBAS FCA
Question 4
Quartz Auto Limited (QAL) is engaged in the business of manufacturing of trucks. Since a number of the prospective
customers do not have adequate funds to purchase the vehicles against full payment, QAL provides lease financing facility
to its customers. It expects to receive a return at the rate of 15% per annum on the amount of lease finance.
On 1 July 2010, QAL sold seven trucks to Emerald Goods Transport Company (EGTC) on lease. The terms of the lease and
related information are as follows:
(i) The lease period is 4 years, extendable up to the expected useful life of the trucks i.e. 5 years.
(ii) EGTC has guaranteed a residual value of Rs. 360,000 for each truck, till the end of the fourth year. However, the
guarantee would lapse if the lease term is extended to the fifth year. EGTC will return the truck at the end of the
lease term.
(iii) Lease rentals amount to Rs. 2,715,224 per annum and are payable in arrears i.e. on 30 June.
(iv) The cost of each truck is Rs. 900,000. Price in case of outright sale is Rs. 1,350,000 per truck.
(v) The expected residual value of each truck at the end of the 4th and 5th year is Rs. 150,000 and Rs. 100,000
respectively.
Required:
Assuming that QAL and EGTC intend to extend the lease for a period of five years, prepare:
(a) Journal entries to record the transactions for the year ended 30 June 2011. (08)
(b) A note for inclusion in the financial statements, for the year ended 30 June 2011, in accordance with the
requirements of IFRS-16 ‘Leases’. (07)
{Autumn 2011, Q # 4}
Question 5
Guava Leasing Limited (GLL), had leased a machinery to Honeyberry Limited (HL) on 1 July 2017 on the following terms:
(i) The non-cancellable lease period is 3.5 years. Each semi-annual lease instalment of Rs. 48 million is
receivable in arrears.
(ii) The useful life of machine is 6 years.
(iii) The lease contains an option to extend the lease term by 1.5 years. Each semiannual lease instalment
in the extended period will be of Rs. 15 million, receivable in arrears. It is reasonably certain that HL
will exercise this option.
(iv) The rate implicit in the lease is 10% p.a.
(v) The unguaranteed residual value at the end of lease term is estimated at Rs. 20 million.
GLL incurred a direct cost of Rs. 10 million and general overheads of Rs. 0.5 million to complete the transaction.
Required:
Prepare note(s) for inclusion in GLL’s financial statements, for the year ended 30 June 2018. (09)
{Autumn 2018, Q # 6(a)}
Question 6
Square Limited (SL) is a dealer of electronic items. SL acquires refrigerators of a particular model from a manufacturer at
a discount of 15% on the retail price of Rs. 300,000 per unit.
On 1 January 2018, SL sold 12 refrigerators to Cube Hotel at retail price on lease. The rate of interest implicit in the lease
was 10% per annum. The payment is to be made in three equal annual instalments payable in advance. Residual value at
the end of 3 years is nil.
The market rate of interest is 14% per annum.
Required:
Prepare journal entries in the books of SL in respect of above transaction for the year ended 31 December 2018. (07)
{Spring 2019, Q # 1(b)}
460
NASIR ABBAS FCA
Question 7
Lessor limited leased land and building to Lessee limited. The detail of which is as follows:
- Commencement date of lease is January 1, 2019
- Lease term is for 20 years
- Lease payments are Rs. 500,000 payable at end of every year.
At the inception of the lease the fair value of leasehold interest in land was Rs. 5,000,000 while the fair value of the
leasehold interest in the building was Rs. 2,240,832.
The building had been purchased for Rs. 3,000,000 and were being depreciated over its total estimated useful life of 30
years to a nil residual value. At inception of lease, the building had a remaining useful life of 22 years.
Land was purchased 10 years ago for Rs. 2,200,000 and was not depreciated.
The interest rate implicit in lease is 3.293512%.
After a careful assessment of all facts and circumstances, each of elements was correctly classified as follows:
- Lease over land was classified as operating lease
- Lease over building was classified as finance lease
Required:
Prepare accounting entries for the years ending December 31, 2019 and 2020.
461
NASIR ABBAS FCA
LEASES (IFRS-16) [Lessor] – SOLUTIONS
SOLUTIONS
Solution No. 1
Books of FVLL
--------- Rs. million --------
01-01-19 Machine 200.00
Cash 200.00
[Purchase of machine]
30-11-19 Cash 12.00

Lease income 12.00
[1st rental received]
31-12-19 Rent receivable [38.40(W-1) x 10/12 - 12] 20.00

Lease income 20.00
[Accrual adjustment at year-end]
31-12-19 Depreciation [(200 - 16)/8] 23.00

W-1 Rs. million

Total lease payments [12 x 8] 96.00
Lease income per year [96 / 2.5] 38.40
Solution 2
(a)
Date Particulars Dr. Cr.
------------ Rs. '000 ----------
LEASE - A [FINANCE LEASE]
01-Jan-09 Lease receivable [W-1] 8,704
Cost of sales 6,963
Sales 8,704
Inventory 6,963
[Initial recognition of lease]
01-Jan-09 Bank 2,000
Lease receivable 2,000
[receipt of 1st rental]
31-Dec-09 Lease receivable 1,006
Finance income 1,006
[accrual of interest income for the year]
LEASE - B [OPERATING LEASE]

01-Jan-09 Bank 4,000
Rent income 4,000
[Rent received for 2009]
31-Dec-09 Rent income [W-2] 197
Advance rent 197
[Recording unearned income]
462
NASIR ABBAS FCA
31-Dec-09 Depreciation [15,000 / 6] 2,500

[Depreciation charge for the year]
W–1 PV of LP = 2,000 x Annuity factor

= 8,704
Sale value / FV = 6,963.448 x (1 + 25%)

= 8,704
Since PV of LP is equal to FV and lease term covers whole life, therefore, lease A is a finance lease
W–2
Rent as per agreement: Rs,'000’
year 1 4,000
year 2 (95%) 3,800
year 3 (95%) 3,610
11,410
Income for the year 3,803
Receipt in 2009 4,000
Unearned income 197
Since LP is much lower than cost and lease term covers 50% life, therefore, lease B is an operating lease.
W - 3 Lease schedule
Date Open. Bal. Payment Interest Principal Clos. Bal.
01-Jan-09 8,704 2,000 - 2,000 6,704
01-Jan-10 6,704 2,000 1,006 994 5,710
01-Jan-11 5,710 2,000 856 1,144 4,566
01-Jan-12 4,566 2,000 685 1,315 3,251
01-Jan-13 3,251 2,000 488 1,512 1,739
01-Jan-14 1,739 2,000 261 1,739 (0)
(b)
NOTES TO THE ACCOUNTS
1 - Net investment in lease
Lease term is 6 years. Rental is receivable at start of every year. Implicit rate is 15%.
Maturity analysis:
Rs.'000’
Lease payments receivable:
1 year 2,000
2 years 2,000
3 years 2,000
4 years 2,000
5 years 2,000
10,000
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NASIR ABBAS FCA
Reconciliation: Rs.'000’
Total lease payments receivable 10,000
Unguaranteed residual value -
Gross investment in lease 10,000
Less: Unearned finance income 2,290
Net investment in lease 7,710
2 - Operating lease
Maturity analysis:
1 year 3,800
2 years 3,610
7,410
Solution 3
(a)
------------ Rs. '000’ ----------
01-Jul-13 Lease receivable 28,690
Bank 28,690
01-Jul-13 Bank 3,000
[Receipt of down payment]
30-Jun-14 Bank 7,800
(b)
Lease term is 4 years and instalment is receivable at end of every year. Implicit rate is 14%.
Maturity analysis:
Rs.'000’
1 year 7,800
2 years 7,800
3 years 12,800
28,400
Reconciliation:
Rs.'000’
Unguaranteed residual value -
464
NASIR ABBAS FCA
W-1 Lease schedule

01-Jul-13 28,690 3,000 - 3,000 25,690
30-Jun-14 25,690 7,800 3,597 4,203 21,487
30-Jun-15 21,487 7,800 3,008 4,792 16,695
30-Jun-16 16,695 7,800 2,337 5,463 11,232
30-Jun-17 11,232 7,800 1,568 6,232 5,000
Solution 4
(a)
------------ Rs. '000’ ----------
01-Jul-10 Lease receivable [1,350 x 7] 9,450
Cost of sales [900 x 7 – 348 (W-1)] 5,952
Sales [9,450 – 348 (W-1)] 9,102
Inventory [900 x 7] 6,300
30-Jun-11 Bank 2,715
(b)
Lease term is 4 years extendable upto 5 years. Rental is receivable at end of every year. Implicit rate is 15%.
Maturity analysis:
Rs.'000’
1 year 2,715
2 years 2,715
3 years 2,715
4 years 2,715
10,861
Reconciliation:
Unguaranteed residual value 700
465
NASIR ABBAS FCA
W–1 Residual value 700

Less: GRV -
UGRV 700
PV of UGRV 348
W–2 NIL = FV = 2,715.224 x Annuity factor + 700 x Discount factor

= 9,450
W-3 Lease schedule
30-Jun-11 9,450 2,715 1,418 1,298 8,152
30-Jun-12 8,152 2,715 1,223 1,492 6,660
30-Jun-13 6,660 2,715 999 1,716 4,944
30-Jun-14 4,944 2,715 742 1,974 2,970
30-Jun-15 2,970 2,715 445 2,270 700
Solution 5
Guava Leasing Limited
Notes to financial statements

Lease term is 3.5 years, extendable upto 5 years. Installment is receivable at end of every six months.
Implicit rate is 10%.
Maturity analysis:
Lease payments receivable as follows: Rs. million
1 year 96.00
2 years 96.00
3 years 63.00
4 years 30.00
285.00
Reconciliation:
Rs. million
Total lease payments receivable 285.00
Unguaranteed residual value 20.00
Gross investment in lease 305.00
Less: Unearned finance income 51.64
Net investment in lease 253.36
W-1 Initial recognition

= Rs. 48 million x A.F. + Rs. 15 million x A.F. + Rs. 20 million x D.F.
= 319.05
Date Op. bal Payment Interest Principal Cl. Bal

31-Dec-17 319.05 48.00 15.95 32.05 287.01
30-Jun-18 287.01 48.00 14.35 33.65 253.36
31-Dec-18 253.36 48.00 12.67 35.33 218.03
30-Jun-19 218.03 48.00 10.90 37.10 180.93
466
NASIR ABBAS FCA
Solution 6
----- Rs. million ----
01-01-18 Lease receivable (W-2) 3.483
Cost of sales [3.60 x 85%] 3.060
Sales [W-2] 3.483
Inventory 3.060
01-01-18 Cash (W-1) 1.316

Lease receivable 1.316
31-12-18 Lease receivable [(3.483 - 1.316) x 14%] 0.303

Finance income 0.303
[Finance income for 2018]
W-1
Rental = [0.30m x 12] / (1 + annuity factor at 10%)
= 1.316
W-2
NIL = Sales = Lease receivable = 1.316 + 1.316 x annuity factor at 14%
= 3.483
Solution 7
------------ Rs. -----------
01-01-19 Lease receivable 2,240,832
Acc. dep - building [3,000,000 x 8/30] 800,000
Building 3,000,000
31-12-19 Lease receivable (W-2) 73,802

31-12-19 Cash 500,000

Lease receivable (W-1) 154,736
Lease income (W-1) 345,264
31-12-20 Lease receivable (W-2) 71,137

31-12-20 Cash 500,000

Lease receivable (W-1) 154,736
Lease income (W-1) 345,264
[2nd rental received]
467
NASIR ABBAS FCA
W-1 Allocation of lease payments

Rs.
Land [500,000 x 5,000,000/7,240,832] 345,264
Building [500,000 x 2,240,832/7,240,832] 154,736
W-3 Lease schedule

Lease
Date Open. Bal Interest Clos. Bal
payment
31-12-19 2,240,832 73,802 (154,736) 2,159,898
31-12-20 2,159,898 71,137 (154,736) 2,076,299
468
NASIR ABBAS FCA
IFRS 16 [Lessee] – Class notes
BOOKS OF LESSEE
Lessee
Lessee is an entity that obtains the right to use an underlying asset for a period of time in exchange for
consideration.
IMPORTANT TERMS
Status of terms studied in books of lessor portion:
Same as studied for lessor:- Inception of lease, commencement of lease, lease term, lease
modification, GRV, IDC, implicit rate
Not applicable for lessee:- Types of lease, UGRV, GIL, NIL, UFI
Additional/different terms for lessee:

1. Lease payments [LP] are the payments made by a lessee to a lessor relating to the right to use an
underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives;
(b) variable lease payments that depend on an index or a rate;
(c) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
and
(d) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.
Lease payments also include amounts expected to be payable by the lessee under residual value
guarantees.
2. The lessee’s incremental borrowing rate of interest is the rate of interest that a lessee would have to
pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset
of a similar value to the right-of-use asset in a similar economic environment.
3. Right-of-use asset is an asset that represents a lessee’s right to use an underlying asset for the lease
term.
4. Short term lease is a lease that, at the commencement date, has a lease term of 12 months or less. A
lease that contains a purchase option is not a short-term lease.
SEPARATING COMPONENTS OF A CONTRACT

For a contact that contains a lease component and one or more additional lease or non-lease components,
a lessee shall allocate the consideration in the contract to each lease component on the basis of the
relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease
components. [i.e. same concept as for allocation of transaction price to separate performance obligations
in IFRS-15]
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469
NORMAL LEASE ACCOUNTING
Recognition and initial measurement

1. At the commencement of lease, a lessee shall recognize a right-of-use asset and a lease liability at the
present value of lease payments discounted at implicit rate. If implicit rate can not be readily
determined, the lessee shall use the lessee’s incremental borrowing rate.
Dr. Right-of-use
Cr. Lease liability
[Any lease payments made at or before the commencement date, less any lease incentives shall also
be included in the cost of right-of-use asset]
2. Any initial direct cost incurred by the lessee shall be included in the cost of right-of-use asset.
Dr. Right-of-use asset

Cr. Cash
3. PV of estimated dismantling and site restoration shall be included in the cost of right-of-use asset if
lessee has an obligation in accordance with IAS 37.
Dr. Right-of-use asset

Cr. Provision for dismantling cost
4. If a lessee incurs costs relating to the construction or redesigning for use of underlying asset, the
lessee shall account for those costs in accordance with other applicable standards e.g. IAS 16.
Right-of-use asset
1. A lessee shall measure the right-of-use asset using cost model, revaluation model or fair value model
(i.e. IAS 40) as per its selected policy.
2. Depreciation on right-of-use asset shall be charged by lessee as follows:
If underlying asset will be retained by lessee after If underlying asset will be returned by lessee:
lease:
Depreciation shall be charged from the Depreciation shall be charged from the
commencement date to the end of useful life of commencement date to the earlier of:
the underlying asset. - the end of useful life of the right-of-use
asset.
- the end of lease term.
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470
Exam tip:
Asset will be retained by lessee after lease if any one of the following terms are agreed:
- ownership of the underlying asset will be transferred to lessee at end of lease term.
- If lease contains BPO
Asset will be returned to lessor after lease if any one of the following terms are agreed:
- If lease contains GRV
- It is clearly mentioned that asset will be returned to lessor.
Lease liability
1. A lessee shall recognize interest cost over the lease term, based on a pattern reflecting a constant
periodic rate of interest on remaining lease liability. Interest is calculated using a lease amortization
schedule.
When interest cost for the period is accrued

Dr. Interest expense
Cr. Lease liability
When lease payment is made

Dr. Lease liability
Cr. Cash
2. Variable lease payments not included in the measurement of lease liability shall be recognized in P&L
in the period in which the event or condition that triggers those payments occurs.
Re-assessment of lease liability

1. A lessee shall re-measure the lease liability and recognize the amount of remeasurement as an
adjustment to the right-of-use asset. However, if the carrying amount of the asset is reduced to zero,
then further reduction in the measurement of liability shall be recognized in P&L.
2. Discount rate to be used for remeasurement of lease liability shall be as follows:
Revised implicit There is a change in lease term due to change in assessment of

rate/incremental borrowing exercise of options (i.e. extension option and termination
rate shall be used if: option). In this case revised lease payments shall be calculated
on revised lease term.
OR
There is a change in assessment of an option to purchase the
underlying asset. In this case revised lease payments shall reflect
the change in amounts payable under the purchase option.
Original implicit There is a change in amount expected to be payable under a

rate/incremental borrowing residual value guarantee. In this case revised lease payments
rate shall be used if: shall reflect this change in amount.
OR
Nasir Abbas FCA

471
There is a change in future lease payments resulting from a

change in index used to determine those payments. In this case
revised lease payments shall be determined for the remaining
lease term based on revised contractual cashflows.
Revised discount rate, There is a change in future lease payments resulting from a
reflecting the changes in change in rate used to determine those payments. In this case
interest rate, shall be used if: revised lease payments shall be determined for the remaining
lease term based on revised contractual cashflows.
Lease modification
Case I – Modification shall be accounted for as a new lease

A lessee shall account for a lease modification as a separate lease if both:
(a) the modification increases the scope of the lease by adding the right to use one or more underlying
assets; and
(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for
the increase in scope and any appropriate adjustments to that stand-alone price to reflect the
circumstances of the particular contract.
Case II – Modification shall not be accounted for as a new lease

1. For all modifications (except for the scope reduction in point 2 below) a lessee shall remeasure the
lease liability by discounting the revised lease payments using a revised discount rate. The revised
discount rate is determined as the interest rate implicit in the lease for the remainder of the lease
term, if that rate can be readily determined, or the lessee’s incremental borrowing rate at the
effective date of the modification, if the interest rate implicit in the lease cannot be readily
determined. A corresponding shall be made to the right-of-use asset.
2. Adjustment for scope reduction (e.g. reduction in right of use, reduction in lease term) will be made
by decreasing the carrying amounts of lease liability and right of use. This adjustment will be made
before adjusting any other modification. The lessee shall recognize in profit or loss any gain or loss
relating to this scope reduction as follows:
Dr. Lease liability (W-1)

Cr. Right-of-use [Carrying amount of ROU asset x proportionate reduction in scope of lease]
Dr./Cr. Loss or gain on modification [balancing figure]
W-1
Carrying amount of lease liability on the date of modification X
PV of lease payments after scope reduction discounted at original rate (X)
(ignoring any other modification)
X
Nasir Abbas FCA

472
Presentation and disclosures

Students should study this portion themselves either from IFRS or ICAP study text.
EXCEPTION ACCOUTING FOR LEASE
A lessee may elect not to apply normal lease accounting for:

(a) Short term leases
(b) Leases for low value assets
Low value asset
A lessee shall assess the value of an underlying asset based on the value of the asset when it is new,
regardless of the age of the asset being leased. The assessment of whether an underlying asset is of
low value is performed on an absolute basis regardless of whether those leases are material to the
lessee. The assessment is not affected by the size, nature or circumstances of the lessee. Examples
of low-value underlying assets can include tablet and personal computers, small items of office
furniture and telephones.
Exceptional accounting:
The lessee shall recognize the lease payments associated with those leases as an expense on either a
straight-line basis over the lease term or another systematic basis. The lessee shall apply another
systematic basis if that basis is more representative of the pattern of the lessee’s benefit.
SUB-LEASE
A transaction for which an underlying asset is re-leased by a lessee (‘intermediate lessor’) to a third party,
and the lease (‘head lease’) between the head lessor and lessee remains in effect.
Classification of sublease:
In classifying a sublease, an intermediate lessor shall classify the sublease as a finance lease or an
operating lease as follows:
(a) if the head lease is a short-term lease that the entity, as a lessee, has followed exceptional accounting,
the sublease shall be classified as an operating lease.
(b) otherwise, the sublease shall be classified by reference to the right-of-use asset arising from the head
lease, rather than by reference to the underlying asset (for example, the item of property, plant or
equipment that is the subject of the lease).
Sublease classified as finance lease

When the intermediate lessor enters into the sublease, the intermediate lessor:
(a) derecognizes the right-of-use asset relating to the head lease that it transfers to the sublessee and
recognizes the net investment in the sublease;
(b) recognizes any difference between the right-of-use asset and the net investment in the sublease in
profit or loss; and
(c) retains the lease liability relating to the head lease in its statement of financial position, which
represents the lease payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognizes both finance income on the
sublease and interest expense on the head lease.
Nasir Abbas FCA

473
Sublease classified as operating lease

When the intermediate lessor enters into the sublease, the intermediate lessor retains the lease liability
and the right-of-use asset relating to the head lease in its statement of financial position.
During the term of the sublease, the intermediate lessor:

(a) recognizes a depreciation charge for the right-of-use asset and interest on the lease liability; and
(b) recognizes lease income from the sublease.
Nasir Abbas FCA

474
LEASES (IFRS-16) [Lessee] – QUESTIONS
PRACTICE QUESTIONS
Question 1
On 1 January 2019, French Vanilla Leasing Limited (FVLL) purchased a machine costing Rs. 200 million having useful life
of 8 years. Residual value of the machine at end of its useful life is estimated at Rs. 16 million.
On 1 February 2019, FVLL entered into a lease agreement for this machine with Cotton Candy Limited (CCL) for a non-
cancellable period of 2.5 years with effect from 1 March 2019. Under the agreement, eight instalments of Rs. 12 million
are to be paid quarterly in arrears commencing from the end of 3rd quarter i.e. 30 November 2019.
FVLL has incorporated an implicit rate of 15% per annum which is not known to CCL. Incremental borrowing rate of CCL
is 16% per annum.
On 1 April 2019, CCL completed installation of the machine at a cost of Rs. 4 million and put it into use.
Both companies follow straight line method for charging depreciation.
Required:
Prepare journal entries for the year ended 31 December 2019 in the books of CCL to record the above transactions.
(15)
[Spr-20, Q-5]
Question 2
On 1 July 2010, Miracle Textile Limited (MTL) acquired a machine on lease, from a bank. Details of the lease are as follows:
(i) Fair value of machine is Rs. 20 million. It is also equal to present value of lease payments.
(ii) The lease term and useful life is 4 years and 10 years respectively.
(iii) Installment of Rs. 5.80 million is to be paid annually in advance on 1 July.
(iv) The interest rate implicit in the lease is 15.725879%.
(v) 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.
MTL depreciates the machine on the straight line method to a nil residual value.
Required:
Prepare relevant extracts of the statement of financial position and related notes to the financial statements for the year
ended 30 June 2012 along with comparative figures. Ignore taxation (16)
{Autumn 2012, Q # 2}
Question 3
On 1 July 2015, ABC acquired a machine on lease on following terms:
(i) Basic contract period is 5 years, however, ABC has an option to extend it by 2 more years.
(ii) Rental of Rs. 240,000 payable at end of every year in 1st 5 years. During extension period, lease rental will reduce to
Rs. 180,000 per year.
Implicit rate was not readily determined, therefore, incremental borrowing rate of 8% was used at commencement to
account for lease. Initially ABC was uncertain about exercise of extension option.
On June 30, 2018 due to change in circumstances, ABC reassessed the possibility of exercise of extension option and
concluded it to be reasonably certain to be exercised. On that date the incremental borrowing rate was 10%.
Required:
Journal entries for the years ending June 30, 2018 and 2019.
Question 4
On 1 July 2016, XYZ acquired a machine on lease on following terms:
(i) Lease term 8 years.
(ii) Lease rental payable in advance on 1st July every year. It will be revised every two years on the basis of the increase
in CPI for the preceding 24 months. Rental applicable for first two years is Rs. 50,000 per year.
(iii) XYZ is also required to make a variable payment for each year of lease equal to 1% of sales generated from the
machine.
475
NASIR ABBAS FCA
LEASES (IFRS-16) [Lessee] – QUESTIONS
account for lease. Initial direct cost paid by XYZ was Rs. 4,000. CPI on the date of commencement was 125.
On July 1, 2018 i.e. start of third year of lease, CPI moved to 135. On that date the incremental borrowing rate was 10%.
XYZ made annual sales of Rs. 1,250,000 in 2018 and 2019.
Required:
Journal entries for the years ending June 30, 2018 and 2019 (excluding sales entry).
Question 5
On 1 July 2017, DEF acquired a property on lease on following terms:
(i) Basic contract period is 5 years.
(ii) Rental of Rs. 250,000 payable at end of every year.
account for lease.
On July 1, 2019 lessee and lessor both agreed to amend the original lease by increasing the contractual lease period by
four years. Lease rentals were also revised to Rs. 290,000 payable at end of every year over remaining lease term. On that
date the incremental borrowing rate was 10%.
Required:
Question 6
On 1 July 2014, MNO acquired a 5,000 square metres of office space on lease on following terms:
(i) Contract period is 10 years.
account for lease.
On July 1, 2019 lessee and lessor both agreed to amend the original lease to reduce the office space by 2,500 square
metres only (i.e. 50% reduction) w.e.f. July 1, 2019. Lease payments were reduced to Rs. 120,000 per year. On that date
the incremental borrowing rate was 7%.
Required:
Question 7
On 1 July 2014, PQR acquired a 2,000 square metres of office space on lease on following terms:
(i) Contract period is 10 years.
account for lease.
On July 1, 2019 lessee and lessor both agreed to amend (w.e.f. July 1, 2019) the original lease to:
(a) include an additional 1,500 square metres of space in the same building
(b) reduce the lease term from 10 years to 8 years.
The annual rental for 3,500 square metres was revised to Rs. 150,000 per year. Since this increase in rental is not
consistent with the stand-alone price of additional office space, therefore, it can not be accounted for as a separate lease.
On that date the incremental borrowing rate was 7%.
Required:
476
NASIR ABBAS FCA
LEASES (IFRS-16) [Lessee] – SOLUTIONS
SOLUTIONS
Solution No. 1
Books of CCL
--------- Rs. million --------
01-03-19 ROU asset (W-2) 74.70
Lease liability 74.70
01-04-19 ROU asset 4.00

Cash 4.00
[Installation cost]

[Interest expense for Q-1]


30-11-19 Lease liability 12.00

Cash 12.00
[1st rental paid]
31-12-19 Interest expense [2.88(W-2) x 1/3] 0.96

[Interest accrual at year end]
31-12-19 Depreciation [74.70/30 x 10 + 4/29 x 9] 26.14

W-2 Rs. million

PV of lease payments [12 x 8 qtr-annuity factor x 2 qtr-discount factor at 4%] 74.70
W-3 Lease schedule
Open. Lease
Date Interest Clos. Bal
Bal payment
31-05-19 74.70 2.99 - 77.69
31-08-19 77.69 3.11 - 80.79
30-11-19 80.79 3.23 (12.00) 72.02
29-02-20 72.02 2.88 (12.00) 62.91
477
NASIR ABBAS FCA
Solution 2
Miracle Textile Limited
Balance sheet – Extracts 2012 2011
-------------- Rs.'000’ ----------
Non-Current assets
Right of use [Note - 1] 16,000 18,000
Non-Current liabilities
Lease liability [Note - 2] 6,505 10,633
Current liabilities
Lease liability [Note - 2] 5,800 5,800
Miracle Textile Limited
Notes - Extracts
1 - Property, plant and equipment
Cost
As at July 1 20,000 -
Additions - 20,000
Disposal - -
As at June 30 20,000 20,000
Depreciation
As at July 1 2,000 -
For the year 2,000 2,000
Disposal - -
As at June 30 4,000 2,000
NBV as at June 30 16,000 18,000
2 - Lease Liability
The Company has entered into a finance lease agreement with a bank in respect of a machine. The finance 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 annually in advance
2012 2011
For the year: ---------- Rs.'000’ ----------
Depreciation 2,000 2,000
Finance charge 1,672 2,233
Total cash outflow for leases 5,800 5,800
Lease assets:
Carrying amount 16,000 18,000
Addition to right of use - 20,000
Maturity analysis: 2012 2011

---------- Rs.'000’ ----------
Undiscounted lease payments are as follows:
1 year 5,800 5,800
2 years 7,800 5,800
3 years - 7,800
13,600 19,400
478
NASIR ABBAS FCA
W-1 Lease schedule

01-Jul-10 20,000 5,800 - 5,800 14,200
01-Jul-11 14,200 5,800 2,233 3,567 10,633
01-Jul-12 10,633 5,800 1,672 4,128 6,505
01-Jul-13 6,505 5,800 1,023 4,777 1,728
30-Jun-14 1,728 2,000 272 1,728 0
Solution 3
------------ Rs. -----------
30-06-18 Depreciation [958,250(W-1)/5] 191,650
Acc. depreciation 191,650
30-06-18 Finance cost (W-2) 49,480

Lease liability 49,480
30-06-18 Lease liability 240,000

Cash 240,000
[Lease rental paid]
30-06-18 ROU asset 246,724

Lease liability (W-3) 246,724
[Re-assessment adjustment]
30-06-19 Depreciation (W-4) 157,506

30-06-19 Finance cost (W-5) 67,471


Cash 240,000
[Lease rental paid]
Rs.
PV of lease payments [240,000 x 5-year annuity factor at 8%] 958,250
W-2 Lease schedule before re-assessment

Lease
payment
30-06-16 958,250 76,660 (240,000) 794,910
30-06-17 794,910 63,593 (240,000) 618,503
30-06-18 618,503 49,480 (240,000) 427,984
479
NASIR ABBAS FCA
W-3 Re-assessment adjustment Rs.

PV of lease payments 674,708
[240,000 x 2-year AF at 10% + 180,000 x 2-year AF at 10% x 2-year DF at 10%]
Lease liability balance 427,984
Re-assessment adjustment 246,724
W-4 Depreciation revised Rs.

NBV of ROU on 30-06-18 [958,250 x 2/5] 383,300
630,025
Depreciation [630,025/4] 157,506
W-5 Lease schedule after re-assessment

Lease
payment
30-06-19 674,708 67,471 (240,000) 502,179
30-06-20 502,179 50,218 (240,000) 312,397
30-06-21 312,397 31,240 (180,000) 163,636
30-06-22 163,636 16,364 (180,000) 0
Solution 4
------------ Rs. -----------
30-06-18 Depreciation [314,319(W-1)/8] 39,290
30-06-18 Finance cost (W-2) 18,492

30-06-18 P&L [1,250,000 x 1%] 12,500

Cash 12,500
[Payment of 1% of sales]
01-07-18 Lease liability [50,000 x 135/125] 54,000

Cash 54,000
[Lease rental paid]
01-07-18 ROU asset 19,971

[Re-assessment adjustment]
30-06-19 Depreciation (W-4) 42,618

480
NASIR ABBAS FCA
30-06-19 Finance cost (W-5) 17,249

30-06-19 P&L [1,250,000 x 1%] 12,500

Cash 12,500
[Payment of 1% of sales]

Rs.
ROU asset [260,319 + 50,000 + 4,000] 314,319
W-2 Lease schedule before re-assessment

Lease
payment
01-07-17 260,319 20,825 (50,000) 231,144
30-06-18 231,144 18,492 - 249,636
W-3 Re-assessment adjustment Rs.

PV of lease payments [54,000 + 54,000 x 5-year AF at 8%] 269,606

NBV of ROU on 30-06-18 [314,319 x 6/8] 235,739
255,710
Depreciation [255,710/6] 42,618
W-5 Lease schedule after re-assessment

Lease
payment
01-07-18 269,606 - (54,000) 215,606
01-07-19 215,606 17,249 (54,000) 178,855
01-07-20 178,855 14,308 (54,000) 139,163
01-07-21 139,163 11,133 (54,000) 96,296
01-07-22 96,296 7,704 (54,000) 50,000
01-07-23 50,000 4,000 (54,000) 0
Solution 5
------------ Rs. -----------
30-06-19 Depreciation [972,413(W-1)/5] 194,483
481
NASIR ABBAS FCA
30-06-19 Finance cost (W-2) 72,894


Cash 250,000
[Lease rental paid]
01-07-19 ROU asset 779,018

[Modification adjustment]
30-06-20 Depreciation (W-4) 194,638

30-06-20 Finance cost (W-5) 141,184


Cash 290,000
[Lease rental paid]

Rs.
W-2 Lease schedule before modification

Lease
payment
30-06-18 972,413 87,517 (250,000) 809,930
30-06-19 809,930 72,894 (250,000) 632,824
W-3 Modification adjustment Rs.

PV of revised lease payments [290,000 x 7-year AF at 10%] 1,411,841
Modification adjustment 779,018

NBV of ROU on 30-06-19 [972,413 x 3/5] 583,448
1,362,465
Depreciation [1,362,465/7] 194,638
482
NASIR ABBAS FCA
W-5 Lease schedule after modification

Lease
payment
30-06-20 1,411,841 141,184 (290,000) 1,263,026
30-06-21 1,263,026 126,303 (290,000) 1,099,328
30-06-22 1,099,328 109,933 (290,000) 919,261
30-06-23 919,261 91,926 (290,000) 721,187
30-06-24 721,187 72,119 (290,000) 503,306
30-06-25 503,306 50,331 (290,000) 263,636
30-06-26 263,636 26,364 (290,000) 0
Solution 6
------------ Rs. -----------
30-06-19 Depreciation [1,283,532(W-1)/10] 128,353
30-06-19 Finance cost (W-2) 80,747


Cash 200,000
[Lease rental paid]
01-07-19 Lease liability (W-3) 311,172

Acc. dep. [641,766 – 320,883(W-4)] 320,883
Loss on modification 9,711
ROU asset [1,283,532 x 50%] 641,766
[Scope reduction adjustment]
01-07-19 ROU asset 25,266

30-06-20 Depreciation (W-4) 69,230

30-06-20 Finance cost (W-5) 34,442


Cash 120,000
[Lease rental paid]
483
NASIR ABBAS FCA

Rs.
PV of lease payments [200,000 x 10-year annuity factor at 9%] 1,283,532

Lease
payment
30-06-15 1,283,532 115,518 (200,000) 1,199,049
30-06-16 1,199,049 107,914 (200,000) 1,106,964
30-06-17 1,106,964 99,627 (200,000) 1,006,591
30-06-18 1,006,591 90,593 (200,000) 897,184
30-06-19 897,184 80,747 (200,000) 777,930

Lease liability carrying amount 777,930
PV of revised lease payments for scope reduction [120,000 x 5-year AF at 9%] 466,758
Scope reduction adjustment 311,172
Liability revised for scope reduction at original rate 466,758

PV of revised lease payments for rate change [120,000 x 5-year AF at 7%] 492,024

NBV of ROU on 30-06-19 [1,283,532 x 5/10] 641,766
Scope reduction [641,766 x 50%] (320,883)
320,883
346,148
Depreciation [346,148/5] 69,230

Lease
payment
30-06-20 492,024 34,442 (120,000) 406,465
30-06-21 406,465 28,453 (120,000) 314,918
30-06-22 314,918 22,044 (120,000) 216,962
30-06-23 216,962 15,187 (120,000) 112,150
30-06-24 112,150 7,850 (120,000) -
Solution 7
------------ Rs. -----------
30-06-19 Depreciation [736,009(W-1)/10] 73,601
484
NASIR ABBAS FCA
30-06-19 Finance cost (W-2) 29,504


Cash 100,000
[Lease rental paid]
01-07-19 Lease liability (W-3) 153,935

Acc. dep [294,403 - 147,202(W-4)] 147,202
ROU asset [736,009 x 2/5] 294,403
Gain on modification 6,733
[Scope reduction adjustment]
01-07-19 ROU asset 126,346

30-06-20 Depreciation (W-4) 115,716

30-06-20 Finance cost (W-5) 27,555


Cash 150,000
[Lease rental paid]

Rs.

Lease
payment
30-06-15 736,009 44,161 (100,000) 680,169
30-06-16 680,169 40,810 (100,000) 620,979
30-06-17 620,979 37,259 (100,000) 558,238
30-06-18 558,238 33,494 (100,000) 491,732
30-06-19 491,732 29,504 (100,000) 421,236

Lease liability carrying amount 421,236
PV of revised lease payments for scope reduction [100,000 x 3-year AF at 6%] 267,301
Scope reduction adjustment 153,935
485
NASIR ABBAS FCA
Liability revised for scope reduction at original rate 267,301

PV of revised lease payments for rate change [150,000 x 3-year AF at 7%] 393,647

NBV of ROU on 30-06-19 [736,009 x 5/10] 368,004
Scope reduction [368,004 x 2/5] (147,202)
220,803
347,149
Depreciation [347,149/3] 115,716

Lease
payment
30-06-20 393,647 27,555 (150,000) 271,203
30-06-21 271,203 18,984 (150,000) 140,187
30-06-22 140,187 9,813 (150,000) 0
486
NASIR ABBAS FCA
Q-4 [Dec-18] SOLUTION
Lease liability Rs. million

01-01-15 Initital recognition (W-1) 563.51
01-01-15 Lease payment (80.00)
483.51
31-12-15 Interest [483.51 x 8%] 38.68
522.19
442.19
01-01-16 Re-assessment adjustment (W-2) (131.02)
311.17
31-12-16 Interest [311.17 x 9%] 28.01
339.18
259.18
01-01-17 Scope reduction (W-3) (118.45)
01-01-17 Modification adjustment (W-3) (1.89)
138.84
31-12-17 Interest [138.84 x 10%] 13.88
152.73
Right-of-use asset Rs. million

01-01-15 Initital recognition [563.51(W-1) + 15] 578.51
31-12-15 Depreciation [578.51/12] (48.21)
530.30
01-01-16 Re-assessment adjustment (W-2) (131.02)
399.28
31-12-16 Depreciation [399.28/6] (66.55)
332.73
01-01-17 Scope reduction [332.73 x 2/5] (133.09)
01-01-17 Modification adjustment (W-3) (1.89)
197.76
31-12-17 Depreciation [197.76/3] (65.92)
131.84
487
W-1 Initial recognition Rs. million
PV of lease payments 563.51
[80 + 80 x 6-year AF at 8% + 70 x 3-year AF at 8% x 6-year DF at 8%]
W-2 Re-assessment adjustment Rs. million

PV of revised lease payments [80 x 5-year AF at 9%] 311.17
Lease liability balance 442.19
Re-assessment adjustment (131.02)
W-3 Modification adjustment Rs. million

Carrying amount of lease liability 259.18
PV of revised lease payments at original rate [80 x 2-year AF at 9%] 140.73
Scope reduction 118.45
PV of revised lease payments [80 x 2-year AF at 10%] 138.84

PV of revised lease payments at original rate [80 x 2-year AF at 9%] 140.73
Modification adjustment in ROU (1.89)
488
IFRS 16 [Sale and leaseback] – Class notes
If an entity (seller-lessee) transfers an asset to another entity (buyer-lessor) and leases that asset back,
this whole transaction (i.e. transfer and leaseback) is called sale and leaseback.
Case 1 – Transfer of the asset is a sale as per IFRS 15

Exam tip
If the lease is an operating lease from lessor’s perspective, then the transfer of asset is a sale
1) Terms are fair

[Sale value is equal to the fair value of the asset and lease payments are at market rates]
Books of Seller-Lessee
De-recognition of transferred asset and recognition of lease:
Dr. Cash [Consideration received]

Dr. Right-of-use asset (W-1)
Cr. Lease liability [PV of lease payments]
Cr. Asset derecognized [NBV]
Dr./Cr. Loss or Profit on transaction (balancing figure)
W-1
NBV of transferred asset
ROU asset = PV of lease payments x
Fair value of transferred asset
Subsequent measurement of lease:
ROU asset and lease liability shall be measured subsequently using same guidance as already studied in
books of lessee.
Books of Buyer-Lessor
The buyer-lessor shall account for the purchase of the asset as per applicable standard (e.g. IAS 16). Lease
shall be accounted as already studied in books of lessor.
Nasir Abbas FCA

489
2) Above market terms
[Sale value > fair value of the asset or PV of lease payments > PV of lease payments at market rate]

Cr. Lease liability [PV of cashflows – Above market terms(W-1.1)]
Cr. Financial liability [Above market terms(W-1.1]
W-1
ROU asset = [PV of cashflows – Above market terms(W-1.1)] x
W-1.1
“Above market terms” shall be accounted for as additional financing. It is calculated as:
= Sale value – fair value of asset

OR whichever is available
= PV of cashflows – PV of cashflows at market rate
- ROU asset and lease liability shall be measured subsequently using same guidance as already studied
in books of lessee.
- Financial liability shall be measured subsequently as per IFRS 9
- Contractual cashflows will be split in ratio of “lease liability” and “financial liability” initially recognized
and applied against these separate liabilities accordingly.
- The buyer-lessor shall account for the purchase of the asset as per applicable standard (e.g. IAS 16).
- Lease shall be accounted as already studied in books of lessor.
- Above market terms (W-1.1) shall be recognized as financial asset as per IFRS 9
- Split of cashflows (as done above for lessee) shall be accounted for “lease payments” and “contractual
cashflow of financial asset” accordingly.
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490
3) Below market terms
[Sale value < fair value of the asset or PV of lease payments < PV of lease payments at market rate]

Cr. Lease liability [PV of cashflows]
W-1
ROU asset = [PV of cashflows + Below market terms(W-1.1)] x
W-1.1
“Below market terms” shall be accounted for as a prepayment of lease payments. It is calculated as:
= Fair value of asset – Sale value

OR whichever is available
= PV of cashflows at market rate – PV of cashflows
ROU asset and lease liability shall be measured subsequently using same guidance as already studied in
books of lessee.
The buyer-lessor shall account for the purchase of the asset as per applicable standard (e.g. IAS 16). Lease
shall be accounted as already studied in books of lessor.
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Case 2 – Transfer of the asset is not a sale as per IFRS 15

Exam tip
If the lease is a finance lease from lessor’s perspective, then the transfer of asset is not a sale.
- It shall continue to recognize the transferred asset as per relevant standard (e.g. IAS 16)
- It shall recognize a financial liability equal to the transfer proceeds as per IFRS 9.
- It shall not recognize the transferred asset.
- It shall recognize a financial asset equal to the transfer proceeds as per IFRS 9.
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LEASES (IFRS-16) [Sale and leaseback] – QUESTIONS
PRACTICE QUESTIONS
Question 1
Shoaib Limited (SL) were facing financial difficulties for some period. Finance director decided to use sale and lease
back as a source of finance. SL entered into following transactions during the year:
On July 1, 2012, SL sold an equipment, having net book value of Rs. 2.25 million, to ABC Finance for Rs. 2.5 million and
leased it back for remaining life of equipment i.e. 5 years. Lease rental of Rs. 693,524 is payable on every June 30th.
SL had a machine in use having book value of Rs. 1.5 million on December 31, 2012. On that date it sold the machine
for Rs. 1.675 million (equal to the fair value) and leased it back for 3 years. This sale can be assumed to meet criteria of
sale under IFRS 15. Agreed lease payments are as follows:
- December 31, 2013 : Rs. 150,000
- December 31, 2014 : Rs. 160,000
- December 31, 2015 : Rs. 200,000
Required:
(a) Journal entries for the year ending June 30, 2013
(b) Show the relevant extracts of Income statement and Balance sheet for the year ending June 30, 2013
(Disclosures in notes are not required)
Question 2
On July 1, 2019, Ess Limited sold an equipment, having net book value of Rs. 1.5 million, to XYZ Traders and leased it
back for 3 years. The fair market value at that date was Rs. 1,600,000. Implicit rate in lease was 10%.
Following are the terms of sale and lease back agreement:
Sale price Annual rent (arrears)
------------ Rs.------------
Scenario I 1,600,000 130,000
Scenario II 1,700,000 140,000
Scenario III 1,400,000 120,000
XYZ Traders classified this lease as operating lease and estimated the useful life to be 20 years.
Required:
Journal entries for the year ending June 30, 2020 for each scenario in books of both companies.
Question 3
On 1 January 2016 Maisum Limited (ML) entered into a sale and lease back agreement with Bachat Bank in respect of a
machine. The details of machine sold and leased back are as under:
Rs. in million
Carrying value 85
Sale price to the lessor 95
Fair market value 120
The terms of lease agreement are as follows:
Lease term 4 years

Annual rentals (payable in advance) Rs. 21 million
Implicit interest rate 9%
493
NASIR ABBAS FCA
LEASES (IFRS-16) [Sale and leaseback] – QUESTIONS
The transfer of machine by the seller-lessee satisfies the requirements of IFRS 15 to be accounted for as a sale.
Required:
(a) Prepare journal entry in the books of ML to record the above transaction on 1 January 2016. (07)
(b) Prepare relevant extracts from the statements of financial position and comprehensive income and related notes for
inclusion in ML’s financial statements, for the year ended 31 December 2016. (10)
{Spring 2017, Q # 4}
494
NASIR ABBAS FCA
LEASES (IFRS-16) [Sale and leaseback] – SOLUTIONS
SOLUTIONS
Solution No. 1
(a)
01-Jul-12 Bank 2,500,000
Financial liability 2,500,000
[Sale proceeds]
31-Dec-12 Bank 1,675,000
Right of use (W-2) 374,964
Machine 1,500,000
Profit on disposal (balancing) 131,254
[Sale and recognition of lease]
30-Jun-13 Depreciation [2,250 / 5] 450,000
[Depreciation charge on equipment for the year]
30-Jun-13 Finance cost [418,710 x 10% x 6/12] 20,936
[Interest expense for the year]
30-Jun-13 Depreciation [374,964/3 x 6/12] 62,494
[Depreciation charge on right of use for the year]
30-Jun-13 Financial liability 393,524
Interest expense (W-1) 300,000
Bank 693,524
[Payment of 1st rental]
W-1 Financial liability

30-Jun-13 2,500,000 693,524 300,000 393,524 2,106,476
30-Jun-14 2,106,476 693,524 252,777 440,747 1,665,729
W - 2 PV of LP
Rental Discount factor Present value
150,000 0.909 136,350
160,000 0.826 132,160
200,000 0.751 150,200
418,710
Right of use = 1,500,000 x 418,710 / 1,675,000

= 374,964
W - 3 Lease liability
31-Dec-13 418,710 150,000 41,871 108,129 310,581
495
NASIR ABBAS FCA
(b)
INCOME STATEMENT - Extracts
Rs.
Finance charge on lease 20,936
Interest expense 300,000
Depreciation [450,000 + 62,494] 512,494
BALANC SHEET – Extracts Rs.
Non-Current assets
Machine [2,250,000 - 450,000] 1,800,000
Right of use [374,964 - 62,494] 312,470
Financial liability 1,665,729
Current liabilities
Financial liability 440,747
Solution No. 2
BOOKS OF LESSEE
Scenario I
------------ Rs. -----------
01-07-19 Bank 1,600,000
Right-of-use (W-1) 303,085
Equipment 1,500,000
30-06-20 Depreciation [303,085/3] 101,028

30-06-20 Finance cost [323,291 x 10%] 32,329


Cash 130,000
[Lease rental paid]
496
NASIR ABBAS FCA

Rs.
ROU asset [323,291 x 1,500,000/1,600,000] 303,085
Scenario II
------------ Rs. -----------
01-07-19 Bank 1,700,000
Equipment 1,500,000
Financial liability (W-1) 100,000
30-06-20 Depreciation [232,649/3] 77,550

30-06-20 Finance cost [248,159 x 10%] 24,816

30-06-20 Finance cost [100,000 x 10%] 10,000

30-06-20 Lease liability [140,000 x 248,159/348,159] 99,789

Financial liability [140,000 x 100,000/348,159] 40,211
Cash 140,000
[Lease rental paid]

Rs.
Above market terms [1,700,000 - 1,600,000] 100,000
ROU asset [248,159 x 1,500,000/1,600,000] 232,649
497
NASIR ABBAS FCA
Scenario III
------------ Rs. -----------
01-07-19 Bank 1,400,000
Equipment 1,500,000
30-06-20 Depreciation [467,271/3] 155,757

30-06-20 Finance cost [298,422 x 10%] 29,842


Cash 120,000
[Lease rental paid]

Rs.
Below market terms [1,600,000 - 1,400,000] 200,000
498,422
ROU asset [498,422 x 1,500,000/1,600,000] 467,271
BOOKS OF LESSOR
Scenario I
------------ Rs. -----------
01-07-19 Equipment 1,600,000
Cash 1,600,000
[Purchase of equipment]
30-06-20 Depreciation [1,600,000/20] 80,000

30-06-20 Cash 130,000

Lease income 130,000
[Lease income for 2020]
498
NASIR ABBAS FCA
Scenario II
------------ Rs. -----------
01-07-19 Equipment 1,600,000
Cash 1,700,000
30-06-20 Depreciation [1,600,000/20] 80,000

30-06-20 Financial asset 10,000

Interest income [100,000 x 10%] 10,000
30-06-20 Cash 140,000

Lease income 99,789
Scenario III
------------ Rs. -----------
01-07-19 Equipment 1,600,000
Lease income 200,000
Cash 1,400,000
30-06-20 Depreciation [1,600,000/20] 80,000

30-06-20 Cash 120,000

Lease income [200,000 - 186,667(W-1)] 13,333
Advance rent 133,333
W-1 Rs.
Lease income [(200,000 + 120,000 x 3)/3] 186,667
Solution No. 3
(a) Dr. Cr.
Journal entry -------- Rs. in million --------
01-01-16 Right-of-use asset 70.24
Bank 95.00
Machine 85.00
499
NASIR ABBAS FCA
Profit on disposal (balancing) 6.08

[Recognition of sale and lease back]
01-01-16 Lease liability 21.00

Bank 21.00
[Payment of 1st rental]
W-1 Rs. (million)

Present value of lease payments [21 + 21 x annuity factor] 74.16
Excess of fair value over sale value [120 - 95] 25.00
99.16
Right of use asset [99.16 x 85/120] 70.24

(b)
Extracts of statement of financial position
as at December 31, 2016 Rs. (million)
Non current assets

PPE [70.24 x 3/4] 52.68

Current liabilities
W-2 Date Rental Interest Principal Balance

74.16
01-01-16 21.00 - 21.00 53.16
01-01-17 21.00 4.78 16.22 36.94
Extracts of statement of comprehensive income
for the year ended December 31, 2016 Rs. (million)
Depreciation [70.24 / 4] 17.56

Finance cost 4.78
Profit on disposal 6.08
Extracts of Notes
2 - Property, plant and equipment Rs. (million)

Cost
Balance as at 01-01-16 -
Addition 70.24
Disposal -
Balance as at 31-12-16 70.24
500
NASIR ABBAS FCA
Depreciation
Balance as at 01-01-16 -
Charge for the year 17.56
Disposal -
Balance as at 31-12-16 17.56
Net book value as 31-12-16 52.68
8 - Lease liability
ML has entered into a lease agreement of a machine. Lease term is 4 years. Implicit rate is 9%.
The lease rentals are payable annually advance.
For the year: Rs. (million)

Depreciation 17.56
Finance charge 4.78
Profit on sale and lease back 6.08
Total cash outflow for leases 21.00
Lease asset:
Carrying amount 52.68
Addition to right of use 70.24
Maturity analysis:
Undiscounted lease payments are as follows
1 year 21.00
2 years 21.00
3 years 21.00
63.00
501
NASIR ABBAS FCA
Q-6(a) Dec-17
Patel Limited
Extracts of SOFP
as at June 30, 2017
Rs. million
Non-current assets
Net investment in lease [W-3] 51.32
Right-of-use asset [W-7] 98.11
Current assets
Net investment in lease [65.15 - 51.32] (W-3) 13.83
Lease liability [32.51(W-2) + 86.78(W-8)] 119.28
Current liabilities
Lease liability [(46.34 - 32.51)(W-2) + (124.34 - 86.78) (W-8)] 51.40
Patel Limited
Extracts of SOCI
Rs. million
Depreciation (W-7) 32.70
Interest expense [5.31(W-2) + 15.85(W-8)] 21.16
Loss on scope reduction [62.10(W-7) - 53.70(W-6)] 8.39
Gain on sub-lease (W-3) 18.73
Workings for Lease (i)

W-1 Initial recognition [Head lease]
Rs. million
PV of lease payments [18 x 5-year AF at 9% + 1 x 5-year DF at 9%] 70.66
W-2 Lease schedule [Head lease]

Lease
payment
30-06-16 70.66 6.36 (18.00) 59.02
30-06-17 59.02 5.31 (18.00) 46.34
30-06-18 46.34 4.17 (18.00) 32.51
W-3 Sub-lease recognition Rs. million

Net investment in lease [21 x 5-year AF at 11%] 77.61
ROU derecognized [70.66 x 5/6] 58.89
Profit 18.73
502
W-3.1 NIL
Lease
payment
30-06-17 77.61 8.54 (21.00) 65.15
30-06-18 65.15 7.17 (21.00) 51.32
Workings for Lease (ii)

Rs. million
PV of lease payments [50 x 8-year annuity factor at 12%] 248.38

Lease
payment
30-06-15 248.38 29.81 (50.00) 228.19
30-06-16 228.19 27.38 (50.00) 205.57
W-6 Modification adjustment Rs. million

Lease liability carrying amount 205.57
PV of revised lease payments for scope reduction [50 x 4-year AF at 12%] 151.87
Scope reduction adjustment 53.70
Liability revised for scope reduction at original rate 151.87

PV of revised lease payments for rate change [50 x 4-year AF at 10%] 158.49
Modification adjustment 6.63
W-7 Depreciation revised Rs. million

NBV of ROU on 30-06-16 [248.38 x 6/8] 186.29
Scope reduction [186.29 x 2/6] (62.10)
124.19
Modification adjustment 6.63
130.82
Depreciation [130.82/4] 32.70
98.11

Lease
payment
30-06-17 158.49 15.85 (50.00) 124.34
30-06-18 124.34 12.43 (50.00) 86.78
30-06-19 86.78 8.68 (50.00) 45.45
30-06-20 45.45 4.55 (50.00) 0.00
503
REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue
Income arising in the course of an entity’s ordinary activities
Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s
ordinary activities in exchange for consideration.
RECOGNITION AND MEASUREMENT

Five Steps model
1. Identify the contract(s) with the customer
2. Identify the separate performance obligations
3. Determine the transaction price
4. Allocate transaction price
5. Recognize revenue when performance obligation is satisfied
1) Identify the contract(s) with customer

1. An entity shall account for a contract with a customer only when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing, orally or in accordance with
other customary business practices) and are committed to perform their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be transferred;
(c) the entity can identify the payment terms for the goods or services to be transferred;
(d) the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash
flows is expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange
for the goods or services that will be transferred to the customer. (i.e. this assessment is based
on customer’s ability and intention to pay that amount of consideration when it is due).
2. A contract does not exist if each party to the contract has the unilateral enforceable right to terminate
a wholly underperformed contract without compensating the other party.
Wholly underperformed contract
A contract is wholly underperformed if:
- the entity has not yet transferred any promised goods or services to the customer; and
- the entity has not yet received and is not yet entitled to receive any consideration.
3. If identification criteria as mentioned in point 1 above is not met, then any consideration received
from the customer shall be recognized as revenue only when either of the following events has
occurred:
(a) the entity has no remaining obligations to transfer goods or services to the customer and all, or
substantially all, of the consideration promised by the customer has been received by the entity
and is nonrefundable; or
(b) the contract has been terminated and the consideration received from the customer is non-
refundable.
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504
Combination of contracts
An entity shall combine two or more contracts entered into at or near the same time with the same
customer (or related parties of the customer) and account for the contracts as a single contract if one
or more of the following criteria are met:
(a) the contracts are negotiated as a package with a single commercial objective;
(b) the amount of consideration to be paid in one contract depends on the price or performance of the
other contract; or
(c) the goods or services promised in the contracts (or some goods or services promised in each of the
contracts) are a single performance obligation.
Contract modification
A contract modification is a change in the scope or price (or both) of a contract that is approved by the
parties to the contract.
Case 1 – Modification is a separate contract

An entity shall account for a contract modification as a separate contract if both of the following
conditions are present:
(a) the scope of the contract increases because of the addition of promised goods or services that are
distinct; and
(b) the price of the contract increases by an amount of consideration that reflects the entity’s stand-alone
selling prices of the additional promised goods or services.
Case 2 – Modification is NOT a separate contract
If the remaining goods - An entity shall account for the modification as if it were a termination of
or services are distinct existing contract and the creation of a new contracts.
from those already - Total amount of consideration to be allocated to remaining performance
transferred: obligation(s) = consideration promised by the customer that had not
been recognized as revenue plus consideration promised for
modification.
If the remaining goods - An entity shall account for the modification as if it were a part of the
or services are not existing contract.
distinct - The effect of modification on transaction price and progress
measurement is recognized as an adjustment to revenue at modification
date.
2) Identify the separate performance obligations

1. Performance obligation is a promise in a contract with a customer to transfer to the customer either:
(a) a good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer (e.g. gym services, bookkeeping services).
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505
2. A contract with a customer generally explicitly states the goods or services that an entity promises to
transfer to a customer. However, a contract with a customer may also include promises that are
implied by an entity’s customary business practices, published policies or specific statements if, at the
time of entering into the contract, those promises create a valid expectation of the customer that the
entity will transfer a good or service to the customer.
3. A good or service that is promised to a customer is distinct if both of the following criteria are met:
(a) the customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer (ie the good or service is capable of being
distinct).
Example – where customer can benefit from the good
The and fact that the entity regularly sells a good or service separately would indicate that a
customer can benefit from the good or service on its own or with other readily available
resources
(b) the entity’s promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract (ie the promise to transfer the good or service is distinct within the
context of the contract).
Examples – where two or more promises are NOT separately identifiable
o The entity is using the goods or services as inputs to produce or deliver the combined
output or outputs specified by the customer.
o One or more of the goods or services significantly modifies or customizes one or more of
the other goods or services promised in the contract.
o The goods or services are highly interdependent or highly interrelated.
3) Determine the transaction price

1. Transaction price is the amount of consideration to which an entity expects to be entitled in exchange
for transferring promised goods or services to a customer, excluding amounts collected on behalf of
third parties (e.g. sales tax).
2. When determining the transaction price, an entity shall consider the effects of the following:
(a) Variable consideration
An amount of consideration can vary because of discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses, penalties or other similar items. An entity shall
estimate an amount of variable using either:
- Expected value (Ʃpx) of a range of possible consideration amounts (it is used when there are
large number of possible outcomes or large number of similar contracts).
- Mostly likely amount in a range of possible consideration amounts (it is used when a contract
has only two possible outcomes).
Transaction price shall include the amount of variable consideration only to the extent that it is
highly probable that a significant reversal in recognized revenue will not occur. Following are the
examples of factors to be considered for this assessment:
- Amount of consideration is highly susceptible to factors outside entity’s influence
- Uncertainty is not expected to be resolved for a long period of time
- Entity’s experience with similar types of contracts is limited
- Entity has a practice of offering a broad range of price concessions
- Contract has a large number and broad range of possible consideration amounts
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At end of every year, an entity shall update the estimated transaction price and any necessary
adjustment in the amount of revenue, already recognized, shall be recognized in the period of
change.
(b) Existence of a significant financing component in the contract

An entity shall adjust the promised amount of consideration for the effects of time value of money
(excluding for reasons other than financing e.g. retention money). Significant financing
component may exist in following two ways:
Cash is received in advance: Cash receipt is deferred:
- Cash received is recognized as a liability. - Transaction price will be the present

- Transaction price will be the future discounted value of cash consideration.
compounded value of cash received. - A receivable is recognized on recognition
- Interest expense is recognized over the of revenue.
period on liability. - Interest income is recognized over the
period on receivable.
For above compounding/discounting calculations, an entity shall use the discount rate that would
be reflected in a separate financing transaction between the entity and its customer at contract
inception. Such discount rate shall not be updated subsequently.
(c) Non-cash consideration

An entity shall measure the non-cash consideration (or promise of non-cash consideration) at fair
value. If a customer contributes goods or services (for example, materials, equipment or labour)
to facilitate an entity’s fulfilment of the contract, the entity shall assess whether it obtains control
of those contributed goods or services. If so, the entity shall account for the contributed goods or
services as non-cash consideration received from the customer.
(d) Consideration payable to a customer

An entity shall account for consideration payable to a customer as a reduction of the transaction
price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct
good or service that the customer transfers to the entity.
If consideration payable to a customer is a payment for a distinct good or service from the
customer, then an entity shall account for the purchase of the good or service in the same way
that it accounts for other purchases from suppliers. If the amount of consideration payable to the
customer exceeds the fair value of the distinct good or service that the entity receives from the
customer, then the entity shall account for such an excess as a reduction of the transaction price.
4) Allocate transaction price

1. If there are more than one performance obligations in the contract, the transaction price shall be
allocated to each performance obligation on the basis of relative stand-alone selling prices.
2. The best evidence of a stand-alone selling price is the observable price. If stand-alone selling price is
not directly observable, then following are some suitable methods for estimating the stand-alone
selling prices:
- Adjusted market assessment approach
- Expected cost plus a margin approach
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507
- Residual approach [This approach can be used for a good or service only when the entity sells the
same good or service for a broad range of prices OR the entity has not yet established a price for
that good or service]
3. If a discount is allowed to customer for purchasing a bundle of goods or services, the entity shall
allocate discount proportionately to all performance obligations unless there is an observable
evidence that entire discount relates to only one or more performance obligations.
4. An entity shall allocate to the performance obligations in the contract any subsequent changes in the
transaction price (e.g. change in variable consideration) on the same basis as at contract inception.
Consequently, an entity shall not reallocate the transaction price to reflect changes in stand-alone
selling prices after contract inception. Amounts allocated to a satisfied performance obligation shall
be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price
changes.
5) Recognize revenue when performance obligation is satisfied

1. An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by
transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or
as) the customer obtains control of that asset.
2. Following are the indicators of the transfer of control to customer:

- the entity has a present right to payment for the asset
- the customer has legal title to the asset
- the entity has transferred physical possession of the asset
- the customer has the significant risks and rewards of ownership of the asset
- the customer has accepted the asset
3. Performance obligation is satisfied as follows:
Performance obligation satisfied over Performance obligation satisfied at a point in

time: time:
An entity transfers control of a good or If a performance obligation is not satisfied over time
service over time and thus recognizes then it is satisfied at a point in time (e.g. supply of
revenue over time if any one of the goods).
following criteria is met:
- Customer simultaneously receives and
consumes the benefits provided by the
entity’s performance (e.g. cleaning
services)
- The customer controls the asset as it is
created or enhanced (e.g. building under
construction for customer)
- The entity’s performance does not
create an asset with an alternative use
to entity and the entity has an
enforceable right to payment for
performance completed to date.
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508
Revenue shall be recognized over time by

measuring the progress. Following methods,
provided the selected method faithfully
depicts the entity’s performance, may be
used for measuring progress:
- Output methods (e.g. survey of
performance, milestones achieved, time
elapsed and units produced/delivered)
- Input methods (e.g. cost incurred,
machine/labor hours used) [Example 19
is an exception]
At end of every year, an entity shall

remeasure its progress using updated
estimates.
If progress cannot be measured reliably (i.e.

in early stages of a contract), the entity shall
recognize revenue only to the extent of
recoverable costs incurred.
CONTRACT COSTS
Costs of obtaining the - An entity shall recognize as an asset [i.e. “contract cost”] the incremental
contract: costs (e.g. sales commission) of obtaining a contract if it expects to
recover those costs. [Entity may recognized these incremental costs as
expense when incurred if amortization period, as discussed below in
point 1, is one year or less].
- Costs to obtain a contract that would have been incurred regardless of
whether the contract was obtained or not shall be recognized as expense
when incurred unless those costs are explicitly chargeable to customer.
Costs to fulfill the - Costs incurred in fulfilling the contract (except for those covered under
contract: IAS 2, IAS 16 and IAS 38 which are accounted for as per aforementioned
standards accordingly) shall be recognized as an asset [i.e. “contract
cost”] only if those costs are directly related to the contract (e.g. direct
material, direct labor, directly attributable overheads).
- General and administrative costs, costs of wasted resources and costs
related to past satisfied performance shall be recognized as expense
when incurred.
1. The “Contract cost” asset shall be amortized on a systematic basis that is consistent with the transfer
of the goods or services to the customer (i.e. consistent with revenue recognition).
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509
2. An entity shall recognize an impairment loss in P&L to the extent the carrying amount of the asset
exceeds “remaining consideration entity expects to receive for goods or services to which the asset
relates less directly related costs not yet recognized as expense”.
PRESENTATION
Receivable
If an entity has unconditional to an amount of consideration, it is presented as a “receivable”. A right to
consideration is unconditional if only the passage of time is required before payment of that consideration
is due even though that amount may be subject to refund in future. Such receivable is measured as per
IFRS 9.
Contract asset
If an entity has transferred goods or services before the customer pays consideration or before the
payment is due, it shall present as a “contract asset”. This asset shall be assessed for impairment in
accordance with IFRS 9.
Contract liability
If a customer pays consideration, or an entity has a right to an amount of consideration that is
unconditional (i.e. a receivable), before the entity transfers a good or service to the customer, the entity
shall present the contract as a “contract liability” when the payment is made or the payment is due
(whichever is earlier). A contract liability is an entity’s obligation to transfer goods or services to a
customer for which the entity has received consideration (or an amount of consideration is due) from the
customer.
Nasir Abbas FCA

510
REVENUE (IFRS-15) - QUESTIONS
PRACTICE QUESTIONS
QUESTION NO. 1
Financial statements of Trich Mir Limited (TML) for the year ended 31 December 2019 are under preparation. While
reviewing revenues from contract with customers, following matters have been identified:
(i) On 1 October 2019, TML sold Machine C to Chan Limited for Rs. 25 million. As per the contract, payment would be
made after 2 years. The accountant recognised sales revenue of Rs. 25 million upon delivery on 1 October 2019.
Further, commission paid to sales employees for winning the contract of Rs. 1.6 million was capitalised and is being
amortised over 2 years period. Applicable discount rate is 10% per annum.
(ii) TML entered into a contract to manufacture a specialised machine for Dhan Limited at a price of Rs. 30 million. The
contract meets the criteria of recognition of revenue over time. At the year end, the machine was 60% complete and
it was estimated that a further cost of Rs. 10 million would be incurred. Cost of Rs. 15 million incurred till year end
has been included in closing inventory and receipts of Rs. 11 million have been credited to revenues.
(iii) TML entered into a contract to sell one unit of Machine A and Machine B for a total price of Rs. 16 million. Machine
A was delivered in December 2019 to the customer while Machine B was delivered in January 2020. The consideration
of Rs. 16 million is due only after TML transfers both the machines to the customer. TML sells machines A and B at
standalone prices of Rs. 12 million and Rs. 8 million respectively. The accountant recognised receivable and revenue
of Rs. 12 million upon delivery of Machine A.
Required:
Prepare correcting entries for the year ended 31 December 2019 in accordance with IFRS 15. (14)
{Spring 2020, Q # 7}
QUESTION NO. 2
Thursday Enterprise (TE) is a supplier of product Zee and has provided you the following
information:
(a) On 1 August 2018, TE entered into a six months contract with customer Alpha for sale of Zee for Rs. 250 per unit,
under the following terms and conditions:
if Alpha purchases more than 5,000 units during the contract period, the price per unit would be retrospectively
reduced to Rs. 215 per unit.
TE’s unconditional right to receive consideration would be established upon:
- completion of quality control procedures by Alpha for the first order. The procedure would take a week after
receiving the goods.
- placement of order by Alpha for subsequent orders.
At the inception of the contract, TE concludes that Alpha’s purchases will not exceed the 5,000 units threshold for
the discount. Alpha placed the following orders:
Order date Units Delivery date Payment date

[Transfer of control]
10-08-2018 3,000 28-08-2018 12-09-2018
25-12-2018 4,000 15-01-2019 10-01-2019
(b) On 1 February 2019, TE entered into a six months contract with another customer Beta for sale of Zee for Rs. 250 per
unit, under the following terms and conditions:
if the Beta purchases more than 15,000 units during the contract period, the price per unit would be
retrospectively reduced to Rs. 215 per unit.
TE’s unconditional right to receive consideration would be established upon delivery of goods to Beta.
At the inception of the contract, TE concludes that Beta will meet 15,000 units threshold for the discount. Beta placed
the following orders:
Order date Units Delivery date Payment date
[Transfer of control]
14-02-2019 10,000 25-02-2019 20-03-2019
01-06-2019 8,000 15-07-2019 18-07-2019
Required:
In respect of the above contracts, prepare journal entries to be recorded in the books of TE for the years ended 31
December 2018 and 2019. (Entries without date will not be awarded any marks) (15)
{Autumn 2019, Q # 8}
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NASIR ABBAS FCA
QUESTION NO. 3
Guitar World (GW) normally sells Machine A13 for Rs. 1.7 million. Maintenance services for such type of machines are
provided separately at Rs. 25,000 per month. Details of two contracts for sale of Machine A13 are as follows:
(i) On 1 July 2018, GW signed a contract with Energene Limited to sell Machine A13 with one year free maintenance
services at a lumpsum payment of Rs. 1.8 million. The amount was received upon delivery of machine on 1 August
2018.
(ii) On 1 October 2018, GW sold Machine A13 to Vitalene Limited for Rs. 1.95 million. As per the contract, payment would
be made after 2 years. Maintenance services would also be provided for Rs. 25,000 per month for two years which
would be paid at the end of each month.
Required:
With reference to IFRS-15 ‘Revenue from Contracts with Customers’, explain how the above contracts should be recorded
in GW’s books for year ended 31 December 2018. (Show supporting calculations but entries are not required).
(11)
{Spring 2019, Q # 4(b)}
QUESTION NO. 4
On 1 June 2018 Ravi Limited (RL) delivered 500 units of one of its products to Bravo Limited (BL) at Rs. 200 per unit. BL
immediately paid the amount and obtained control upon delivery. BL is allowed to return unused units within 30 days and
receive a full refund. RL’s cost of the product is Rs. 150 per unit and it uses perpetual system for recording inventory
transactions.
On 30 June 2018, BL returned 20 units.
Required:
Prepare necessary journal entries in the books of RL on 1 June 2018 and 30 June 2018 under each of the following
independent situations:
(i) Based upon historical data, RL estimates that 5% units will be returned on expiry of 30 days. (05)
(ii) The product is new and RL has no relevant historical evidence of product returns or other available market evidence.
(04)
{Autumn 2018, Q # 3}
QUESTION NO. 5
On 1 October 2017, Galaxy Telecommunications (GT) entered into a contract with a bank for supplying 20 smart phones
to the bank staff with unlimited use of mobile network for one year. The contract price per smart phone is Rs. 34,650 and
the price is payable in full within 10 days from the date of contract. At the end of the contract, the phones will not be
returned to GT.
The entire amount received as per contract was credited by GT to advance from customers account. The smart phones
were delivered on 1 November 2017.
If sold separately, GT charges Rs. 18,000 for a smart phone and a monthly fee of Rs. 1,800 for unlimited use of mobile
network.
Required:
Prepare adjusting entry for the year ended 31 December 2017 in accordance with IFRS 15 ‘Revenue from Contracts with
Customers’. (04)
{Spring 2018, Q # 2 (b)}
QUESTION NO. 6
(a) Jupiter Limited (JL) entered into a two year contract on 1 January 2017, with a customer for the maintenance of
computer network. JL has offered the following payment options:
Option 1: Immediate payment of Rs. 200,000.
Option 2: Payment of Rs. 110,000 at the end of each year.
The applicable discount rate is 6.596%.
Required:
Prepare journal entries to be recorded in the books of JL under each option over the period of contract. (05)
(b) Pluto Limited (PL) sells industrial chemicals at following standalone prices:
Products Rupees
(per carton)
C-1 100,000
C-2 90,000
C-3 110,000
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NASIR ABBAS FCA
PL regularly sells a carton each of C-2 and C-3 together for Rs. 170,000.
Required:
Calculate the selling price to be allocated to each product, in case PL offers to sell one carton of each product for
a total price of Rs. 260,000. (05)
{Autumn 2017, Q # 6}
QUESTION NO. 7
Decent Constructions (DC) enters into a contract with a customer to build an asset for Rs. 20 million with a performance
bonus of Rs. 2 million that will be paid based on the timing of completion. The amount of the performance bonus
decreases by 10% per week for every week beyond the agreed-upon completion date. The contract requirements are
similar to contracts DC has performed previously, and management believes that such experience is predictive for this
contract. DC concludes that the expected value method is most predictive in this case.
DC estimates that there is a 60% probability that the contract will be completed by the agreed-upon completion date, a
30% probability that it will be completed one week late, and a 10% probability that it will be completed two weeks late.
Required
How should DC determine the transaction price?
QUESTION NO. 8
United Constructions (UC) enters into a contract to construct a manufacturing facility for a customer. The contract price
was agreed at Rs. 250 million plus a Rs. 25 million bonus only if the facility is completed by a specified date. The contract
is expected to take three years to complete. UC has a long history of constructing similar facilities. UC will receive no
bonus if the facility is not completed by the specified date. UC believes, based on its experience, that it is 95% likely that
the contract will be completed successfully and in advance of the target date.
Required:
How should UC determine the transaction price?
QUESTION NO. 9
Newage Constructions (NC) enters into a contract to construct a manufacturing facility for a customer. The contract price
was agreed at Rs. 100 million and a stipulated time period of 2 years was also agreed. To ensure timely completion, a
penalty of Rs. 10 million was agreed which would be deducted from contract price if work is not completed within 2 years.
NC believes, based on its experience, that it is 80% likely that the contract will be completed successfully and in advance
of the target date.
Required:
How should NC determine the transaction price?
QUESTION NO. 10
Alpha Consultants (AC) entered into a 1-year contract for book keeping services with a customer. Total contract price was
agreed at Rs. 5 million. It was also agreed that AC will be entitled to an extra Rs. 500,000 if number of mistakes found in
audit are less than 10. AC has experience of providing such services and it is highly probable that mistakes will not exceed
the acceptable limit.
Required:
How should AC determine the transaction price?
QUESTION NO. 11
Beta Traders (BT) enters into 100 contracts with customers on January 1, 2018. Each contract includes the sale of one
product for Rs. 500. The cost to BT of each product is Rs. 300. Cash is received upfront and control of the product transfers
on delivery. Customers can return the product within 30 days to receive a full refund. BT can sell the returned products
at a profit.
BT has significant experience in estimating returns for this product. It estimates that 92 products will not be returned.
Required:
How the above transactions should be accounted for if after 30 days:
(a) no refunds are claimed
(b) 5 products are refunded
(c) 10 products are refunded
513
NASIR ABBAS FCA
QUESTION NO. 12
Gamma Traders (GT) enters into a 1-year contract with a customer to supply standard capacity UPS for office use. The
contract states that price per UPS will be adjusted retroactively once customer reaches certain sale volume as follows:
Cumulative annual sales (UPS) Price (Rs.)

0 – 500 5,000
501 – 800 4,000
801 and above 3,500
Based on past experience and knowledge of customer, GT estimates that sales volume for the year will be 610 UPS. At
the end of first month, customer purchased 130 UPS at a price of Rs. 5,000 per UPS.
Required:
Journal entry to record first month sale.
QUESTION NO. 13
Using the same situation as in Question 12, at the end of 2nd month customer purchased 300 units at a price of Rs. 5,000
per UPS. Now GT estimates that cumulative sale volume for the year will be 850 UPS.
Required:
Journal entry to record 2nd month sale.
QUESTION NO. 14
On January 1, 2018 Gallant Limited (GL) sold a machine to a customer. Control was transferred at the time of delivery.
However customer requested for a special credit of 2 years. Therefore a special price of Rs. 950,000 was charged.
Prevailing market interest rate on that date was 10%. Financial year of GL ends every December 31 st. Cost of machine to
GL was Rs. 400,000. Cash equivalent price of machine was Rs. 750,000.
Required:
All journal entries for above transaction.
QUESTION NO. 15
On January 1, 2018 Prudent Limited (PL) agreed to sell an equipment to a customer. The customer demanded its delivery
after 2 years. PL will manufacture the equipment at the time of delivery. PL gave two options to customer:
Option I – 100% advance payment of Rs. 800,000 at the time of agreement
Option II – Payment of Rs. 1,000,000 at the time of delivery
Prevailing market interest rate at the date of agreement was 9%.
Required:
All journal entries for above transaction if customer opts for:
(a) Option I
(b) Option II
(c)
QUESTION NO. 16
Honest Traders (HT) entered into a contract with a customer to deliver Product A and Product B for Rs. 150,000 payable
up-front. Product A will be delivered in two years and Product B will be delivered in five years.
HT has determined that contract contains two performance obligations; Product A and Product B. Total price of Rs.
150,000 has been allocated, on the basis of stand-alone prices, to Product A and B at Rs. 37,500 and Rs. 112,500
respectively. HT also concludes that transaction contains significant financing component and interest rate of 6% is
appropriate.
Required:
Calculate annual interest expense till final delivery and amount of revenue recognized for each product.
QUESTION NO. 17
Finance House (FH) sold an equipment, costing Rs. 60,000, to a customer on installment sale basis on January 1, 2018.
Each installment of Rs. 40,000 will be received on every December 31st for 3 years. Controlled was transferred on delivery.
Applicable market interest rate is 12%. FH prepares its financial statements on 31st December every year.
Required:
514
NASIR ABBAS FCA
QUESTION NO. 18
Modern Engineering (ME) entered into a contract for 3-year maintenance services with a manufacturing concern. Same
service will be rendered over 3-year period. Contract required 100% upfront fees of Rs. 300,000 payable at the time of
agreement on January 1, 2018. Prevailing market interest rate for ME is 12%. ME prepares its financial statements on 31st
December every year.
Required:
QUESTION NO. 19
Manufacture Co enters into a contract with Technology Co to build a machine. Technology Co pays Manufacture Co Rs. 1
million and contributes materials to be used in the development of the machine. The materials have a fair value of Rs.
500,000. Technology Co will deliver the materials to Manufacture Co approximately three months after development of
the machine begins. Manufacture Co concludes that it obtains control of the materials upon delivery by Technology Co
and could elect to use the materials for other projects.
Required:
How should Manufacture Co determine the transaction price?
QUESTION NO. 20
Golden Gate enters into a contract with a major chain of retail stores. The customer commits to buy at least Rs. 20m of
products over the next 12 months. The terms of the contract require Golden Gate to make a payment of Rs. 1m to
compensate the customer for changes that it will need to make to its retail stores to accommodate the products. By the
31 December 2018, Golden Gate has transferred products with a sales value of Rs. 4m to the customer.
Required
How much revenue should be recognised by Golden Gate in the year ended 31 December 2018?
QUESTION NO. 21
Mobile Co sells 1,000 phones to Retailer for Rs. 100,000. The contract includes an advertising arrangement that requires
Mobile Co to pay Rs. 10,000 toward a specific advertising promotion that Retailer will provide. Retailer will provide the
advertising on strategically located billboards and in local advertisements. Mobile Co could have elected to engage a third
party to provide similar advertising services at a cost of Rs. 10,000.
Required:
How should Mobile Co determine the transaction price?
QUESTION NO. 22
Marine sells boats and provides mooring facilities for its customers. Marine sells the boats for Rs. 300,000 each and
provides anchorage facilities for Rs. 50,000 per year. Marine concludes that the goods and services are distinct and
accounts for them as separate performance obligations. Marine enters into a contract to sell a boat and one year of
anchorage services to a customer for Rs. 325,000.
Required:
How should Marine allocate the transaction price of Rs. 325,000 to the performance obligations?
QUESTION NO. 23
Alpha Traders (AT) sells industrial boilers and also provides maintenance services. On January 1, 2018 AT sold a boiler
along with one year maintenance service at a package price of Rs. 400,000 to a customer. The contract involves two
performance obligations. Boilers are normally sold at a price of Rs. 360,000 and maintenance services are sold at cost plus
20%. Estimated cost of services in this contract will be Rs. 50,000.
Required:
Allocate transaction price to the performance obligations.
QUESTION NO. 24
Seller enters into a contract with a customer to sell Products A, B, and C for a total transaction price of Rs. 100,000. Seller
regularly sells Product A for Rs. 25,000 and Product B for Rs. 45,000 on a standalone basis. Product C is a new product
that has not been sold previously, has no established price, and is not sold by competitors in the market. Products A and
B are not regularly sold together at a discounted price. Product C is delivered on March 1, and Products A and B are
delivered on April 1.
Required:
How should Seller determine the standalone selling price of Product C?
515
NASIR ABBAS FCA
QUESTION NO. 25
A seller sold four products A, B, C and D (all qualify for separate performance obligation) to a customer at a package price
of Rs. 500,000. It also sells such products on individual basis at following prices:
Products Stand-alone price
(Rs.)
A 120,000
B 140,000
C 130,000
D 150,000
Some customers also normally purchase products A and B at a package price of Rs. 250,000.
Required:
Allocate transaction price of Rs. 500,000 to four performance obligations.
QUESTION NO. 26
Telecom sells wireless mobile phone and other telecom service plans from a retail store. Sales agents employed at the
store signed 120 customers to two-year service contracts in a particular month. Telecom pays its sales agents commissions
for the sale of service contracts in addition to their salaries. Salaries paid to sales agents during the month were Rs.
120,000, and commissions paid were Rs. 24,000. The retail store also incurred Rs. 20,000 in advertising costs during the
month.
Required:
How should Telecom account for the costs?
QUESTION NO. 27
TechCo enters into a contract with a customer to track and monitor payment activities for a five-year period. A
prepayment is required from the customer at contract inception. TechCo incurs costs at the outset of the contract
consisting of uploading data and payment information from existing systems. The ongoing tracking and monitoring is
automated after customer set up. There are no refund rights in the contract.
Required:
How should TechCo account for the set-up costs?
QUESTION NO. 28
On 1 January 2018, Angelo enters into a twelve-month ‘pay monthly’ contract for a mobile phone. The contract is with
TeleSouth, and terms of the plan are:
(a) Angelo receives a free handset on 1 January 2018
(b) Angelo pays a monthly fee of Rs. 200, which includes unlimited free minutes. Angelo is billed on the last day of
the month
Customers may purchase the same handset from TeleSouth for Rs. 500 without the payment plan. They may also enter
into the payment plan without the handset, in which case the plan costs them Rs. 175 per month.
Required:
Show how TeleSouth should recognise revenue from this plan in accordance with IFRS 15 Revenue from contracts with
customers. Your answer should also give journal entries:
(a) On 1 January 2018
(b) On 31 January 2018
QUESTION NO. 29
Hassan Builders (HB) entered into a construction contract for construction of a building on January 1, 2017. Total contract
price was agreed at Rs. 500 million. Following information relates to the year ending December 31, 2017:
Rs. million
Contract cost incurred to date 80
Estimated further cost to complete the contract 320
Invoice issued on December 1, 2017 75
(HB has an unconditional right to receive payment against this invoice)
It has been determined that construction of building is single performance obligation and it will be satisfied over time. It
is HB’s policy to measure progress using proportion of cost incurred to date method.
Required:
Prepare extracts of statement of financial position and statement of comprehensive income for the year ending December
31, 2017.
516
NASIR ABBAS FCA
REVENUE (IFRS-15) - SOLUTIONS
SOLUTIONS
SOLUTION TO QUESTION NO. 1
Trich Mir Limited
Correcting entries for the year ended 31 December 2019
S.No. Description Debit Credit

---- Rs. in million ----
(i) Revenues 25–20.66{25×(1.1)–2} 4.34
Receivable 4.34
Receivable 20.66×10%×(3÷12) 0.52

Interest income 0.52
Commission expense 1.60

Amortization expense 1.6÷2×3÷12 0.20
Contract cost 1.40
(ii) Cost of goods sold 15.00

Inventories 15.00
Receivable (30×60%)–11 7.00

Construction revenues 7.00
(iii) Revenues 12–12×16÷(12+8) 2.40

Receivable 2.40
Contract asset (12–2.4) 9.60

Receivable 9.60
517
NASIR ABBAS FCA
(i) The contract contains two distinct performance obligations i.e. selling the machine and providing the maintenance
services as:
the customer can separately benefit from the machine without the maintenance services from GW (or GW
sells maintenance services separately) and
the machine and maintenance services are separately identifiable in the contract.
Thus GW will allocate the transaction price between the two performance obligations as follows:
Revenue related to sale of machine would be recognized at a point in time i.e. upon delivery on 1 August 2018.
While revenue related to maintenance service would be recognized over time i.e. as the services are rendered.
Till 31 December 2018, revenue would be recognized in respect of:

Sale of machine Rs. 1,530,000
Maintenance service Rs. 112,500 (i.e Rs. 22,500 for 5 months)
Remaining amount of Rs. 157,500 would appear in liabilities as deferred revenue.
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NASIR ABBAS FCA
(ii) The contract contains two distinct performance obligations i.e. selling the machine and providing the maintenance
services.
The contract includes a significant financing component in respect of sale of machine which is evident from the
difference between the amount of promised consideration of Rs. 1.95 million and the cash selling price of Rs. 1.7
million.
Revenue related to machine would be recognized upon delivery on 1 October 2018. Revenue related to
maintenance service would be recognized as the services are rendered each month. The difference between
promised consideration and cash selling price of Rs. 250,000 would be recognized as interest revenue over two
years using the implicit rate of 7.1% [(1.95÷1.7) ½ –1].
Till 31 December 2018, revenue would be recognized in respect of:

- Sale of machine Rs. 1,700,000
- Maintenance service Rs. 75,000 i.e Rs. 25,000 for 3 months
- Interest revenue Rs. 30,175 (Rs. 1.7 million × 7.1% × 3/12)

(i)
Dr. Cr.
Rs. Rs.
1/6/18 Cash [500 x Rs. 200] 100,000
Sales [100,000 x 95%] 95,000
Refund liability [100,000 x 5%] 5,000
(To record sale of 500 units with 5% refund liability)
1/6/18 Cost of sale 71,250

Asset for right to recover products [75,000 x 5%] 3,750
Inventory [500 x Rs. 150] 75,000
(To record cost of sale and expected return)
30/6/18 Refund liability 5,000

Cash [Rs. 200 x 20] 4,000
Sales [Rs. 200 x 5] 1,000
(To record refund of units returned and sales)
30/6/18 Cost of sales [5 x Rs. 150] 750

Inventory [20 x Rs. 150] 3,000
Asset for right to recover products 3,750
(To record return of units and cost of sale)
Dr. Dr.
(ii) Rs. Rs.
1/6/18 Cash 100,000
Refund liability 100,000
(To record upfront cash received for goods delivered)
1/6/18
Inventory 75,000
(To record asset for right to recover products)
519
NASIR ABBAS FCA
30/6/18 Refund liability 100,000

Sales [480 x Rs. 200] 96,000
Cash [Rs. 200 x 20] 4,000
(To record refund of units returned and sales)
30/6/18 Cost of sales [480 x Rs. 150] 72,000

(To record cost of sale 7 return of units and cost of sale)

Dr. Cr.
----- Rs. -----
31-12-17 Advance from customer 378,000
Revenue - mobile [15,750 (W-1) x 20] 315,000
Revenue - network usage [18,900 (W-1) x 20 x 2/12] 63,000
[To record revenue at year end]
W -1 Allocation of transaction price

Standalone prices Rs.
Smart phone 18,000

Network usage for 1 year [1,800 x 12] 21,600
39,600
Allocation of transaction price:
Smart phone (34,650 x 18,000/39,600) 15,750
Net work usage (34,650 x 21,600/39,600) 18,900
34,650

(a)
Journal entries - Option 1 (Lump sum payment)
Debit Credit
Date Description
Rs. Rs.
01-Jan-17 Cash 200,000
Contract liability 200,000
[Cash received]
31-Dec-17 Interest expense (W-2) 13,192
Contract liability (200,000 x 6.596%) 13,192
31-Dec-17 Contract liability (W-1) 110,000
Maintenance service revenue 110,000
[Revenue for 2017]
31-Dec-18 Interest expense (W-2) 6,808
31-Dec-18 Contract liability 110,000
[Revenue for 2018]
520
NASIR ABBAS FCA
W-1 Annual service revenue

200,000
= —2
= 110,000
[1—(1+6.596%) ]
6.596%
W-2 Revenue Interest Principal Balance
Date -------------------- Rs. ----------------------
200,000
31-Dec-17 110,000 13,192 96,808 103,192
31-Dec-18 110,000 6,808 103,192 -
Journal entries - Option 2 (Payment at end of each year )

Debit Credit
Date Description
Rs. Rs.
31-Dec-17 Cash 110,000
[Cash received for 1st year service]
31-Dec-18 Cash 110,000
[Cash received for 2nd year service]
(b) Calculation of Selling price to be allocated to each product

Rs.
Standalone price of product C - 1 100,000
Adjusted Standalone prices of:
C - 2 [170,000/200 x 90] 76,500
C - 3 [170,000/200 x 110] 93,500
270,000
Allocation of transaction price:
C - 1 [260,000/270 x 100] 96,296
C - 2 [260,000/270 x 76.5] 73,667
C - 3 [260,000/270 x 93.5] 90,037
260,000

The transaction price should include management’s estimate of the amount of consideration to which the entity will be
entitled for the work performed.
Probability weighted average consideration
Rs. million
Contract price 20.00
Bonus:
[2m x 0.6] 1.20
[2m x 90% x 0.3] 0.54
[2m x 80% x 0.1] 0.16
1.90
21.90
The total transaction price is Rs. 21.90 million based on the probability-weighted estimate. DC will update its estimate at
each reporting date.

It is appropriate for UC to use the most likely amount method to estimate the variable consideration as there is a binary
condition for bonus. The contract’s transaction price is therefore Rs. 275 million [Rs. 250 million + Rs. 25 million] because
it is more likely that UC will receive the bonus. This estimate should be updated each reporting date.
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NASIR ABBAS FCA

It is appropriate for NC to use the most likely amount method to estimate the variable consideration as there is a binary
condition for penalty. The contract’s transaction price is therefore Rs. 100 million (i.e. ignoring penalty of Rs 10 million)
because it is more likely that penalty will not be deducted. This estimate should be updated each reporting date.

It is appropriate for AC to use the most likely amount method to estimate the variable consideration as there is a binary
condition for bonus. The contract’s transaction price is therefore Rs. 5.5 million [Rs. 5 million + Rs. 0.5 million] because it
is highly likely that AC will receive the bonus.

Dr. Cr.
--------- Rs. --------
01-01-18 Cash [100 x Rs. 500] 50,000
Sales [92 x Rs. 500] 46,000
Refund liability [8 x Rs. 500] 4,000
[Cash received against sale]
01-01-18 Cost of sales [92 x Rs. 300] 27,600

Asset for right to recover product [8 x Rs. 300] 2,400
Inventory [100 x Rs. 300] 30,000
[Goods delivered to customers]
(a) Dr. Cr.
--------- Rs. --------
30-01-18 Refund liability 4,000
Sales 4,000
[Refund liability expires and revenue recognized]
30-01-18 Cost of sales 2,400

Asset for right to recover product 2,400
[Cost of goods recognized]
(b)
Cash [5 x Rs. 500] 2,500
Sales [3 x Rs. 500] 1,500
[Refund made and remaining recognized as revenue]
30-01-18 Cost of sales [3 x Rs. 300] 900

[Goods returned and remained recognized as cost]
(c)
Sale return [2 x Rs. 500] 1,000
Cash [10 x Rs. 500] 5,000
[Refund actually made]
522
NASIR ABBAS FCA
30-01-18 Inventory [10 x Rs. 300] 3,000

Cost of sales [2 x Rs. 300] 600
[Goods returned by customers]

Dr. Cr.
--------- Rs. --------
Cash [130 x Rs. 5,000] 650,000
Sales [130 x Rs. 4,000] 520,000
Refund liability [130 x Rs. 1,000] 130,000

Dr. Cr.
--------- Rs. --------
Cash [300 x Rs. 5,000] 1,500,000
Sales [300 x Rs. 3,500 – 130 x Rs. 500] 985,000
Refund liability (balancing) 515,000

Dr. Cr.
--------- Rs. --------
01-01-18 Receivable 785,124
Sales [W-1] 785,124
[Machine sold]
01-01-18 Cost of sales 400,000

Inventory 400,000
[Cost of machine recognized]
31-12-18 Receivable 78,512

Interest income [785,124 x 10%] 78,512
31-12-19 Receivable 86,364

Interest income [785,124 x 1.1 x 10%] 86,364
31-12-19 Cash 950,000

Receivable 950,000
[Cash received]
W-1
950,000
Present value of sale price = (1+10%)2 = Rs. 785,124
523
NASIR ABBAS FCA

(a) Option I Dr. Cr.
--------- Rs. --------
01-01-18 Cash 800,000
31-12-18 Interest expense [800,000 x 9%] 72,000

31-12-19 Interest expense [800,000 x 1.09 x 9%] 78,480

31-12-19 Contract liability 950,480

Sales 950,480
[Equipment delivered and sale recognized]
(a) Option II
31-12-19 Cash 1,000,000
Sales 1,000,000
[Equipment delivered and sale recognized]
Product A Rs.
Up-front price 37,500
Year 1 Interest expense [37,500 x 6%] 2,250
39,750
Year 2 Revenue for Product A 42,135
Product B
Up-front price 112,500
119,250
126,405
133,989
142,029
Year 5 Revenue for Product B 150,550
524
NASIR ABBAS FCA

Dr. Cr.
--------- Rs. --------
01-01-18 Receivable 96,073
Sales [W-1] 96,073
[Equipment sold and revenue recognized]
01-01-18 Cost of sales 60,000

Inventory 60,000
[Cost of equipment recognized]
31-12-18 Cash 40,000

Receivable [W-2] 28,471
Interest income [W-2] 11,529
[1st installment received]
31-12-19 Cash 40,000

[2nd installment received]
31-12-20 Cash 40,000

[3rd installment received]
W-1
[1–(1+12%)—3]
Present value of installments = 40,000 x 12%
W-2
Installment Interest Principal Balance
Date -------------------- Rs. ----------------------
96,073
31-Dec-18 40,000 11,529 28,471 67,602
31-Dec-19 40,000 8,112 31,888 35,714
31-Dec-20 40,000 4,286 35,714 0

Dr. Cr.
--------- Rs. --------
01-01-18 Cash 300,000
[100% upfront fees received]
31-12-18 Interest expense [W-2] 36,000


Maintenance service income [W-1] 124,905
[Revenue recognized for maintenance service]
525
NASIR ABBAS FCA




W-1 Annual service revenue

300,000
= —3
= 124,905
[1—(1+12%) ]
12%
W-2
Revenue Interest Principal Balance
Date -------------------- Rs. ----------------------
300,000
31-Dec-18 124,905 36,000 88,905 211,095
31-Dec-19 124,905 25,331 99,573 111,522
31-Dec-20 124,905 13,383 111,522 0

Manufacture Co should include the fair value of the materials in the transaction price because it obtains control of them.
The transaction price of the arrangement is therefore Rs. 1.5 million.

The payment made to the customer is not in exchange for a distinct good or service. Therefore, the Rs. 1m paid to the
customer must be treated as a reduction in the transaction price. The total transaction price is essentially being reduced
by 5% (Rs. 1m/ Rs. 20m). Therefore, Golden Gate reduces the price allocated to each good by 5% as it is transferred. By
31 December 2018, Golden Gate should have recognised revenue of Rs. 3.8m (Rs. 4m × 95%).

Mobile Co should account for the payment to Retailer consistent with other purchases of advertising services. The
payment from Mobile Co to Retailer is consideration for a distinct service provided by Retailer and reflects fair value. The
advertising is distinct because Mobile Co could have engaged a third party who is not its customer to perform similar
services. The transaction price for the sale of the phones is Rs. 100,000 and is not affected by the payment made by
Retailer.
526
NASIR ABBAS FCA

Rs.
Stand-alone prices
Boat 300,000
Anchorage 50,000
350,000
Transaction price 325,000
Allocation of price:
Boat [325 x 300/350] 278,571
Anchorage [325 x 50/350] 46,429
325,000

Rs.
Stand-alone prices
Boiler 360,000
Services [50,000 x 1.2] 60,000
420,000
Boiler [400 x 360/420] 342,857
Services [400 x 60/420] 57,143
400,000

Seller can use the residual approach to estimate the standalone selling price of Product C because Seller has not previously
sold or established a price for Product C. Seller has observable evidence that Products A and B sell for Rs. 25,000 and Rs.
45,000, respectively, for a total of Rs. 70,000. The residual approach results in an estimated standalone selling price of Rs.
30,000 for Product C (Rs. 100,000 total transaction price less Rs. 70,000).

Rs.
Adjusted Standalone prices of:
A [250 x 120/260] 115,385

B [250 x 140/260] 134,615
250,000
Revised stand-alone prices
A 115,385
B 134,615
C 130,000
D 150,000
530,000
Allocation of price
527
NASIR ABBAS FCA
A [500 x 115.385/530] 108,853

B [500 x 134.615/530] 126,996
C [500 x 130/530] 122,642
D [500 x 150/530] 141,509
500,000

The only costs that qualify as incremental costs of obtaining a contract are the commissions paid to the sales agents. The
commissions are costs to obtain a contract that Telecom would not have incurred if it had not obtained the contracts.
Telecom should record an asset for the costs, assuming they are recoverable.
All other costs are expensed as incurred. The sales agents’ salaries and the advertising expenses are expenses Telecom
would have incurred whether or not it obtained the customer contracts.

TechCo should recognize the set-up costs incurred at the outset of the contract as an asset since they (1) relate directly
to the contract, (2) enhance the resources of the company to perform under the contract, and relate to future
performance, and (3) are expected to be recovered.
An asset is recognized and amortized on a systematic basis consistent with the pattern of transfer of the tracking and
monitoring services to the customer.

Application of the five-step process to TeleSouth
(i) Identify the contract with a customer. This is clear. TeleSouth has a twelve-month contract with Angelo.
(ii) Identify the separate performance obligations in the contract. In this case there are two distinct performance
obligations:
(1) The obligation to deliver a handset
(2) The obligation to provide network services for twelve months (The obligation to deliver a handset would
not be a distinct performance obligation if the handset could not be sold separately, but it is in this case
because the handsets are sold separately.)
(iii) Determine the transaction price. The transaction price is straightforward i.e. Rs. 2,400 [12 x Rs. 200]
(iv) Allocate the transaction price to the separate performance obligations in the contract. The transaction price is
allocated to each separate performance obligation in proportion to the standalone selling price at contract
inception of each performance obligation, that is the stand-alone price of the handset (Rs. 500 and the stand-
alone price of the network services (Rs. 175 × 12 = Rs. 2,100)
Rs.
Stand-alone prices
Handset 500
Services 2,100
2,600
Handset [2,400 x 500/2,600] 462
Services [2,400 x 2,100/2,600] 1,938
2,400
528
NASIR ABBAS FCA
(v) Recognise revenue when (or as) the entity satisfies a performance obligation, that is when the entity transfers
a promised good or service to a customer. This applies to each of the performance obligations:
(1) When TeleSouth gives a handset to Angelo, it needs to recognize the revenue of Rs. 462.
(2) When TeleSouth provides network services to Angelo, it needs to recognize the total revenue of
Rs. 1,938. It would be reasonable to recognized service revenue on monthly basis.
Journal entries
Dr. Cr.
--------- Rs. --------
01-01-18 Receivable 462
Revenue 462
[Revenue from sale of handset recognized]
31-01-18 Cash 200

Revenue (1,938/12) 162
Receivable (462/12) 38
[Monthly bill received and service revenue recognized]

Extracts – SOCI Rs. million
Revenue [500 x 80/400] 2 marks 100
Costs 1 mark 80
Extracts – SOFP
Current assets
Contract asset [100 – 75] 2 marks 25
Receivable 1 mark 75
529
NASIR ABBAS FCA
IFRS 15 [Illustrative examples 1 – 40] – Class notes
IFRS 15 Revenue from Contracts with Customers

Illustrative Examples – Summarized
Identifying the contract
Example 1—Collectability of the consideration
An entity, a real estate developer, enters into a contract with a customer for the sale of a building for Rs. 1 million.
The customer intends to open a restaurant in the building. The building is located in an area where new restaurants
ace high levels of competition and the customer has little experience in the restaurant industry. The customer pays
a non-refundable deposit of Rs. 50,000 at inception of the contract and enters into a long-term financing agreement
with the entity for the remaining 95 per cent of the promised consideration.
The financing arrangement is provided on a non-recourse basis, which means that if the customer defaults, the entity
can repossess the building, but cannot seek further compensation from the customer, even if the collateral does not
cover the full value of the amount owed. The entity’s cost of the building is Rs. 600,000. The customer obtains control
of the building at contract inception.
The entity concludes that it is not probable that the entity will collect the consideration to which it is entitled in
exchange for the transfer of the building. Hence the contract is not identified. The entity has not received
substantially all of the consideration and it has not terminated the contract. Consequently, the entity accounts for
the non-refundable Rs. 50,000 payment as a deposit liability.
Example 2—Consideration is not the stated price—implicit price concession
An entity sells 1,000 units of a prescription drug to a customer for promised consideration of Rs. 1 million. This is the
entity’s first sale to a customer in a new region, which is experiencing significant economic difficulty. Thus, the entity
expects that it will not be able to collect from the customer the full amount of the promised consideration. Based
on the assessment of the facts and circumstances, the entity determines that it expects to provide a price concession
and accept a lower amount of consideration from the customer. Accordingly, the entity concludes that the
transaction price is not Rs. 1 million and, therefore, the promised consideration is variable. The entity estimates the
variable consideration and determines that it expects to be entitled to Rs. 400,000.
The entity considers the customer’s ability and intention to pay the consideration and concludes that even though
the region is experiencing economic difficulty, it is probable that it will collect Rs. 400,000 from the customer.
Consequently, the entity accounts for the contract with the customer in accordance with IFRS 15.
Example 3—Implicit price concession
An entity, a hospital, provides medical services to an uninsured patient in the emergency room. The entity has not
previously provided medical services to this patient but is required by law to provide medical services to all
emergency room patients. Because of the patient’s condition upon arrival at the hospital, the entity provides the
services immediately and, therefore, before the entity can determine whether the patient is committed to perform
its obligations under the contract in exchange for the medical services provided.
After providing services, the entity obtains additional information about the patient including a review of the services
provided, standard rates for such services and the patient’s ability and intention to pay the entity for the services
provided. During the review, the entity notes its standard rate for the services provided in the emergency room is
Rs. 10,000. The entity also reviews the patient’s information and to be consistent with its policies designates the
patient to a customer class based on the entity’s assessment of the patient’s ability and intention to pay.
The entity reviews its historical cash collections from this customer class and other relevant information about the
patient. The entity estimates the variable consideration and determines that it expects to be entitled to Rs. 1,000.
On the basis of its collection history from patients in this customer class, the entity concludes it is probable that the
entity will collect Rs. 1,000 (which is the estimate of variable consideration). Consequently, the entity accounts for
the contract with the patient in accordance with IFRS 15.
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Example 4—Reassessing the criteria for identifying a contract

An entity licenses a patent to a customer in exchange for a usage-based royalty. At contract inception, the contract
meets all the criteria and the entity accounts for the contract with the customer in accordance with the requirements
in IFRS 15. Throughout the first year of the contract, the customer provides quarterly reports of usage and pays
within the agreed-upon period.
During the second year of the contract, the customer continues to use the entity’s patent, but the customer’s
financial condition declines. The customer’s current access to credit and available cash on hand are limited. The
entity continues to recognize revenue on the basis of the customer’s usage throughout the second year. The
customer pays the first quarter’s royalties but makes nominal payments for the usage of the patent in Quarters 2–
4. The entity accounts for any impairment of the existing receivable in accordance with IFRS 9 Financial Instruments.
During the third year of the contract, the customer continues to use the entity’s patent. However, the entity learns
that the customer has lost access to credit and its major customers and thus the customer’s ability to pay significantly
deteriorates. The entity therefore concludes that it is unlikely that the customer will be able to make any further
royalty payments for ongoing usage of the entity’s patent. As a result of this significant change in facts and
circumstances, the entity reassesses the criteria and determines that they are not met because it is no longer
probable that the entity will collect the consideration to which it will be entitled. Accordingly, the entity does not
recognize any further revenue associated with the customer’s future usage of its patent. The entity accounts for any
impairment of the existing receivable in accordance with IFRS 9 Financial Instruments.
Contract modification
Example 5—Modification of a contract for goods
An entity promises to sell 120 products to a customer for Rs. 12,000 (Rs. 100 per product). The products are
transferred to the customer over a six-month period. The entity transfers control of each product at a point in time.
After the entity has transferred control of 60 products to the customer, the contract is modified to require the
delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products
were not included in the initial contract.
Case A—Additional products for a price that reflects the stand-alone selling price
When the contract is modified, the price of the contract modification for the additional 30 products is an additional
Rs. 2,850 or Rs. 95 per product. The pricing for the additional products reflects the stand-alone selling price of the
products at the time of the contract modification and the additional products are distinct from the original products.
The contract modification for the additional 30 products is, in effect, a new and separate contract for future products
that does not affect the accounting for the existing contract. The entity recognizes revenue of Rs. 100 per product
for the 120 products in the original contract and Rs. 95 per product for the 30 products in the new contract.
Case B—Additional products for a price that does not reflect the stand-alone selling price
During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price of
Rs. 80 per product. However, the customer discovers that the initial 60 products transferred to the customer
contained minor defects that were unique to those delivered products. The entity promises a partial credit of Rs. 15
per product to compensate the customer for the poor quality of those products. The entity and the customer agree
to incorporate the credit of Rs. 900 (Rs. 15 credit × 60 products) into the price that the entity charges for the
additional 30 products. Consequently, the contract modification specifies that the price of the additional 30 products
is Rs. 1,500 or Rs. 50 per product. That price comprises the agreed-upon price for the additional 30 products of Rs.
2,400, or Rs. 80 per product, less the credit of Rs. 900.
At the time of modification, the entity recognizes the Rs. 900 as a reduction of the transaction price and, therefore,
as a reduction of revenue for the initial 60 products transferred. In accounting for the sale of the additional 30
products, the entity determines that the negotiated price of RS. 80 per product does not reflect the stand-alone
selling price of the additional products.
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531
Consequently, the contract modification does not meet the conditions to be accounted for as a separate contract.
Because the remaining products to be delivered are distinct from those already transferred, the entity accounts for
the modification as a termination of the original contract and the creation of a new contract.
Consequently, the amount recognized as revenue for each of the remaining products is a blended price of Rs. 93.33
{[(Rs. 100 × 60 products not yet transferred under the original contract) + (Rs. 80 × 30 products to be transferred
under the contract modification)] ÷ 90 remaining products}.
Example 6—Change in the transaction price after a contract modification
On 1 July 20X0, an entity promises to transfer two distinct products to a customer. Product X transfers to the
customer at contract inception and Product Y transfers on 31 March 20X1. The consideration promised by the
customer includes fixed consideration of Rs. 1,000 and variable consideration that is estimated to be Rs. 200. The
entity includes its estimate of variable consideration in the transaction price because it concludes that it is highly
probable that a significant reversal in cumulative revenue recognized will not occur when the uncertainty is resolved.
The transaction price of Rs. 1,200 is allocated equally to the performance obligation for Product X and the
performance obligation for Product Y (because both have same stand-alone price). When Product X transfers to the
customer at contract inception, the entity recognizes revenue of Rs. 600.
On 30 November 20X0, the scope of the contract is modified to include the promise to transfer Product Z (in addition
to the undelivered Product Y) to the customer on 30 June 20X1 and the price of the contract is increased by Rs. 300
(fixed consideration), which does not represent the stand-alone selling price of Product Z. The stand-alone selling
price of Product Z is the same as the stand-alone selling prices of Products X and Y.
The entity accounts for the modification as if it were the termination of the existing contract and the creation of a
new contract. This is because the remaining Products Y and Z are distinct from Product X, which had transferred to
the customer before the modification. Consequently, the consideration to be allocated to the remaining
performance obligations comprises the consideration that had been allocated to the performance obligation for
Product Y and the consideration promised in the modification. The transaction price for the modified contract is Rs.
900 and that amount is allocated equally to the performance obligation for Product Y and the performance obligation
for Product Z (i.e. Rs. 450 is allocated to each performance obligation).
After the modification but before the delivery of Products Y and Z, the entity revises its estimate of the amount of
variable consideration to which it expects to be entitled to Rs. 240. The entity concludes that the change in estimate
of the variable consideration can be included in the transaction price, because it is highly probable that a significant
reversal in cumulative revenue recognized will not occur when the uncertainty is resolved. Therefore, the change in
the transaction price is allocated to the performance obligations for Product X and Product Y on the same basis as
at contract inception. Consequently, the entity recognizes revenue of Rs. 20 for Product X in the period in which the
change in the transaction price occurs. Because Product Y had not transferred to the customer before the contract
modification, the change in the transaction price that is attributable to Product Y is allocated to the remaining
performance obligations at the time of the contract modification. Thus, the entity allocates the Rs. 20 increase in
the transaction price for the modified contract equally to the performance obligations for Product Y and Product Z.
Consequently, the amount of the transaction price allocated to the performance obligations for Product Y and
Product Z increases by Rs. 10 to Rs. 460 each.
On 31 March 20X1, Product Y is transferred to the customer and the entity recognizes revenue of Rs. 460. On 30
June 20X1, Product Z is transferred to the customer and the entity recognizes revenue of Rs. 460.
Example 7—Modification of a services contract
An entity enters into a three-year contract to clean a customer’s offices on a weekly basis. The customer promises
to pay Rs. 100,000 per year. The stand-alone selling price of the services at contract inception is Rs. 100,000 per
year. The entity recognizes revenue of Rs. 100,000 per year during the first two years of providing services. At the
end of the second year, the contract is modified and the fee for the third year is reduced to Rs. 80,000. In addition,
the customer agrees to extend the contract for three additional years for consideration of Rs. 200,000 payable in
three equal annual instalments of Rs. 66,667 at the beginning of years 4, 5 and 6. After the modification, the contract
has four years remaining in exchange for total consideration of Rs. 280,000. The stand-alone selling price of the
Nasir Abbas FCA

532
services at the beginning of the third year is Rs. 80,000 per year, therefore, total stand-alone price of remaining
services should be Rs. 320,000 (i.e. 4 years × Rs. 80,000 per year).
At contract inception, the entity accounts for the cleaning contract as a single performance obligation because the
weekly cleaning services are a series of distinct services that are substantially the same and have the same pattern
of transfer to the customer. At the date of the modification, the entity assesses the remaining services to be provided
and concludes that they are distinct. However, the amount of remaining consideration to be paid (Rs. 280,000) does
not reflect the stand-alone selling price of the services to be provided (Rs. 320,000).
Consequently, the entity accounts for the modification as a termination of the original contract and the creation of
a new contract with consideration of Rs. 280,000 for four years of cleaning service and recognizes revenue of Rs.
70,000 per year (Rs. 280,000 ÷ 4 years) as the services are provided over the remaining four years.
Example 8—Modification resulting in a cumulative catch-up adjustment to revenue
An entity, a construction company, enters into a contract to construct a commercial building for a customer on
customer-owned land for promised consideration of Rs. 1 million and a bonus of Rs. 200,000 if the building is
completed within 24 months. The entity accounts for the promised bundle of goods and services as a single
performance obligation satisfied over time. At the inception of the contract, the entity expects the following:
Rs.
Transaction price 1,000,000
Expected costs 700,000
Expected profit (30%) 300,000
At contract inception, the entity excludes the Rs. 200,000 bonus from the transaction price because it cannot
conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will
not occur.
By the end of the first year, the entity has satisfied 60% of its performance obligation on the basis of costs incurred
to date (Rs. 420,000) relative to total expected costs (Rs. 700,000). The entity reassesses the variable consideration
and concludes that the amount is still constrained. Consequently, the cumulative revenue and costs recognized for
the first year are as follows:
Rs.
Revenue 600,000
Costs 420,000
In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the floor
plan of the building. As a result, the fixed consideration and expected costs increase by Rs. 150,000 and Rs. 120,000,
respectively. Total potential consideration after the modification is Rs. 1,350,000 (Rs. 1,150,000 fixed consideration
+ Rs. 200,000 completion bonus). In addition, the allowable time for achieving the Rs. 200,000 bonus is extended by
6 months to 30 months from the original contract inception date. At the date of the modification, on the basis of its
experience and the remaining work to be performed, which is primarily inside the building and not subject to
weather conditions, the entity concludes that it is highly probable that including the bonus in the transaction price
will not result in a significant reversal in the amount of cumulative revenue recognized and includes the Rs. 200,000
in the transaction price. In assessing the contract modification, the entity evaluates that the remaining goods and
services to be provided using the modified contract are not distinct from the goods and services transferred on or
before the date of contract modification; that is, the contract remains a single performance obligation.
Consequently, the entity accounts for the contract modification as if it were part of the original contract and updates
its measure of progress and estimates that it has satisfied 51.2 % of its performance obligation (Rs. 420,000 actual
costs incurred ÷ CU820,000 total expected costs). The entity recognizes additional revenue of Rs. 91,200 [(51.2 %
complete × CU1,350,000 modified transaction price) – Rs. 600,000 revenue recognized to date] at the date of the
modification as a cumulative catch-up adjustment.
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Example 9—Unapproved change in scope and price

An entity enters into a contract with a customer to construct a building on customer-owned land. The contract states
that the customer will provide the entity with access to the land within 30 days of contract inception. However, the
entity was not provided access until 120 days after contract inception because of storm damage to the site that
occurred after contract inception. The contract specifically identifies any delay (including force majeure) in the
entity’s access to customer-owned land as an event that entitles the entity to compensation that is equal to actual
costs incurred as a direct result of the delay. The entity is able to demonstrate that the specific direct costs were
incurred as a result of the delay in accordance with the terms of the contract and prepares a claim. The customer
initially disagreed with the entity’s claim.
The entity assesses the legal basis of the claim and determines, on the basis of the underlying contractual terms,
that it has enforceable rights. Consequently, it accounts for the claim as a contract modification. The modification
does not result in any additional goods and services being provided to the customer. In addition, all of the remaining
goods and services after the modification are not distinct and form part of a single performance obligation.
Consequently, the entity accounts for the modification by updating the transaction price and the measure of
progress towards complete satisfaction of the performance obligation.
Identifying performance obligations
Example 10—Goods and services are not distinct
Anentity, acontractor, enters intoacontracttobuildahospitalfora customer. The entity is responsible for the overall
management of the project and identifies various goods and services to be provided, including engineering, site clearance,
foundation, procurement, construction of the structure, piping and wiring, installation of equipment and finishing.
The promised goods and services are capable of being distinct because the customer can benefit from the goodsand
services either on their own or together with other readily available resources. This is evidenced by the fact that the
entity, or competitors of the entity, regularly sells many of these goods and services separately to other customers.
However, the goods and services are not distinct within the context of the contract because the entity’s promise to
transfer individual goods and services in the contract are not separately identifiable from other promises in the contract.
This is evidenced by the fact that the entity provides a significant service of integrating the goods and services (the inputs)
into the hospital (the combined output) for which the customer has contracted. Hence the goods and services are not
distinct. The entity accounts for all of the goods and services in the contract as a single performance obligation.
Example 11—Determining whether goods or services are distinct
Case A—Distinct goods or services
An entity, a software developer, enters into a contract with a customer to transfer a software licence, perform an
installation service and provide unspecified software updates and technical support (online and telephone) for a two-year
period. The entity sells the licence, installation service and technical support separately. The installation service is
routinely performed by other entities and does not significantly modify the software. The software remains functional
without the updates and the technical support.
The entity observes that the software is delivered before the other goods and services and remains functional without the
updates andthetechnicalsupport. Thus,the customercan benefitfromeachofthegoodsandserviceseitherontheirown
or together with the other goods and services that are readily available. In particular, the entity observes that the
installation service does not significantly modify or customise the software itself and, as such, the software and the
installation service are separate outputs promisedbytheentityinsteadofinputsusedtoproduceacombinedoutput. On
the basis of this assessment, the entity identifies four performance obligations in the contract for the following
goods or services:
(a) the software licence;
(b) an installation service;
(c) software updates; and
(d) technical support.
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534
Case B—Significant customisation

The promised goods and services are the same as in Case A, except that the contract specifies that, as part of the
installation service, the software is to be substantially customised to add significant new functionality to enable the
software to interface with other customised software applications used by the customer. Thecustomisedinstallationservice
can be provided byother entities.
The entity is using the licence and the customised installation service as inputs to produce the combined output. In
addition, the software is significantly modified and customised by the service. Thus, the software licence and the
customised installation service are not distinct.
On the basis of this assessment, the entity identifies three performance obligations in the contract for the following
goods or services:
(a) customised installation service (that includes the software licence);
(b) software updates; and
(c) technical support.
Case C—Promises are separately identifiable (installation)
An entity contracts with a customer to sell a piece of equipment and installation services. The equipment is
operational without any customization or modification. The installation required is not complex and is capable of
being performed by several alternative service providers.
The entity identifies two promised goods and services in the contract:
(a) equipment; and (b) installation.
The customer can benefit from the equipment on its own, by using it or reselling it for an amount greater than scrap
value, or together with other readily available resources (for example, installation services available from alternative
providers). The customer also can benefit from the installation services together with other resources that the
customer will already have obtained from the entity (ie the equipment).
The entity has not promised to combine the equipment and the installation services in a way that would transform
them into a combined output. The entity’s installation services will not significantly customize or significantly modify
the equipment. The equipment and the installation services do not each significantly affect the other, they are not
highly interdependent or highly interrelated.
On the basis of this assessment, the entity identifies two performance obligations in the contract for the following
goods or services:
(i) the equipment; and
(ii) installation services.
Case D—Promises are separately identifiable (contractual restrictions)
Assume the same facts as in Case C, except that the customer is contractually required to use the entity’s installation
services.
The contractual requirement to use the entity’s installation services does not change the evaluation of whether the
promised goods and services are distinct in this case. This is because the contractual requirement to use the entity’s
installation services does not change the characteristics of the goods or services themselves, nor does it change the
entity’s promises to the customer. Although the customer is required to use the entity’s installation services, the
equipment and the installation services are capable of being distinct and the entity’s promises to provide the
equipment and to provide the installation services are each separately identifiable. The entity’s analysis in this regard
is consistent with that in Case C.
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Case E—Promises are separately identifiable (consumables)

An entity enters into a contract with a customer to provide a piece of off-the-shelf equipment (i.e. the equipment is
operational without any significant customization or modification) and to provide specialized consumables for use
in the equipment at predetermined intervals over the next three years. The consumables are produced only by the
entity, but are sold separately by the entity.
The entity determines that the customer can benefit from the equipment together with the readily available
consumables. The consumables are readily available, because they are regularly sold separately by the entity (i.e.
through refill orders to customers that previously purchased the equipment). Therefore, the equipment and the
consumables are each capable of being distinct.
The entity determines that the equipment and the consumables are not inputs to a combined output. In addition,
neither the equipment nor the consumables are significantly customized or modified by the other. Lastly, the entity
concludes that the equipment and the consumables are not highly interdependent or highly interrelated because
they do not significantly affect each other.
On the basis of this assessment, the entity identifies two performance obligations in the contract for the following
goods or services:
(a) the equipment; and
(b) the consumables.
Example 12—Explicit and implicit promises in a contract
An entity, a manufacturer, sells a product to a distributor (i.e. its customer) who will then resell it to an end customer.
Case A—Explicit promise of service
In the contract with the distributor, the entity promises to provide maintenance services for no additional
consideration (i.e. ‘free’) to any party (i.e. the end customer) that purchases the product from the distributor. The
entity outsources the performance of the maintenance services to the distributor and pays the distributor an agreed-
upon amount for providing those services on the entity’s behalf. If the end customer does not use the maintenance
services, the entity is not obliged to pay the distributor.
The contract with the customer includes two promised goods or services—(a) the product and (b) the maintenance
services. The product and the maintenance services are not inputs to a combined item in the contract. The entity is
not providing a significant integration service because the presence of the product and the services together in this
contract do not result in any additional or combined functionality. In addition, neither the product nor the services
modify or customize the other. Lastly, the product and the maintenance services are not highly interdependent or
highly interrelated because the entity would be able to fulfil each of the promises in the contract independently of
its efforts to fulfil the other. Consequently, the entity allocates a portion of the transaction price to each of the two
performance obligations (i.e. the product and the maintenance services) in the contract.
Case B—Implicit promise of service
The entity has historically provided maintenance services for no additional consideration (i.e. ‘free’) to end
customers that purchase the entity’s product from the distributor. The entity does not explicitly promise
maintenance services during negotiations with the distributor and the final contract between the entity and the
distributor does not specify terms or conditions for those services. However, on the basis of its customary business
practice, the entity determines at contract inception that it has made an implicit promise to provide maintenance
services as part of the negotiated exchange with the distributor. That is, the entity’s past practices of providing these
services create valid expectations of the entity’s customers (i.e. the distributor and end customers). Consequently,
the entity assesses whether the promise of maintenance services is a performance obligation. For the same reasons
as in Case A, the entity determines that the product and maintenance services are separate performance obligations.
Case C—Services are not a promised service
In the contract with the distributor, the entity does not promise to provide any maintenance services. In addition,
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the entity typically does not provide maintenance services and, therefore, the entity’s customary business practices,
published policies and specific statements at the time of entering into the contract have not created an implicit
promise to provide goods or services to its customers. The entity transfers control of the product to the distributor
and, therefore, the contract is completed. However, before the sale to the end customer, the entity makes an offer
to provide maintenance services to any party that purchases the product from the distributor for no additional
promised consideration. The promise of maintenance is not included in the contract between the entity and the
distributor at contract inception. Consequently, the entity does not identify the promise to provide maintenance
services as a performance obligation. Instead, the obligation to provide maintenance services is accounted for in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Although the maintenance services
are not a promised service in the current contract, in future contracts with customers the entity would assess
whether it has created a business practice resulting in an implied promise to provide maintenance services.
Performance obligations satisfied over time
Example 13—Customer simultaneously receives and consumes the benefits

An entity enters into a contract to provide monthly payroll processing services to a customer for one year. The
promised payroll processing services are accounted for as a single performance obligation. The performance
obligation is satisfied over time because the customer simultaneously receives and consumes the benefits of the entity’s
performance in processing each payroll transaction as and when each transaction is processed. The fact that another entity
would not need to re-perform payroll processing services for the service that the entity has provided to date also
demonstrates that the customer simultaneously receives and consumes the benefits of the entity’s performance as the
entity performs. The entity recognizes revenue over time by measuring its progress towards complete satisfaction of
that performance obligationin.
Example 14—Assessing alternative use and right to payment
An entity enters into a contract with a customer to provide a consulting service that results in the entity providing a
professional opinion to the customer. The professional opinion relates to facts and circumstances that are specific
to the customer. If the customer were to terminate the consulting contract for reasons other than the entity’s failure
to perform as promised, the contract requires the customer to compensate the entity for its costs incurred plus a
15% margin. The 15% margin approximates the profit margin that the entity earns from similar contracts.
If the entity were to be unable to satisfy its obligation and the customer hired another consulting firm to provide the
opinion, the other consulting firm would need to substantially re-perform the work that the entity had completed
to date, because the other consulting firm would not have the benefit of any work in progress performed by the
entity. However, the entity’s performance obligation is a performance obligation satisfied over time because of both
of the following factors:
(a) the development of the professional opinion does not create an asset with alternative use to the entity because
the professional opinion relates to facts and circumstances that are specific to the customer; and
(b) the entity has an enforceable right to payment for its performance completed to date for its costs plus a
reasonable margin, which approximates the profit margin in other contracts.
Example 15—Asset has no alternative use to the entity
An entity enters into a contract with a customer, a government agency, to build a specialized satellite. The entity
builds satellites for various customers, such as governments and commercial entities. The design and construction
of each satellite differ substantially, on the basis of each customer’s needs and the type of technology that is
incorporated into the satellite.
Although the contract does not preclude the entity from directing the completed satellite to another customer, the
entity would incur significant costs to rework the design and function of the satellite to direct that asset to another
customer. Consequently, the asset has no alternative use to the entity because the customer-specific design of the
satellite limits the entity’s practical ability to readily direct the satellite to another customer.
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For the entity’s performance obligation to be satisfied over time when building the satellite, IFRS 15 also requires
the entity to have an enforceable right to payment for performance completed to date. This condition is not
illustrated in this example.
Example 16—Enforceable right to payment for performance completed to date
An entity enters into a contract with a customer to build an item of equipment. The payment schedule in the contract
specifies that the customer must make an advance payment at contract inception of 10% of the contract price,
regular payments throughout the construction period (amounting to 50% of the contract price) and a final payment
of 40% of the contract price after construction is completed and the equipment has passed the prescribed
performance tests. The payments are non-refundable unless the entity fails to perform as promised. If the customer
terminates the contract, the entity is entitled only to retain any progress payments received from the customer. The
entity has no further rights to compensation from the customer.
Even though the payments made by the customer are non-refundable, the cumulative amount of those payments is
not expected, at all times throughout the contract, to at least correspond to the amount that would be necessary to
compensate the entity for performance completed to date. This is because at various times during construction the
cumulative amount of consideration paid by the customer might be less than the selling price of the partially
completed item of equipment at that time. Consequently, the entity does not have a right to payment for
performance completed to date. Thus, the entity accounts for the construction of the equipment as a performance
obligation satisfied at a point in time.
Example 17—Assessing whether a performance obligation is satisfied at a point in time or over time
Anentityisdevelopingamulti-unitresidentialcomplex. Acustomerentersinto a binding sales contract with the entity
for a specified unit that is under construction. Each unit has a similar floor plan and is of a similar size, but other
attributesoftheunitsaredifferent(forexample, thelocationoftheunit within the complex).
Case A—Entity does not have an enforceable right to payment for performance completed to date
The customer pays a deposit upon entering into the contract and the deposit is refundable only if the entity fails to
complete construction of the unit in accordance with the contract. The remainder of the contract price is payable on
completionofthecontractwhenthecustomer obtainsphysicalpossessionofthe unit. If the customer defaults on the contract
before completion of the unit, the entity only has the right to retain the deposit.
Theentitydoes not havean enforceableright to payment for performancecompleted to date because, until construction
of the unit is complete, the entity only has a right to the deposit paid by the customer. Because the entity does not have a
right to payment for work completed to date, the entity’s performance obligation is not a performance obligation satisfied
over time. Instead, the entity accounts for the sale of the unit as a performance obligation satisfied at a point in time.
Case B—Entity has an enforceable right to payment for performance completed to date
The customer pays a non-refundable deposit upon entering into the contract and will make progress payments during
construction of the unit. The contract has substantiveterms thatpreclude the entity frombeingabletodirecttheunitto
another customer. In addition, the customer does not have the right to terminate the contract unless the entity fails
to perform as promised. If the customerdefaultsonitsobligationsbyfailingtomakethepromisedprogress paymentsas
andwhentheyaredue, theentitywouldhavearighttoallofthe considerationpromisedinthecontractifitcompletesthe
constructionofthe unit. The courts have previously upheld similar rights that entitle developers to requirethe customer to
perform, subject to theentity meeting its obligations under the contract.
The entity also has a right to payment for performance completed to date. This is because if the customer were to
default on its obligations, the entity would have an enforceable right to all of the consideration promised under the
contract if it continues to perform as promised. Therefore, the terms of the contract and the practices in the legal
jurisdiction indicate that there is a right to payment for performance completed to date. Consequently, the entity has a
performance obligation that it satisfies over time.
Case C—Entity has an enforceable right to payment for performance completed to date
The same facts as in Case B apply to Case C, except that in the event of a default by the customer, either the entity can
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require the customer to perform as required under the contract or the entity can cancel the contract in exchange for the
asset under construction and an entitlement to a penalty of a proportion of the contract price.
Notwithstanding that the entity could cancel the contract (in which case the customer’sobligationtotheentitywould
be limited to transferring control of the partially completed asset to the entity and paying the penalty prescribed), the
entity has a right to payment for performance completed to date because the entity could also choose to enforce its rights to
full payment under the contract. The fact that the entity may choose to cancel the contract in the event the customer
defaults on its obligations would not affect that assessment, provided that the entity’s rights to require the customer
to continue to perform as required under the contract (ie pay the promised consideration) are enforceable.
Measuring progress towards complete satisfaction of a performance obligation
Example 18—Measuring progress when making goods or services available
An entity, an owner and manager of health clubs, enters into a contract with a customer for one year of access to any of
its health clubs. The customer has unlimited use of the health clubs and promises to pay Rs. 100 per month.
Theentity determinesthatits promisetothecustomeristoprovideaserviceof making the health clubs available for the
customer to use as and when the customer wishes. This is because the extent to which the customer uses the health
clubs does not affect the amount of the remaining goods and services to which the customer is entitled. The entity
concludes that the customer simultaneously receives and consumes the benefits of the entity’s performance as it performs
by making the health clubs available. Consequently, the entity’s performanceobligationissatisfiedovertime.
The entity also determines that the customer benefits from the entity’s service of making the health clubs available
evenly throughout the year. Consequently, theentityconcludes thatthebest measure of progress towards complete
satisfaction of the performance obligation over time is a time-based measure and it recognizes revenue on a straight-
line basis throughout the year at Rs. 100 per month.
Example 19—Uninstalled materials
In November 20X2, an entity contracts with a customer to refurbish a 3-storey building and install new elevators for
total consideration of Rs. 5 million. The promised refurbishment service, including the installation of elevators, is a
single performance obligation satisfied over time. Total expected costs are Rs. 4 million, including Rs. 1.5 million for
the elevators. A summary of the transaction price and expected costs is as follows:
Rs.
Transaction price 5,000,000
Expected costs:
Elevators 1,500,000
Other costs 2,500,000
Total expected costs 4,000,000
The entity uses an input method based on costs incurred to measure its progress towards complete satisfaction of
the performance obligation. The customer obtains control of the elevators when they are delivered to the site in
December 20X2, although the elevators will not be installed until June 20X3. The costs to procure the elevators (Rs.
1.5 million) are significant relative to the total expected costs to completely satisfy the performance obligation (Rs.
4 million). The entity is not involved in designing or manufacturing the elevators.
The entity concludes that including the costs to procure the elevators in the measure of progress would overstate
the extent of the entity’s performance. Consequently, the entity adjusts its measure of progress to exclude the costs
to procure the elevators from the measure of costs incurred and from the transaction price. The entity recognizes
revenue for the transfer of the elevators in an amount equal to the costs to procure the elevators (i.e. at a zero
margin).
As of 31 December 20X2 the entity observes that:
(a) other costs incurred (excluding elevators) are Rs. 500,000; and
(b) performance is 20% complete (i.e. Rs. 500,000 ÷ Rs. 2,500,000).
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Consequently, at 31 December 20X2, the entity recognizes the following:

(a) Revenue of Rs. 2,200,000
[20% × Rs. 3,500,000 (i.e. Transaction price excluding cost of elevators) + Rs. 1,500,000]
(b) Cost of goods sold of Rs. 2,000,000
[Rs. 500,000 + Rs. 1,500,000]
Variable consideration
Example 20—Penalty gives rise to variable consideration
An entity enters into a contract with a customer to build an asset for Rs. 1 million. In addition, the terms of the
contract include a penalty of Rs. 100,000iftheconstructionisnotcompletedwithinthreemonthsofadate specified in
the contract. Theentityconcludesthattheconsiderationpromisedinthecontractincludesa fixed amount of Rs. 900,000
and a variable amount of Rs. 100,000 (arising from the penalty).
Example 21—Estimating variable consideration
An entity enters into a contract with a customer to build a customized asset. The promise to transfer the asset is a
performanceobligationthatissatisfiedover time. The promised consideration is Rs. 2.5 million, but that amount will be
reduced or increased depending on the timing of completion of the asset. Specifically, for each day after 31 March 20X7
that the asset is incomplete, the promised consideration is reduced by Rs. 10,000. For each day before 31 March 20X7 that
the asset is complete, the promised consideration increases by Rs. 10,000. Inaddition,uponcompletionoftheasset,a
thirdpartywillinspecttheassetand assign a rating based on metrics that are defined in the contract. If the asset receives
a specified rating, the entity will be entitled to an incentive bonus of Rs. 150,000.
Indeterminingthetransactionprice,theentitypreparesaseparateestimatefor each element of variable consideration as
follows:
(a) the entity decides to use the expected value method to estimate the variable consideration associated with the
daily penalty or incentive (i.e. Rs. 2.5 million, plus or minus Rs. 10,000 per day). This is because it is the method that
the entity expects to better predict the amount of consideration to which it will be entitled.
(b) the entity decides to use the most likely amount to estimate the variable consideration associated with the incentive
bonus. This is because there are only two possible outcomes (Rs. 150,000 or Rs. 0) and it is the method thattheentity
expectstobetterpredicttheamountofconsiderationto which it will be entitled.
Constraining estimates of variable consideration
Example 22—Right of return
Anentity enters into 100 contractswithcustomers. Eachcontractincludesthe sale of one product for Rs. 100 (100 total
products ×Rs. 100 =Rs. 10,000 total consideration). Cash is received when control of a product transfers. The entity’s
customary business practice is to allow a customer to return any unused product within 30 days and receive a full refund.
The entity’s cost of each product is Rs. 60. Because thecontract allows acustomer toreturn the products, theconsideration
received from the customer is variable. To estimate the variable consideration, entity applies expected value method and
estimates that 97 products will not be returned.
Upon transfer of control of the 100 products, the entity does notrecognize revenue for the three products that it expects
to be returned. Consequently, the entity recognizes the following:
(a) revenue of Rs. 9,700 (Rs. 100 × 97 products not expected to be returned);
(b) arefundliability of Rs. 300 (Rs. 100 refund× 3 products expectedtobe returned); and
(c) anassetof Rs. 180 (Rs. 60 × 3 products for its right torecoverproducts from customers on settling the refund).
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Example 23—Price concessions

An entity enters into a contract with a customer, a distributor, on 1 December 20X7. The entity transfers 1,000
products at contract inception for a price stated in the contract of Rs. 100 per product (total consideration is Rs.
100,000). Payment from the customer is due when the customer sells the products to the end customers. The
entity’s customer generally sells the products within 90 days of obtaining them. Control of the products transfers to
the customer on 1 December 20X7.
On the basis of its past practices and to maintain its relationship with the customer, the entity anticipates granting
a price concession to its customer because this will enable the customer to discount the product and thereby move
the product through the distribution chain. Consequently, the consideration in the contract is variable.
Case A—Estimate of variable consideration is not constrained
The entity has significant experience selling this and similar products. The observable data indicate that historically
the entity grants a price concession of approximately 20% of the sales price for these products. Current market
information suggests that a 20% reduction in price will be sufficient to move the products through the distribution
chain. The entity has not granted a price concession significantly greater than 20% in many years. Using the expected
value method, the entity estimates the transaction price to be Rs. 80,000 (Rs. 80 × 1,000 products).
Despite some uncertainty resulting from factors outside its influence, based on its current market estimates, the
entity expects the price to be resolved within a short time frame. Thus, the entity concludes that it is highly probable
that a significant reversal in the cumulative amount of revenue recognized (i.e. Rs. 80,000) will not occur when the
uncertainty is resolved (i.e. when the total amount of price concessions is determined). Consequently, the entity
recognizes Rs. 80,000 as revenue when the products are transferred on 1 December 20X7.
Case B—Estimate of variable consideration is constrained
The entity has experience selling similar products. However, the entity’s products have a high risk of obsolescence
and the entity is experiencing high volatility in the pricing of its products. The observable data indicate that
historically the entity grants a broad range of price concessions ranging from 20%–60% of the sales price for similar
products. Current market information also suggests that a 15%–50% reduction in price may be necessary to move
the products through the distribution chain. Using the expected value method, the entity estimates that a discount
of 40% will be provided and, therefore, the estimate of the variable consideration is Rs. 60,000 (Rs. 60 × 1,000
products).
The entity observes that the amount of consideration is highly susceptible to factors outside the entity’s influence
(i.e. risk of obsolescence) and it is likely that the entity may be required to provide a broad range of price concessions
to move the products through the distribution chain. Consequently, the entity cannot include its estimate of Rs.
60,000 (i.e. a discount of 40%) in the transaction price because it cannot conclude that it is highly probable that a
significant reversal in the amount of cumulative revenue recognized will not occur. Although the entity’s historical
price concessions have ranged from 20%–60%, market information currently suggests that a price concession of
15%–50% will be necessary. Consequently, the entity concludes that it is highly probable that a significant reversal
in the cumulative amount of revenue recognized will not occur if the entity includes Rs. 50,000 in the transaction
price (Rs. 100 sales price and a 50% price concession) and therefore, recognizes revenue at that amount and
reassesses the estimates of the transaction price at each reporting date until the uncertainty is resolved.
Example 24—Volume discount incentive
An entity enters into a contract with a customer on 1 January 20X8 to sell Product A for Rs. 100 per unit. If the customer
purchases more than 1,000 units of Product A in a calendar year, the contract specifies that the price per unit is
retrospectively reduced to Rs. 90 per unit. Consequently, the consideration in the contract is variable.
Forthefirstquarterended 31 March20X8, theentitysells75 unitsofProductA to thecustomer. The entity estimates that
the customer’s purchases will not exceed the 1,000-unit threshold required for the volume discount in the calendar
year. The entity concludes that it is highly probable that a significant reversal in the cumulative amount of revenue
recognized (i.e. Rs. 100 per unit) will not occur when the uncertainty is resolved (i.e. when the total amount of
purchases is known). Consequently, the entity recognizes revenue of Rs. 7,500 (75 units × Rs. 100 per unit) for the quarter
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ended 31 March 20X8. Inthesecond quarter ended 30 June 20X8 the entity sells an additional 500 units of Product A to the
customer. In the light of the new fact, the entity estimates that the customer’s purchases will exceed the 1,000-unit
threshold for the calendar year and therefore it will be required to retrospectively reduce the price per unit to Rs. 90.
Consequently, the entity recognizes revenueof Rs. 44,250 for thequarter ended 30 June 20X8. That amountis calculated
from Rs. 45,000 forthesaleof 500 units (500 units × Rs. 90 per unit) less the change in transaction price of Rs. 750 (75
units × Rs. 10 price reduction) for the reduction of revenue relating to units sold forthequarterended 31 March 20X8.
Example 25—Management fees subject to the constraint
On 1 January 20X8, an entity enters into a contract with a client to provide asset management services for five years.
The entity receives a 2% quarterly management fee based on the client’s assets under management at the end of
each quarter. In addition, the entity receives a performance-based incentive fee of 20% of the fund’s return in excess
of the return of an observable market index over the five-year period. Consequently, both the management fee and
the performance fee in the contract are variable consideration.
The entity accounts for the services as a single performance obligation, because it is providing a series of distinct
services that are substantially the same and have the same pattern of transfer. The entity observes that the promised
consideration is dependent on the market and thus is highly susceptible to factors outside the entity’s influence. In
addition, the incentive fee has a large number and a broad range of possible consideration amounts. The entity also
observes that although it has experience with similar contracts, that experience is of little predictive value in
determining the future performance of the market. Therefore, at contract inception, the entity cannot conclude that
it is highly probable that a significant reversal in the cumulative amount of revenue recognized would not occur if
the entity included its estimate of the management fee or the incentive fee in the transaction price.
At each reporting date, the entity updates its estimate of the transaction price. Consequently, at the end of each
quarter, the entity concludes that it can include in the transaction price the actual amount of the quarterly
management fee because the uncertainty is resolved. At 31 March 20X8, the client’s assets under management are
Rs. 100 million. Therefore, the resulting quarterly management fee and the transaction price is Rs. 2 million. At the
end of each quarter, the entity allocates the quarterly management fee to the distinct services provided during the
quarter. This is because the fee relates specifically to the entity’s efforts to transfer the services for that quarter,
which are distinct from the services provided in other quarters. Consequently, the entity recognizes Rs. 2 million as
revenue for the quarter ended 31 March 20X8.
The existence of a significant financing component in the contract
Example 26—Significant financing component and right of return
AnentitysellsaproducttoacustomerforRs. 121thatispayable24monthsafter delivery. The customer obtains control of
theproductatcontractinception. The contract permits the customer to return the product within 90 days. The product
is new and the entity has no relevant historical evidence of product returns or other available market evidence. The
cash selling price of the product is Rs. 100 and entity’s cost of the product isRs. 80.
Theentity doesnotrecognizerevenuewhencontroloftheproducttransfers to thecustomer. This is because the existence
of the right of return and the lack of relevant historical evidence means that the entity cannot conclude that it is highly
probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Consequently, revenue
is recognized after three months when the right of return lapses.
The contract includes a significant financing component which is evident from the difference between the amount of
promised consideration of Rs. 121 and the cash selling price of Rs. 100 at the date that the goods are transferred to the
customer. The following journal entries illustrate how the entity accounts for this contract:
(a) When the product is transferred to the customer:
Dr. Asset for right to recover product to be returned Rs. 80
Cr. Inventory Rs. 80
(b) During the three-month right of return period, no interest is recognised because no contract asset or receivable has
been recognized.
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(c) When the right of return lapses (the product is not returned):
Dr. Receivable Rs. 100
Cr. Revenue Rs. 100
Dr. Cost of sales Rs. 80

Cr. Asset for product to be returned Rs. 80
Untiltheentityreceivesthecashpaymentfromthecustomer, interestrevenue would be recognized.
Example 27—Withheld payments on a long-term contract
An entity enters into a contract for the construction of a building that includes scheduled milestone payments for
the performance by the entity throughout the contract term of three years. The performance obligation will be
satisfied over time and the milestone payments are scheduled to coincide with the entity’s expected performance.
The contract provides that a specified percentage of each milestone payment is to be withheld (i.e. retained) by the
customer throughout the arrangement and paid to the entity only when the building is complete. The entity
concludes that the contract does not include a significant financing component. The milestone payments coincide
with the entity’s performance and the contract requires amounts to be retained for reasons other than the provision
of finance. The withholding of a specified percentage of each milestone payment is intended to protect the customer
from the contractor failing to adequately complete its obligations under the contract.
Example 28—Determining the discount rate
An entity enters into a contract with a customer to sell equipment. Control of the equipment transfers to the
customer when the contract is signed. The price stated in the contract is Rs. 1 million plus a 5% contractual rate of
interest, payable in 60 monthly instalments of Rs. 18,871.
Case A—Contractual discount rate reflects the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, the entity observes
that the 5% contractual rate of interest reflects the rate that would be used in a separate financing transaction
between the entity and its customer at contract inception (i.e. the contractual rate of interest of 5% reflects the
credit characteristics of the customer).The market terms of the financing mean that the cash selling price of the
equipment is Rs. 1 million. This amount is recognized as revenue and as a loan receivable when control of the
equipment transfers to the customer. The entity accounts for the receivable in accordance with IFRS 9.
Case B—Contractual discount rate does not reflect the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, the entity observes
that the 5% contractual rate of interest is significantly lower than the 12% interest rate that would be used in a
separate financing transaction between the entity and its customer at contract inception (i.e. the contractual rate
of interest of 5% does not reflect the credit characteristics of the customer). This suggests that the cash selling price
is less than Rs. 1 million.
Thus, the entity determines the transaction price by adjusting the promised amount of consideration to reflect the
contractual payments using the 12% interest rate that reflects the credit characteristics of the customer.
Consequently, the entity determines that the transaction price is Rs. 848,357 (60 monthly payments of CU18,871
discounted at 12%). The entity recognizes revenue and a loan receivable for that amount. The entity accounts for
the loan receivable in accordance with IFRS 9.
Example 29—Advance payment and assessment of discount rate
An entity enters into a contract with a customer to sell an asset. Control of the asset will transfer to the customer in two
years (i.e. the performance obligation will be satisfied at a point in time). The contract includes two alternative
payment options: payment of Rs. 5,000 in two years when the customer obtains control of the asset or payment of Rs. 4,000
when the contract is signed. The customer elects to pay Rs. 4,000 when the contract is signed. The entity concludes
that the contract contains a significant financing componentbecauseofthelengthoftimebetweenwhenthecustomer
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paysfor the asset and when the entity transfers the asset to the customer.
Theinterestrateimplicitinthetransactionis 11.8%. However, the entity determines that the rate that should be used in
adjusting the promised consideration is 6%, which is the entity’s incremental borrowing rate as well as the prevailing market
interest rate. The following journal entries illustrate how the entity would account for the significant financing
component:
(a) recognize a contract liability for the Rs. 4,000 payment received at contract inception:
Dr. Cash Rs. 4,000
Cr. Contract liability Rs. 4,000
(b) during the two years from contract inception until the transfer of the asset, the entity adjusts the promised
amount of consideration and accretes the contract liability by recognizing interest on Rs. 4,000 at 6%for two years:
Dr. Interest expense Rs. 494(*)

Cr. Contract liability Rs. 494
* Rs. 494 = Rs. 4,000 x 1.062 – Rs. 4,000.
(c) recognize revenue for the transfer of the asset:
Dr. Contract liability Rs. 4,494
Cr. Revenue Rs. 4,494
Example 30—Advance payment
An entity, a technology product manufacturer, enters into a contract with a customer to provide global telephone
technology support and repair coverage for three years along with its technology product. The customer purchases
this support service at the time of buying the product. Consideration for the service is an additional Rs. 300.
Customers electing to buy this service must pay for it upfront (i.e. a monthly payment option is not available). The
entity charges a single upfront amount, not with the primary purpose of obtaining financing from the customer but,
instead, to maximize profitability, taking into consideration the risks associated with providing the service.
Specifically, if customers could pay monthly, they would be less likely to renew and the population of customers that
continue to use the support service in the later years may become smaller and less diverse over time (i.e. customers
that choose to renew historically are those that make greater use of the service, thereby increasing the entity’s
costs). In addition, customers tend to use services more if they pay monthly rather than making an upfront payment.
Finally, the entity would incur higher administration costs such as the costs related to administering renewals and
collection of monthly payments.
Thus, the entity determines that the payment terms were structured primarily for reasons other than the provision
of finance to the entity and concludes that there is not a significant financing component.
Non-cash consideration
Example 31—Entitlement to non-cash consideration
An entity enters intoa contractwith a customer to provide a weekly service for one year. In exchange for the service, the
customer promises 100 shares of its common stockperweekofservice(atotalof5,200sharesforthecontract). Theterms
in the contract require that the shares must be paid upon the successful completion of each week ofservice. The
entity measures its progress towards complete satisfaction of the performanceobligation aseach week of service is
complete. Todeterminethe transaction price (and the amount of revenue to be recognized), the entity measures the
fair value of 100 shares that are received upon completion of each weekly service. The entity does not reflect any
subsequentchangesinthefair value of the shares received (or receivable) in revenue.
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Consideration payable to a customer

Example 32—Consideration payable to a customer
Anentitythatmanufacturesconsumergoodsentersintoaone-yearcontractto sell goods to a customer that is a large
global chain of retail stores. The customer commits to buy at least Rs. 15 million of products during the year. The contract
also requires the entity to make a non-refundable payment of Rs. 1.5 million to the customer at the inception of the
contract. The Rs. 1.5 million payment will compensate the customer for the changes it needs to make to its shelving to
accommodate the entity’s products.
The entity concludes that the payment to the customer is not in exchange for a distinct goodorservicethattransfersto
the entity. This is becausethe entitydoes not obtain control of any rights to the customer’s shelves. The entity concludes
that the consideration payable is accounted for as a reduction in the transaction price when the entity recognizes revenue
for the transfer of the goods. Consequently, as the entity transfers goods to the customer, the entity reduces the
transaction price for each good by 10% (Rs. 1.5 million ÷ Rs. 15 million). Therefore, in the first month in which the entity
transfers goods to the customer, the entity recognizes revenue of Rs. 1.8 million (Rs. 2.0 million invoiced amount less Rs. 0.2
million of consideration payable to the customer).
Allocating the transaction price to performance obligations
Example 33—Allocation methodology
An entity enters into acontract with a customer to sell Products A, B and C in exchange for Rs. 100. Theentitywillsatisfy the
performance obligations for each oftheproductsatdifferentpointsintime. Theentityregularlysells Product A separately
and therefore the stand-alone selling price is directly observable. The stand-alone selling prices of Products B and C are not
directlyobservable. Because the stand-alone selling prices for Products B and C are not directly observable, the entity
must estimate them. To estimate the stand-alone selling prices, the entity uses the adjusted market assessment approach for
Product B andtheexpectedcostplusamarginapproachfor Product C. Inmakingthose estimates, the entity maximizes the
useofobservableinputs. The entity estimates the stand-alone selling prices as follows:
Product Stand-alone selling price (Rs.) Method
A 50 Directly observable
B 25 Adjusted market assessment approach
C 75 Expected cost plus margin approach
150
The customer receives a discount for purchasing thebundle of goods because the sum of the stand-alone selling prices
(Rs. 150) exceeds the promised consideration (Rs. 100). Theentityconsiderswhetherithasobservable evidence about the
performance obligation to which the entire discount belongs and concludes that it does not. Consequently, the
discount is allocated proportionately across Products A, B and C. The discount, and therefore the transaction price, is
allocated as follows:
Product Allocated transaction price
Rs.
A 33 (Rs. 50 ÷ Rs. 150 × Rs. 100)
B 17 (Rs. 25 ÷ Rs. 150 × Rs. 100)
C 50 (Rs. 75 ÷ Rs. 150 × Rs. 100)
Total 100
Example 34—Allocating a discount
An entity regularly sells Products A, B and C individually, thereby establishing the following stand-alone sellingprices:
A – Rs.40 B – Rs. 55 C – Rs. 45
In addition, the entity regularly sells Products B and C together for Rs. 60.
Case A — Allocating a discount to one or more performance obligations
The entity enters into a contract with a customer to sell Products A, B and C in exchange for Rs. 100. The entity will satisfy
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theperformance obligations for each of the products at different points in time.

The contract includes a discount of Rs. 40 on the overall transaction, which would be allocated proportionately to all
three performance obligations when allocating the transaction price using the relative stand-alone selling price
method. However, becausethe entity regularly sells Products B and C together for Rs. 60 and Product A for Rs. 40, it
has evidence that the entire discount should be allocated to the promises to transfer Products B and C.
If the entity transfers control of Products B and C at the same point in time, then the entity could, as a practical matter,
account for the transfer of those products as a single performance obligation. That is, the entity could allocate Rs. 60 of the
transaction price to the single performance obligation and recognize revenue of Rs. 60 when Products B and C
simultaneously transfer to thecustomer.
If the contract requires the entity to transfer control of Products B and C at different points in time, then the allocated
amount of Rs. 60 is individually allocated to the promises to transfer Product B (stand-alone selling price of Rs. 55)
and Product C (stand-alone selling price of Rs. 45) as follows:
Product Allocated transaction price
Rs.
B 33 [Rs. 55 x Rs. 60/Rs. 100]
C 27 [Rs. 45 x Rs. 60/Rs. 100]
Total 60
Case B — Residual approach is appropriate

Theentity entersintoacontractwithacustomertosell Products A, Band Cas described in Case A. Thecontractalso includes
a promise to transfer Product D. Total consideration in the contract is Rs. 130. The stand-alone selling price for Product D is
highly variable because the entity sells Product D to different customers for a broad range of amounts (Rs. 15 – Rs. 45).
Consequently, the entity decides to estimate the stand-alone selling price of Product D using the residual approach.
Before estimating the stand-alone selling price of Product D using the residual approach, the entity determines whether
any discount should be allocated to the other performance obligations.
As in Case A, because the entity regularly sells Products B and C together for Rs. 60 and Product A for Rs. 40, it has
observable evidence that Rs. 100 should be allocated to those three products and a Rs. 40 discount should be allocated to the
promises to transfer Products B and C. Using the residual approach, the entity estimates the stand-alone selling price
of Product D to be Rs. 30 as follows:
Product Stand-alone selling price (Rs.) Method
A 40 Directly observable
B and C 60 Directly observable with discount
D 30 Residual approach
130
Case C — Residual approach is inappropriate
The same facts as in Case B apply to Case C except the transaction price is Rs. 105 instead of Rs. 130. Consequently, the
application of the residual approach would result in a stand-alone selling price of Rs. 5 for Product D (Rs. 105 transaction
priceless Rs. 100 allocatedto Products A, Band C). Theentityconcludesthat Rs. 5 would not faithfully depict the amount of
consideration for Product D. Consequently, the entity reviews its observable data, including sales and margin reports, to
estimate the stand-alonesellingpriceof Product Dusing anothersuitable method. The entity allocates the transaction price
of Rs. 105 to Products A, B, C and D using the relative stand-alone selling prices of those products.
Example 35—Allocation of variable consideration
An entity enters into a contract with a customer for two intellectual property licences (Licences X and Y), which the
entity determines to represent two performance obligations each satisfied at a point in time. The stand-alone selling
prices of Licences X and Y are Rs. 800 and Rs. 1,000, respectively.
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Case A—Variable consideration allocated entirely to one performance obligation

The price stated in the contract for Licence X is a fixed amount of Rs. 800 and for Licence Y the consideration is 3%
of the customer’s future sales of products that use Licence Y. For purposes of allocation, the entity estimates its
sales-based royalties (i.e. the variable consideration) to be Rs. 1,000. To allocate the transaction price, the entity
concludes that the variable consideration (i.e. the sales-based royalties) should be allocated entirely to Licence Y.
The entity transfers Licence Y at inception of the contract and transfers Licence X one month later. Upon the transfer
of Licence Y, the entity does not recognize revenue because the consideration allocated to Licence Y is in the form
of a sales-based royalty. Therefore, the entity recognizes revenue for the sales-based royalty when those subsequent
sales occur. When Licence X is transferred, the entity recognizes as revenue the Rs. 800 allocated to Licence X.
Case B—Variable consideration allocated on the basis of stand-alone selling prices
The price stated in the contract for Licence X is a fixed amount of Rs. 300 and for Licence Y the consideration is 5%
of the customer’s future sales of products that use Licence Y. The entity’s estimate of the sales-based royalties (i.e.
the variable consideration) is Rs. 1,500.
To allocate the transaction price, the entity concludes that even though the variable payments relate specifically to
an outcome from the performance obligation to transfer Licence Y (i.e. the customer’s subsequent sales of products
that use Licence Y), allocating the variable consideration entirely to Licence Y would be inconsistent with the principle
for allocating the transaction price. Allocating Rs. 300 to Licence X and Rs. 1,500 to Licence Y does not reflect a
reasonable allocation of the transaction price on the basis of the stand-alone selling prices of Licences X and Y of Rs.
800 and Rs. 1,000, respectively.
The entity allocates the transaction price of Rs. 300 to Licences X and Y on the basis of relative stand-alone selling
prices of Rs. 800 and Rs. 1,000, respectively. The entity also allocates the consideration related to the sales-based
royalty on a relative stand-alone selling price basis. However, when an entity licenses intellectual property in which
the consideration is in the form of a sales-based royalty, the entity cannot recognize revenue until the later of the
following events:
- the subsequent sales occur; or
- the performance obligation is satisfied (or partially satisfied).
Licence Y is transferred to the customer at the inception of the contract and Licence X is transferred three months
later. When Licence Y is transferred, the entity recognizes as revenue the Rs.167 (Rs. 1,000 ÷ Rs. 1,800 × Rs. 300)
allocated to Licence Y. When Licence X is transferred, the entity recognizes as revenue the Rs. 133 (Rs. 800 ÷ Rs.
1,800 × Rs. 300) allocated to Licence X.
In the first month, the royalty due from the customer’s first month of sales is Rs. 200. Consequently, the entity
recognizes as revenue Rs. 111 (Rs. 1,000 ÷ Rs. 1,800 × Rs. 200) allocated to Licence Y (which has been transferred to
the customer and is therefore a satisfied performance obligation). The entity recognizes a contract liability for the
Rs. 89 (Rs. 800 ÷ Rs. 1,800 × Rs. 200) allocated to Licence X. This is because although the subsequent sale by the
entity’s customer has occurred, the performance obligation to which the royalty has been allocated has not been
satisfied.
Contract costs
Example 36—Incremental costs of obtaining a contract

An entity, a provider of consulting services, wins a competitive bid to provide consulting services to a new customer. The
entity incurred the following costs to obtain the contract:
Rs.
External legal fees for due diligence 15,000
Travel costs to deliver proposal 25,000
Commissions to sales employees 10,000
Total costs incurred 50,000
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The entity recognizes an asset for the Rs. 10,000 incremental costs of obtaining the contract arising from the
commissions to sales employees because the entity expects to recover those costs through future fees for the consulting
services. The entity also pays discretionary annual bonuses to sales supervisors based on annual sales targets, overall
profitability of the entity and individual performance evaluations. However, the entity does not recognize an asset for the
bonuses paid to sales supervisors because the bonuses are not incremental to obtaining acontract. The amounts are
discretionary and are based on other factors, including the profitability of the entity and the individuals’
performance. The bonuses are not directly attributable to identifiable contracts. Alsotheexternallegalfeesandtravel
costswouldhavebeen incurred regardless of whether the contract was obtained. Therefore, thosecostsarerecognized
asexpenses when incurred.
Example 37—Costs that give rise to an asset
An entity enters into a service contract to manage a customer’s information technology data centre for five years.
The contract is renewable for subsequent one-year periods. The average customer term is seven years. The entity
pays an employee a Rs. 10,000 sales commission upon the customer signing the contract. Before providing the
services, the entity designs and builds a technology platform for the entity’s internal use that interfaces with the
customer’s systems. That platform is not transferred to the customer, but will be used to deliver services to the
customer.
Incremental costs of obtaining a contract
The entity recognizes an asset for the Rs. 10,000 incremental costs of obtaining the contract for the sales commission
because the entity expects to recover those costs through future fees for the services to be provided. The entity
amortizes the asset over seven years, because the asset relates to the services transferred to the customer during
the contract term of five years and the entity anticipates that the contract will be renewed for two subsequent one-
year periods.
Costs to fulfill a contract
The initial costs incurred to set up the technology platform are as follows:
Rs.
Design services 40,000
Hardware 120,000
Software 90,000
Migration and testing of data centre 100,000
Total costs 350,000
The initial setup costs relate primarily to activities to fulfil the contract but do not transfer goods or services to the
customer. The entity accounts for the initial setup costs as follows:
(a) hardware costs—accounted for in accordance with IAS 16 Property, Plant and Equipment.
(b) software costs—accounted for in accordance with IAS 38 Intangible Assets.
(c) costs of the design, migration and testing of the data centre—assessed to determine whether an asset can be
recognized for the costs to fulfil the contract. Any resulting asset would be amortized on a systematic basis over
the seven-year period that the entity expects to provide services related to the data centre.
In addition to the initial costs to set up the technology platform, the entity also assigns two employees who are
primarily responsible for providing the service to the customer. Although the costs for these two employees are
incurred as part of providing the service to the customer, the entity concludes that the costs cannot be recognized
as an asset rather the entity recognizes the payroll expense for these two employees when incurred.
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Presentation
Example 38—Contract liability and receivable
Case A — Cancellable contract
On 1 January 20X9, an entity enters into a cancellable contract to transfer a product to acustomer on 31 March 20X9. The
contract requires the customer to pay consideration of Rs. 1,000 in advance on 31 January 20X9. The customer pays the
considerationon 1 March 20X9. Theentity transfers theproducton 31 March 20X9. The following journal entries illustrate
how the entity accounts for the contract:
(a) The entity receives cash of Rs. 1,000 on 1 March 20X9 (cash is received in advance of performance):
Dr. Cash Rs. 1,000
(b) The entity satisfies the performance obligation on 31 March 20X9:
Case B — Non-cancellable contract
The same facts as in Case A apply to Case B except that the contract is non-cancellable. The followingjournalentries
illustrate howtheentityaccounts for the contract:
(a) The amount of consideration is due on 31 January 20X9 (which is when the entity recognizes a receivable because it
has an unconditional right to consideration):
Dr. Receivable Rs. 1,000
(b) The entity receives the cash on 1 March 20X9:
Dr. Cash Rs. 1,000
Cr. Receivable Rs. 1,000
(c) The entity satisfies the performance obligation on 31 March 20X9:
If the entity issued the invoice before 31 January 20X9 (the due date of the consideration), the entity would not
present the receivable and the contract liability on a gross basis in the statement of financial position because the entity
does not yet have a right to consideration that is unconditional.
Example 39—Contract asset recognized for the entity’s performance
On1January20X8,anentityentersintoacontracttotransferProductsAandB toacustomerinexchangefor Rs. 1,000. The
contractrequires Product Atobe delivered first and states that payment for the delivery of Product A is conditional
on the delivery of Product B. In other words, the consideration of Rs. 1,000 is due only after the entity has transferred both
Products A and B to the customer.
The entity identifies the promises to transfer Products A and B as performance obligations and allocates Rs. 400 to the
performance obligation to transfer Product A and Rs. 600 to the performance obligation to transfer Product B on the basis
of their relative stand-alone selling prices. The entity recognizes revenue for each respective performance obligation
when control of the product transfers to the customer. The entity satisfies the performance obligation to transfer
Product A:
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Dr. Contract asset Rs. 400

Cr. Revenue Rs. 400
The entity satisfies the performance obligation to transfer Product B and to recognize the unconditional right to
consideration:
Dr. Receivable Rs. 1,000
Cr. Contract asset Rs. 400
Cr. Revenue Rs. 600
Example 40—Receivable recognized for the entity’s performance
An entity enters into a contract with a customer on 1 January 20X9 to transfer products to the customer for Rs. 150 per
product. If thecustomerpurchases more than 1 million products in a calendar year, the contract indicates that the price per
unit is retrospectively reduced to Rs. 125 per product. Consideration is due when control of the products transfer to
the customer. Therefore, theentityhasanunconditionalrightto consideration (i.e. areceivable) forRs. 150perproductuntil
theretrospectivepricereductionapplies(i.e. after 1 million products areshipped).
Indeterminingthetransactionprice, theentityconcludesatcontractinception that the customer will meet the 1 million
products threshold and therefore estimates that the transaction price is Rs. 125 per product. Consequently, upon the first
shipment to the customer of 100 products the entity recognises the following:
Dr. Receivable Rs. 15,000*
Cr. Revenue Rs. 12,500**

Cr. Refund liability (contract liability) Rs. 2,500
* Rs. 150 per product × 100 products.
** Rs. 125 transaction price per product × 100 products.
The refund liability represents a refund of Rs. 25 per product, which is expected to be provided to the customer for the
volume-based rebate.
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IFRS 15 Revenue from Contracts with Customers

Illustrative Examples – Summarized
Warranties
Warranty provides a It is generally the case when a customer does not have an option to purchase
customer with assurance a warranty separately.
that the product will It is not a separate performance obligation rather it is accounted for in
accordance with IAS 37.
function as intended:
Warranty provides the It is the case when a customer has an option to purchase a warranty
service to the customer in separately.
addition to the assurance It is considered as a separate performance obligation and a portion of
transaction price is allocated to that performance obligation.
of compliance as
intended:
Factors to be considered:
o If the entity is required by law to provide a warranty, then it is not a separate performance obligation.
o Longer warranty coverage period is more likely to be a separate performance obligation.
Example 44—Warranties
An entity, a manufacturer, provides its customer with a warranty with the purchase of a product. The warranty
provides assurance that the product complies with agreed-upon specifications and will operate as promised for one
year from the date of purchase. The contract also provides the customer with the right to receive up to 20 hours of
training services on how to operate the product at no additional cost.
The product and training services are each capable of being distinct because the customer can benefit from the
product on its own without the training services and can benefit from the training services together with the product
that already has been transferred by the entity. The entity regularly sells the product separately without the training
services.
The training services and product do not significantly modify or customize each other. The product and the training
services are not highly interdependent or highly interrelated. Consequently, the entity concludes that its promise to
transfer the product and its promise to provide training services are not inputs to a combined item, and, therefore,
give rise to two separate performance obligations.
Finally, the entity assesses the promise to provide a warranty and observes that the warranty provides the customer
with the assurance that the product will function as intended for one year. The entity, therefore, does not account
for it as a performance obligation rather it accounts for the assurance-type warranty in accordance with the
requirements in IAS 37. As a result, the entity allocates the transaction price to the two performance obligations
(the product and the training services) and recognizes revenue when (or as) those performance obligations are
satisfied.
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Principal versus agent considerations
Principal: An entity is a principal if it controls the specified good or service before that
good or service is transferred to a customer.
When principal satisfies a performance obligation, then it recognizes revenue
in the gross amount of consideration.
Agent: An entity is an agent if its performance obligation is to arrange for the

provision of the specified good or service by another party. It does not control
the specified good or service before that good or service is transferred to a
customer.
When agent satisfies a performance obligation, then it recognizes revenue in
the amount of any fees or commission.
Factors to be considered (for Principal):

o The entity is primarily responsible for fulfilling the promise to provide the specified good or service.
o The entity has inventory risk before the specified good or service has been transferred to a customer.
o The entity has discretion in establishing the price for the specified good or service.
Example 45—Arranging for the provision of goods or services (entity is an agent)

An entity operates a website that enables customers to purchase goods from a range of suppliers who deliver the
goods directly to the customers. Under the terms of the entity’s contracts with suppliers, when a good is purchased
via the website, the entity is entitled to a commission that is equal to 10% of the sales price. The entity’s website
facilitates payment between the supplier and the customer at prices that are set by the supplier. The entity requires
payment from customers before orders are processed and all orders are non-refundable. The entity has no further
obligations to the customer after arranging for the products to be provided to the customer.
The website operated by the entity is a marketplace in which suppliers offer their goods and customers purchase
the goods that are offered by the suppliers. Accordingly, the entity observes that the specified goods to be provided
to customers that use the website are the goods provided by the suppliers, and no other goods or services are
promised to customers by the entity. The entity does not control the suppliers’ inventory of goods used to fulfil the
orders placed by customers using the website.
Consequently, the entity concludes that it is an agent and its performance obligation is to arrange for the provision
of goods by the supplier. When the entity satisfies its promise to arrange for the goods to be provided by the supplier
to the customer (which, in this example, is when goods are purchased by the customer), the entity recognizes
revenue in the amount of the commission to which it is entitled.
Example 46—Promise to provide goods or services (entity is a principal)
An entity enters into a contract with a customer for equipment with unique specifications. The entity and the
customer develop the specifications for the equipment, which the entity communicates to a supplier that the entity
contracts with to manufacture the equipment. The entity also arranges to have the supplier deliver the equipment
directly to the customer. Upon delivery of the equipment to the customer, the terms of the contract require the
entity to pay the supplier the price agreed to by the entity and the supplier for manufacturing the equipment. The
entity and the customer negotiate the selling price and the entity invoices the customer for the agreed-upon price
with 30-day payment terms. The entity’s profit is based on the difference between the sales price negotiated with
the customer and the price charged by the supplier. The contract between the entity and the customer requires the
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customer to seek remedies for defects in the equipment from the supplier under the supplier’s warranty. However,
the entity is responsible for any corrections to the equipment required resulting from errors in specifications.
The entity concludes that it has promised to provide the customer with specialized equipment designed by the entity.
Although the entity has subcontracted the manufacturing of the equipment to the supplier, the entity concludes
that the design and manufacturing of the equipment are not distinct, because they are not separately identifiable
(i.e. there is a single performance obligation). The entity is responsible for the overall management of the contract
(for example, by ensuring that the manufacturing service conforms to the specifications) and, thus, provides a
significant service of integrating those items into the combined output—the specialized equipment—for which the
customer has contracted. In addition, those activities are highly interrelated. If necessary, modifications to the
specifications are identified as the equipment is manufactured, the entity is responsible for developing and
communicating revisions to the supplier and for ensuring that any associated rework required conforms with the
revised specifications.
Thus, the entity concludes that it is a principal in the transaction. The entity recognizes revenue in the gross amount
of consideration to which it is entitled from the customer in exchange for the specialized equipment.
Example 46A—Promise to provide goods or services (entity is a principal)
An entity enters into a contract with a customer to provide office maintenance services. The entity and the customer
define and agree on the scope of the services and negotiate the price. The entity is responsible for ensuring that the
services are performed in accordance with the terms and conditions in the contract. The entity invoices the customer
for the agreed-upon price on a monthly basis with 10-day payment terms. The entity regularly engages third-party
service providers to provide office maintenance services to its customers. When the entity obtains a contract from
a customer, the entity enters into a contract with one of those service providers, directing the service provider to
perform office maintenance services for the customer. The payment terms in the contracts with the service providers
are generally aligned with the payment terms in the entity’s contracts with customers. However, the entity is obliged
to pay the service provider even if the customer fails to pay.
The customer does not have a right to direct the service provider to perform services that the entity has not agreed
to provide. Therefore, the right to office maintenance services obtained by the entity from the service provider is
not the specified good or service in its contract with the customer. The entity concludes that it controls the specified
services before they are provided to the customer. The entity obtains control of a right to office maintenance services
after entering into the contract with the customer but before those services are provided to the customer.
Thus, the entity is a principal in the transaction and recognizes revenue in the amount of consideration to which it
is entitled from the customer in exchange for the office maintenance services.
Example 47—Promise to provide goods or services (entity is a principal)
An entity negotiates with major airlines to purchase tickets at reduced rates compared with the price of tickets sold
directly by the airlines to the public. The entity agrees to buy a specific number of tickets and must pay for those
tickets regardless of whether it is able to resell them. The reduced rate paid by the entity for each ticket purchased
is negotiated and agreed in advance. The entity determines the prices at which the airline tickets will be sold to its
customers. The entity sells the tickets and collects the consideration from customers when the tickets are purchased.
The entity also assists the customers in resolving complaints with the service provided by the airlines. However, each
airline is responsible for fulfilling obligations associated with the ticket, including remedies to a customer for
dissatisfaction with the service.
The entity concludes that, with each ticket that it commits itself to purchase from the airline, it obtains control of a
right to fly on a specified flight (in the form of a ticket) that the entity then transfers to one of its customers.
The entity has inventory risk with respect to the ticket because the entity committed itself to obtain the ticket from
the airline before obtaining a contract with a customer to purchase the ticket. This is because the entity is obliged
to pay the airline for that right regardless of whether it is able to obtain a customer to resell the ticket to or whether
it can obtain a favourable price for the ticket. The entity also establishes the price that the customer will pay for the
specified ticket.
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Thus, the entity concludes that it is a principal in the transactions with customers. The entity recognizes revenue in
the gross amount of consideration to which it is entitled in exchange for the tickets transferred to the customers.
Example 48—Arranging for the provision of goods or services (entity is an agent)
An entity sells vouchers that entitle customers to future meals at specified restaurants. The sales price of the voucher
provides the customer with a significant discount when compared with the normal selling prices of the meals (for
example, a customer pays Rs. 100 for a voucher that entitles the customer to a meal at a restaurant that would
otherwise cost Rs. 200). The entity does not purchase or commit itself to purchase vouchers in advance of the sale
of a voucher to a customer; instead, it purchases vouchers only as they are requested by the customers. The entity
sells the vouchers through its website and the vouchers are non-refundable. The entity and the restaurants jointly
determine the prices at which the vouchers will be sold to customers. Under the terms of its contracts with the
restaurants, the entity is entitled to 30% of the voucher price when it sells the voucher. The entity also assists the
customers in resolving complaints about the meals and has a buyer satisfaction programme. However, the
restaurant is responsible for fulfilling obligations associated with the voucher, including remedies to a customer for
dissatisfaction with the service.
A customer obtains a voucher for the restaurant that it selects. The entity does not engage the restaurants to provide
meals to customers on the entity’s behalf. The entity concludes that it does not control the voucher (right to a meal)
at any time.
Thus, the entity concludes that it is an agent with respect to the vouchers. The entity recognizes revenue in the net
amount of consideration to which the entity will be entitled in exchange for arranging for the restaurants to provide
vouchers to customers for the restaurants’ meals, which is the 30% commission it is entitled to upon the sale of each
voucher.
Example 48A—Entity is a principal and an agent in the same contract
An entity sells services to assist its customers in more effectively targeting potential recruits for open job positions.
The entity performs several services itself, such as interviewing candidates and performing background checks. As
part of the contract with a customer, the customer agrees to obtain a License to access a third party’s database of
information on potential recruits. The entity arranges for this License with the third party, but the customer contracts
directly with the database provider for the License. The entity collects payment on behalf of the third-party database
provider as part of the entity’s overall invoicing to the customer. The database provider sets the price charged to
the customer for the License, and is responsible for providing technical support and credits to which the customer
may be entitled for service down time or other technical issues.
For the purpose of this example, it is assumed that the entity concludes that its recruitment services and the
database access License are each distinct. Accordingly, there are two specified goods or services to be provided to
the customer—access to the third party’s database and recruitment services. The entity concludes that it does not
control the access to the database before it is provided to the customer. The entity does not at any time have the
ability to direct the use of the License because the customer contracts for the License directly with the database
provider. The entity does not control access to the provider’s database—it cannot, for example, grant access to the
database to a party other than the customer, or prevent the database provider from providing access to the
customer.
Thus, the entity concludes that it is an agent in relation to the third party’s database service. In contrast, the entity
concludes that it is the principal in relation to the recruitment services because the entity performs those services
itself and no other party is involved in providing those services to the customer.
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Customer options for additional goods or services
If an entity grants a customer the option to acquire additional goods or services, that option gives rise to a
performance obligation in the contract only if the option provides a material right to the customer that it would
not receive without entering into that contract.
Example 49—Option that provides the customer with a material right (discount voucher)
An entity enters into a contract for the sale of Product A for Rs. 100. As part of thecontract, theentity givesthecustomer
a 40 percentdiscountvoucherfor any futurepurchases up to Rs. 100 in the next 30 days. The entity intends to offer a 10
per cent discount on all sales during the next 30 days as part of a seasonal promotion. The 10 per cent discount cannot be
used in addition to the 40 per cent discountvoucher.
Because all customers will receive a 10 per cent discount on purchases during the next 30 days, the only discount that
provides the customer with a material right is the discount that is incremental to that 10 per cent (i.e. the additional 30
per cent discount). The entity accounts for the promise to provide the incremental discount as a performance obligation
in the contract for the sale of Product A. To estimate the stand-alone selling price of the discount voucher, the entity
estimatesan 80percentlikelihood thatacustomerwillredeemthevoucherandthatacustomerwill,onaverage, purchase
Rs. 50 of additional products. Consequently, the entity’s estimated stand-alone selling price of the discount voucher is
Rs. 12 (Rs. 50 average purchase price of additional products × 30 per cent incremental discount × 80 per cent likelihood
of exercising the option). The stand-alone selling prices of Product A and the discount voucher and the resulting allocation of
the Rs. 100 transaction price are as follows:
Performance obligation Stand-alone selling price (Rs.)

Product A 100
Discount voucher 12
112
Performance obligation Allocated transaction price (Rs.)

Product A 89 [100 x 100/112]
Discount voucher 11 [100 x 12/112]
100
The entity allocates Rs. 89 to Product A and recognizes revenue for Product A when control transfers. The entity allocates
Rs. 11 to the discount voucher and recognizesrevenueforthevoucherwhenthecustomerredeemsitforgoodsor services
or when it expires.
Example 50—Option that does not provide the customer with a material right (additional goods or services)
An entity in the telecommunications industry enters into a contract with a customer to provide a handset and
monthly network service for two years. The network service includes up to 1,000 call minutes and 1,500 text
messages each month for a fixed monthly fee. The contract specifies the price for any additional call minutes or texts
that the customer may choose to purchase in any month. The prices for those services are equal to their stand-alone
selling prices. The entity determines that the promises to provide the handset and network service are each separate
performance obligations.
The prices of the additional call minutes and texts reflect the stand-alone selling prices for those services. Because
the option for additional call minutes and texts does not grant the customer a material right, the entity concludes it
is not a performance obligation in the contract. Consequently, the entity does not allocate any of the transaction
price to the option for additional call minutes or texts. The entity will recognize revenue for the additional call
minutes or texts if and when the entity provides those services.
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Example 51—Option that provides the customer with a material right (renewal option)
An entity enters into 100 separate contracts with customers to provide one year of maintenance services for Rs.
1,000 per contract. The terms of the contracts specify that at the end of the year, each customer has the option to
renew the maintenance contract for a second year by paying an additional Rs. 1,000. Customers who renew for a
second year are also granted the option to renew for a third year for Rs. 1,000. The entity charges significantly higher
prices for maintenance services to customers that do not sign up for the maintenance services initially (i.e. when the
products are new). That is, the entity charges Rs. 3,000 in Year 2 and Rs. 5,000 in Year 3 for annual maintenance
services if a customer does not initially purchase the service or allows the service to lapse.
The entity concludes that the renewal option provides a material right to the customer that it would not receive
without entering into the contract, because the price for maintenance services are significantly higher if the
customer elects to purchase the services only in Year 2 or 3. Consequently, the entity concludes that the promise to
provide the option is a performance obligation. The renewal option is for a continuation of maintenance services
and those services are provided in accordance with the terms of the existing contract. Instead of determining the
stand-alone selling prices for the renewal options directly, the entity allocates the transaction price by determining
the consideration that it expects to receive in exchange for all the services that it expects to provide.
The entity expects 90 customers to renew at the end of Year 1 (90 per cent of contracts sold) and 81 customers to
renew at the end of Year 2 (90 per cent of the 90 customers that renewed at the end of Year 1 will also renew at the
end of Year 2, that is 81 per cent of contracts sold).
At contract inception, the entity determines the expected consideration for each contract is Rs. 2,710 [Rs. 1,000 +
(90 per cent × Rs. 1,000) + (81 per cent × Rs. 1,000)]. The entity also determines that recognizing maintenance service
revenue on the basis of costs incurred relative to the total expected costs depicts the transfer of services to the
customer. Estimated costs for a three-year contract are as follows:
Rs.
Year 1 600
Year 2 750
Year 3 1,000
Accordingly, the pattern of revenue recognition expected at contract inception for each contract is as follows:
Allocation of consideration expected Expected costs adjusted for likelihood of contract renewal
Rs. Rs.
Year 1 600 (Rs. 600 × 100%) 780 [(Rs. 600 ÷ Rs. 2,085) x Rs. 2,710]
Year 2 675 (Rs. 750 × 90%) 877 [(Rs. 675 ÷ Rs. 2,085) x Rs. 2,710]
Year 3 810 (Rs. 1,000 × 81%) 1,053 [(Rs. 810 ÷ Rs. 2,085) x Rs. 2,710]
Total 2,085 2,710
Consequently, at contract inception, the entity allocates to the option to renew at the end of Year 1 Rs. 22,000 of
the consideration received to date [cash of Rs. 100,000 – maintenance service revenue to be recognized in Year 1 of
Rs. 78,000 (Rs. 780 × 100)].
Assuming there is no change in the entity’s expectations and the 90 customers renew as expected, at the end of the
first year, the entity has collected cash of Rs. 190,000 [(100 × Rs. 1,000) + (90 × Rs. 1,000)], has recognized revenue
of Rs. 78,000 (Rs. 780 × 100) and has recognized a contract liability of Rs. 112,000.
Consequently, upon renewal at the end of the first year, the entity allocates Rs. 24,300 to the option to renew at the
end of Year 2 [cumulative cash of Rs. 190,000 less cumulative revenue recognized in Year 1 and to be recognized in
Year 2 of Rs. 165,700 (Rs. 78,000 + Rs. 877 × 100)].
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If the actual number of contract renewals was different than what the entity expected, the entity would update the
transaction price and the revenue recognized accordingly.
Example 52—Customer loyalty programme
An entity has a customer loyalty programme that rewards a customer with one customer loyalty point for every Rs. 10 of
purchases. Each point is redeemable for a Rs. 1 discount on any future purchases of the entity’s products. During a
reporting period, customers purchase products for Rs. 100,000 and earn 10,000 points that are redeemable for future
purchases. The consideration is fixed and the stand-alone selling price of the purchased products is Rs. 100,000. The entity
expects 9,500 points to be redeemed. The entity estimates a stand-alone selling price of Rs. 0.95 per point (totalling Rs.
9,500).
The points provide a material right to customers that they would not receive without entering into a contract.
Consequently, the entity concludes that the promise to provide points to the customer is a performance obligation. The
entity allocates the transaction price (Rs. 100,000) to the product and the points on a relative stand-alone selling price basis
as follows:
Rs.
Product 91,324 [Rs. 100,000 × (Rs. 100,000 stand-alone selling price ÷ Rs. 109,500)]
Points 8,676 [Rs. 100,000 × (Rs. 9,500 stand-alone selling price ÷ Rs. 109,500)]
Non-refundable upfront fee
An entity may charge a customer a non-refundable upfront fee at or near inception (e.g. joining fees in health
club). It does not result in the transfer of a promised good or service to the customer. Instead the upfront fee is
an advance payment for future goods or services and therefore would be recognized as revenue when those when
those future goods or services are provided.
An entity may charge a non-refundable fee in part as compensation for costs incurred in setting up a contract (or
other administrative tasks). If those setup activities do not satisfy a performance obligation, the entity shall
disregard those activities (and related costs) when measuring progress. That is because the costs of setup
activities do not depict the transfer of services to the customer.
Example 53—Non-refundable upfront fee
An entity enters into a contract with a customer for one year of transaction processing services. The entity’s
contracts have standard terms that are the same for all customers. The contract requires the customer to pay an
upfront fee to set up the customer on the entity’s systems and processes. The fee is a nominal amount and is non-
refundable. The customer can renew the contract each year without paying an additional fee.
The entity’s setup activities do not transfer a good or service to the customer and, therefore, do not give rise to a
performance obligation. The entity concludes that the renewal option does not provide a material right to the
customer that it would not receive without entering into that contract. The upfront fee is, in effect, an advance
payment for the future transaction processing services. Consequently, the entity determines the transaction price,
which includes the non-refundable upfront fee, and recognizes revenue for the transaction processing services as
those services are provided.
Licensing
A License establishes a customer’s rights to the intellectual property of an entity. Following are some examples
of such intellectual properties:
(a) software and technology;
(b) motion pictures, music and other forms of media and entertainment;
(c) franchises; and
(d) patents, trademarks and copyrights.
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In addition to a promise to grant a License to a customer, an entity may also promise to transfer other goods or
services to the customer:
If the promise to grant a An entity shall account for the License and other services as a single performance
License is NOT distinct obligation. Examples of such Licenses are:
from other promised a License that forms a component of a tangible good and that is integral to the
goods or services: functionality of the good; and
a License that the customer can benefit from only in conjunction with a related
service (such as an online service provided by the entity that enables, by
granting a License, the customer to access content)
Determination of whether the performance obligation is satisfied over time or at
a point in time is made as per guidance studied in IFRS 15.
If the promise to grant a An entity shall account for the License as a separate performance obligation.
License is distinct from Determination of whether the performance obligation is satisfied over time or at
other promised goods or a point in time is made as follows:
services: (a) performance obligation is satisfied over time:
If grant of License is a right to access the intellectual property as it exists
throughout the License period. It happens when all of the following criteria is
met:
entity will undertake the activities that significantly affect the intellectual
property.
the rights granted by the License directly expose the customer to any +/-
effects of aforementioned activities (e.g. the benefit derived from a brand is
often dependent the entity’s ongoing activities that support or maintain the
value of property).
these activities do not result in the transfer of a good or service to customer as
those activities occur.
(b) performance obligation is satisfied at a point in time
If grant of License is a right to access the intellectual property as it exists at the
point in time at which the License is granted. It happens when the intellectual
property, to which the customer has rights, has significant stand-alone
functionality and a substantial portion of the benefit of that intellectual property
is derived from that functionality. Consequently, the ability of the customer to
obtain benefit from that intellectual property would not be significantly affected
by the entity’s activities unless those activities significantly change its form or
functionality. Types of intellectual property that often have significant stand-
alone functionality include software, biological compounds or drug formulas, and
completed media content (for example, films, television shows and music
recordings).
However, revenue cannot be recognized before the beginning of the period
during which the customer is able to use and benefit from the License. For
example, if a software License period begins before an entity provides (or
otherwise makes available) to the customer a code that enables the customer to
immediately use the software, the entity would not recognize revenue before
that code has been provided (or otherwise made available).
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Sale-based or usage-based royalties

An entity shall recognize revenue from a sale-based or usage-based royalty promised in exchange for a License of
intellectual property only when (or as) the later of the following events occurs:
(a) the subsequent sale or usage occurs; and
(b) the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated
has been satisfied (or partially satisfied).
Example 54—Right to use intellectual property
Using the same facts as in Case A in Example 11, the entity identifies four performance obligations in a contract:
(a) the software License;
(b) installation services;
(c) software updates; and
(d) technical support.
The entity observes that it does not have any contractual or implied obligations (independent of the updates and
technical support) to undertake activities that will change the functionality of the software during the License period.
The entity also observes that the software remains functional without the updates and the technical support. The
entity concludes that the software to which the License relates has significant stand-alone functionality. The entity
further concludes that the nature of the entity’s promise in transferring the License is to provide a right to use the
entity’s intellectual property as it exists at a point in time. Consequently, the entity accounts for the License as a
performance obligation satisfied at a point in time.
Example 55—License of intellectual property
An entity enters into a contract with a customer to License (for a period of three years) intellectual property related
to the design and production processes for a good. The contract also specifies that the customer will obtain any
updates to that intellectual property for new designs or production processes that may be developed by the entity.
The updates are integral to the customer’s ability to derive benefit from the License during the License period,
because the intellectual property is used in an industry in which technologies change rapidly. Although the benefit
the customer can derive from the License on its own (i.e. without the updates) is limited because the updates are
integral to the customer’s ability to continue to use the intellectual property in an industry in which technologies
change rapidly, the License can be used in a way that generates some economic benefits. The entity determines that
the customer can benefit from (a) the License on its own without the updates; and (b) the updates together with
the initial License.
Because the benefit that the customer could obtain from the License over the three-year term without the updates
would be significantly limited, the entity’s promises to grant the License and to provide the expected updates are,
in effect, inputs that together fulfil a single promise to deliver a combined item to the customer. The promises within
that combined item (i.e. to grant the License and to provide when-and-if-available updates) are, therefore, not
separately identifiable and are a single performance obligation. The entity concludes that because the customer
simultaneously receives and consumes the benefits of the entity’s performance as it occurs, the performance
obligation is satisfied over time.
Example 56—Identifying a distinct License
An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for 10
years and also promises to manufacture the drug for the customer. The drug is a mature product; therefore the
entity will not undertake any activities to support the drug, which is consistent with its customary business practices.
Case A—License is not distinct
In this case, no other entity can manufacture this drug because of the highly specialized nature of the manufacturing
process. As a result, the License cannot be purchased separately from the manufacturing services. The entity
determines that the customer cannot benefit from the License without the manufacturing service; therefore, the
License and the manufacturing service are not distinct and the entity accounts for the License and the manufacturing
service as a single performance obligation.
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Case B—License is distinct

In this case, the manufacturing process used to produce the drug is not unique or specialized and several other
entities can also manufacture the drug for the customer. The entity concludes that its promises to grant the License
and to provide the manufacturing service are separately identifiable. In reaching this conclusion, the entity considers
that the customer could separately purchase the License without significantly affecting its ability to benefit from the
License. Neither the License, nor the manufacturing service, is significantly modified or customized by the other and
the entity is not providing a significant service of integrating those items into a combined output. Thus, although the
manufacturing service necessarily depends on the License in this contract (i.e. the entity would not provide the
manufacturing service without the customer having obtained the License), the License and the manufacturing
service do not significantly affect each other. Consequently, the entity concludes that its promises to grant the
License and to provide the manufacturing service are distinct and that there are two performance obligations.
The drug is a mature product (i.e. it has been approved, is currently being manufactured and has been sold
commercially for the last several years). For these types of mature products, the entity’s customary business
practices are not to undertake any activities to support the drug. The drug compound has significant stand-alone
functionality (i.e. its ability to produce a drug that treats a disease or condition). Consequently, the customer obtains
a substantial portion of the benefits of the drug compound from that functionality, rather than from the entity’s
ongoing activities. The nature of the entity’s promise in transferring the License is to provide a right to use the
entity’s intellectual property in the form and the functionality with which it exists at the point in time that it is
granted to the customer. Consequently, the entity accounts for the License as a performance obligation satisfied at
a point in time.
Example 57—Franchise rights
An entity enters into a contract with a customer and promises to grant a franchise License that provides the customer
with the right to use the entity’s trade name and sell the entity’s products for 10 years. In addition to the License,
the entity also promises to provide the equipment necessary to operate a franchise store. In exchange for granting
the License, the entity receives a sales-based royalty of 5% of the customer’s monthly sales. The fixed consideration
for the equipment is Rs. 150,000 payable when the equipment is delivered.
Identifying performance obligations
The entity observes that the entity, as a franchisor, has developed a customary business practice to undertake
activities such as analyzing consumers’ changing preferences and implementing product improvements, pricing
strategies, marketing campaigns and operational efficiencies to support the franchise name. However, the entity
concludes that these activities do not directly transfer goods or services to the customer because they are part of
the entity’s promise to grant a License.
The entity determines that it has two promises to transfer goods or services: a promise to grant a License and a
promise to transfer equipment. In addition, the entity concludes that the promise to grant the License and the
promise to transfer the equipment are each distinct. The customer can benefit from the License together with the
equipment that is delivered before the opening of the franchise and the equipment can be used in the franchise or
sold for an amount other than scrap value. The entity concludes that the License and the equipment are not inputs
to a combined item (i.e. they are not fulfilling what is, in effect, a single promise to the customer). In addition, the
License and the equipment are not highly interdependent or highly interrelated because the entity would be able to
fulfil each promise (i.e. to license the franchise or to transfer the equipment) independently of the other.
Consequently, the entity has two performance obligations; the franchise license and the equipment.
Allocating the transaction price
The entity determines that the transaction price includes fixed consideration of Rs. 150,000 and variable
consideration (5% of customer sales). The stand-alone selling price of the equipment is Rs. 150,000 and the entity
regularly licenses franchises in exchange for 5% of customer sales. In addition, the entity observes that allocating Rs.
150,000 to the equipment and the sales-based royalty to the franchise License would be consistent with an allocation
based on the entity’s relative stand-alone selling prices in similar contracts. Consequently, the entity concludes that
the variable consideration should be allocated entirely to the performance obligation to grant the franchise License.
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Application guidance: licensing

The entity assesses the nature of the entity’s promise to grant the franchise License and concludes that it is to
provide access to the entity’s intellectual property in its current form throughout the license period because:
entity will undertake the activities that significantly affect the intellectual property. In addition, the entity observes
that because part of its compensation is dependent on the success of the franchisee (as evidenced through the
sales-based royalty), the entity has a shared economic interest with the customer that indicates that the customer
will expect the entity to undertake those activities to maximize earnings.
the rights granted by the License directly expose the customer to any +/- effects of aforementioned activities.
these activities do not result in the transfer of a good or service to customer as those activities occur.
The entity concludes that the promise to transfer the License is a performance obligation satisfied over time. After
the transfer of the franchise License, the entity recognizes revenue as and when the customer’s sales occur because
the entity concludes that this reasonably depicts the entity’s progress towards complete satisfaction of the franchise
License performance obligation.
Example 58—Access to intellectual property
An entity, a creator of comic strips, licenses the use of the images and names of its comic strip characters in three of
its comic strips to a customer for a four-year term. There are main characters involved in each of the comic strips.
However, newly created characters appear regularly and the images of the characters evolve over time. The
customer, an operator of cruise ships, can use the entity’s characters in various ways, such as in shows or parades,
within reasonable guidelines. The contract requires the customer to use the latest images of the characters. In
exchange for granting the License, the entity receives a fixed payment of Rs. 1 million in each year of the four-year
term. The entity concludes that it has no other performance obligations other than the promise to grant a License.
That is, the additional activities associated with the License do not directly transfer a good or service to the customer
because they are part of the entity’s promise to grant a License.
The entity assesses the nature of the entity’s promise to grant the license and concludes that it is to provide access
to the entity’s intellectual property in its current form throughout the license period because:
entity will undertake the activities that significantly affect the intellectual property. This is because the entity’s
activities (i.e. development of the characters) change the form of the intellectual property.
the rights granted by the License directly expose the customer to any +/- effects of aforementioned activities
because the contract requires the customer to use the latest characters.
Consequently, the entity concludes that the nature of the entity’s promise to transfer the License is to provide the
customer with access to the entity’s intellectual property as it exists throughout the License period. The entity
accounts for the promised License as a performance obligation satisfied over time. Because the contract provides
the customer with unlimited use of the licensed characters for a fixed term, the entity determines that a time-based
method would be the most appropriate measure of progress towards complete satisfaction of the performance
obligation.
Example 59—Right to use intellectual property
An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony by a noted orchestra.
The customer, a consumer products company, has the right to use the recorded symphony in all commercials,
including television, radio and online advertisements for two years in Country A. In exchange for providing the
License, the entity receives fixed consideration of Rs. 10,000 per month. The contract does not include any other
goods or services to be provided by the entity. The contract is non-cancellable. The entity concludes that its only
performance obligation is to grant the License. The entity determines that the term of the License (two years), its
geographical scope (the customer’s right to use the recording only in Country A), and the defined permitted use for
the recording (in commercials) are all attributes of the promised License in the contract. The entity does not have
any contractual or implied obligations to change the licensed recording. The licensed recording has significant stand-
alone functionality (i.e. the ability to be played) and, therefore, the ability of the customer to obtain the benefits of
the recording is not substantially derived from the entity’s ongoing activities. Consequently, the entity concludes
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that the nature of its promise in transferring the License is to provide the customer with a right to use the entity’s
intellectual property as it exists at the point in time that it is granted. The entity recognizes all of the revenue at the
point in time when the customer can direct the use of, and obtain substantially all of the remaining benefits from,
the licensed intellectual property. Because of the length of time between the entity’s performance (i.e. at the
beginning of the period) and the customer’s monthly payments over two years (which are non-cancellable), the
entity must determine whether a significant financing component exists.
Example 60—Sales-based royalty for a License of intellectual property
An entity, a movie distribution company, licenses Movie XYZ to a customer. The customer, an operator of cinemas,
has the right to show the movie in its cinemas for six weeks. Additionally, the entity has agreed to (a) provide
memorabilia from the filming to the customer for display at the customer’s cinemas before the beginning of the six-
week screening period; and (b) sponsor radio advertisements for Movie XYZ on popular radio stations in the
customer’s geographical area throughout the six-week screening period. In exchange for providing the License and
the additional promotional goods and services, the entity will receive a portion of the operator’s ticket sales for
Movie XYZ (i.e. variable consideration in the form of a sales-based royalty). The entity concludes that the License to
show Movie XYZ is the predominant item to which the sales-based royalty relates because the entity has a
reasonable expectation that the customer would ascribe significantly more value to the License than to the related
promotional goods or services. If the License, the memorabilia and the advertising activities are separate
performance obligations, the entity would allocate the sales-based royalty to each performance obligation.
Example 61—Access to intellectual property
An entity, a well-known sports team, licenses the use of its name and logo to a customer. The customer, an apparel
designer, has the right to use the sports team’s name and logo on items including t-shirts, caps, mugs and towels for
one year. In exchange for providing the License, the entity will receive fixed consideration of Rs. 2 million and a
royalty of 5% of the sales price of any items using the team name or logo. The customer expects that the entity will
continue to play games and provide a competitive team. The entity concludes that its only performance obligation
is to transfer the License. The additional activities associated with the License (i.e. continuing to play games and
provide a competitive team) do not directly transfer a good or service to the customer because they are part of the
entity’s promise to grant the License.
The entity assesses the nature of the entity’s promise to grant the license and concludes that it is to provide access
to the entity’s intellectual property in its current form throughout the license period because:
entity will undertake the activities that significantly affect the intellectual property. This is because the entity’s
activities (i.e. continuing to play) support and maintain the value of the name and logo. In addition, the entity
observes that because part of its compensation is dependent on the success of the customer (as evidenced
through the sales-based royalty), the entity has a shared economic interest with the customer that indicates that
the customer will expect the entity to undertake those activities to maximize earnings.
the rights granted by the License directly expose the customer to any +/- effects of aforementioned activities.
The entity concludes that the entity’s promise to grant the License is to provide the customer with access to the
entity’s intellectual property as it exists throughout the License period. Consequently, the entity accounts for the
promised License as a performance obligation satisfied over time. The entity concludes that recognition of the Rs. 2
million fixed consideration as revenue rateably over time plus recognition of the royalty as revenue as and when the
customer’s sales of items using the team name or logo occur reasonably depicts the entity’s progress towards
complete satisfaction of the License performance obligation
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Repurchase agreements
A repurchase agreement is a contract in which an entity sells an asset and also promises or has the option (either
in the same contract or in another contract) to repurchase the asset. The repurchased asset may be the asset that
was originally sold to the customer, an asset that is substantially the same as that asset, or another asset of which
the asset that was originally sold is a component. Repurchase agreements generally come in following forms:
A forward or a call If an entity an obligation to repurchase (i.e. forward) or a right to repurchase (i.e.
option: call option) the asset, a customer does not obtain control of the asset.
Consequently the entity shall account for the contract as either of the following:
a lease in accordance with IFRS 16 if the entity can or must repurchase the
asset for an amount that is less than the original selling price of the asset.; OR
a financial liability for consideration received if the entity can or must
repurchase the asset for an amount equal to or more than the original selling
price of the asset. The difference between the consideration received for sale
and consideration to be paid for repurchase shall be recognized as interest. If
option lapses unexercised, an entity shall derecognize the liability and
recognize revenue.
A put option: If an entity has an obligation to repurchase the asset at customer’s demand at
a price lower than the original selling of the asset as well as than expected
market value of the asset at the date of repurchase, the entity shall account for
the agreement as a lease in accordance with IFRS 16.
If an entity has an obligation to repurchase the asset at customer’s demand at
a price lower than the original selling of the asset but more than expected
market value of the asset at the date of repurchase, the entity shall account for
the agreement as a sale of a product with a right of return.
a price equal to or more than the original selling of the asset and more than
expected market value of the asset at the date of repurchase, the entity shall
account for the agreement as a financial liability as studied above for call
option.
a price equal to or more than the original selling of the asset but equal to or
less than expected market value of the asset at the date of repurchase, the
entity shall account for the agreement as a sale of a product with a right of
return.
When comparing repurchase price with the selling price, time value of money is to be considered.
Example 62—Repurchase agreements

An entity enters into a contract with a customer for thesaleof a tangible asset on 1 January 20X7 for Rs. 1 million.
Case A—Call option: financing
The contract includes a call option that gives the entity the right to repurchase the asset for Rs. 1.1 million on or before
31 December 20X7. Control of the asset does not transfer to the customer on 1 January 20X7 because the entity has a right
to repurchase the asset and therefore the customer is limited in its ability to direct the use of, and obtain substantially
all of the remaining benefits from, the asset. Consequently, the entity accounts for the transaction as a financing
arrangement, because the exercise price is more than the original selling price. Hence, the entity does not derecognize
theassetandinsteadrecognizesthecashreceivedasafinancial liability. The entity also recognizes interest expense for the
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difference between the exerciseprice(Rs. 1.1 million) and the cash received (Rs. 1 million), which increases the liability.
On 31 December 20X7, the option lapses unexercised; therefore, the entity derecognizes the liability and recognizes
revenue of Rs. 1.1 million.
Case B—Put option: lease
Instead of having a call option, the contract includes a put option that obliges the entity to repurchase the asset at
the customer’s request for Rs. 900,000 on or before 31 December 20X7. The market value is expected to be Rs.
750,000 on 31 December 20X7. The entity concludes that the customer has a significant economic incentive to
exercise the put option because the repurchase price significantly exceeds the expected market value of the asset
at the date of repurchase. Consequently, the entity concludes that control of the asset does not transfer to the
customer, because the customer is limited in its ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset. The entity accounts for the transaction as a lease in accordance with IFRS 16
Leases.
Bill-and-hold arrangements
A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity
retains physical possession of the product (i.e. entity provides custodial service) until it is transferred to the
customer at a point in time in the future.
The entity has satisfied its performance obligation to transfer a product when a customer obtains control of that
product. For a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following
criteria must be met:
(a) the reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested
the arrangement);
(b) the product must be identified separately as belonging to the customer;
(c) the product currently must be ready for physical transfer to the customer; and
(d) the entity cannot have the ability to use the product or to direct it to another customer.
Example 63—Bill-and-hold arrangement

An entity enters into a contract with a customer on 1 January 20X8 for the sale of a machine and spare parts. The
manufacturinglead time for the machine and spare parts is twoyears.
Upon completion of manufacturing, theentity demonstrates that the machine and spare parts meet the agreed-upon
specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in two
performance obligations that each will be satisfied at a point in time. On 31 December 20X9, the customer pays for the
machine and spare parts, butonly takes physical possession of the machine. Although the customer inspects and accepts the
spare parts, the customer requests that the spare parts be stored at the entity’s warehouse because of its close proximity to
the customer’s factory. The customer has legal title to the spare parts and the parts can be identified as belonging to the
customer. Furthermore,theentitystoresthesparepartsina separate section of its warehouse and the parts are ready
for immediate shipment at the customer’s request. The entity expects to hold the spare parts for two to four years and the
entity does not have the ability to use the spare parts or direct them to another customer.
The entity identifies thepromisetoprovide custodialservices asaperformance obligation because it is a service provided
to the customer and it is distinct from the machine and spare parts. Consequently, the entity accounts for three
performance obligations in the contract (the promises to provide the machine, the spare parts and the custodial services).
The transaction price is allocated to the three performance obligations and revenue is recognized when (or as) control
transfers to thecustomer.
Control of the machine transfers to the customer on 31 December 20X9 when the customer takes physical possession.
The entity recognizes revenue for the spare parts on 31 December 20X9 when control transfers to the customer. The
performanceobligationtoprovidecustodialservicesissatisfiedovertimeas the services are provided.
Nasir Abbas FCA

564
Note
In absence of information and to avoid complexity of calculations, it is assumed that service
revenue of Rs. 7.8m remains same every year and is not affected by inflation
Builders and Developers 2016 2015

Extracts - SOCI ------- Rs. million -------
Revenue from sale of building (W-1) 282.61 -
Revenue from services [7.80 x 6/12] 3.90
Contract cost - sale of building [50 + 80.20 + 32.60 + 5.80] (168.60)
Contract cost - maintenance service (3.00)
Interest expense [2016: 13.49 + 1.38][2015: 24.75] (W-2) (14.87) (24.75)
Builders and Developers 2016 2015

Extracts - SOFP ------- Rs. million -------
Non-current assets
Land - 50.00
Current assets
Contract cost [(168.60 - 50) x 1/1.5] - 79.07
Contract liability (W-2) 26.80 32.01
Current liabilities
Contract liability (W-2) [2016: 32.01 - 26.80] [2015: 299.75 - 32.01] 5.21 267.74
WORKINGS
W-1 Transaction price allocation Rs. million
Advance received 275.00
Cash for maintenance [6m x 1.3 x 5-year AF at 9% x 1.5-year DF at 9%] (26.66)
Cash for sale of building (i.e. residual value basis) 248.34
Transaction price for sale of building [248.34 x 1.091.5] 282.61

Transaction price for annual maintenance [6m x 1.3] 7.80
W-2 Interest expense Interest PO satisfied Balance

------------ Rs. million -----------
275.00
31-12-15 Interest [275 x 9%] 24.75 - 299.75
30-06-16 Interest [299.75 x 9% x 6/12] / Sale 13.49 (282.61) 30.63
31-12-16 Interest [30.63 x 9% x 6/12] 1.38 - 32.01
30-06-17 Interest [32.01 x 9% x 6/12] 1.44 (7.80) 25.65
31-12-17 Interest [30.63 x 9% x 6/12] 1.15 - 26.80
565
QWL
Extracts - SOCI 2014 2013
------- Rs. million -------
Revenue [2014: 3,000 x 80% - 1,350] [2013: 3,000 x 45%] 1,050.00 1,350.00
Contract cost (W-1) [2014: 2,320 - 1,170] (1,150.00) (1,170.00)
Indirect cost of obtaining the contract - (7.00)
* It is assumed that work certified method faithfully depicts entity's performance
QWL
Extracts - SOFP 2016 2015
------- Rs. million -------
Non-current assets
Retention money receivable 120.00 67.50
[2014: 3,000 x 80% x 5%][2013: 3,000 x 45% x 5%]
Current assets
Contract cost (W-1) 233.00 323.00
Receivable [2014: 100 x 85%][2013: 75 x 85%] 85.00 63.75
Current liabilities
Contract liability [2014: 3,000 x 20% x 10%][2013: 3,000 x 55% x 10%] 60.00 165.00
* In absence of detailed information, it is assumed that warranty is not a performance obligation,

therefore, it shall be accounted for as per IAS 37 once warranty period starts.
WORKINGS
W-1 Contract cost [i.e. Contract WIP] 2014 2013
------- Rs. million -------
Cost incurred to date [2,560 - 7] [1,500 - 7] 2,553.00 1,493.00
Amortized [2014: 2,900 x 80%][2013: 2,600 x 45%] (2,320.00) (1,170.00)
c/d balance 233.00 323.00
566
IAS 33 [Diluted EPS] – QUESTIONS
PRACTICE QUESTIONS
Question No. 1
Profit after tax for the year Rs. 1,200,000
Weighted average number of ordinary shares outstanding during the year 500,000 shares
Average market price per share for the year Rs. 20
Weighted average number of shares under option 100,000 shares
Exercise price for shares under option Rs. 15
Required:
Calculate basic EPS and diluted EPS for the year.
Question No. 2
Profit after tax for the year Rs. 1,200,000
Weighted average number of ordinary shares outstanding during the year 500,000 shares
Average market price per share for the year Rs. 20
Weighted average number of unvested share options as per IFRS 2 100,000 shares
Cash exercise price for shares under option Rs. 15
Estimated amount of expense to be recognized over vesting period as per IFRS 2 Rs. 200,000
Required:
Calculate basic EPS and diluted EPS for the year.
Question No. 3
The following information pertains to the financial statements of HDL, a listed company, for the year ended 31 December
2020:
(i) Profit for the year:
Rs.
Profit before tax 30,000,000
Tax [40%] (12,000,000)
Profit after tax 18,000,000
(ii) HDL has a share capital of Rs. 80 million (Rs. 10 each) and Rs. 20 million 5% convertible bonds (Rs. 100 each) in
issue. Carrying amount on December 31, 2020 of the liability component of these bonds amounted to Rs. 17.28
million with an effective interest rate of 8%. These bonds can be converted as follows:
Each bond is convertible into 8 shares on December 31, 2024; OR
Each bond is convertible into 6 shares on December 31, 2025
Required:
Calculate basic EPS and diluted EPS for the year ended 31 December 2020.
Question No. 4
A company has an issued ordinary share capital of Rs. 100 million (Rs. 10 each) and Rs. 20 million (Rs. 100 each) 6%
convertible bonds at start of year.
These bonds are convertible into ordinary shares in a ratio of 5 shares for every Rs. 100 bond at any time till December
31, 2021. Tax rate is 30%. On April 1, 2020 50% of these bonds were converted into ordinary shares. Ignore any difference
between nominal amount and liability component for ease of calculations. Net profit for the year ended December 31,
2020 amounts to Rs. 25.5 million.
Required:
Calculate basic EPS and diluted EPS for the year ending December 31, 2020.
Question No. 5
Ordinary shares outstanding during 2020:
1,000,000 (there were no options, warrants or convertible instruments outstanding during the period)
An agreement related to a recent business combination provides for the issue of additional ordinary shares based on the
following conditions:
- 5,000 additional ordinary shares for each new retail site opened during 2020
- 1,000 additional ordinary shares for each Rs. 1,000 of consolidated profit in excess of Rs. 2,000,000 for the year ended
31 December 2020
Retail sites opened during the year:
- One on 1 May 2020
- One on 1 September 2020
Consolidated year-to-date profit attributable to ordinary equity holders of the parent entity:
567
NASIR ABBAS FCA
IAS 33 [Diluted EPS] – QUESTIONS
- Rs. 1,100,000 as of 31 March 2020

- Rs. 2,300,000 as of 30 June 2020
- Rs. 1,900,000 as of 30 September 2020
- Rs. 2,900,000 as of 31 December 2020
Required:
Calculate Basic EPS and Diluted EPS for each quarter as well as for the full year.
Question No. 6
Rs.
Profit from continuing operations attributable to parent 16,400,000
Dividends on preference shares (6,400,000)
Profit from continuing operations attributable to ordinary shareholders of parent 10,000,000
Loss from discontinued operations attributable to the parent (4,000,000)
Profit attributable to ordinary shareholders of parent 6,000,000
Ordinary shares outstanding during the year 2,000,000
Average market price of ordinary share during the year Rs. 75
Potential ordinary shares:
Options
100,000 with exercise price of Rs. 60
Convertible preference shares
800,000 shares with a par value of Rs. 100 entitled to a cumulative dividend of Rs. 8 per share. Each preference share is
convertible to two ordinary shares.
5% convertible bonds
Nominal amount Rs. 100,000,000. Each Rs. 1,000 bond is convertible to 20 ordinary shares. There is no amortization of
premium or discount affecting the determination of interest expense.
Tax rate 40%

Required:
Calculate basic EPS and diluted EPS
Question No. 7
Parent:
Profit attributable to ordinary equity holders of the parent entity Rs. 12,000 (unconsolidated)
Ordinary shares outstanding 10,000
Instruments of subsidiary owned by the parent:
- 800 ordinary shares
- 30 warrants exercisable to purchase ordinary shares of subsidiary
- 300 convertible preference shares
Subsidiary:
Profit Rs. 5,400
Ordinary shares outstanding 1,000
Warrants:
150, exercisable to purchase ordinary shares of the subsidiary at an exercise price Rs. 10
Average market price of one ordinary share Rs. 20
Convertible preference shares:

400, each convertible into one ordinary share
Dividends on preference shares Rs. 1 per share
Required:
Calculate basic EPS and diluted EPS for Subsidiary’s F/S as well as for consolidated F/S.
(Ignore taxation)
568
NASIR ABBAS FCA
IAS 33 [Basic EPS] – SOLUTIONS
SOLUTIONS

Solution No. 1
Rs.
Profit after tax [A] 420,000
Number of shares [B] (W-1) 3,680
Earnings per share [A/B] 114.13
W-1
Time Bonus Right W. Avg
Date Particular Shares Balance
factor factor factor shares
[1] [2] [3] [4] [1x2x3x4]
(W-2)
01-01-16 Balance - 2,000 3/12 6/5 24/22.5 640
01-04-16 New issue 1,000 3,000 3/12 6/5 24/22.5 960
01-07-16 Bonus 600 3,600 4/12 - 24/22.5 1,280
01-11-16 Right 1,200 4,800 2/12 - - 800
3,680
W-2
TERP = (3 x Rs. 24 + 1 x Rs. 18) / (3 + 1)
= 22.50
Right factor = 24 / 22.5
Solution No. 2
2015
2016 2015
(restated)
------------------- Rs. ----------------
Current tax (20,000) (29,000) (29,000)
Deferred tax (12,000) 11,000 11,000
Profit after tax 143,000 102,000 102,000
Dividend on irredeemable preference shares (9,600) (9,600) (9,600)
Profit attributable to ordinary equity holders [A] 133,400 92,400 92,400
Number of shares [B] (W-1) 14,118 8,000 10,589
Earning per share [A/B] 9.45 11.55 8.73
W-1
[1] [2] [3] [4] [1x2x3x4]
2015 (W-2)
01-01-15 Balance - 6,000 6/12 - - 3,000
01-07-15 New issue 4,000 10,000 6/12 - - 5,000
569
NASIR ABBAS FCA
8,000
2015 (restated)
01-01-15 Balance - 6,000 6/12 1.25/1 30/28.33 3,971
01-07-15 New issue 4,000 10,000 6/12 1.25/1 30/28.33 6,618
10,589
2016
01-01-16 Balance - 10,000 6/12 1.25/1 30/28.33 6,618
01-07-16 Right 2,000 12,000 5/12 1.25/1 - 6,250
01-12-16 Bonus 3,000 15,000 1/12 - - 1,250
14,118
W-2
TERP = (5 x Rs. 30 + 1 x Rs. 20) / (5 + 1)
= 28.33
Solution No. 3
Rs.
Profit after tax [A] 250,000
Earning per share [A/B] 17.39
W-1
Time Split Bonus W. Avg
[1] [2] [3] [4] [1x2x3x4]
01-01-16 Balance - 5,000 3/12 2/1 5/4 3,125
01-04-16 New 1,000 6,000 1/12 2/1 5/4 1,250
30-04-16 Split 6,000 12,000 6/12 - 5/4 7,500
01-11-16 Bonus 3,000 15,000 2/12 - - 2,500
14,375
Solution No. 4
2016 2015
(restated)
-------- Rs. --------
Profit after tax [A] 100,000 64,000 [4000 x 16]
Number of shares [B] (W-1) 1,729 1,351
Earning per share [A/B] 57.85 47.36
570
NASIR ABBAS FCA
W-1
Time Cons. Right W. Avg
factor Factor factor shares
[1] [2] [3] [4] [1x2x3x4]
2015 (restated) (W-2)
01-01-15 Balance - 4,000 12/12 1/3 45/44.4 1,351
1,351
2016
01-01-16 Balance - 4,000 6/12 1/3 45/44.4 676
01-07-16 New 2,000 6,000 3/12 1/3 45/44.4 507
30-09-16 Cons. (4,000) 2,000 2/12 - 45/44.4 338
01-12-16 Right 500 2,500 1/12 - - 208
1,729
W-2
TERP = (4 x Rs. 45 + 1 x Rs. 42) / (4 + 1)
= 44.40
Solution No. 5
Rs.
Profit after tax [A] (W-1) 366,000
Earning per share [A/B] 56.61
W-1 Rs.
Group profit [240 + 180] 420,000
Profit attributable to NCI [180 x 30%] (54,000)
Profit attributable to equity holders of parent 366,000
W-2
Shares
Right issue [7500 x 1/5] (1,500)
New issue (2,000)

[1] [2] [3] [4] [1x2x3x4]
(W-3)
01-01-16 Balance - 4,000 6/12 6/5 30/29 2,483
01-07-16 New issue 2,000 6,000 4/12 6/5 30/29 2,483
01-11-16 Right 1,500 7,500 2/12 6/5 - 1,500
6,466
571
NASIR ABBAS FCA
Note - As per IAS 10, bonus issue after year end is adjusted in EPS of current year
W-3
TERP = (4 x Rs. 30 + 1 x Rs. 25) / (4 + 1)
= 29.00
Right factor = 30 / 29
Solution No. 6
Continuing Discontinued
operations operations
---------- Rs. ---------
Profit attributable [A] (W-1) 70,000 20,000
Number of shares [B] (W-2) 4,466 4,466
Earning per share [A/B] 15.67 4.48
W-1 Rs.
Preference dividend (30,000)
Profit attributable to equity holders 70,000
W-2
Shares
Right issue [6000 x 1/6] (1,000)
New issue (1,500)
3,500
Bonus [3,500 x 1/7] (500)
Right W. Avg
Date Particular Shares Balance Time factor Bonus factor
factor shares
[1] [2] [3] [4] [1x2x3x4]
(W-3)
01-01-16 Balance - 3,000 2/12 7/6 30/29 604
01-03-16 Bonus 500 3,500 4/12 - 30/29 1,207
01-07-16 New issue 1,500 5,000 5/12 - 30/29 2,155
30-11-16 Right 1,000 6,000 1/12 - - 500
4,466
W-3
TERP = (5 x Rs. 30 + 1 x Rs. 24) / (5 + 1)
= 29.00
572
NASIR ABBAS FCA
Solution No. 7
Continuing Discontinued
operations operations
Profit attributable [A] (Rs. in million) (W-1) 761.00 155.00

Number of shares [B] (million) (W-2) 16.65 16.65
Earnings per share [A/B] (Rs.) 45.71 9.31
W-1 Rs. in million

Profit after tax from continuing operations 765.00
Preference dividend [4m x 10 x 10%] (4.00)
Profit attributable to equity holders 761.00
W-2
Time Right W. Avg
Date Particulars Shares Balance Bonus factor
factor factor shares
[1] [2] [3] [4] [1x2x3x4]
(W-3)
01-01-16 Balance - 10.00 5/12 1.2/1 x 1.1/1 32/30 5.87
31-05-16 Right 4.00 14.00 3/12 1.2/1 x 1.1/1 - 4.62
31-08-16 Bonus 2.80 16.80 4/12 1.1/1 - 6.16
16.65
W-3
TERP = (10 x Rs. 32 + 4 x Rs. 25) / (10 + 4)
= 30.00
Solution No. 8
(a)
2017 2016
(restated)
Profit after tax [Rs. in million] (W-1) 660.25 331.67
Number of shares [million] (W-2) 291.86 255.01
Earnings per share [Rs.] 2.26 1.30
Workings (All figures in Rs. million)

W-1
2017 2016
Given 650.00 318.00
Excess depreciation (W-1.1) 10.25 13.67
660.25 331.67
573
NASIR ABBAS FCA
W -1 .1 Wrong Correct Adjustment

Cost 700.00 700.00
Dep 2014 [700/4 x 6/12] [700/4 x 11/12] (87.50) (160.42) (72.92)
612.50 539.58
Dep 2015 [612.5 x 25%] [539.58 x 25%] (153.13) (134.90) 18.23
459.37 404.68
Dep 2016 [459.37 x 25%] [ 404.68 x 25%] (114.84) (101.17) 13.67
344.53 303.51
Dep 2017 [344.53 x 25%] [303.51 x 25%] (86.13) (75.88) 10.25
258.40 227.63
W-2
Date Particulars Shares Balance
[1] [2] [3] [4] [1x2x3x4]
(W-3)
01-01-16 Balance - 160.00 4/12 1.1 x 1.15 25/23.15 72.86
01-05-16 Right 40.00 200.00 8/12 1.1 x 1.15 25/23.15 182.15
255.01
01-01-17 Balance - 200.00 3/12 1.1 x 1.15 25/23.15 68.30

01-04-17 Bonus (10%) 20.00 220.00 3/12 1.15 25/23.15 68.30
01-07-17 Right 50.00 270.00 2/12 1.15 - 51.75
01-09-17 Bonus (15%) 40.50 310.50 4/12 - - 103.50
291.86
W-3
Right issue of May 1
Since right issue was made at full market price, no adjustment was needed
Right issue of July 1

TERP = (220 x Rs. 25 + 50 x Rs. 15) / (220 + 50)
= 23.15
(b)
Dividend on redeemable preference shares
Preference dividend on redeemable preference shares is recognized as a finance cost. Hence it is already
charged to profit for the year, therefore, no separate treatment is required for calculation of basic EPS.
Dividend on Irredeemable preference shares

Preference dividend on irredeemable preference shares is considered as a distribution of retained earnings.
Since it is not already charged to profit for the year and such dividend is preferred over distribution to ordinary
shareholders, therefore, it is deducted from profit for the year to arrive at "profit attributable to ordinary
shareholders".
574
NASIR ABBAS FCA
Solution No. 9
2018 2019 2020
-------------------- Rs. --------------------
Profit after tax 540,000 600,000 720,000
Imputed dividend (W-1) (22,856) (24,456) (26,167)
Profit attributable to ordinary shareholders 517,144 575,544 693,833
W-1 Amortized cost schedule
Opening Imputed Dividend Closing

balance dividend at 7% payment balance
-------------------- Rs. --------------------

31-12-18 326,520 22,856 - 349,376
31-12-19 349,376 24,456 - 373,833
31-12-20 373,833 26,167 - 400,000
Solution No. 10
Rs.
Preference dividend [600,000 x 5.5%] (33,000)
Ordinary dividend [10,000 x 2.10] (21,000)
Undistributed earnings 46,000
Allocation:
Shares Weight Product
Ordinary 10000 8 80000
Preference 6000 2 12000
92000
Rs.
Undistributed earnings attributable to preference shares 6,000
[46,000 x 12/92]
Basic EPS Rs.

Preference dividend (33,000)
Share attributable to preference shares (6,000)
61,000
Basic EPS [61,000 / 10,000] 6.10
575
NASIR ABBAS FCA
IAS 33 [Basic EPS] – Class notes
SCOPE
1. This standard shall apply to the separate or individual financial statements of an entity (and
consolidated financial statements of a parent) which is a listed company or in the process of listing.
2. If a parent presents both consolidated financial statements and separate financial statements, then
disclosures required by this IAS need to be presented only in one of the statements (by default
consolidated statements).
BASIC EARNINGS PER SHARE

MEASUREMENT
Exam note
All paragraphs refer to parent entity, however, all this discussion is also relevant for a listed entity in its
separate financial statements
An entity shall calculate basic earnings per share amounts for profit or loss attributable to ordinary equity
holders of the parent entity and, if presented, profit or loss from continuing operations attributable to
those equity holders [Basic EPS for discontinued operations shall be disclosed separately].
Profit or loss attributable to ordinary shareholders of the parent entity (𝒊.𝒆. 𝒏𝒖𝒎𝒆𝒓𝒂𝒕𝒐𝒓)
Basic EPS =
weighted avera number of ordinary share outstanding during the period (𝒊.𝒆.𝒅𝒆𝒏𝒐𝒎𝒊𝒏𝒂𝒕𝒐𝒓)
Numerator
= PAT from continuing operations attributable to parent – dividends or other adjustments on settlements
on preference shares classified as equity (net of tax)
Exam note:
Deduct dividends on preference shares classified as equity (net of tax):
- In respect of non-cumulative preference shares, it shall be the amount of dividend declared for the
period.
- In respect of cumulative preference shares, it shall be the amount of dividend for the period
whether or not declared.
Other adjustments on settlement of preference shares:

o Preference shares that provide for a low initial dividend to compensate an entity for selling the
preference shares at a discount, on an above-market dividend in later periods to compensate
investors for purchasing preference shares at a premium, are sometimes referred to as increasing
rate preference shares. Any original issue discount or premium on increasing rate preference
shares is amortized to retained earnings using effective interest method and treated as a preference
dividend for the purpose of calculating EPS.
o Preference shares may be repurchased under an entity’s tender offer to the holders. The excess of
the fair value of the consideration paid to the preference shareholders over the carrying amount of
the preference shares represents a return to the holders of the preference shares and a charge to
retained earnings for the entity. This amount is deducted in calculating profit or loss attributable to
ordinary equity holders of the parent entity.
o Early conversion of convertible preference shares may be induced by an entity through favourable
changes to the original conversion terms or the payment of additional consideration. The excess of
Nasir Abbas FCA

576
the fair value of the ordinary shares or other consideration paid over the fair value of the ordinary
shares issuable under the original conversion terms is a return to the preference shareholders, and
is deducted in calculating profit or loss attributable to ordinary equity holders of the parent entity.
o Any excess of the carrying amount of preference shares over the fair value of the consideration paid
to settle them is added in calculating profit or loss attributable to ordinary equity holders of the
parent entity.
Denominator
1. The weighted average number of ordinary shares outstanding during the period is the number of
ordinary shares outstanding at the beginning of the period, adjusted by the number of ordinary shares
bought back or issued during the period multiplied by a time‑weighting factor. The time‑weighting
factor is the number of days that the shares are outstanding as a proportion of the total number of
days in the period; a reasonable approximation of the weighted average is adequate in many
circumstances.
2. Shares are usually included in the weighted average number of shares from the date consideration is
receivable (which is generally the date of their issue), for example:
(a) ordinary shares issued in exchange for cash are included when cash is receivable;
(b) ordinary shares issued on the voluntary reinvestment of dividends on ordinary or preference
shares are included when dividends are reinvested;
(c) ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares are
included from the date that interest ceases to accrue;
(d) ordinary shares issued in place of interest or principal on other financial instruments are included
from the date that interest ceases to accrue;
(e) ordinary shares issued in exchange for the settlement of a liability of the entity are included from
the settlement date;
(f) ordinary shares issued as consideration for the acquisition of an asset other than cash are included
as of the date on which the acquisition is recognized; and
(g) ordinary shares issued for the rendering of services to the entity are included as the services are
rendered.
Ordinary shares issued as part of the consideration transferred in a business combination are included
in the weighted average number of shares from the acquisition date.
3. The weighted average number of shares shall be adjusted in the tabular working as follows:
Items Adjustment
A capitalization or All “Total shares” prior to the line of bonus issue shall be multiplied by a bonus
bonus issue (e.g. factor which is calculated as follows using bonus ratio:
existing+bonus
bonus dividend) Bonus factor = [e.g. 2 for 5 bonus issue factor = 7/5]
existing
A bonus element All “Total shares” prior to the line of right issue shall be multiplied by a bonus
in any other issue element which is calculated as follows:
e.g. right issue fair value of share immediately be the exercise of right
Bonus element =
theoretcial ex right price [i.e.TERP]
Nasir Abbas FCA

577
Here TERP =
Aggregate fair value of shares immediately before exercise of right + right proceeds
number of shares outstanding after the exercise of rights
Stock split or All “Total shares” prior to the line of stock split or consolidation shall be multiplied
Consolidation by a stock split factor/consolidation factor which is calculated as follows:
new
Split/consolidation factor = [e.g. 1 into 2 share split factor = 2/1]
old
Retrospective adjustments
Bonus issue, stock split and stock consolidation, issued in IAS 10 phase, shall be treated as an adjusting
event only for EPS calculation.
Partly paid shares

Where ordinary shares are issued but not fully paid, they are treated in the calculation of basic earnings
per share as a fraction of an ordinary share to the extent that they were entitled to participate in dividends
during the period relative to a fully paid ordinary share.
Participating equity instruments and two-class ordinary shares
The equity of some entities includes:

(a) instruments that participate in dividends with ordinary shares according to a predetermined formula
(for example, two for one) with, at times, an upper limit on the extent of participation (for example,
up to, but not beyond, a specified amount per share).
(b) a class of ordinary shares with a different dividend rate from that of another class of ordinary shares
but without prior or senior rights.
To calculate basic earnings per share:

(a) profit or loss attributable to ordinary equity holders of the parent entity is adjusted (a profit reduced
and a loss increased) by the amount of dividends declared in the period for each class of shares and
by the contractual amount of dividends (or interest on participating bonds) that must be paid for the
period (for example, unpaid cumulative dividends).
(b) the remaining profit or loss is allocated to ordinary shares and participating equity instruments to the
extent that each instrument shares in earnings as if all of the profit or loss for the period had been
distributed. The total profit or loss allocated to each class of equity instrument is determined by
adding together the amount allocated for dividends and the amount allocated for a participation
feature.
(c) the total amount of profit or loss allocated to each class of equity instrument is divided by the number
of outstanding instruments to which the earnings are allocated to determine the earnings per share
for the instrument.
Nasir Abbas FCA

578
IAS 33 [Diluted EPS] – SOLUTIONS
SOLUTIONS
Solution No. 1
Basic EPS = 1,200,000 / 500,000 = Rs. 2.40
Diluted EPS = 1,200,000 / [500,000 + 25,000(W-1)] = Rs. 2.29
W-1
Weighted average shares under option 100,000
Shares that would have been issued at market price [100,000 x 15 / 20] (75,000)
25,000
Solution No. 2
Basic EPS = 1,200,000 / 500,000 = Rs. 2.40
Diluted EPS = 1,200,000 / [500,000 + 15,000(W-1)] = Rs. 2.33
W-1
Weighted average shares under option 100,000
Shares that would have been issued at market price [(1,500,000 + 200,000)/20] (85,000)
15,000
Solution No. 3
Basic EPS = 18,000,000 / 8,000,000 = Rs. 2.25
Diluted EPS Rs.

PAT 18,000,000
Interest on convertible bonds [(17.28m + 1m) x 8/108 x 60%] 812,444
18,812,444
Shares [8,000,000 + 200,000 x 8*] 9,600,000
Diluted EPS [18,812,444 / 9,600,000] 1.96
* It is assumed that conversion into 8 shares per bond is the most advantageous conversion rate
Solution No. 4
Basic EPS
Basic EPS = 25,500,000/[11,500,000(W-1)] = Rs. 2.22

W-1
Outstanding shares = 10m + 20m x 50% x 20/100 x 9/12 = 11.50 million shares
Diluted EPS Rs.

PAT 25,500,000
Interest on convertible bonds [20m x 50% x 6% x 3/12 x 70% + 20m x 50% x 6% x 70%] 525,000
26,025,000
Shares [11.5m + 20m x 50% x 20/100 x 3/12 + 20m x 50% x 20/100] 14,000,000
Diluted EPS [26,025,000 / 14,000,000] 1.86
Solution No. 5
Basic EPS Q-1 Q-2 Q-3 Q-4 Full year
Profit for the period (Rs.) 1,100,000 1,200,000 (400,000) 1,000,000 2,900,000
Shares:
- Outstanding shares 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
- Retail site contingency (W-1) - 3,333 6,667 10,000 5,000
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NASIR ABBAS FCA
- Earnings contingency (W-2) - - - - -

1,000,000 1,003,333 1,006,667 1,010,000 1,005,000
Basic EPS (Rs. per share) 1.10 1.20 (0.40) 0.99 2.89
W-1
Q-2: 5,000 x 2/3 = 3,333
Q-3: 5,000 + 5,000 x 1/3 = 6,667
Q-4: 10,000
Full year: 5,000 x 8/12 + 5,000 x 4/12 = 5,000
W-2
Earning condition was met on last day of year, therefore, these shares are not considered outstanding.
Diluted EPS Q-1 Q-2 Q-3 Q-4 Full year

Profit for the period (Rs.) 1,100,000 1,200,000 (400,000) 1,000,000 2,900,000
Shares:
- Outstanding shares 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
- Retail site contingency (W-3) - 5,000 10,000 10,000 5,000
- Earnings contingency (W-4) - 300,000 - 900,000 900,000
1,000,000 1,305,000 1,010,000 1,910,000 1,905,000
Diluted EPS (Rs. per share) 1.10 0.92 (0.40) 0.52 1.52
W-3
Contingently issuable shares are included in the diluted EPS calculation from the late of the beginning
of the period or the date of agreement.
W-4
Q-1: Profit till March 31, 2020 was below Rs. 2 million
Q-2 [(2,300,000 - 2,000,000) x 1,000/1,000] = 300,000
Q-3: Profit till March 31, 2020 was below Rs. 2 million
Q-4 [(2,900,000 - 2,000,000) x 1,000/1,000] = 900,000
Solution No. 6
Basic EPS
Basic EPS (continuing operations) = 10,000,000 / 2,000,000 = Rs. 5
Basic EPS (discontinued operations) = (4,000,000) / 2,000,000 = (Rs. 2)
Diluted EPS
Ranking
Incremental Incremental Incremental
earnings shares EPS
Options - 20,000 - 1st
[100,000 - 100,000 x 60/75]
580
NASIR ABBAS FCA
Convertible preference shares 6,400,000 1,600,000 4.00 3rd

[800,000 x 8] [800,000 x 2]
Convertible bonds 3,000,000 2,000,000 1.50 2nd

[100m x 5% x 60%] [100m x 20/1,000]
Calculation of diluted EPS (continuing operations)

Numerator Denominator EPS
Used for basic EPS 10,000,000 2,000,000 5.00
Options - 20,000
10,000,000 2,020,000 4.95 dilutive
Convertible bonds 3,000,000 2,000,000
13,000,000 4,020,000 3.23 dilutive
Convertible preference shares 6,400,000 1,600,000
19,400,000 5,620,000 3.45 Anti-dilutive
Hence dilutive EPS is follows:

Continuing operations 3.23
Discontinued operations [(4,000,000) / 4,020,000] (1.00)
Solution No. 7
Subsidiary’s F/S
5,400 – 400(W–1)
Basic EPS = 1,000
= Rs. 5.00
W-1 Preference dividend = 400 x 1 = 400
5,400
Diluted EPS = = Rs. 3.66
1,000+ (W–2) + 400(W–3)
W-2 Incremental shares for warrants = 150 – (150 x 10)/20 = 75 shares

W-3 Incremental shares for preference shares = 400 x 1 = 400 shares
Consolidated F/S
12,000 + 4,300(W–4)
Basic EPS = 10,000
= Rs. 1.63
W-4 = 5 x 800 + 1 x 300 = 4,300
12,000+2,928(W–5)+5 (W–6)+1,098(W–7)
Diluted EPS = 10,000
= Rs. 1.61
W-5 = 1,000 x 3.66 x 80% = 2,928

W-6 = 75 x 3.66 x 30/150 = 55
W-7 = 3.66 x 400 x 300/400 = 1,098
581
NASIR ABBAS FCA
IAS 33 [Diluted EPS] – Class notes
DILUTED EARNINGS PER SHARE

Dilution is a reduction in earnings per share or an increase in loss per share resulting from the assumption
that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares
are issued upon the satisfaction of specified conditions.
MEASUREMENT
Exam note
All paragraphs refer to parent entity, however, all this discussion is also relevant for a listed entity in its
individual/separate financial statements
An entity shall calculate diluted earnings per share amounts for profit or loss attributable to ordinary
equity holders of the parent entity and, if presented, profit or loss from continuing operations attributable
to those equity holders [Diluted EPS for discontinued operations shall be disclosed separately].
Diluted EPS =
Numerator for Basic EPS +/– adjustment in profit or loss for effect of dilutive potential ordinary shares
Denominator for Basic EPS +/– adjustment in number of shares for effect of dilutive potential ordinary shares
Potential ordinary shares

A potential ordinary share is a financial instrument or other contract that may entitle its holder to
ordinary shares. [convertible bonds, share warrants etc.]
Dilutive potential ordinary shares

Potential ordinary shares shall be treated as dilutive when, and only when, their conversion to ordinary
shares would decrease earnings per share or increase loss per share from continuing operations.
Adjustments for dilutive potential ordinary shares
1) Options, warrants and their equivalents
Options, warrants and their equivalents are financial instruments that give the holder the right to
purchase ordinary shares.
Options and warrants are dilutive when they would result in the issue of ordinary shares for less than the
average market price of ordinary shares during the period (i.e. “in the money” options). The assumed
proceeds from these instruments shall be regarded as having been received from the issue of ordinary
shares at the average market price of ordinary shares during the period. Thus, the issue would involve the
issue of certain number of ordinary shares for no consideration.
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582
Adjustment in Numerator Adjustment in Denominator
No adjustment required Number of shares to be added to denominator:

= shares to be issued less [cash proceeds from
option exercise ÷ average market share price]
Options as per IFRS 2

Equity instruments granted as per IFRS 2 are treated as options in calculation of diluted EPS.
In case of Non-vested equity instruments granted:
Shares to be added to denominator = Shares to be issued less [(cash proceeds from option exercise
+ fair value of any goods or services to be supplied to the entity) ÷ average market share price]
2) Convertible instruments
Convertible preference shares are antidilutive whenever the amount of the dividend on such shares
declared in or accumulated for the current period per ordinary share obtainable on conversion exceeds
basic earnings per share. Similarly, convertible debt is antidilutive whenever its interest (net of tax and
other changes in income or expense) per ordinary share obtainable on conversion exceeds basic earnings
per share.
Adjustment in Numerator Adjustment in Denominator
Add back to numerator the after-tax amount of: Number of shares to be added to denominator:
Any dividends or other items which was = weighted average number of shares that would
deducted from numerator or basic EPS in be issued on the conversion of all the dilutive
respect of convertible preference shares potential ordinary shares into ordinary shares.
Any interest recognized in the period relating
to convertible bonds.
3) Contingently issuable shares
Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other
consideration upon the satisfaction of specified conditions in a contingent share agreement.
Contingently issuable shares are treated as outstanding and are included in the calculation of basic EPS
only from the date when all necessary conditions are satisfied (i.e. the events have occurred). Shares that
are issuable solely after the passage of time are not contingently issuable shares, because the passage of
time is a certainty. If the conditions are not satisfied, the number of contingently issuable shares included
in the diluted EPS calculation is based on the number of shares that would be issuable if the end of the
period were the end of the contingency period. It is further explained by following two examples:
o If attainment or maintenance of a specified amount of earnings for a period is the condition for
contingent issue and if that amount has been attained at the end of the reporting period but must be
maintained beyond the end of the reporting period for an additional period. In that case, the
Nasir Abbas FCA

583
calculation of diluted EPS is based on the number of ordinary shares that would be issued if the
amount of earnings at the end of the reporting period were the amount of earnings at the end of the
contingency period. Because earnings may change in a future period, the calculation of basic EPS does
not include such contingently issuable ordinary shares until the end of the contingency period because
not all necessary conditions have been satisfied.
o The number of ordinary shares contingently issuable may depend on the future market price of the
ordinary shares. In that case, if the effect is dilutive, the calculation of diluted EPS is based on the
number of ordinary shares that would be issued if the market price at the end of the reporting period
were the market price at the end of the contingency period. Because the market price may change in
a future period, the calculation of basic EPS does not include such contingently issuable ordinary
shares until the end of the contingency period because not all necessary conditions have been
satisfied.
4) Contracts thay may be settled in ordinary shares or cash
When an entity has issued a contract that may be settled in ordinary shares or cash at the entity’s option,
the entity shall presume that the contract will be settled in ordinary shares, and the resulting potential
ordinary shares shall be included in diluted earnings per share if the effect is dilutive.
For contracts that may be settled in ordinary shares or cash at the holder’s option, the more dilutive of
cash settlement and share settlement shall be used in calculating diluted earnings per share.
Important points:
1. Dilutive potential ordinary shares shall be deemed to have been converted into ordinary shares at the
beginning of the period or, if later, the date of issue.
2. Potential ordinary shares that are cancelled or allowed to lapse during the period are included in the
calculation of diluted earnings per share only for the portion of the period during which they are
outstanding.
3. Potential ordinary shares that are actually converted into ordinary shares during the period are
included in the calculation of diluted earnings per share from the beginning of the period to the date
of conversion. From the date of conversion, the resulting ordinary shares are included in denominator
of Basic EPS.
4. When more than one basis of conversion exists, the calculation assumes the most advantageous
conversion rate or exercise price from the standpoint of the holder of the potential ordinary shares.
5. To maximize the dilution of basic earnings per share, each issue or series of potential ordinary shares
is considered in sequence from the most dilutive to the least dilutive. Options and warrants are
generally included first because they do not affect the numerator of the calculation.
Determining the order in which to include dilutive instruments:
Steps:
1) Calculate incremental EPS for each potential ordinary share:
Ædjustment in profit or loss for effect of dilutive potential ordinary shares
Incremental EPS = Ædjustment in number of shares for effect of dilutive potential ordinary share
2) Rank from lowest (i.e. most dilutive) to highest (i.e. least dilutive) on the basis of incremental
EPS calculated in Step-1
6. For calculation of diluted EPS, if subsidiary has potential ordinary shares, solve PQ-6
Nasir Abbas FCA

584
IAS 33 [Basic EPS] – QUESTIONS
PRACTICE QUESTIONS
Question No. 1
Qureshi Ltd (QL) had an issued share capital of 2000 shares on January 1, 2016. During the year following share issues
took place:
On April 1, 2016 QL issued 1000 shares against cash at full market price.
On July 1, 2016 QL made a bonus issue of 1 for 5.
On November 1, 2016 QL made a right issue of 1 for 3 at an exercise price of Rs. 18 per share when market price was
Rs. 24 per share.
Net profit before tax and profit after tax for the year were Rs. 540,000 and Rs. 420,000 respectively.
Required:
Calculate basic earnings per share for 2016.
Question No. 2
Yasir Ltd (YL) is a listed company. Following financial information relates to years ending December 31, 2016 and 2015:
2016 (Rs.) 2015 (Rs.)
Taxation:
Current tax expense 20,000 29,000
Deferred tax expense / (income) 12,000 (11,000)
10% redeemable preference shares 240,000 200,000
12% irredeemable preference shares 80,000 80,000
YL made following equity transactions:
On July 1, 2015 YL issued 4,000 shares at full market price.
On July 1, 2016 YL made a right issue of 1 for 5 at an exercise price of Rs. 20 per share when market price was Rs. 30
per share.
On December 1, 2016 YL made a 25% bonus issue.
Required:
Calculate basic earnings per share for 2016 and 2015 as well as restated EPS for 2015.
Question No. 3
Gallant Ltd (GL) had an issued share capital of 5,000 shares of Rs. 10 each on January 1, 2016. During the year following
share transactions took place:
On April 1, 2016 GL issued 1,000 shares against cash at full market price.
On April 30, 2016 ordinary shares were split and each Rs. 10 face value existing share was replaced with two Rs. 5
face value new shares.
On November 1, 2016 GL made a bonus issue of 1 for 4.
Net profit after tax for the year was Rs. 250,000.
Required:
Question No. 4
Super Ltd (SL) had an issued share capital of 4,000 shares of Rs. 10 each on January 1, 2016. During the year following
share transactions took place:
On July 1, 2016 SL issued 2,000 shares against cash at full market price.
On September 30, 2016 ordinary shares were consolidated and every three Rs. 10 face value existing shares were
replaced with one Rs. 30 face value new share.
On December 1, 2016 SL made a right issue of 1 for 4 at a discount of Rs. 3 per share on current market price of Rs.
45 per share.
Net profit after tax for the year 2016 was Rs. 100,000. Basic EPS as reported in 2015 was Rs. 16 per share.
Required:
Calculate basic earnings per share for 2016 and restated earnings per share for 2015.
Question No. 5
Prema Ltd (PL) acquired 70% shares of Anhaar Ltd (AL) on January 1, 2016. Following information relates to both
companies for the year ending December 31, 2016:
585
NASIR ABBAS FCA
PL (Rs.) AL (Rs.)
PL made following equity transactions during 2016:
On July 1, 2016 PL issued 2,000 shares at full market price.
On November 1, 2016 PL made a right issue of 1 for 4 at an exercise price of Rs. 25 per share when market price was
Rs. 30 per share.
On January 12, 2017 PL made a bonus issue of 1 for 5. Financial statements for the year 2016 were authorized in February
2017.
Required:
Calculate basic earnings per share for 2016 to be reported on consolidated income statement for 2016.
Question No. 6
Style Ltd (SL) has an issued share capital of 6,000 shares of Rs. 10 each on December 31, 2016. During the year 2016
following share transactions took place:
On March 1, 2016 SL made a bonus of 1 for 6.
On July 1, 2016 SL issued 1,500 shares at full market price.
On November 30, 2016 SL made a right issue of 1 for 5 at an exercise price of Rs. 24 per share when cum-right market
price was Rs. 30 per share.
Net profit after tax for the year 2016 was Rs. 120,000 (comprising of Rs. 100,000 from continuing operations and Rs.
20,000 from discontinued operations) and preference dividend declared on irredeemable preference shares amounts to
Rs. 30,000.
Required:
Question No. 7
The following information pertains to the financial statements of Home Dynamics Limited (HDL), a listed company, for the
year ended 31 December 2016:
(i) Profit after tax for the year:
Rs. in million
Profit from continuing operations – net of tax 765
Profit from discontinued operations – net of tax 155
Profit after tax 920
(ii) Shareholders’ equity as on 1 January 2016 comprised of:
10 million ordinary shares of Rs. 10 each, having market value of Rs. 25 each.
4 million cumulative preference shares of Rs. 10 each entitled to a cumulative dividend at 10%.
(iii) On 31 March 2016, HDL announced 40% right shares to its ordinary shareholders at Rs. 25 per share. The
entitlement date of right shares was 31 May 2016. The market price per share immediately before the
announcement date and entitlement date was Rs. 28 and Rs. 32 respectively.
(iv) On 2 August 2016, HDL announced 20% bonus issue. The entitlement date of bonus shares was 31 August 2016.
(v) On 1 February 2017, the board of directors announced 20% cash dividend and 10% bonus issue being the final
dividend to the ordinary shareholders and 10% cash dividend for preference shareholders.
Required:
Calculate basic earnings per share for inclusion in HDL’s financial statements for the year ended 31 December 2016. Show
all relevant calculations. (10)
(Q-1, Spring 2017)
Question No. 8
For the purpose of preparation of statement of changes in equity for the year ended 31 December 2017, Daffodil Limited
(DL) has extracted the following information:
2017 2016 2015
Draft Audited Audited
--------------- Rs. in million ---------------
Net profit 650 318 214
Transfer to general reserves 112 - 141
Transfer of incremental depreciation - 49 55
Final cash dividend - - 7.5%
586
NASIR ABBAS FCA
(i) Details of share issues:
25% right shares were issued on 1 May 2016 at Rs. 18 per share. The market price per share immediately
before the entitlement date was also Rs. 18 per share.
A bonus issue of 10% was made on 1 April 2017 as final dividend for 2016.
50 million right shares were issued on 1 July 2017 at Rs. 15 per share. The market price per share immediately
before the entitlement date was Rs. 25 per share.
A bonus issue of 15% was made on 1 September 2017 as interim dividend.
(ii) After preparing draft financial statements, it was discovered that depreciation on a plant costing Rs. 700 million
has been charged @ 25% under reducing balance method, from the date of commencement of manufacturing i.e.
1 July 2014. However, the plant was available for use on 1 February 2014.
(iii) Share capital and reserves as at 31 December:
2015 2014
--------- Rs. in million -------
Ordinary share capital (Rs. 10 each) 1,600 1,600
General reserves 1,850 1,709
Required:
(a) Compute DL’s basic earnings per share for the year ended 31 December 2017 along with the comparative figure.
(08)
(b) Explain how dividend on preference shares is dealt with while computing basic EPS. (03)
(Q-2, Spring 2018)
Question No. 9
Dee Limited (DL) issued 4,000 non-convertible, non-redeemable class A cumulative preference shares of Rs. 100 par value
on 1 January 2018. The class A preference shares are entitled to a cumulative annual dividend of 7% per share starting in
2021. At the time of issue, the market rate dividend yield on the class A preference shares was 7% a year. Thus, DL could
have expected to receive proceeds of approximately Rs. 100 per class A preference share if the dividend rate of 7% per
share had been in effect at the date of issue. In consideration of the dividend payment terms, however, the class A
preference shares were issued at Rs. 81.63 per share, i.e. at a discount of Rs. 18.37 per share.
Net profit after tax for the years ending December 31, 2018, 2019 and 2020 were Rs. 540,000, Rs. 600,000 and Rs. 720,000
respectively.
Required:
Calculate profit attributable to ordinary shareholders (i.e. numerator of basic EPS) for each of the three years.
Question No. 10
Bee Limited (BL) earned a profit after tax of Rs. 100,000 for the year ending December 31, 2020. Following details relate
to equity of BL:
Ordinary share capital (Rs. 10 each) Rs. 100,000
5.5% non-convertible non-cumulative preference shares (Rs. 100 each) Rs. 600,000
Interim ordinary dividend paid during the year Rs. 2.10 per share
Preference shares participate in any additional dividend (i.e. after payment of ordinary dividend and preference dividend)
on a 20:80 basis with ordinary shares.
Required:
Calculate basic EPS for ordinary shareholders.
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NASIR ABBAS FCA
Q-7 Jun-18
Tiger Limited
(a) For the quarter ended December 31, 2017

Basic Diluted
Numerator [Rs. million] 140.00 148.05 (W-2)
Denominator [million shares] (W-1) 24.80 26.40 (W-2)
EPS [Rs. per share] 5.65 5.61
WORKINGS
W-1
W. Avg
Date Particulars Shares Balance Time factor
shares
[1] [2] [1 x 2]
01-10-17 Balance - 24.00 1/3 8.00

01-11-17 Converted 1.20 25.20 2/3 16.80
[0.8 x 3 x 50%] 24.80
W-2
Calculation of diluted EPS
[Rs. million] [million shares] [Rs./share]
Used for basic EPS 140.00 24.80 5.65
Warrants - -
140.00 24.80 5.65 No effect
Convertible bonds (W-2.1) 8.05 1.60
148.05 26.40 5.61 dilutive
W-2.1 Bonds
Rs. million
01-11-16 Initial 760.00
31-10-17 Interest [760 x 9%] 68.40
31-10-17 Cash flow [800 x 7%] (56.00)
31-10-17 Balance 772.40
01-11-17 Conversion (386.20)
386.20
31-12-17 Interest [386.20 x 9% x 2/12] 5.79
Interest adjustment in numerator Rs. million

Oct [68.40 x 1/12 x 70%] 3.99
Nov-Dec [5.79 x 70%] 4.06
8.05
588
Number of shares Million shares
Not yet converted [0.8 x 3 x 50%] 1.20
Actually converted [0.8 x 3 x 50% x 1/3] 0.40
1.60
(b) For the half year ended December 31, 2017

Basic Diluted
Numerator [Rs. million] 239.00 239.00 (W-4)
Denominator [million shares] (W-3) 23.73 24.07 (W-4)
EPS [Rs. per share] 10.07 9.93
WORKINGS
W-3
W. Avg
Date Particulars Shares Balance Time factor
shares
[1] [2] [1 x 2]
01-07-17 Balance - 20.00 1/6 3.33

01-08-17 New issue 4.00 24.00 3/6 12.00
01-11-17 Converted 1.20 25.20 2/6 8.40
[0.8 x 3 x 50%] 23.73
W-4
[Rs. million] [million shares] [Rs./share]
Used for basic EPS 239.00 23.73 10.07
Warrants - 0.33
[6m - 6m x 340/360] 239.00 24.07 9.93 dilutive
Convertible bonds (W-4.1) 20.02 2.00
259.02 26.07 9.94 Anti-dilutive
W-4.1 Bonds
Interest adjustment in numerator Rs. million
1st quarter [68.40(W-2.1) x 1/4 x 70%] 11.97
2nd quarter (W-2.1) 8.05
20.02
Number of shares Million shares

Not yet converted [0.8 x 3 x 50%] 1.20
Actually converted [0.8 x 3 x 50% x 4/6] 0.80
2.00
589
Q-6 Jun-15
Ittehad Industries Limited
Extracts - SOCI
Rs. million
Earnings per share (Rs. per share):

- Basic Note-4 1.29
- Diluted Note-4 1.27
Ittehad Industries Limited

Extracts - Notes
4- Earnings per share Basic Diluted
Numerator [Rs. million] 4.1 225.00 234.34

Denominator [million shares] 4.2 174.13 184.46
4.1 - Reconciliation of earnings Rs. million

Earnings for basic EPS 225.00
Interest on TFC (W-2) 9.34
234.34
4.2 - Reconciliation of shares Million shares

Shares for basic EPS (W-1) 174.13
Options (W-2) 0.33
Convertible TFC (W-2) 10.00
184.46
WORKINGS
W-1
Bonus W. Avg
Date Particulars Shares Balance Time factor Bonus issue
element shares
[1] [2] [3] [4] [1x2x3x4]
(W-1.1)
01-01-16 Balance - 120 3/12 1.2 25/23 39.13
01-04-16 Right 30 150 1/12 1.2 15.00
01-05-16 Bonus 30 180 8/12 - 120.00
174.13
590
W-1.1
TERP = (100 x Rs. 25 + 25 x Rs. 15) / (100 + 25)
= 23.00
Bonus element = 25 / 23
W-2
Ranking
Incremental Incremental Incremental
earnings shares EPS
Options - 333,333 - 1st
[5,000,000 - (5,000,000 x 12 + 10,000,000)/15]
Convertible TFC 9,343,750 10,000,000 0.93 2nd

[250m x 11.5% x 6/12 x 65%] [20m x 6/12]
Used for basic EPS 225,000,000 174,130,435 1.292

Options - 333,333
225,000,000 174,463,768 1.290 dilutive
Convertible TFC 9,343,750 10,000,000
234,343,750 184,463,768 1.270 dilutive
591
Tax expense (tax income) is the aggregate amount included in the determination of profit or loss for the
period in respect of current tax and deferred tax.
CURRENT TAX
IMPORTANT TERMS
1. Accounting profit is profit or loss for a period before deducting tax expense (i.e. PBT).
2. Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules
established by the taxation authorities, upon which income taxes are payable (recoverable).
3. Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax
loss) for a period.
RECOGNITION
1. Current tax for current and prior periods shall, to the extent unpaid, be recognized as a liability. If the
amount already paid in respect of current and prior periods exceeds the amount due for those
periods, the excess shall be recognized as an asset.
2. Current tax shall be recognized as follows:
Tax arising from a transaction Current tax shall also be recognized in OCI
or event which is recognized in
OCI (e.g. equity investment
measured at FV through OCI):
Tax arising from a transaction Current tax shall also be recognized directly in equity.
or event which is recognized [Tax relating to share based payments is discussed in detail later]
directly in equity (e.g.
adjustment in RE as per IAS):
Otherwise: Current tax shall be recognized in P&L for the period.
MEASUREMENT
Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected
to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been
enacted or substantively enacted by the end of the reporting period.
Nasir Abbas FCA

592
Accounting entries for current tax:

(1) Current tax for current year [Accounted for at year end in respect of tax on tax profit for the year]
Dr. Tax expense
Cr. Tax payable
(2) Current tax for prior year [Accounted for after assessment order for any prior year is received]
Dr. Tax expense [Under estimate]
Cr. Tax payable
OR
Dr. Tax payable
Cr. Tax expense [Over estimate]
Calculation of current tax for current year – Format:

Rs.
Accounting profit [PBT] XXX
Add: Inadmissible expenses XXX
Less: Exempt incomes (XXX)
Add / Less: Adjustments for items having different treatments in accounting and tax rules XXX
Less: brought forward tax losses (XXX)
Tax profit XXX
[Tax profit x applicable tax rate] XXX
Less: brought forward unused tax credit (XXX)
Less: tax credit for current year (XXX)
Current tax for current year XXX
Following assumptions are used for calculation of current tax for current year:
1. Incomes and expenses are taxable / deductible on accrual basis unless specifically mentioned otherwise.
2. Fines and penalties are not deductible for tax purposes.
3. Tax deduction is not allowed for doubtful debts, rather, it is allowed for bad debts actually written off.
4. Tax deduction is not allowed for provision of expenses (e.g. warranty provision), however, it is allowed when
expenditure is actually incurred.
5. Tax deduction is not allowed for employee cost (under post-employment benefit) for the year, rather, it is
allowed for benefits actually paid or contributions made (as instructed in question) during the year.
6. Any revaluation or impairment recognized in P&L is not allowed for tax purposes.
7. In case of lease (books of lessee) tax deduction is not allowed for finance charge and depreciation on ROU
asset, rather full tax deduction is allowed for lease payments.
8. Borrowing cost is capitalized in accordance with IAS 23, however, it is allowed as tax deduction when incurred.
For tax purposes, actual borrowing cost incurred (e.g. contractual coupon payment) is allowed rather than
interest cost using effective interest rate method.
9. Dismantling cost is allowed for tax purposes in full when actually incurred, therefore, finance cost on provision
of dismantling is not allowed for tax purposes.
10. Tax depreciation (also called capital allowance) is calculated on full year basis. Tax depreciation is calculated
on cost of asset for tax purposes (i.e. excluding borrowing cost capitalized and dismantling cost capitalized.)
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DEFERRED TAX
IMPORTANT TERMS
1. Deferred tax liabilities [DTL] are the amounts of income taxes payable in future periods in respect of
taxable temporary differences.
2. Deferred tax assets [DTA] 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.
3. Temporary differences are differences between the carrying amount [CA] of an asset or liability in the
statement of financial position and its tax base [TB]. Temporary differences may be either:
(a) taxable temporary differences [TTD], which are temporary differences that will result in taxable
amounts in determining taxable profit (tax loss) of future periods when the carrying amount of
the asset or liability is recovered or settled; or
(b) deductible temporary differences [DTD], which are temporary differences that will result in
amounts that are deductible in determining taxable profit (tax loss) of future periods when the
carrying amount of the asset or liability is recovered or settled.
Exam note:
Students can identify the differences as taxable or deductible with the help of following guidance:
For Assets For Liabilities

Taxable difference If CA > TB If TB > CA
Deductible difference If TB > CA If CA > TB
4. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
Tax base – explained
1) Tax base for assets
For assets whose economic benefits are For assets whose economic benefits are NOT
taxable: taxable:
TB = amount that will be deductible for tax TB = carrying amount

purposes against taxable economic benefits
Examples
(a) 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. Revenue generated by using the machine is taxable, any gain
on disposal of the machine will be taxable and any loss on disposal will be deductible for tax
purposes. The tax base of the machine is 70.
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(b) 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.
(c) Trade receivables have a carrying amount of 100. The related revenue has already been included in
taxable profit (tax loss). The tax base of the trade receivables is 100.
(d) Dividends receivable from a subsidiary have a carrying amount of 100. The dividends are not
taxable. In substance, the entire carrying amount of the asset is deductible against the economic
benefits. Consequently, the tax base of the dividends receivable is 100.
(e) A loan receivable has a carrying amount of 100. The repayment of the loan will have no tax
consequences. The tax base of the loan is 100.
2) Tax base for liabilities
For a liability for advance revenue: For all other liabilities:
TB = carrying amount less any amount of the TB = carrying amount less any amount that will be
revenue that will not be taxable in future deductible for tax purposes in respect of that
periods liability in future periods
Examples
(a) 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.
(b) 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.
(c) 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.
(d) 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.
(e) A loan payable has a carrying amount of 100. The repayment of the loan will have no tax
consequences. The tax base of the loan is 100.
Some items have a tax base but are not recognized as assets and liabilities in the statement of financial
position. For example, research costs are recognized as an expense in determining accounting profit in
the period in which they are incurred but may not be permitted as a deduction in determining taxable
profit (tax loss) until a later period.
Helpful for exam

Following list of examples is helpful and time saving in exam question for students if they memorize it:
Items Carrying amount Tax base
Assets
Non depreciable land Cost/Revalued amount Cost
Owned depreciable assets As per relevant IAS (e.g. Tax WDV (i.e. Cost for tax purposes
16/38) less accumulated tax depreciation)
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Right of use assets As per relevant IAS (e.g. 16) Zero

Inventory As per IAS 2 Cost (if NRV write-down is not allowed
for tax purposes)
Carrying amount (if NRV write-down is
allowed for tax purposes)
Financial asset As per IFRS 9 Cost (i.e. face value because any
transaction cost is allowed when
incurred)
Prepaid expenses As per accrual concept Carrying amount (if related expense is
allowed on accrual basis)
Zero (if related expense is allowed on
cash basis)
Accrued income As per accrual concept Carrying amount (if related income is
taxed on accrual basis)
Zero (if related income is taxed on
cash basis)
Receivable for any income As per accrual concept Carrying amount
exempt from tax
Any expense which has Zero Amount, in respect of expense
been paid and will be incurred to date, which will be
allowed for tax purposes in allowed as tax deduction in future
future periods (e.g. research periods.
cost)
Liabilities
Lease liabilities As per IFRS 16 Zero
Defined benefit obligation As per IAS 19 Zero
Provisions (e.g. warranty) As per IAS 37 Zero
Provision for doubtful debts Best estimate Zero
Provision/payable for any As per relevant guidance (e.g. Carrying amount
inadmissible expense IAS 37)
Convertible debt (liability As per IAS 32 Initial total amount less principal
component) repayments
Other borrowings As per IFRS 9 Initial total amount less principal
repayments
Dividend payable Declared but not yet paid Carrying amount
Accrued expenses As per accrual concept Carrying amount (if related expense is
allowed on accrual basis)
Zero (if related expense is allowed on
cash basis)
Advance income As per accrual concept Carrying amount (if related income is
taxed on accrual basis)
Zero (if related income is taxed on
cash basis)
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RECOGNITION
Deferred tax liability

A deferred tax liability shall be recognized for all taxable temporary differences, except to the extent that
the deferred tax liability arises from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
Exam note:
An example of such exception is an asset for which transaction no or partial deduction is allowed
for tax purposes. [ROU asset is not an exception as tax deduction is however allowed for lease
payments]
Deferred tax asset

A deferred tax asset shall be recognized for:
(1) all deductible temporary differences, unless the deferred tax asset arises from the initial recognition
of an asset or liability in a transaction which:
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
Exam note:
Only example of such exception is a non-taxable government grant. Whichever method for grant is
followed (i.e. deducting from asset or setting up as deferred income) a deductible difference arises
on initial recognition.
(2) the carryforward of unused tax losses
(3) the carryforward of unused tax credits
to the extent that it is probable that future taxable profits will be available against which such deductible
differences, unused tax losses and unused tax credits can be utilized. To the extent that it is not probable
that taxable profits will be available, the deferred tax asset is not recognized. However, at end of each
reporting period, an entity reassesses unrecognized deferred tax assets. The entity recognizes a previously
unrecognized deferred tax asset to the extent that it has become probable that future taxable profit will
allow the deferred tax asset to be recovered.
Deferred tax shall be recognized as follows:
Tax arising from a transaction or Deferred tax shall also be recognized in OCI
event which is recognized in OCI
(e.g. Revaluation of PPE):
Tax arising from a transaction or Deferred tax shall also be recognized directly in equity.
event which is recognized directly
in equity (e.g. equity component of
convertible debt):
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Otherwise: Deferred tax shall be recognized in P&L for the period.
MEASUREMENT
1. Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the
period when the asset is realized 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. [If future rates are not yet
announced, then year end rates are used].
2. When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities
are measured using the average rates that are expected to apply to the taxable profit (tax loss) of the
periods in which the temporary differences are expected to reverse.
3. The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences
that would follow from the manner in which the entity expects, at the end of the reporting period, to
recover or settle the carrying amount of its assets and liabilities.
4. Deferred tax assets and liabilities shall not be discounted.
Various examples for explanation of tax consequences

Example 1
An item of property, plant and equipment has a carrying amount of 100 and a tax base of 60. A tax rate
of 20% would apply if the item were sold and a tax rate of 30% would apply to other income.
The entity recognizes a deferred tax liability of 8 (40 at 20%) if it expects to sell the item without further
use and a deferred tax liability of 12 (40 at 30%) if it expects to retain the item and recover its carrying
amount through use.
Example 2
An item or property, plant and equipment with a cost of 100 and a carrying amount of 80 is revalued
to 150. No equivalent adjustment is made for tax purposes. Cumulative depreciation for tax purposes
is 30 and the tax rate is 30%. If the item is sold for more than cost, the cumulative tax depreciation of
30 will be included in taxable income but sale proceeds in excess of cost will not be taxable.
The tax base of the item is 70 and there is a taxable temporary difference of 80. If the entity expects to
recover the carrying amount by using the item, it must generate taxable income of 150, but will only be
able to deduct depreciation of 70. On this basis, there is a deferred tax liability of 24 (80 at 30%). If the
entity expects to recover the carrying amount by selling the item immediately for proceeds of 150, the
deferred tax liability is computed as follows:
TTD Tax% DTL

Cumulative tax depreciation 30 30% 9
Proceeds in excess of cost 50 - -
Total 80 9
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Example 3
The facts are as in example 2, except that if the item is sold for more than cost, the cumulative tax
depreciation will be included in taxable income (taxed at 30%) and the sale proceeds will be taxed at
40%, after deducting an inflation‑adjusted cost of 110.
If the entity expects to recover the carrying amount by using the item, it must generate taxable income
of 150, but will only be able to deduct depreciation of 70. On this basis, the tax base is 70, there is a
taxable temporary difference of 80 and there is a deferred tax liability of 24 (80 at 30%), as in example
2.
If the entity expects to recover the carrying amount by selling the item immediately for proceeds of 150,
the entity will be able to deduct the indexed cost of 110. The net proceeds of 40 will be taxed at 40%. In
addition, the cumulative tax depreciation of 30 will be included in taxable income and taxed at 30%. On
this basis, the tax base is 80 (110 less 30), there is a taxable temporary difference of 70 and there is a
deferred tax liability of 25 (40 at 40% plus 30 at 30%).
Example 4
An investment property has a cost of 100 and fair value of 150. It is measured using the fair value model
in IAS 40. It comprises land with a cost of 40 and fair value of 60 and a building with a cost of 60 and
fair value of 90. The land has an unlimited useful life. Cumulative depreciation of the building for tax
purposes is 30. Unrealized changes in the fair value of the investment property do not affect taxable
profit. If the investment property is sold for more than cost, the reversal of the cumulative tax
depreciation of 30 will be included in taxable profit and taxed at an ordinary tax rate of 30%. For sales
proceeds in excess of cost, tax law specifies tax rates of 25% for assets held for less than two years and
20% for assets held for two years or more.
Because the investment property is measured using the fair value model in IAS 40, there is a rebuttable
presumption that the entity will recover the carrying amount of the investment property entirely
through sale. If that presumption is not rebutted, the deferred tax reflects the tax consequences of
recovering the carrying amount entirely through sale, even if the entity expects to earn rental income
from the property before sale.
The tax base of the land if it is sold is 40 and there is a taxable temporary difference of 20 (60 – 40). The
tax base of the building if it is sold is 30 (60 – 30) and there is a taxable temporary difference of 60 (90
– 30). As a result, the total taxable temporary difference relating to the investment property is 80 (20 +
60).
The tax rate is the rate expected to apply to the period when the investment property is realized. Thus,
the resulting deferred tax liability is computed as follows, if the entity expects to sell the property after
holding it for more than two years:
TTD Tax% DTL
Cumulative tax depreciation 30 30% 9
Proceeds in excess of cost 50 20% 10
Total 80 19
If the entity expects to sell the property after holding it for less than two years, the above computation
would be amended to apply a tax rate of 25%, rather than 20%, to the proceeds in excess of cost. If,
instead, the entity holds the building within a business model whose objective is to consume
substantially all of the economic benefits embodied in the building over time, rather than through sale,
this presumption would be rebutted for the building.
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However, the land is not depreciable. Therefore, the presumption of recovery through sale would not be
rebutted for the land. It follows that the deferred tax liability would reflect the tax consequences of
recovering the carrying amount of the building through use and the carrying amount of the land through
sale. The tax base of the building if it is used is 30 (60 – 30) and there is a taxable temporary difference
of 60 (90 – 30), resulting in a deferred tax liability of 18 (60 at 30%).
The tax base of the land if it is sold is 40 and there is a taxable temporary difference of 20 (60 – 40),
resulting in a deferred tax liability of 4 (20 at 20%). As a result, if the presumption of recovery through
sale is rebutted for the building, the deferred tax liability relating to the investment property is 22 (18 +
4).
Example 5
The following example deals with the measurement of current and deferred tax assets and liabilities
for an entity in a jurisdiction where income taxes are payable at a higher rate on undistributed profits
(50%) with an amount being refundable when profits are distributed. The tax rate on distributed profits
is 35%. At the end of the reporting period, 31 December 20X1, the entity does not recognize a liability
for dividends proposed or declared after the reporting period. As a result, no dividends are recognized
in the year 20X1. Taxable income for 20X1 is 100,000. The net taxable temporary difference for the year
20X1 is 40,000.
The entity recognizes a current tax liability and a current income tax expense of 50,000. No asset is
recognized for the amount potentially recoverable as a result of future dividends. The entity also
recognizes a deferred tax liability and deferred tax expense of 20,000 (40,000 at 50%) representing the
income taxes that the entity will pay when it recovers or settles the carrying amounts of its assets and
liabilities based on the tax rate applicable to undistributed profits.
Subsequently, on 15 March 20X2 the entity recognizes dividends of 10,000 from previous operating
profits as a liability.
On 15 March 20X2, the entity recognizes the recovery of income taxes of 1,500 (15% of the dividends
recognized as a liability) as a current tax asset and as a reduction of current income tax expense for
20X2.
Detailed discussion on certain items:

Business combination
With limited exceptions, the identifiable assets acquired and liabilities assumed in a business
combination are recognized at their fair values at the acquisition date. For example, when the carrying
amount of an asset is increased to fair value but the tax base of the asset remains at cost to the previous
owner, a taxable/deductible temporary difference arises which results in a deferred tax liability/asset.
This DTL/DTA is considered as an identifiable liability/asset at acquisition date and thus recognized. The
resulting deferred tax liability/asset affects goodwill (i.e. deducted/added in “net assets at acquisition”
in goodwill calculation).
When inter-company URP eliminations take place in consolidated SOFP, then temporary difference
arises because no corresponding adjustment is made in tax base. As a result, deferred tax is recognized
using buyer’s tax rate.
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As a result of a business combination, the probability of realizing a pre‑acquisition deferred tax asset of
the acquirer could change. An acquirer may consider it probable that it will recover its own deferred
tax asset that was not recognized before the business combination. For example, the acquirer may be
able to utilize the benefit of its unused tax losses against the future taxable profit of the acquiree.
Alternatively, as a result of the business combination it might no longer be probable that future taxable
profit will allow the deferred tax asset to be recovered. In such cases, the acquirer recognizes a change
in the deferred tax asset in the period of the business combination, but does not include it as part of
the accounting for the business combination. Therefore, the acquirer does not take it into account in
measuring the goodwill or bargain purchase gain it recognizes in the business combination.
Assets carried at fair value

IFRSs permit or require certain assets to be carried at fair value or to be revalued (e.g. IAS 16, IAS 38,
IAS 40 and IFRS 9). In some jurisdictions, the tax base of the asset is adjusted and no temporary
difference arises. In other jurisdictions, the tax base of the asset is not adjusted. The difference between
the carrying amount of a revalued asset and its tax base is a temporary difference and gives rise to a
deferred tax liability or asset.
As already discussed above, if related fair value gain/loss is recognized in OCI then its related deferred
tax is also recognized in OCI. If an entity transfers required amount from revaluation surplus to retained
earnings, such transfer shall be a net of deferred tax amount.
For example
A building having carrying amount of Rs. 400 is revalued to Rs. 500. Ignoring tax, Rs. 30 out of this gain
is to be credited to P&L (loss reversal) and remaining Rs. 70 is to be credited to Revaluation surplus
(OCI). Remaining useful life is 10 years. If tax rate is 20% then revaluation entries will be:
Dr. Building 100

Cr. P&L 30
Cr. Revaluation surplus 56 [70 x 80% i.e. net of tax]
Cr. Deferred tax 14 [70 x 20%]
Year end:
Dr. Revaluation surplus 5.60
Cr. Retained earnings 5.60
Goodwill
If goodwill is allowed as a deduction for tax purposes, then any resulting deferred tax liability/asset shall
be recognized. However, if no reduction in goodwill is allowed as deduction for tax purposes, then
taxable temporary difference arises on initial recognition of goodwill. No deferred tax liability shall be
recognized on such difference (neither initial nor subsequent).
Initial recognition of an asset or liability

If difference arises on initial recognition of the asset or liability:
a) in a business combination – recognize DTL/DTA
b) if the transaction either affects accounting or tax profit – recognize DTL/DTA
c) if the transaction neither affects accounting nor tax profit – do not recognize DTL/DTA
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Convertible debt
In accordance with IAS 32, the issuer of a compound financial instrument (for example, a convertible
bond) classifies the instrument’s liability component as a liability and the equity component as equity.
In some jurisdictions, the tax base of the liability component on initial recognition is equal to the initial
carrying amount of the sum of the liability and equity components. The resulting taxable temporary
difference arises from the initial recognition of the equity component separately from the liability
component. Consequently, an entity recognizes the resulting deferred tax liability and the deferred tax
is charged directly to the carrying amount of the equity component. Any subsequent changes in the
deferred tax liability are recognized in profit or loss as deferred tax expense (income).
Investments in subsidiaries, branches and associates and interest in joint arrangements

Temporary differences may arise when carrying amount of investment (e.g. using equity method) is
different from the tax base (i.e. cost). An entity shall recognize DTL/DTA on all such differences only if:
- investor does not control the timing of reversal of the temporary difference; and
- it is probable that temporary difference will reverse in foreseeable future.
Share-based payment transactions

In some tax jurisdictions, an entity receives a tax deduction that relates to remuneration paid in shares,
share options or other equity instruments of the entity. The amount of that tax deduction may differ
from the related cumulative remuneration expense, and may arise in a later accounting period.
For example, in some jurisdictions, an entity may recognize an expense for the consumption of
employee services received as consideration for share options granted as per IFRS 2, and not receive a
tax deduction until the share options are exercised, with the measurement of the tax deduction based
on the entity’s share price at the date of exercise.
The difference between the tax base of the employee services received to date (being the amount the
taxation authorities will permit as a deduction in future periods in respect of services rendered to date),
and the carrying amount of nil, is a deductible temporary difference that results in a deferred tax asset.
If the amount the taxation authorities will permit as a deduction in future periods is not known at the
end of the period, it shall be estimated, based on information available at the end of the period.
Current and deferred tax should be recognized as follows:

(a) to the extent of “cumulative expense recognized x tax%” is recognized in P&L (i.e. tax on allowable
tax deduction upto the amount of expense charged as per IFRS 2)
(b) any excess amount of tax shall be recognized directly in equity.
SIC 25 – Changes in the tax status of an entity or its shareholders

A change in the tax status of an entity or its shareholders does not give rise to increases or decreases in
amounts recognized outside profit or loss. The current and deferred tax consequences of a change in tax
status shall be included in profit or loss for the period, unless those consequences relate to transactions
and events that result, in the same or a different period, in a direct credit or charge to the recognised
amount of equity or in amounts recognized in other comprehensive income. Those tax consequences that
relate to changes in the recognized amount of equity, in the same or a different period (not included in
profit or loss), shall be charged or credited directly to equity. Those tax consequences that relate to
amounts recognized in other comprehensive income shall be recognized in other comprehensive income.
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Calculation of deferred tax for a comprehensive exam question:

Carrying Tax Difference/ Applicable DTL/(DTA)
amount Base Loss tax %
Assets
xxxxx X X X X% X
xxxxx X X X X% X
xxxxx X X X X% X
Liabilities
xxxxx X X X X% X
xxxxx X X X X% X
xxxxx X X X X% X
c/f tax loss (X) X% (X)

c/f tax credit (X)
Closing DTL/(DTA) X
Tips:
- for assets, difference = CA – TB
- for liabilities, difference = TB – CA
- Do not include assets/liabilities, which are covered under exception, in above calculation.
Calculation of deferred tax expense for the year in a comprehensive exam question:
Deferred tax [DTL / DTA]
b/d [Opening DTA] X b/d [Opening DTL] X
Tax on OCI (e.g. revaluation downwards) X Tax on OCI (e.g. revaluation upwards) X
Effect of tax rate change on OCI item X Effect of tax rate change on OCI item X
Tax directly credited in equity X Tax directly debited in equity X
Tax expense (– ve expense) (bal.) X Tax expense (+ ve expense) (bal.) X
c/d [Closing DTL] X c/d [Closing DTA] X
DISCLOSURES
5 – Deferred tax Opening Recognized Closing

Balance Equity OCI P&L Balance
Deferred tax comprises of: ------------------------------------ Rs. million -------------------------------------
PPE X X
Investments X X
Deferred tax asset
Defined benefit obligation (X) (X)
Share options (X) (X)
Doubtful debts (X) (X)
c/f loss (X) (X)
X X
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15 – Taxation / Tax expense Rs. million

Current tax:
- For current year XXX
- For prior year [under/(over) estimate] XXX
XXX
Deferred tax:
- Effect of tax rate change (W-1) XXX
- Relating to differences for the year XXX
XXX
XXX
Relationship between accounting profit and tax expense:

Accounting profit [PBT] XXX
Tax [PBT x Applicable tax rate] XXX
Tax for prior year [as above] XXX
Effect of tax rate change [as above] XXX
Exempt income [Income x Applicable tax rate] (XXX)
Tax credit for current year (XXX)
Permanently inadmissible expense [Expense x Applicable tax rate] XXX
Benefit arising from a previously unrecognized DTA (XXX)
Effect of (lower)/higher tax rate for expenses / (incomes) (e.g. dividend) XXX
[Expense or income x difference in tax rate]
XXX
Current tax recognized in:

- OCI X
- Directly in equity X
W-1 Effect of tax rate change

= Opening DT x change in rate/old tax rate
It is shown in above note as +/- as follows:
Rate increase Rate decrease

Opening DTL + -
Opening DTA - +
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INCOME TAXES (IAS-12) – QUESTIONS
PRACTICE QUESTIONS
Question No. 1
Given below is the statement of comprehensive income of Shakir Industries for the year ended December 31, 2008:
2008
Rs. 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)
Following information is available:
(i) Operating expenses include an amount of Rs. 0.7 million paid as penalty to SECP on non-compliance of certain
requirements of the Companies Act.
(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, Lease liability stood at Rs. 1.2 million. The movement in right-of-use assets is
as follows:
Rs. in million
Opening balance – 01/01/2008 2.50
Depreciation for the year (0.7)
Closing balance – 31/12/2008 1.80
(iv) The details of owned fixed assets are as follows:
Accounting Tax
Rs. in million
Opening balance – 01/01/2008 12.50 10.20
Purchased during the year 5.30 5.30
Depreciation for the year (1.10) (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. 0.55 million and Rs. 0.7 million
respectively.
(vii) As at December 31, 2008, the company had assessed brought forward tax losses of Rs. 3.5 million.
(viii) 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. (15)
{Spring 2009, Q # 5}
Question No. 2
Following information relates to Dynamic Limited for the year ended June 30, 2019:
(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. 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 Rs.4.75 million
whereas capital allowance 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 payments during the year amount to Rs. 5 million.
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(iii) During the year Rs. 0.45 million were spent on advertisement. As per tax rules such expenses 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:
Calculate current tax expense and deferred tax expense for the year ended June 30, 2019. (15)
Question No. 3
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 debt 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 millionrespectively.
(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 January 1, 2013) 350
Cost of a building sold on April 30, 2015 (for Rs. 35 million) 30
Purchased on July 1, 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 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 right of use would be depreciated over its useful life on straight linemethod.
(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)
{Spring 2016, Q 4}
Question No. 4
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.
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NASIR ABBAS FCA
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 January 2017 RL acquired a plant at a cost of Rs. 250 million. It has been depreciated on 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)
(Q-6, Spr-18)
Question No. 5
Orange Limited (OL) 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 5.40
Provision for warranty (14.70)
25.20
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NASIR ABBAS FCA
(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. (11)
(b) Compute the deferred tax liability/asset in respect of each temporary difference. (07)
(Comparative figures are not required)
{Autumn 2018, Q # 1}
Question No. 6
Following information relates to Akmal Limited for the year ended December 31, 2019:
(i) Owned property plant and equipment has a net book value of Rs. 28.5 million at December 31, 2019. Tax base of
property, plant and equipment on December 31, 2018 was Rs. 24 million. On January 1, 2019, an owned machine
was sold at fair value of Rs. 9 million (i.e. Rs. 1.8 million higher than its carrying amount). Accumulated accounting
depreciation of the machine at the time of sale was Rs. 3.6 million whereas its accumulated capital allowance at
that date was Rs. 5 million. On the same date, a similar machine was obtained on a lease for four years. Lease
rental was agreed at Rs. 2.019 million payable at end of every year with an effective interest rate of 10%.
Additions to owned property, plant and equipment during the year amount to Rs. 3.5 million. Accounting
depreciation for the year on owned assets was Rs. 2.3 million whereas capital allowance for the year was Rs. 5.2
million.
(ii) During the year Rs. 3 million was incurred on research. Due to deficiency in supporting documents, only Rs. 2.4
million can be claimed as deduction for tax purposes. Such expenses are allowed on straight line basis over 3
years.
(iii) Rent income (i.e. operating lease) is taxed on receipt basis. Rent income recognized during the year was Rs. 0.25
million. Unearned rent income at start and end of year was Rs. 0.1 million and Rs. 0.15 million respectively.
(iv) During the year a pending appeal in respect of tax year 2017 was settled. As a result, tax return was revised and
a tax refund of Rs. 0.3 million was approved. No adjustment in books has been made so far in this respect.
(vi) Profit before tax for the year amounts to Rs. 18.2 million.
(vii) Corporation tax rate is 35%.
Required:
Prepare “Deferred tax” and “Taxation” notes to the financial statements for the year ending December 31, 2019.
(Comparative information is not required) (22)
Question No. 7
Mercury Water Limited (MWL) is a listed company and is engaged in the business of purifying and marketing of bottled
water.
MWL purchased a bottling plant on 1 July 2006 at a cost of Rs. 90 million. The plant has a useful life of ten years with no
residual value. Depreciation is provided on straight-line method over the plant’s useful life. MWL revalues its plant at the
end of every two years.
The revalued amounts determined by Jet Valuers, an independent firm of valuers, are as follows:
(i) On 30 June 2008: Rs. 64 million
(ii) On 30 June 2010: Rs. 60 million
However, there was no change in the expected useful life and residual value of the plant.
Profit before tax for the years ended 30 June 2011 and 2010 was Rs. 80 million and Rs. 60 million respectively. The tax
authorities allow tax depreciation at 20% on reducing balance method. There are no temporary or permanent differences
other than those apparent from the above information. The tax rate applicable on MWL is 40%.
Required:
(a) Prepare journal entries to record the effect of revaluation and deferred tax, at the end of each year, up to 30
June 2011. (14)
(b) Prepare a note on taxation for the year ended 30 June 2011 in accordance with International Financial Reporting
Standards. (Comparative figures are required. Accounting policies are not required.) (07)
{Autumn 2011, Q # 5}
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NASIR ABBAS FCA
Question No. 8
Following is the draft balance sheet, before accounting for tax, of Bilal Limited as at December 31, 2019:
Non current assets: Rs.'000
Land 18,000
Building 24,000
Leased vehicles 3,500
65,500
Current assets:
Inventory 1,500
Trade debts 850
Prepayments and other receivables 300
Cash and bank 1,100
3,750
69,250
Capital and reserves:
Share capital (Rs. 10 each) 35,000
Share premium 5,000
Revaluation surplus 3,500
58,385
Non current liabilities:
Provision for Gratuity 920
Deferred tax 6,465
10,035
Current liabilities:
Lease liability 510
Creditors and other liabilities 320
830
69,250
Other information:
1) Land is carried at revaluation model. It was revalued to Rs. 18 million in 2017. Its fair value at December 31, 2019
is Rs. 18.5 million. However, no adjustment has been made for this revaluation. The revaluation surplus in balance
sheet relates to this land. Effect of rate change has not yet been accounted for.
2) Building was purchased on January 1, 2016. Total useful life of building was 20 years. Tax department allows
depreciation on building @ 10% on straight line basis.
3) Plant is depreciated on straight line basis over a life of 10 years. Plant was purchased on January 1, 2014. Tax
department allows depreciation on plant @ 25% reducing balance basis.
4) During the year Rs. 3 million were incurred on Research cost. Supporting documents relating to Rs. 0.45 million
are not available therefore will not be allowed as deduction by Tax deptt. As it allows only verifiable research
expenses on straight-line basis over three years.
5) Total lease rentals are allowed as deduction when paid. Total payments made during the year include Rs. 425,000
in respect of principal.
6) Gratuity expense for the year amounts to Rs. 0.35 million. Provision for gratuity balance at start of 2019 was Rs.
0.7 million.
8) Depreciation on leased vehicles during the year is Rs. 550,000.
9) Brought forward tax loss amounts to Rs. 850,000.
10) A penalty of Rs. 60,000 was charged during the year. No deduction is available for tax purposes.
11) Profit includes an income of Rs. 40,000 which is exempt from tax.
12) Profit before tax for the year is Rs. 4,200,000.
13) An expense claim has been rejected during 2019 as a result of assessment of 2015. BL will pay tax amounting to
Rs. 45,000 on this expense in 1st quarter of 2020.
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NASIR ABBAS FCA
14) Tax rate at end of 2018 was 30% and at end of 2019 is 35%.
Required:
Prepare "Tax expense" note for the year ended December 31, 2019. (comparatives not required)
Question No. 9
Following information relates to Irfan Limited (IL) as at December 31, 2018:
Carrying
Tax base
amount
---------- Rs. million --------
Building 180.00 128.00
Plant & machinery 80.00 70.00
Provision for doubtful debts 9.00 -
Provision for gratuity 13.00 -
Other information:
(1) Building was purchased on January 1, 2017. Its useful life was estimated at 20 years. It was revalued on January
1, 2019 to Rs. 216 million. Revaluation will not affect tax depreciation.
(2) Tax depreciation is charged on all fixed assets at 20% reducing balance basis. Accounting depreciation on plant
& machinery for 2019 amounts to Rs. 10 million.
(3) Provision for gratuity and provision for doubtful debt as at December 31, 2019 amounts to Rs. 20 million and
Rs. 13 million respectively.
(4) Tax rate applicable to IL is 30%.
(5) Carried forward assessed tax losses as at December 31, 2018 were Rs. 20 million.
(6) Tax profit, before adjustment of brought forward losses, for the year 2019 amounts to Rs. 11 million.
Required:
Prepare note on "deferred tax" for inclusion in financial statements for the year ending December 31, 2019.
Question No. 10
A company issued 5% convertible bonds for a nominal amount of Rs. 50,000 on January 1, 2017. On that date prevailing
market interest rates for comparable bonds without conversion option was 9%. These bonds will be redeemed at par or
converted into 5 ordinary shares per bond after 3 years. Tax rate is 30%.
Required:
Journal entries for all 3 years assuming that investors eventually chose cash redemption.
Question No. 11
A company granted 100 share options each to its 500 employees on January 1, 2016. Options involved a vesting period of
3 years. 40,000 options were eventually exercised on December 31, 2020. Tax deduction for such options was allowed for
intrinsic value on actual exercise of options.
Following detail relates to expense recognized as per IFRS 2 and intrinsic value at each year end:
Date Employee service expense Number of options Intrinsic value per option
(Rs.) (Rs.)
31-12-16 188,000 50,000 5
31-12-17 185,000 45,000 8
31-12-18 190,000 40,000 13
31-12-19 40,000 17
31-12-20 40,000 20
Tax rate is 40%.

Required:
Calculate current and deferred tax for each of 5 years.
610
NASIR ABBAS FCA
INCOME TAXES (IAS-12) – SOLUTIONS
SOLUTIONS
Solution No. 1
Shakir Industries
Current tax expense 2008

Rs. million
Accounting profit 15.80
Add:
Penalty 0.70
Gratuity expense 2.40
Finance charge on lease 0.15
Dep - ROU asset 0.70
Dep - owned assets 1.10
Less:
Lease rentals (0.65)
Tax dep - owned assets (1.65)
Borrowing cost capitalized (2.30)
14.65
b/f losses (3.50)
Taxable profit 11.15
Current tax [11.15 x 35%] 3.90
Deferred tax expense

Closing deferred tax (W-1) 1.49
Opening deferred tax (W-1) 0.55
Deferred tax expense 0.94
(W-1)
CA TB Diff
---------------- Rs. million ---------------
PPE 16.70 13.85 2.85
ROU asset 1.80 - 1.80
Capital WIP 2.30 - 2.30
Provision for gratuity [0.7 + 2.4 - 1.6] 1.50 - (1.50)
Lease liability 1.20 - (1.20)
4.25
DTL 35% 1.49
Solution No. 2
Current tax expense for the year
Rs.'000
Accounting profit 6,500
Accounting depreciation 4,750
Capital allowance (7,000)
Loss on disposal 100
Tax gain on disposal 300
Gratuity expense 1,500
Gratuity paid (5,000)
Advertisement [450 - 150] 300
611
NASIR ABBAS FCA
Bad debts expense 175

Bad debts written off (100)
Exempt income (50)
1,475
Current tax 35% 516
Deferred tax as at 30-06-19: CA TB Diff

---------------------- Rs.'000 -----------------
----
PPE [W-1] 24,500 15,400 9,100
Advertisement - 300 (300)
Provision for bad debts [350 + 175 - 100] 425 - (425)
Provision for Gratuity [8,250 + 1,500 - 5,000] 4,750 - (4,750)
3,625
DTL 35% 1,269
Deferred tax as at 30-06-18: CA TB Diff

---------------------- Rs.'000 -----------------
----
PPE [W-1] 26,750 19,500 7,250
Provision for bad debts 350 - (350)
Provision for Gratuity 8,250 - (8,250)
(1,350)
DTA 35% (473)
Deferred tax expense for 2019 [1,269 + 473] 1,741
W-1 PPE CA TB
------ Rs. '000 -------
Year start balance 26,750 19,500
Addition 6,000 6,000
Disposal [3,500 - 100 - 300] (3,500) (3,100)
Depreciation (4,750) (7,000)
Year end balance 24,500 15,400
Solution No. 3
Notes:
No adjustment is needed for tax on repairs disallowed unless decision on appeal is finalized.
Floors & Tiles Limited
Extracts from notes to the financial statements
TAXATION
Rs. in million
Current tax:
- for current year (W-1) 26.60
- for prior year [6 x 32%] 1.92
Deferred tax (W-4) (2.28)
Tax expenses 26.24
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NASIR ABBAS FCA
Reconciliation of relationship between tax expenses & accounting profit

Rs. in million
Tax on accounting profit [80 x 32%] 25.60

Tax for prior year [6 x 32%] 1.92
Tax on inadmissible expense [1 x 32%] 0.32
Tax saving on exempt capital gain [5 x 32%] (1.60)
Tax expense 26.24
{Working notes}
(W-1)
Calculation for current tax expense:

Add: Gratuity expense 12.00
Bad debt expense 10.00
Tax gain on building [35 - 24.3] 10.70
Accounting depreciation (W-2) 17.50
Lease interest [(120 - 30) x 12.59%] 11.33
Depreciation on ROU (120 (W-5) /5) 24.00
Penalty 1.00
Less: Tax depreciation (W-3) (29.92)

Accounting gain on building [35 - 26.5] (8.50)
Lease rental (30.00)
Capital gain (Exempt) (5.00)
Taxable profit 83.11
Current tax @ 32% 26.60

(W-2)
Remaining
Disposed Addition Total
opening
----------- Rs. in million ------------
Cost 30.00 320.00 40.00
Depreciation till 01-01-15 [2 years] (3.00) (32.00) -
Depreciation for the year:
[30 x 5% x 4/12] [320 x 5%] [40 x 5% x 6/12] (0.50) (16.00) (1.00) (17.50)
26.50 272.00 39.00
Disposal (26.50)
- 272.00 39.00 311.00
(W-3)
Remaining
Disposed Addition Total
opening
----------- Rs. in million ------------
Cost 30.00 320.00 40.00
Dep (2013) 10% (3.00) (32.00) -
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NASIR ABBAS FCA
27.00 288.00 40.00

Dep (2014) 10% (2.70) (28.80) -
24.30 259.20 40.00
Dep (2015) 10% - (25.92) (4.00) (29.92)
24.30 233.28 36.00
Disposal (24.30)
- 233.28 36.00 269.28
It is assumed that for tax purposes, depreciation is charged on full year basis.
(W-4)
Calculation of deferred tax expense for 2015:
--------------------------- Rs in million ---------------------------
Carrying amount Tax base Difference
Building (W-2)(W-3) 311.00 269.28 41.72
Right of use [120 (W-5) - 24] 96.00 - 96.00
Lease liability [120 (W-5) – 30 + 11.33] 101.33 - (101.33)
Provision for gratuity [13 + 12 - 10] 15.00 - (15.00)
Provision for bad debts [2 + 10] 12.00 - (12.00)
Net 9.39
Deferred tax liability @ 32% 3.00
Deferred tax income (5.28 - 3) (2.28)
(W-5)
PV of lease payments = 30 + 30 x annuity factor = Rs. 120 million
Solution No. 4
Note
It is assumed that change in taxation for dividend and interest for 2018 was enacted or substantively enacted at
year end.
Deferred tax as at December 31, 2017

CA TB Diff
----------- Rs. in million ----------
Advertising [15 x 4/5] - 12.00 (12.00)
Other receivable 9.00 6.00 3.00
Dividend receivable 8.00 8.00 -
ROU asset (W-1) 48.82 - 48.82
Plant (W-2) 234.59 225.00 9.59
Building [300 x 25/30] (W-3) 250.00 177.15 72.85
Unearned commission income 10.00 10.00 -
Trade and other payable 30.00 25.00 (5.00)
Lease liability [48.59 + 4.86](W-1) 53.45 - (53.45)
Provision for dismantling (W-2.1) 34.03 - (34.03)
29.77 [A]
Interest receivable [40 x 10% x 9/12] 3.00 - 3.00 [B]
Deferred tax liability:

[A x 30%] 8.93
[B x 15%] 0.45
9.38
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NASIR ABBAS FCA
Workings (All figures in Rs. million)

W-1 Lease
Initial recognition = 28 + 28 x annuity factor of 3 years
= 97.63
ROU asset = 97.63 x 2/4
= 48.82
Lease liability
Date Rental Interest Principal Balance
97.63
01-01-16 28.00 - 28.00 69.63
01-01-17 28.00 6.96 21.04 48.59
01-01-18 28.00 4.86 23.14 25.45
W-2 Plant
CA TB
Initial cost:
Purchase cost 250.00 250.00
Dismantling (W-2.1) 31.51 -
281.51 250.00
Depreciation (46.92) (25.00)
234.59 225.00
W-2.1
Initial [50 x (1 + 8%)-6] 31.51
Interest 2017 [31.51 x 8%] 2.52
34.03
W-3 Tax base of building (excluding the sold one)

[300 x (1 - 10%)5 177.15
Solution No. 5
(a)
Notes:
- It is assumed that restructuring relates to current year only and no provision was recognized last year
- It is assumed that change in taxation of dividend and commission is based on tax laws enacted.
Orange Limited
Extracts – Notes
4 – Taxation Rs. million
Current tax (W-1) 162.90
Deferred tax (W-2) (19.60)
143.30
4.1 - Relationship between tax expense and accounting profit
Tax [508 x 30%] 152.40
Tax on dividend income [35 x 20%] (7.00)
Tax on exempt income [12 x 30%] (3.60)
Tax on inadmissible donation [5 x 30%] 1.50
143.30
-
615
NASIR ABBAS FCA
W-1 Current tax

PBT 508.00
Excess accounting depreciation 45.00
Excess tax gain on disposal 15.00
Tax amortization on trademark [90/10] (9.00)
Accounting warranty expense [W-1.1] 24.00
Tax warranty claim (54.00)
Accounting restructuring expense 17.50
Tax restructuring expense [17.5 / 5] (3.50)
Accrued expenses 26.00
Donations not allowed 5.00
Exempt commission income (12.00)
Dividend income receivable (35.00)
Advance rent 16.00
543.00
Current tax 30% 162.90
Rs. million
W-1.1 Provision for warranty
Opening balance [14.7 / 0.3] 49.00
Expense for the year [balancing] 24.00
Actual expenditure during the year (54.00)
Closing balance [1,750 x 2% - (54 - 38)] 19.00
W-2 Deferred tax expense

Net closing DTL (part b) [2.1 + 3.5] 5.60
Opening DTL 25.20
Deferred tax expense (19.60)
(b)
CA TB Diff DTL / (DTA)
---------------- Rs. million ----------------
PPE (W-3) 30% 55.00 16.50
Trademark [90 x 7/10] 30% 90.00 63.00 27.00 8.10
Restructuring [17.5 x 4/5] 30% - 14.00 (14.00) (4.20)
Provision for warranty 30% 19.00 - (19.00) (5.70)
Accrued expense 30% 26.00 - (26.00) (7.80)
Advance rent 30% 16.00 - (16.00) (4.80)
7.00 2.10
Dividend receivable 10% 35.00 - 35.00 3.50
W-3 PPE difference

Rs. million
Opening balance [34.5 / 0.3] 115.00
Disposal (15.00)
Solution No. 6
Notes to the financial statements Rs.'000
1 - Deferred tax
Deferred tax liability comprises of:
PPE 4,200
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NASIR ABBAS FCA
Deferred tax asset

Lease (77)
Research cost (560)
Advance rent (53)
3,510
1.1 Movement in deferred tax
Recognized in P&L:
PPE 525
Lease (77)
Research cost (560)
Rent income (18)
(130)
2 – Taxation
Current tax:
- for current year (W-4) 6,710
- for prior year (300)
Deferred tax (W-1.1) (130)

6,280
Relationship between accounting profit and tax expense:

Tax 6,370
Current tax for prior year (300)
Tax on inadmissible expense [600 x 35%] 210
6,280
W - 1 Calculation of deferred tax liability 2019: CA TB Diff Tax
---------------------- Rs.'000 ---------------------
PPE [W-2] 28,500 16,500 12,000 4,200
ROU [6,400 (W-3) - 1,600 (W-4)] 4,800 - 4,800 1,680
Research [2,400 x 2/3] - 1,600 (1,600) (560)
Lease [W-3] 5,021 - (5,021) (1,757)
Advance rent 150 - (150) (53)
10,029 3,510
W - 1.1 Calculation of deferred tax liability 2018: CA TB Diff Tax

---------------------- Rs.'000 ---------------------
PPE [W-2] 34,500 24,000 10,500 3,675
Advance rent 100 - (100) (35)
10,400 3,640
Deferred tax expense [3,510 - 3,640] (130)
W - 2 PPE CA TB
-------- Rs.'000 ---------
Year start balance 34,500 24,000
Addition 3,500 3,500
Disposal [9,000 - 1,800] [7,200 + 3,600 - 5,000] (7,200) (5,800)
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NASIR ABBAS FCA

Year end balance 28,500 16,500
W - 3 Lease liability
Date Open. bal. Rental Interest Principal Clos. bal.
31-12-19 6,400 2,019 640 1,379 5,021
[2,019 x annuity factor]
W - 4 Current tax for current year

Rs.'000
Accounting depreciation 2,300
Capital allowance (5,200)
Depreciation on ROU [6,400 (W-3) /4] 1,600
Interest on lease (W-3) 640
Lease rental (2,019)
Accounting gain on disposal (1,800)
Tax gain on disposal [9,000 - 5,800 (W-2)] 3,200
Research cost 3,000
Allowable research cost [2,400 / 3] (800)
Rent income (250)
Rent received [150 + 250 - 100] 300
19,171
Current tax 35% 6,710
Solution No. 7
(a)
Mercury Water Limited
Journal entries
Rs.'000 Rs.'000
30-Jun-07 Tax expense (W-2) 3,600
Deferred tax 3,600
(Deferred tax expense for the year)
30-Jun-08 Accumulated depreciation 18,000

Plant 18,000
(Elimination on revaluation)
30-Jun-08 Revaluation loss (W-1) 8,000

Plant 8,000
(Revaluation loss recorded)
30-Jun-08 Deferred tax 1,040
Tax expense (W-2) 1,040
Deferred tax 1,408
30-Jun-10 Accumulated depreciation 16,000

Plant 16,000
(Elimination on revaluation)
30-Jun-10 Plant (W-1) 12,000
618
NASIR ABBAS FCA
Revaluation loss (P&L) (W-3) 6,000

Revaluation surplus (W-1) 3,600
(Revaluation of plant)
Deferred tax 2,886
30-Jun-11 Revaluation surplus (W-1) 600

Retained earnings 600
(transfer of incremental depreciation)
30-Jun-11 Deferred tax 1,051
Tax expense (W-2) 1,051
(b)
Taxation 2011 2010
Rs. '000 Rs. '000
Current (W-4) 33,051 21,114

Deferred (W-3) (1,051) 2,886
32,000 24,000
Reconciliation between tax expense and accounting profit

2011 2010
Rs. '000 Rs. '000
Accounting profit 80,000 60,000
Tax @ 40% 32,000 24,000
Tax expense 32,000 24,000
Carrying Gross Tax on Net Tax Temp.

P&L DTL
W-1 amount surplus surplus surplus base difference
---------------------------------------------------- Rs. '000 ------------------------------------------------
[A] [B] [C = A - B] [C x 40%]
1-7-06 Cost 90,000 90,000
30-6-07 Dep [90/10] (9,000) - (18,000)
30-6-07 81,000 72,000 9,000 3,600
30-6-08 Dep (9,000) - (14,400)
30-6-08 72,000 57,600
30-6-08 Reval. Loss (8,000) (8,000) -
30-6-08 64,000 (8,000) 57,600 6,400 2,560
30-6-09 Dep [64/8] (8,000) 1,000 - (11,520)
30-6-09 56,000 (7,000) 46,080 9,920 3,968
30-6-10 Dep (8,000) 1,000 - (9,216)
30-6-10 48,000 (W-3) (6,000) 36,864
30-6-10 Reval. Gain 12,000 6,000 6,000 2,400 3,600
30-6-10 60,000 6,000 - 3,600 36,864 23,136 9,254
30-6-11 Dep [60/6] (10,000) (1,000) - (600) (7,373)
30-6-11 50,000 5,000 - 3,000 29,491 20,509 8,204
619
NASIR ABBAS FCA
W-2
Op. DTL Revaluation Cl. DTL Tax expense

[1] [2] [3] [3 - 1 - 2]
--------------------- Rs. '000 -----------------------------
30-6-07 - - 3,600 3,600
30-6-08 3,600 - 2,560 (1,040)
30-6-09 2,560 - 3,968 1,408
30-6-10 3,968 2,400 9,254 2,886
30-6-11 9,254 - 8,204 (1,051)
2011 2010
W-3 Rs. '000 Rs. '000

Accounting depreciation 10,000 8,000
Tax depreciation (7,373) (9,216)
Revaluation loss reversed - (6,000)
Tax profit 82,627 52,784
Tax @ 40% 33,051 21,114
Solution No. 8
Tax expense Rs.'000
Current tax:
- for current year (W-1) 2,240
- for prior year 45
2,285
Deferred:
Effect of rate change [6,465 x 5/30 - 250 (W-2)] 827
Relating to differences during the year (605)
(W-2) 222
2,507
Relationship between tax expense and accounting profit
Tax [4,200 x 35%] 1,470
Prior year current tax 45
Effect of rate change 827
Inadmissible expense [(450 + 60) x 35%] 179
Exempt income [40 x 35%] (14)
2,507
W-1 Current tax

Rs.'000
Profit 4,200
Depreciation - building [24,000 /16] 1,500
Depreciation - P&M [20,000 / 4] 5,000
Depreciation - Leased vehicle 550
Tax depreciation - building [1,500 x 2] (3,000)
Tax depreciation - P&M [5,000 x 10 x 0.755 x 0.25] (2,966)
Research cost 3,000
Tax deduction for research [(3,000 - 450)/3] (850)
Gratuity expense 350
Gratuity paid [920 - 700 - 350] (130)
620
NASIR ABBAS FCA
Principal repayment (425)

Exempt income (40)
Penalty 60
7,249
b/f tax loss (850)
6,399
Current tax [6,399 x 35%] 2,240
W-2 Deferred tax CA TB Diff

--------------- Rs.'000 -----------------
Land [TB = 18,000 - 3,500/0.7] 18,500 13,000 5,500
Building 24,000 18,000 6,000
P&M [5,000 x 10 x 0.756] 20,000 8,899 11,101
Leased vehicles 3,500 - 3,500
Research cost - 1,700 (1,700)
Provision for Gratuity 920 - (920)
Lease liability 3,160 - (3,160)
Creditors and other liabilities 320 320 -
20,321
DTL [20,321 x 35%] 7,112
DTL
Rs.,000 Rs.'000
b/d 6,465
OCI (rate change) 250
[3,500 x 5/70] OR [1,500 x 5/30]
OCI [500 x 0.35] 175
c/d 7,112 Tax expense (bal.) 222
7,112 7,112
Solution No. 9
Deferred tax
Deferred tax liability comprises of:
Rs. million
Depreciation [30.48 + 4.20 (W-2)] 34.68
Deferred tax asset

Doubtful debts (3.90)
Gratuity (6.00)
c/f losses (2.70)
22.08
Movement in deferred tax Rs. million

Opening balance (W-1) 6.00
Recognized in OCI:
PPE (W-3) 10.80
Recognized in P&L:
PPE [34.68 – 15.60 – 3.00 – 10.80] 5.28
Doubtful debts (1.20)
Gratuity (2.10)
621
NASIR ABBAS FCA
c/f losses 3.30

5.28
W-1 Deferred tax for 2018

CA TB Diff Tax
-------------------------- Rs. million --------------------------
Building 180.00 128.00 52.00 15.60
P&M 80.00 70.00 10.00 3.00
Provision for doubtful debts 9.00 - (9.00) (2.70)
Provision for gratuity 13.00 - (13.00) (3.90)
c/f losses (20.00) (6.00)
20.00 6.00
W-2 Deferred tax for 2019

CA TB Diff Tax
-------------------------- Rs. million --------------------------
Building (W-3) 204.00 102.40 101.60 30.48
P&M 70.00 56.00 14.00 4.20
Provision for doubtful debts 13.00 - (13.00) (3.90)
Provision for gratuity 20.00 - (20.00) (6.00)
c/f losses [20 - 11] (9.00) (2.70)
73.60 22.08
W-3 CA Gross surplus Tax on surplus Net surplus

-------------------------- Rs. million --------------------------
01-01-19 Balance 180.00

01-01-19 Revaluation 36.00 36.00 10.80 25.20
216.00 36.00 25.20
31-12-19 Dep (12.00) (2.00) (1.40)
204.00 34.00 23.80
Solution No. 10
---------- Rs. --------
01-01-17 Cash 50,000
Equity component (W-1) [5,063 x 70%] 3,544
31-12-17 Interest expense 4,044

[Interest for 2017]
31-12-17 Financial liability 2,500

Cash 2,500
[Coupon payment]
622
NASIR ABBAS FCA
31-12-17 Deferred tax [1,519 - 1,055] 463

Tax expense 463
[Deferred tax expense for 2017]

[Interest for 2018]

Cash 2,500
[Coupon payment]
31-12-18 Deferred tax [1,055 - 550] 505

Tax expense 505

[Interest for 2019]

Cash 52,500
[Coupon payment]
31-12-19 Deferred tax 550

Tax expense 550
W-1 Initial recognition Rs.

Total amount 50,000
Liability component [2,500 x 3-year AF at 9% + 50,000 x 3-year DF at 9%] (44,937)
W-2 Subsequent measurement

CA TB Difference DTL/(DTA)
--------------------- Rs. -------------------------
01-01-17 Initial 44,937 50,000 5,063 1,519
31-12-17 Interest 4,044
31-12-17 Cash flow (2,500)
31-12-17 Balance 46,482 50,000 3,518 1,055
31-12-18 Interest 4,183
31-12-18 Cash flow (2,500)
31-12-18 Balance 48,165 50,000 1,835 550
31-12-19 Interest 4,335
31-12-19 Cash flow (52,500)
31-12-19 Balance - - - -
623
NASIR ABBAS FCA
Solution No. 11
2016
Deferred tax:
CA TB Difference (DTA)
--------------------- Rs. -------------------------
Employee cost - 83,333 (83,333) (33,333)
[50,000 x Rs. 5 x 1/3]
Opening DTA -
Deferred tax income charged to P&L (bal.) (33,333)
Deferred tax income charged to equity -
Deferred tax for the year (33,333)
Deferred tax income is charged to P&L because future tax deduction is less than accounting expense.
2017
Deferred tax:
--------------------- Rs. -------------------------
Employee cost - 240,000 (240,000) (96,000)
[45,000 x Rs. 8 x 2/3]
Opening DTA (33,333)

Deferred tax for the year [96,000 - 33,333] (62,667)
Deferred tax income is charged to P&L because cumulative future tax deduction is less than
cumulative accounting expense of Rs. 373,000.
2018
Deferred tax:
--------------------- Rs. -------------------------
Employee cost - 520,000 (520,000) (208,000)
[40,000 x Rs. 13 x 3/3]

Deferred tax income is charged to P&L because cumulative future tax deduction is less than
cumulative accounting expense of Rs. 563,000.
624
NASIR ABBAS FCA
2019
Deferred tax:
--------------------- Rs. -------------------------
Employee cost - 680,000 (680,000) (272,000)
[40,000 x Rs. 17 x 3/3]

Deferred tax income charged to equity [272,000 - 563,000 x 40%] (46,800)
2020
Deferred tax:
--------------------- Rs. -------------------------
Employee cost - - - -

Deferred tax expense charged to P&L (bal.) 225,200
Deferred tax expense charged to equity 46,800
Deferred tax for the year 272,000
Current tax:
Current tax income for the year [40,000 x 20 x 40%] (320,000)
Current tax income to be recognized in P&L [563,000 x 40%] (225,200)
Current tax to be recognized in equity (bal.) (94,800)
625
NASIR ABBAS FCA
Q-1 Jun-18
Elephant Limited
Extracts - Notes
4 - Taxation
Rs. million
Deferred tax (W-2)
- Relating to differences for the year 8.95
- Effect of tax rate change [3.50 x 5/35] (0.50)
8.45
30.57
4.1 - Relationship between tax expense and accounting profit
Tax [103 x 30%] 30.90

Effect of tax rate change [3.50 x 5/35] (0.50)
Tax on inadmissible share option expense [(4.5 - 3.25) x 30%] 0.37
Tax on dividend income [4 x 20%] (0.80)
Tax on exempt income [10 x 30%] (3.00)
Tax on inadmissible donation [12 x 30%] 3.60
30.57
-
8 - Deferred tax 2016 Recognized 2017

PPE 33.25 - 18.00 (10.75) 40.50
Deferred tax asset
Share options - - - (0.98) (0.98)
Convertible TFC - 2.73 - (0.58) 2.16
Accrued expenses - - - (9.00) (9.00)
c/f loss (29.75) - - 29.75 -
3.50 2.73 18.00 8.45 32.68
626
WORKINGS
W-1 Current tax Rs. million
PBT 103.00
Donations not allowed 12.00
Accrued expenses 30.00
Exempt grant income (10.00)
Dividend income (4.00)
Share options [5,000 x 10 x Rs. 180 x 1/2] 4.50
Excess accounting depreciation 20.00
Interest on liability component [140.89(W-1.1) x 12%] 16.91
Coupon interest payment (15.00)
157.41
b/f tax loss (85.00)
72.41
Normal tax [63.41 x 30%] 21.72
Tax on dividend [4 x 10%] 0.40
Current tax 22.12
Rs. million
W-1.1 Convertible TFC
Initial measurement [1.5 x 100] 150.00
Liability component [15 x 3-year AF at 12% + 150 x 3-year DF at 12%] (140.89)

b/d 3.50
Revaluation gain [60 x 30%] 18.00
Equity [9.11 x 30%] 2.73
c/d (W-2.1) 32.68 Tax expense (bal.) 8.45
32.68 32.68
CA TB Diff DTL/(DTA)
W-2.1 ---------------------- Rs. million -----------------------
PPE (W-2.2) 135.00 40.50
Share options [5,000 x 10 x (150 - 20) x 1/2] - 3.25 (3.25) (0.98)
Accrued expense 30.00 - (30.00) (9.00)
Convertible TFC [140.89 + 16.91 - 15] 142.79 150.00 7.21 2.16
108.96 32.68
W-2.2 PPE difference

Rs. million
Revaluation 60.00
627
Q-5 Jun-16
31-12-15 Depreciation (W-1) 887.74
31-12-15 Revaluation surplus (W-2) 22.31

[Transfer to retained earnings]


Plant 887.74
31-12-15 Revaluation surplus (W-2) 44.62

Deferred tax (W-2) 19.12
Revaluation loss [P&L] (W-1) 57.19
Provision for dismantling (W-1) 206.61
Plant (W-1) 327.55
31-12-15 Deferred tax (W-4) 255.38

Tax expense 255.38
[Deferred tax income for 2015]
W-1 NBV Surplus P&L Provision

---------------------- Rs. million ---------------------
01-01-14 Cost 3,273.21 273.21 [400 x 1.1 -4 ]
31-12-14 Dep / Interest (818.30) 27.32
2,454.91 - - 300.53
31-12-14 Reval./Estimate 208.31 95.62 - 112.69
[2,250 + 413.22] 2,663.22 95.62 - 413.22 [550 x 1.1 -3 ]
31-12-15 Dep / Interest (887.74) (31.87) - 41.32
1,775.48 63.75 - 454.54
31-12-15 Reval./Estimate (327.55) (63.75) (57.19) (206.61)
[1,200 + 247.93] 1,447.93 - (57.19) 247.93 [300 x 1.1 -2 ]
Surplus Tax Net

---------------------- Rs. million ---------------------
01-01-14 -
31-12-14 -
- -
31-12-14 Rev. 95.62 28.69 66.94
95.62 66.94
31-12-15 Dep. (31.87) (22.31)
63.75 44.62
31-12-15 Rev. (63.75) (19.12) (44.62)
- -
628
W-2 Tax base of Plant Rs. million
01-01-14 Cost 3,000.00
31-12-14 Initial dep (1,500.00)
31-12-14 1,500.00
31-12-14 Normal dep (150.00)
31-12-14 1,350.00
31-12-15 Normal dep (135.00)
31-12-15 1,215.00
W-3 Deferred tax calculation

2014 CA TB Difference DTL/(DTA)
---------------------- Rs. million ---------------------
Plant 2,663.22 1,350.00 1,313.22 393.97
Provision for dismant. 413.22 - (413.22) (123.97)
Closing DTL 270.00
2015 CA TB Difference DTL/(DTA)

---------------------- Rs. million ---------------------
Plant 1,447.93 1,215.00 232.93 69.88
Provision for dismant. 247.93 - (247.93) (74.38)
Closing DTL (4.50)
W-4 Deferred tax movement

Opening ------ Recognized ---- Closing
Balance OCI P&L Balance
---------------------- Rs. million ---------------------
Plant 393.97 (19.12) (304.96) 69.88
Provision for dismant. (123.97) - 49.59 (74.38)
270.00 (19.12) (255.38) (4.50)
629
Goodwill ----- Rs. million -----

- Cash 2,000.00
- Replacement reward 140.00
Fair value of net assets [3,618 - (1,888 - 60 + 17)] 1,773.00
Development cost 153.00
DTL (W-1) (85.90) (1,815.10)
Deferred tax to be recognized in consolidated financial statements 31-12-16:

CA TB Difference Tax rate DTL/(DTA)
------------------ Rs. million ---------------- Rs. million
Recognized as acquisition (W-1) 85.90
PAL's stock [80 x 80%] 64.00 80.00 (16.00) 35.0% (5.60)
LG's stock [140 x 85%] 119.00 140.00 (21.00) 25.0% (5.25)
Investment in NAL:
- Difference to be realized through dividend [9(W-2) x 60%] 5.40 12.5% 0.68
- Difference to be realized through capital gain [9 x 40%] 3.60 17.5% 0.63
Increase in share options [150 - 90] - 60.00 (60.00) 25.0% (15.00)
61.36
W-1 DTL at acquisition: FV CA Difference Tax rate DTL/(DTA)

------------------ Rs. million ---------------- Rs. million
PPE 1,532.00 1,259.00 273.00 35% 95.55
Investments 490.00 367.00 123.00 35% 43.05
Development cost 153.00 - 153.00 35% 53.55
DBO* 17.00 17.00 - 35% -
Contingent liability 25.00 - (25.00) 35% (8.75)
c/f tax losses - - (300.00) 25% (75.00)
Intrinsic value of share options** 90.00 - (90.00) 25% (22.50)
85.90
* Employee cost is an exception to measurement rules of IFRS 3 which is not measured at fair value.
** PAL might have reversed its deferred tax as its share options are replaced by LG's share options, hence
LG is now accounting for deferred tax asset for the replacement awards
W-2 Taxable difference on Investment in NAL

Rs. million
Carrying amount [165 + (50 - 20) x 30%] 174.00
Tax base 165.00
9.00
630
Q-3 Dec-16
(a) ---------- Rs. million --------
01-07-14 Cash 600.00
Financial liability (W-1) 600.00
30-06-15 Interest expense 66.31

[Interest for 2015]

Cash 90.00
[Payment of rental]
30-06-15 Depreciation [240/15] 16.00

Property 16.00
30-06-15 Deferred tax (W-2) 105.69

Tax expense 105.69
[Deferred tax income for 2015]
Brief explanation
Property was sold but TL has an option to repurchase (i.e. call option). Total consideration paid in
form of rentals and repurchase price is higher (considering time value of money at 10%) * than the
original sale price, therefore, it will be treated as financing.
* PV of rentals and repurchase price at 10% = Rs. 610.45 million
30-06-16 Interest expense 63.69

[Interest for 2016]

Cash 90.00
[Payment of rental]
30-06-16 Depreciation [240/15] 16.00

Property 16.00

Property [240 - 16 - 16] 208.00
Profit on disposal 342.00
[Derecognition of loan and property]
631
30-06-16 Tax expense 105.69
Deferred tax (W-2) 105.69
W-1 Loan schedule Rs. million

01-07-14 Initial 600.00
30-06-15 Interest [600 x 11.052%] 66.31
30-06-15 Cash flow (90.00)
30-06-15 Balance 576.31
30-06-16 Interest [576.31 x 11.052%] 63.69
30-06-16 Cash flow (90.00)
30-06-16 Balance 550.00
W-2 Deferred tax CA TB Difference DTL/(DTA)

2015 --------------------- Rs. -------------------------
Property [240 - 240/15] 224.00 - 224.00 67.20
Loan 576.31 - (576.31) (172.89)
Closing DTA (105.69)
Opening DTA [In absence of any information it is assumed to be zero] -
Deferred tax income for 2015 (105.69)
2016
Closing DTA [Since both Property and loan are derecognized] -
Opening DTA (105.69)
Deferred tax expense for 2016 105.69
632
Q-4 Jun-19
(a)
Arabian Limited
Extracts - Notes
4 - Taxation Rs. million

Deferred tax: (W-2)
- Relating to differences for the year [11.75(W-2) - 6] (5.75)
- Effect of tax rate change [(288.40 - 120.40) x 1/28 - 5.12] (0.88)
(6.63)
88.97
4.1 - Relationship between tax expense and accounting profit Rs. million
Tax [455 x 27%] 122.85
Effect of tax rate change (0.88)
Previous unrecognized deferred tax asset [88 - 55] (33.00)
88.97
-
8 - Deferred tax 2017 Recognized 2018
PPE 288.40 - 59.68 (82.13) 265.95
Investments - - 6.21 - 6.21
Deferred tax asset -
Defined benefit obligation (120.40) - (10.80) 35.35 (95.85)
Share options - (1.08) - (5.40) (6.48)
Liabilities - - - (9.45) (9.45)
Minimum tax (55.00) - - 55.00 -
113.00 (1.08) 55.09 (6.63) 160.38
(b)
Arabian Limited
Extracts - SOCI
Rs. million
Tax (88.97)
Fair value gain 23.00
Revaluation gain 240.00
Remeasurement adjustments (40.00)
Tax on OCI items (55.09)
167.91
Total comprehensive income 533.94
633
W-1 Current tax Rs. million
PBT 455.00
Accounting depreciation 475.00
Tax depreciation (280.00)
Excess tax gain on disposal [230 - 140] 90.00
Employee cost 145.00
Contribution to DB fund (260.00)
Share options [60 x 1/3] 20.00
Liability written back 35.00
680.00
Normal tax 27% 183.60
Minimum tax [5,300 x 1%] 53.00
Higher of both 183.60

b/f minimum tax (88.00)
Current tax 95.60

Remeasurement [40 x 27%] 10.80 b/d (W-2.1) 113.00
Rate change OCI [512 x 1%] 5.12 Revaluation gain [240 x 27%] 64.80
Options [(24 - 20) x 27%] 1.08 Fair value gain [23 x 27%] 6.21
Tax expense (bal.) 6.63
c/d (W-2.1) 160.38
184.01 184.01
W-2.1
2018 CA TB Diff DTL / (DTA)
---------------- Rs. million ----------------
PPE 27% 2,635.00 1,650.00 985.00 265.95
Investment in TL 27% 175.00 152.00 23.00 6.21
Share options [72 x 1/3] 27% - 24.00 (24.00) (6.48)
DBO 27% 355.00 - (355.00) (95.85)
Certain liabilities 27% 35.00 - (35.00) (9.45)
594.00 160.38
2017 CA TB Diff DTL / (DTA)

---------------- Rs. million ----------------
PPE 28% 2,500.00 1,470.00 1,030.00 288.40
DBO 28% 430.00 - (430.00) (120.40)
Certain liabilities 28% 35.00 35.00 - -
Minimum tax (55.00)
600.00 113.00
634
IFRIC 16
IFRIC 16
Hedges of a Net Investment in a Foreign

Operation
In July 2008 the International Accounting Standards Board issued IFRIC 16 Hedges of a Net
Investment in a Foreign Operation. It was developed by the Interpretations Committee.
Other Standards have made minor consequential amendments to IFRIC 16. They include
IFRS 11 Joint Arrangements (issued May 2011), IFRS 9 Financial Instruments (Hedge Accounting
and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013) and IFRS 9 Financial
Instruments (issued July 2014).
© IFRS Foundation A1711
635
IFRIC 16
CONTENTS
from paragraph
IFRIC INTERPRETATION 16
HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION
REFERENCES
BACKGROUND 1
SCOPE 7
ISSUES 9
CONSENSUS 10
Nature of the hedged risk and amount of the hedged item for which a
hedging relationship may be designated 10
Where the hedging instrument can be held 14
Disposal of a hedged foreign operation 16
EFFECTIVE DATE 18
TRANSITION 19
APPENDIX
Application guidance
FOR THE ACCOMPANYING GUIDANCE LISTED BELOW, SEE PART B OF THIS EDITION
ILLUSTRATIVE EXAMPLE
FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION
BASIS FOR CONCLUSIONS
A1712 © IFRS Foundation
636
IFRIC 16
IFRIC Interpretation 16 Hedges of a Net Investment in a Foreign Operation (IFRIC 16) is set out
in paragraphs 1–19 and the Appendix. IFRIC 16 is accompanied by an illustrative
example and a Basis for Conclusions. The scope and authority of Interpretations are set
out in paragraphs 2 and 7–16 of the Preface to International Financial Reporting Standards.
637
IFRIC 16
IFRIC Interpretation 16
Hedges of a Net Investment in a Foreign Operation
References
● IFRS 9 Financial Instruments

● IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
● IAS 21 The Effects of Changes in Foreign Exchange Rates
Background
1 Many reporting entities have investments in foreign operations (as defined in

IAS 21 paragraph 8). Such foreign operations may be subsidiaries, associates,
joint ventures or branches. IAS 21 requires an entity to determine the
functional currency of each of its foreign operations as the currency of the
primary economic environment of that operation. When translating the results
and financial position of a foreign operation into a presentation currency, the
entity is required to recognise foreign exchange differences in other
comprehensive income until it disposes of the foreign operation.
2 Hedge accounting of the foreign currency risk arising from a net investment in a
foreign operation will apply only when the net assets of that foreign operation
are included in the financial statements.1 The item being hedged with respect to
the foreign currency risk arising from the net investment in a foreign operation
may be an amount of net assets equal to or less than the carrying amount of the
net assets of the foreign operation.
3 IFRS 9 requires the designation of an eligible hedged item and eligible hedging
instruments in a hedge accounting relationship. If there is a designated hedging
relationship, in the case of a net investment hedge, the gain or loss on the
hedging instrument that is determined to be an effective hedge of the net
investment is recognised in other comprehensive income and is included with
the foreign exchange differences arising on translation of the results and
financial position of the foreign operation.
4 An entity with many foreign operations may be exposed to a number of foreign

currency risks. This Interpretation provides guidance on identifying the foreign
currency risks that qualify as a hedged risk in the hedge of a net investment in a
foreign operation.
5 IFRS 9 [Refer: IFRS 9 paragraph 6.2.2] allows an entity to designate either a

derivative or a non-derivative financial instrument (or a combination of
derivative and non-derivative financial instruments) as hedging instruments for
foreign currency risk. This Interpretation provides guidance on where, within a
1 This will be the case for consolidated financial statements, financial statements in which
investments such as associates or joint ventures are accounted for using the equity method and
financial statements that include a branch or a joint operation as defined in IFRS 11 Joint
Arrangements.
638
IFRIC 16
group, hedging instruments that are hedges of a net investment in a foreign

operation can be held to qualify for hedge accounting.
6 IAS 21 and IFRS 9 require cumulative amounts recognised in other

comprehensive income relating to both the foreign exchange differences arising
on translation of the results and financial position of the foreign operation and
the gain or loss on the hedging instrument that is determined to be an effective
hedge of the net investment to be reclassified from equity to profit or loss as a
reclassification adjustment when the parent disposes of the foreign operation.
This Interpretation provides guidance on how an entity should determine the
amounts to be reclassified from equity to profit or loss for both the hedging
instrument and the hedged item.
Scope
7 This Interpretation applies to an entity that hedges the foreign currency risk
arising from its net investments in foreign operations and wishes to qualify for
hedge accounting in accordance with IFRS 9. For convenience this
Interpretation refers to such an entity as a parent entity and to the financial
statements in which the net assets of foreign operations are included as
consolidated financial statements. All references to a parent entity apply
equally to an entity that has a net investment in a foreign operation that is a
joint venture, an associate or a branch.
8 This Interpretation applies only to hedges of net investments in foreign

operations; it should not be applied by analogy to other types of hedge
accounting.
Issues
9 Investments in foreign operations may be held directly by a parent entity or

indirectly by its subsidiary or subsidiaries. The issues addressed in this
Interpretation are:
(a) the nature of the hedged risk and the amount of the hedged item for which a
hedging relationship may be designated:
(i) whether the parent entity may designate as a hedged risk only
the foreign exchange differences arising from a difference
between the functional currencies of the parent entity and its
foreign operation, or whether it may also designate as the hedged
risk the foreign exchange differences arising from the difference
between the presentation currency of the parent entity’s
consolidated financial statements and the functional currency of
the foreign operation;
[Refer: paragraph 10]
(ii) if the parent entity holds the foreign operation indirectly,

whether the hedged risk may include only the foreign exchange
differences arising from differences in functional currencies
between the foreign operation and its immediate parent entity,
or whether the hedged risk may also include any foreign
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exchange differences between the functional currency of the

foreign operation and any intermediate or ultimate parent entity
(ie whether the fact that the net investment in the foreign
operation is held through an intermediate parent affects the
economic risk to the ultimate parent).
[Refer: paragraphs 11–13]
(b) where in a group the hedging instrument can be held:
(i) whether a qualifying hedge accounting relationship can be
established only if the entity hedging its net investment is a party
to the hedging instrument or whether any entity in the group,
regardless of its functional currency, can hold the hedging
instrument;
(ii) whether the nature of the hedging instrument (derivative or
non-derivative) or the method of consolidation affects the
assessment of hedge effectiveness.
[Refer: paragraphs 14 and 15]
(c) what amounts should be reclassified from equity to profit or loss as reclassification
adjustments on disposal of the foreign operation:
(i) when a foreign operation that was hedged is disposed of, what
amounts from the parent entity’s foreign currency translation
reserve in respect of the hedging instrument and in respect of
that foreign operation should be reclassified from equity to profit
or loss in the parent entity’s consolidated financial statements;
[Refer: paragraphs 16 and 17]
(ii) whether the method of consolidation affects the determination

of the amounts to be reclassified from equity to profit or loss.
[Refer: paragraph 17]
Consensus
Nature of the hedged risk and amount of the hedged

item for which a hedging relationship may be designated
[Refer: paragraphs AG2–AG6]
10 Hedge accounting may be applied only to the foreign exchange differences

arising between the functional currency of the foreign operation and the parent
entity’s functional currency.
[Refer: Basis for Conclusions paragraphs BC6–BC14]
11 In a hedge of the foreign currency risks arising from a net investment in a

foreign operation, the hedged item can be an amount of net assets equal to or
less than the carrying amount of the net assets of the foreign operation in the
consolidated financial statements of the parent entity. The carrying amount of
the net assets of a foreign operation that may be designated as the hedged item
in the consolidated financial statements of a parent depends on whether any
lower level parent of the foreign operation has applied hedge accounting for all
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or part of the net assets of that foreign operation and that accounting has been
maintained in the parent’s consolidated financial statements.
[Refer:
paragraphs AG9–AG15
Basis for Conclusions paragraphs BC19–BC21]
12 The hedged risk may be designated as the foreign currency exposure arising
between the functional currency of the foreign operation and the functional
currency of any parent entity (the immediate, intermediate or ultimate parent
entity) of that foreign operation. The fact that the net investment is held
through an intermediate parent does not affect the nature of the economic risk
arising from the foreign currency exposure to the ultimate parent entity.
13 An exposure to foreign currency risk arising from a net investment in a foreign

operation may qualify for hedge accounting only once in the consolidated
financial statements. Therefore, if the same net assets of a foreign operation are
hedged by more than one parent entity within the group (for example, both a
direct and an indirect parent entity) for the same risk, only one hedging
relationship will qualify for hedge accounting in the consolidated financial
statements of the ultimate parent. A hedging relationship designated by one
parent entity in its consolidated financial statements need not be maintained by
another higher level parent entity. However, if it is not maintained by the
higher level parent entity, the hedge accounting applied by the lower level
parent must be reversed before the higher level parent’s hedge accounting is
recognised.
[Refer:
paragraphs AG9–AG15
Where the hedging instrument can be held

[Refer:
paragraph AG7
14 A derivative or a non-derivative instrument (or a combination of derivative and

non-derivative instruments) may be designated as a hedging instrument in a
hedge of a net investment in a foreign operation. The hedging instrument(s)
may be held by any entity or entities within the group, as long as the
designation, documentation and effectiveness requirements of IFRS 9
paragraph 6.4.1 that relate to a net investment hedge are satisfied. In particular,
the hedging strategy of the group should be clearly documented because of the
possibility of different designations at different levels of the group.
[Refer: Basis for Conclusions paragraphs BC24A−BC24D]
15 For the purpose of assessing effectiveness, the change in value of the hedging
instrument in respect of foreign exchange risk is computed by reference to the
functional currency of the parent entity against whose functional currency the
hedged risk is measured, in accordance with the hedge accounting
documentation. Depending on where the hedging instrument is held, in the
absence of hedge accounting the total change in value might be recognised in
profit or loss, in other comprehensive income, or both. However, the assessment
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of effectiveness is not affected by whether the change in value of the hedging

instrument is recognised in profit or loss or in other comprehensive income. As
part of the application of hedge accounting, the total effective portion of the
change is included in other comprehensive income. The assessment of
effectiveness is not affected by whether the hedging instrument is a derivative or
a non-derivative instrument or by the method of consolidation.
[Refer: paragraphs AG9–AG15]
Disposal of a hedged foreign operation

[Refer:
paragraph AG8
Illustrative Example paragraphs IE1–IE5
Basis for Conclusions paragraphs BC33 and BC34]
16 When a foreign operation that was hedged is disposed of, the amount
reclassified to profit or loss as a reclassification adjustment from the foreign
currency translation reserve in the consolidated financial statements of the
parent in respect of the hedging instrument is the amount that IFRS 9
paragraph 6.5.14 requires to be identified. That amount is the cumulative gain
or loss on the hedging instrument that was determined to be an effective hedge.
17 The amount reclassified to profit or loss from the foreign currency translation
reserve in the consolidated financial statements of a parent in respect of the net
investment in that foreign operation in accordance with IAS 21 paragraph 48 is
the amount included in that parent’s foreign currency translation reserve in
respect of that foreign operation. In the ultimate parent’s consolidated financial
statements, the aggregate net amount recognised in the foreign currency
translation reserve in respect of all foreign operations is not affected by the
consolidation method. However, whether the ultimate parent uses the direct or
the step-by-step method of consolidation2 may affect the amount included in its
foreign currency translation reserve in respect of an individual foreign
operation. The use of the step-by-step method of consolidation may result in the
reclassification to profit or loss of an amount different from that used to
determine hedge effectiveness. This difference may be eliminated by
determining the amount relating to that foreign operation that would have
arisen if the direct method of consolidation had been used. Making this
adjustment is not required by IAS 21. However, it is an accounting policy choice
that should be followed consistently for all net investments.
Effective date
18 An entity shall apply this Interpretation for annual periods beginning on or

after 1 October 2008. An entity shall apply the amendment to paragraph 14
made by Improvements to IFRSs issued in April 2009 for annual periods beginning
2 The direct method is the method of consolidation in which the financial statements of the foreign
operation are translated directly into the functional currency of the ultimate parent. The
step-by-step method is the method of consolidation in which the financial statements of the foreign
operation are first translated into the functional currency of any intermediate parent(s) and then
translated into the functional currency of the ultimate parent (or the presentation currency if
different).
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on or after 1 July 2009. Earlier application of both is permitted. If an entity

applies this Interpretation for a period beginning before 1 October 2008, or the
amendment to paragraph 14 before 1 July 2009, it shall disclose that fact.
[Refer: Basis for Conclusions paragraph BC40A]
18A [Deleted]
18B IFRS 9, as issued in July 2014, amended paragraphs 3, 5–7, 14, 16, AG1 and AG8
and deleted paragraph 18A. An entity shall apply those amendments when it
applies IFRS 9.
[If an entity chooses to apply the hedge accounting requirements of IAS 39 instead of the
requirements in Chapter 6 of IFRS 9, it shall also apply IFRIC 16 without the amendments
made by IFRS 9.]
Transition
19 IAS 8 specifies how an entity applies a change in accounting policy resulting

from the initial application of an Interpretation. An entity is not required to
comply with those requirements when first applying the Interpretation. If an
entity had designated a hedging instrument as a hedge of a net investment but
the hedge does not meet the conditions for hedge accounting in this
Interpretation, the entity shall apply IAS 39 to discontinue that hedge
accounting prospectively.
[Refer: Basis for Conclusions paragraph BC40]
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Appendix
Application guidance
This appendix is an integral part of the Interpretation.
AG1 This appendix illustrates the application of the Interpretation using the
corporate structure illustrated below. In all cases the hedging relationships
described would be tested for effectiveness in accordance with IFRS 9, although
this testing is not discussed in this appendix. Parent, being the ultimate parent
entity, presents its consolidated financial statements in its functional currency
of euro (EUR). Each of the subsidiaries is wholly owned. Parent’s £500 million
net investment in Subsidiary B (functional currency pounds sterling (GBP))
includes the £159 million equivalent of Subsidiary B’s US$300 million net
investment in Subsidiary C (functional currency US dollars (USD)). In other
words, Subsidiary B’s net assets other than its investment in Subsidiary C are
£341 million.
Nature of hedged risk for which a hedging relationship

may be designated (paragraphs 10–13)
AG2 Parent can hedge its net investment in each of Subsidiaries A, B and C for the
foreign exchange risk between their respective functional currencies (Japanese
yen (JPY), pounds sterling and US dollars) and euro. In addition, Parent can
hedge the USD/GBP foreign exchange risk between the functional currencies of
Subsidiary B and Subsidiary C. In its consolidated financial statements,
Subsidiary B can hedge its net investment in Subsidiary C for the foreign
exchange risk between their functional currencies of US dollars and pounds
sterling. In the following examples the designated risk is the spot foreign
exchange risk because the hedging instruments are not derivatives. If the
hedging instruments were forward contracts, Parent could designate the
forward foreign exchange risk.
Parent
functional currency EUR
¥ 400,000 million £500 million
Subsidiary A Subsidiary B
functional currency JPY functional currency GBP
US$300 million
(£159 million equivalent)
Subsidiary C
functional currency USD
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Amount of hedged item for which a hedging relationship

may be designated (paragraphs 10–13)
AG3 Parent wishes to hedge the foreign exchange risk from its net investment in
Subsidiary C. Assume that Subsidiary A has an external borrowing of
US$300 million. The net assets of Subsidiary A at the start of the reporting
period are ¥400,000 million including the proceeds of the external borrowing of
US$300 million.
AG4 The hedged item can be an amount of net assets equal to or less than the
carrying amount of Parent’s net investment in Subsidiary C (US$300 million) in
its consolidated financial statements. In its consolidated financial statements
Parent can designate the US$300 million external borrowing in Subsidiary A as a
hedge of the EUR/USD spot foreign exchange risk associated with its net
investment in the US$300 million net assets of Subsidiary C. In this case, both
the EUR/USD foreign exchange difference on the US$300 million external
borrowing in Subsidiary A and the EUR/USD foreign exchange difference on the
US$300 million net investment in Subsidiary C are included in the foreign
currency translation reserve in Parent’s consolidated financial statements after
the application of hedge accounting.
AG5 In the absence of hedge accounting, the total USD/EUR foreign exchange
difference on the US$300 million external borrowing in Subsidiary A would be
recognised in Parent’s consolidated financial statements as follows:
● USD/JPY spot foreign exchange rate change, translated to euro, in profit

or loss, and
● JPY/EUR spot foreign exchange rate change in other comprehensive
income.
Instead of the designation in paragraph AG4, in its consolidated financial

statements Parent can designate the US$300 million external borrowing in
Subsidiary A as a hedge of the GBP/USD spot foreign exchange risk between
Subsidiary C and Subsidiary B. In this case, the total USD/EUR foreign exchange
difference on the US$300 million external borrowing in Subsidiary A would
instead be recognised in Parent’s consolidated financial statements as follows:
● the GBP/USD spot foreign exchange rate change in the foreign currency
translation reserve relating to Subsidiary C,
● GBP/JPY spot foreign exchange rate change, translated to euro, in profit

or loss, and
● JPY/EUR spot foreign exchange rate change in other comprehensive
income.
AG6 Parent cannot designate the US$300 million external borrowing in Subsidiary A
as a hedge of both the EUR/USD spot foreign exchange risk and the GBP/USD spot
foreign exchange risk in its consolidated financial statements. A single hedging
instrument can hedge the same designated risk only once. Subsidiary B cannot
apply hedge accounting in its consolidated financial statements because the
hedging instrument is held outside the group comprising Subsidiary B and
Subsidiary C.
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Where in a group can the hedging instrument be held

(paragraphs 14 and 15)?
AG7 As noted in paragraph AG5, the total change in value in respect of foreign
exchange risk of the US$300 million external borrowing in Subsidiary A would
be recorded in both profit or loss (USD/JPY spot risk) and other comprehensive
income (EUR/JPY spot risk) in Parent’s consolidated financial statements in the
absence of hedge accounting. Both amounts are included for the purpose of
assessing the effectiveness of the hedge designated in paragraph AG4 because
the change in value of both the hedging instrument and the hedged item are
computed by reference to the euro functional currency of Parent against the
US dollar functional currency of Subsidiary C, in accordance with the hedge
documentation. The method of consolidation (ie direct method or step-by-step
method) does not affect the assessment of the effectiveness of the hedge.
Amounts reclassified to profit or loss on disposal of a

foreign operation (paragraphs 16 and 17)
AG8 When Subsidiary C is disposed of, the amounts reclassified to profit or loss in
Parent’s consolidated financial statements from its foreign currency translation
reserve (FCTR) are:
(a) in respect of the US$300 million external borrowing of Subsidiary A, the

amount that IFRS 9 requires to be identified, ie the total change in value
in respect of foreign exchange risk that was recognised in other
comprehensive income as the effective portion of the hedge; and
(b) in respect of the US$300 million net investment in Subsidiary C, the
amount determined by the entity’s consolidation method. If Parent uses
the direct method, its FCTR in respect of Subsidiary C will be determined
directly by the EUR/USD foreign exchange rate. If Parent uses the
step-by-step method, its FCTR in respect of Subsidiary C will be
determined by the FCTR recognised by Subsidiary B reflecting the
GBP/USD foreign exchange rate, translated to Parent’s functional
currency using the EUR/GBP foreign exchange rate. Parent’s use of the
step-by-step method of consolidation in prior periods does not require it
to or preclude it from determining the amount of FCTR to be reclassified
when it disposes of Subsidiary C to be the amount that it would have
recognised if it had always used the direct method, depending on its
accounting policy.
Hedging more than one foreign operation

(paragraphs 11, 13 and 15)
AG9 The following examples illustrate that in the consolidated financial statements
of Parent, the risk that can be hedged is always the risk between its functional
currency (euro) and the functional currencies of Subsidiaries B and C. No matter
how the hedges are designated, the maximum amounts that can be effective
hedges to be included in the foreign currency translation reserve in Parent’s
consolidated financial statements when both foreign operations are hedged are
US$300 million for EUR/USD risk and £341 million for EUR/GBP risk. Other
changes in value due to changes in foreign exchange rates are included in
Parent’s consolidated profit or loss. Of course, it would be possible for Parent to
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designate US$300 million only for changes in the USD/GBP spot foreign
exchange rate or £500 million only for changes in the GBP/EUR spot foreign
exchange rate.
Parent holds both USD and GBP hedging instruments

AG10 Parent may wish to hedge the foreign exchange risk in relation to its net
investment in Subsidiary B as well as that in relation to Subsidiary C. Assume
that Parent holds suitable hedging instruments denominated in US dollars and
pounds sterling that it could designate as hedges of its net investments in
Subsidiary B and Subsidiary C. The designations Parent can make in its
consolidated financial statements include, but are not limited to, the following:
(a) US$300 million hedging instrument designated as a hedge of the
US$300 million of net investment in Subsidiary C with the risk being the
spot foreign exchange exposure (EUR/USD) between Parent and
Subsidiary C and up to £341 million hedging instrument designated as a
hedge of £341 million of the net investment in Subsidiary B with the risk
being the spot foreign exchange exposure (EUR/GBP) between Parent and
Subsidiary B.
(b) US$300 million hedging instrument designated as a hedge of the
US$300 million of net investment in Subsidiary C with the risk being the
spot foreign exchange exposure (GBP/USD) between Subsidiary B and
Subsidiary C and up to £500 million hedging instrument designated as a
hedge of £500 million of the net investment in Subsidiary B with the risk
being the spot foreign exchange exposure (EUR/GBP) between Parent and
Subsidiary B.
AG11 The EUR/USD risk from Parent’s net investment in Subsidiary C is a different risk
from the EUR/GBP risk from Parent’s net investment in Subsidiary B. However,
in the case described in paragraph AG10(a), by its designation of the USD
hedging instrument it holds, Parent has already fully hedged the EUR/USD risk
from its net investment in Subsidiary C. If Parent also designated a GBP
instrument it holds as a hedge of its £500 million net investment in
Subsidiary B, £159 million of that net investment, representing the GBP
equivalent of its USD net investment in Subsidiary C, would be hedged twice for
GBP/EUR risk in Parent’s consolidated financial statements.
AG12 In the case described in paragraph AG10(b), if Parent designates the hedged risk
as the spot foreign exchange exposure (GBP/USD) between Subsidiary B and
Subsidiary C, only the GBP/USD part of the change in the value of its
US$300 million hedging instrument is included in Parent’s foreign currency
translation reserve relating to Subsidiary C. The remainder of the change
(equivalent to the GBP/EUR change on £159 million) is included in Parent’s
consolidated profit or loss, as in paragraph AG5. Because the designation of the
USD/GBP risk between Subsidiaries B and C does not include the GBP/EUR risk,
Parent is also able to designate up to £500 million of its net investment in
Subsidiary B with the risk being the spot foreign exchange exposure (GBP/EUR)
between Parent and Subsidiary B.
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Subsidiary B holds the USD hedging instrument

AG13 Assume that Subsidiary B holds US$300 million of external debt the proceeds of
which were transferred to Parent by an inter-company loan denominated in
pounds sterling. Because both its assets and liabilities increased by
£159 million, Subsidiary B’s net assets are unchanged. Subsidiary B could
designate the external debt as a hedge of the GBP/USD risk of its net investment
in Subsidiary C in its consolidated financial statements. Parent could maintain
Subsidiary B’s designation of that hedging instrument as a hedge of its
US$300 million net investment in Subsidiary C for the GBP/USD risk (see
paragraph 13) and Parent could designate the GBP hedging instrument it holds
as a hedge of its entire £500 million net investment in Subsidiary B. The first
hedge, designated by Subsidiary B, would be assessed by reference to
Subsidiary B’s functional currency (pounds sterling) and the second hedge,
designated by Parent, would be assessed by reference to Parent’s functional
currency (euro). In this case, only the GBP/USD risk from Parent’s net investment
in Subsidiary C has been hedged in Parent’s consolidated financial statements by
the USD hedging instrument, not the entire EUR/USD risk. Therefore, the entire
EUR/GBP risk from Parent’s £500 million net investment in Subsidiary B may be
hedged in the consolidated financial statements of Parent.
AG14 However, the accounting for Parent’s £159 million loan payable to Subsidiary B
must also be considered. If Parent’s loan payable is not considered part of its net
investment in Subsidiary B because it does not satisfy the conditions in IAS 21
paragraph 15, the GBP/EUR foreign exchange difference arising on translating it
would be included in Parent’s consolidated profit or loss. If the £159 million
loan payable to Subsidiary B is considered part of Parent’s net investment, that
net investment would be only £341 million and the amount Parent could
designate as the hedged item for GBP/EUR risk would be reduced from
£500 million to £341 million accordingly.
AG15 If Parent reversed the hedging relationship designated by Subsidiary B, Parent

could designate the US$300 million external borrowing held by Subsidiary B as a
hedge of its US$300 million net investment in Subsidiary C for the EUR/USD risk
and designate the GBP hedging instrument it holds itself as a hedge of only up to
£341 million of the net investment in Subsidiary B. In this case the effectiveness
of both hedges would be computed by reference to Parent’s functional currency
(euro). Consequently, both the USD/GBP change in value of the external
borrowing held by Subsidiary B and the GBP/EUR change in value of Parent’s
loan payable to Subsidiary B (equivalent to USD/EUR in total) would be included
in the foreign currency translation reserve in Parent’s consolidated financial
statements. Because Parent has already fully hedged the EUR/USD risk from its
net investment in Subsidiary C, it can hedge only up to £341 million for the
EUR/GBP risk of its net investment in Subsidiary B.
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Documents published to accompany
IFRIC 16

Operation
The text of the unaccompanied Interpretation, IFRIC 16, is contained in Part A of this
edition. Its effective date when issued was 1 October 2008. The text of the Basis for
Conclusions on IFRIC 16 is contained in Part C of this edition. This part presents the
following document:
ILLUSTRATIVE EXAMPLE
© IFRS Foundation B831
649
IFRIC 16 IE
Illustrative example
This example accompanies, but is not part of, IFRIC 16.
Disposal of a foreign operation (paragraphs 16 and 17)
IE1 This example illustrates the application of paragraphs 16 and 17 in connection

with the reclassification adjustment on the disposal of a foreign operation.
Background
IE2 This example assumes the group structure set out in the application guidance
and that Parent used a USD borrowing in Subsidiary A to hedge the EUR/USD
risk of the net investment in Subsidiary C in Parent’s consolidated financial
statements. Parent uses the step-by-step method of consolidation. Assume the
hedge was fully effective and the full USD/EUR accumulated change in the value
of the hedging instrument before disposal of Subsidiary C is €24 million (gain).
This is matched exactly by the fall in value of the net investment in Subsidiary C,
when measured against the functional currency of Parent (euro).
IE3 If the direct method of consolidation is used, the fall in the value of Parent’s net
investment in Subsidiary C of €24 million would be reflected totally in the
foreign currency translation reserve relating to Subsidiary C in Parent’s
consolidated financial statements. However, because Parent uses the
step-by-step method, this fall in the net investment value in Subsidiary C of
€24 million would be reflected both in Subsidiary B’s foreign currency
translation reserve relating to Subsidiary C and in Parent’s foreign currency
translation reserve relating to Subsidiary B.
IE4 The aggregate amount recognised in the foreign currency translation reserve in
respect of Subsidiaries B and C is not affected by the consolidation method.
Assume that using the direct method of consolidation, the foreign currency
translation reserves for Subsidiaries B and C in Parent’s consolidated financial
statements are €62 million gain and €24 million loss respectively; using the
step-by-step method of consolidation those amounts are €49 million gain and
€11 million loss respectively.
Reclassification
IE5 When the investment in Subsidiary C is disposed of, IFRS 9 requires the full
€24 million gain on the hedging instrument to be reclassified to profit or loss.
Using the step-by-step method, the amount to be reclassified to profit or loss in
respect of the net investment in Subsidiary C would be only €11 million loss.
Parent could adjust the foreign currency translation reserves of both
Subsidiaries B and C by €13 million in order to match the amounts reclassified
in respect of the hedging instrument and the net investment as would have been
the case if the direct method of consolidation had been used, if that was its
accounting policy. An entity that had not hedged its net investment could make
the same reclassification.
B832 © IFRS Foundation
650
IFRIC 16
Document published to accompany
IFRIC 16

Operation
The text of the unaccompanied Interpretation, IFRIC 16, is contained in Part A of this
edition. Its effective date when issued was 1 October 2008. The text of the Accompanying
Guidance on IFRIC 16 is contained in Part B of this edition. This part presents the following
document:
BASIS FOR CONCLUSIONS
© IFRS Foundation C2087
651
IFRIC 16 BC
Basis for Conclusions on

IFRIC Interpretation 16 Hedges of a Net Investment in a
Foreign Operation
This Basis for Conclusions accompanies, but is not part of, IFRIC 16.
Introduction
BC1 This Basis for Conclusions summarises the IFRIC’s considerations in reaching its
consensus. Individual IFRIC members gave greater weight to some factors than
to others.
Background
BC2 The IFRIC was asked for guidance on accounting for the hedge of a net
investment in a foreign operation in the consolidated financial statements.
Interested parties had different views of the risks eligible for hedge accounting
purposes. One issue is whether the risk arises from the foreign currency
exposure to the functional currencies of the foreign operation and the parent
entity, or whether it arises from the foreign currency exposure to the functional
currency of the foreign operation and the presentation currency of the parent
entity’s consolidated financial statements.
BC3 Concern was also raised about which entity within a group could hold a hedging
instrument in a hedge of a net investment in a foreign operation and in
particular whether the parent entity holding the net investment in a foreign
operation must also hold the hedging instrument.
BC4 Accordingly, the IFRIC decided to develop guidance on the accounting for a
hedge of the foreign currency risk arising from a net investment in a foreign
operation.
BC5 The IFRIC published draft Interpretation D22 Hedges of a Net Investment in a Foreign
Operation for public comment in July 2007 and received 45 comment letters in
response to its proposals.
Consensus
Hedged risk and hedged item
Functional currency versus presentation currency (paragraph 10)

BC6 The IFRIC received a submission suggesting that the method of consolidation
can affect the determination of the hedged risk in a hedge of a net investment in
a foreign operation. The submission noted that consolidation can be completed
by either the direct method or the step-by-step method. In the direct method of
consolidation, each entity within a group is consolidated directly into the
ultimate parent entity’s presentation currency when preparing the consolidated
financial statements. In the step-by-step method, each intermediate parent
C2088 © IFRS Foundation
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IFRIC 16 BC
entity prepares consolidated financial statements, which are then consolidated

into its parent entity until the ultimate parent entity has prepared consolidated
financial statements.
BC7 The submission stated that if the direct method was required, the risk that
qualifies for hedge accounting in a hedge of a net investment in a foreign
operation would arise only from exposure between the functional currency of
the foreign operation and the presentation currency of the group. This is
because each foreign operation is translated only once into the presentation
currency. In contrast, the submission stated that if the step-by-step method was
required, the hedged risk that qualifies for hedge accounting is the risk between
the functional currencies of the foreign operation and the immediate parent
entity into which the entity was consolidated. This is because each foreign
operation is consolidated directly into its immediate parent entity.
BC8 In response to this, the IFRIC noted that IAS 21 The Effects of Changes in Foreign
Exchange Rates does not specify a method of consolidation for foreign operations.
Furthermore, paragraph BC18 of the Basis for Conclusions on IAS 21 states that
the method of translating financial statements will result in the same amounts
in the presentation currency regardless of whether the direct method or the
step-by-step method is used. The IFRIC therefore concluded that the
consolidation mechanism should not determine what risk qualifies for hedge
accounting in the hedge of a net investment in a foreign operation.
BC9 However, the IFRIC noted that its conclusion would not resolve the divergence of
views on the foreign currency risk that may be designated as a hedge
relationship in the hedge of a net investment in a foreign operation. The IFRIC
therefore decided that an Interpretation was needed.
BC10 The IFRIC considered whether the risk that qualifies for hedge accounting in a
hedge of a net investment in a foreign operation arises from the exposure to the
functional currency of the foreign operation in relation to the presentation
currency of the group or the functional currency of the parent entity, or both.
BC11 The answer to this question is important when the presentation currency of the
group is different from an intermediate or ultimate parent entity’s functional
currency. If the presentation currency of the group and the functional currency
of the parent entity are the same, the exchange rate being hedged would be
identified as that between the parent entity’s functional currency and the
foreign operation’s functional currency. No further translation adjustment
would be required to prepare the consolidated financial statements. However,
when the functional currency of the parent entity is different from the
presentation currency of the group, a translation adjustment will be included in
other comprehensive income to present the consolidated financial statements in
a different presentation currency. The issue, therefore, is how to determine
which foreign currency risk may be designated as the hedged risk in accordance
with IAS 39 Financial Instruments: Recognition and Measurement1 in the hedge of a net
investment in a foreign operation.
1 IFRS 9 Financial Instruments replaced the hedge accounting requirements in IAS 39. However, the
requirements regarding hedges of a net investment in a foreign operation were retained from
IAS 39 and relocated to IFRS 9.
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IFRIC 16 BC
BC12 The IFRIC noted the following arguments for permitting hedge accounting for a
hedge of the presentation currency:
(a) If the presentation currency of the group is different from the ultimate
parent entity’s functional currency, a difference arises on translation
that is recognised in other comprehensive income. It is argued that a
reason for allowing hedge accounting for a net investment in a foreign
operation is to remove from the financial statements the fluctuations
resulting from the translation to a presentation currency. If an entity is
not allowed to use hedge accounting for the exposure to the presentation
currency of the group when it is different from the functional currency
of the parent entity, there is likely to be an amount included in other
comprehensive income that cannot be offset by hedge accounting.
(b) IAS 21 requires an entity to reclassify from equity to profit or loss as a
reclassification adjustment any foreign currency translation gains and
losses included in other comprehensive income on disposal of a foreign
operation. An amount in other comprehensive income arising from a
different presentation currency is therefore included in the amount
reclassified to profit or loss on disposal. The entity should be able to
include the amount in a hedging relationship if at some stage it is
recognised along with other reclassified translation amounts.
BC13 The IFRIC noted the following arguments for allowing an entity to designate
hedging relationships solely on the basis of differences between functional
currencies:
(a) The functional currency of an entity is determined on the basis of the

primary economic environment in which that entity operates (ie the
environment in which it generates and expends cash). However, the
presentation currency is an elective currency that can be changed at any
time. To present amounts in a presentation currency is merely a
numerical convention necessary for the preparation of financial
statements that include a foreign operation. The presentation currency
will have no economic effect on the parent entity. Indeed, a parent
entity may choose to present financial statements in more than one
presentation currency, but can have only one functional currency.
(b) IAS 39 requires a hedging relationship to be effective in offsetting

changes in fair values or cash flows attributable to the hedged risk. A net
investment in a foreign operation gives rise to an exposure to changes in
exchange rate risk for a parent entity. An economic exchange rate risk
arises only from an exposure between two or more functional currencies,
not from a presentation currency.
BC14 When comparing the arguments in paragraphs BC12 and BC13, the IFRIC
concluded that the presentation currency does not create an exposure to which
an entity may apply hedge accounting. The functional currency is determined
on the basis of the primary economic environment in which the entity operates.
Accordingly, functional currencies create an economic exposure to changes in
cash flows or fair values; a presentation currency never will. No commentators
on the draft Interpretation disagreed with the IFRIC’s conclusion.
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IFRIC 16 BC
Eligible risk (paragraph 12)

BC15 The IFRIC considered which entity’s (or entities’) functional currency may be
used as a reference point for the hedged risk in a net investment hedge. Does
the risk arise from the functional currency of:
(a) the immediate parent entity that holds directly the foreign operation;
(b) the ultimate parent entity that is preparing its financial statements; or
(c) the immediate, an intermediate or the ultimate parent entity, depending
on what risk that entity decides to hedge, as designated at the inception
of the hedge?
BC16 The IFRIC concluded that the risk from the exposure to a different functional
currency arises for any parent entity whose functional currency is different from
that of the identified foreign operation. The immediate parent entity is exposed
to changes in the exchange rate of its directly held foreign operation’s
functional currency. However, indirectly every entity up the chain of entities to
the ultimate parent entity is also exposed to changes in the exchange rate of the
foreign operation’s functional currency.
BC17 Permitting only the ultimate parent entity to hedge its net investments would
ignore the exposures arising on net investments in other parts of the entity.
Conversely, permitting only the immediate parent entity to undertake a net
investment hedge would imply that an indirect investment does not create a
foreign currency exposure for that indirect parent entity.
BC18 The IFRIC concluded that a group must identify which risk (ie the functional
currency of which parent entity and of which net investment in a foreign
operation) is being hedged. The specified parent entity, the hedged risk and
hedging instrument should all be designated and documented at the inception
of the hedge relationship. As a result of comments received on the draft
Interpretation, the IFRIC decided to emphasise that this documentation should
also include the entity’s strategy in undertaking the hedge as required by IAS 39.
Amount of hedged item that may be hedged (paragraphs 11

and 13)
BC19 In the draft Interpretation the IFRIC noted that, in financial statements that
include a foreign operation, an entity cannot hedge the same risk more than
once. This comment was intended to remind entities that IAS 39 does not
permit multiple hedges of the same risk. Some respondents asked the IFRIC to
clarify the situations in which the IFRIC considered that the same risk was being
hedged more than once. In particular, the IFRIC was asked whether the same
risk could be hedged by different entities within a group as long as the amount
of risk being hedged was not duplicated.
BC20 In its redeliberations, the IFRIC decided to clarify that the carrying amount of
the net assets of a foreign operation that may be hedged in the consolidated
financial statements of a parent depends on whether any lower level parent of
the foreign operation has hedged all or part of the net assets of that foreign
operation and that accounting has been maintained in the parent’s consolidated
financial statements. An intermediate parent entity can hedge some or all of the
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IFRIC 16 BC
risk of its net investment in a foreign operation in its own consolidated financial
statements. However, such hedges will not qualify for hedge accounting at the
ultimate parent entity level if the ultimate parent entity has also hedged the
same risk. Alternatively, if the risk has not been hedged by the ultimate parent
entity or another intermediate parent entity, the hedge relationship that
qualified in the immediate parent entity’s consolidated financial statements will
also qualify in the ultimate parent entity’s consolidated financial statements.
BC21 In its redeliberations, the IFRIC also decided to add guidance to the
Interpretation to illustrate the importance of careful designation of the amount
of the risk being hedged by each entity in the group.
Hedging instrument
Location of the hedging instrument (paragraph 14) and

assessment of hedge effectiveness (paragraph 15)
BC22 The IFRIC discussed where in a group structure a hedging instrument may be
held in a hedge of a net investment in a foreign operation. Guidance on the
hedge of a net investment in a foreign operation was originally included in
IAS 21. This guidance was moved to IAS 39 to ensure that the hedge accounting
guidance included in paragraph 88 of IAS 39 would also apply to the hedges of
net investments in foreign operations.
BC23 The IFRIC concluded that any entity within the group, other than the foreign
operation being hedged, may hold the hedging instrument, as long as the
hedging instrument is effective in offsetting the risk arising from the exposure
to the functional currency of the foreign operation and the functional currency
of the specified parent entity. The functional currency of the entity holding the
instrument is irrelevant in determining effectiveness.
BC24 The IFRIC concluded that the foreign operation being hedged could not hold the
hedging instrument because that instrument would be part of, and
denominated in the same currency as, the net investment it was intended to
hedge. In this circumstance, hedge accounting is unnecessary. The foreign
exchange differences between the parent’s functional currency and both the
hedging instrument and the functional currency of the net investment will
automatically be included in the group’s foreign currency translation reserve as
part of the consolidation process. The balance of the discussion in this Basis for
Conclusions does not repeat this restriction.2
BC24A Paragraph 14 of IFRIC 16 originally stated that the hedging instrument could
not be held by the foreign operation whose net investment was being hedged.
The restriction was included in draft Interpretation D22 (from which IFRIC 16
was developed) and attracted little comment from respondents. As originally
explained in paragraph BC24, the IFRIC concluded, as part of its redeliberations,
that the restriction was appropriate because the foreign exchange differences
between the parent’s functional currency and both the hedging instrument and
2 Paragraph BC24 was deleted and paragraphs BC24A–BC24D and paragraph BC40A added as a
consequence of Improvements to IFRSs issued in April 2009.
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IFRIC 16 BC
the functional currency of the net investment would automatically be included

in the group’s foreign currency translation reserve as part of the consolidation
process.
BC24B After IFRIC 16 was issued, it was brought to the attention of the International
Accounting Standards Board that this conclusion was not correct. Without
hedge accounting, part of the foreign exchange difference arising from the
hedging instrument would be included in consolidated profit or loss. Therefore,
in Improvements to IFRSs issued in April 2009, the Board amended paragraph 14 of
IFRIC 16 to remove the restriction on the entity that can hold hedging
instruments and deleted paragraph BC24.
BC24C Some respondents to the exposure draft Post-implementation Revisions to IFRIC

Interpretations (ED/2009/1) agreed that a parent entity should be able to use a
derivative held by the foreign operation being hedged as a hedge of the net
investment in that foreign operation. However, those respondents
recommended that the amendment should apply only to derivative instruments
held by the foreign operation being hedged. They asserted that a non-derivative
financial instrument would be an effective hedge of the net investment only if it
were issued by the foreign operation in its own functional currency and this
would have no foreign currency impact on the profit or loss of the consolidated
group. Consequently, they thought that the rationale described in
paragraph BC24B to support the amendment did not apply to non-derivative
instruments.
BC24D In its redeliberations, the Board confirmed its previous decision that the
amendment should not be restricted to derivative instruments. The Board noted
that paragraphs AG13–AG15 of IFRIC 16 illustrate that a non-derivative
instrument held by the foreign operation does not need to be considered to be
part of the parent’s net investment. As a result, even if it is denominated in the
foreign operation’s functional currency a non-derivative instrument could still
affect the profit or loss of the consolidated group. Consequently, although it
could be argued that the amendment was not required to permit non-derivative
instruments to be designated as hedges, the Board decided that the proposal
should not be changed.
BC25 The IFRIC also concluded that to apply the conclusion in paragraph BC23 when
determining the effectiveness of a hedging instrument in the hedge of a net
investment, an entity computes the gain or loss on the hedging instrument by
reference to the functional currency of the parent entity against whose
functional currency the hedged risk is measured, in accordance with the hedge
documentation. This is the same regardless of the type of hedging instrument
used. This ensures that the effectiveness of the instrument is determined on the
basis of changes in fair value or cash flows of the hedging instrument, compared
with the changes in the net investment as documented. Thus, any effectiveness
test is not dependent on the functional currency of the entity holding the
instrument. In other words, the fact that some of the change in the hedging
instrument is recognised in profit or loss by one entity within the group and
some is recognised in other comprehensive income by another does not affect
the assessment of hedge effectiveness.
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IFRIC 16 BC
BC26 In the draft Interpretation the IFRIC noted Question F.2.14 in the guidance on
implementing IAS 39, on the location of the hedging instrument, and
considered whether that guidance could be applied by analogy to a net
investment hedge. The answer to Question F.2.14 concludes:
IAS 39 does not require that the operating unit that is exposed to the risk being
hedged be a party to the hedging instrument.
This was the only basis for the IFRIC’s conclusion regarding which entity could
hold the hedging instrument provided in the draft Interpretation. Some
respondents argued that the Interpretation should not refer to implementation
guidance as the sole basis for an important conclusion.3
BC27 In its redeliberations, the IFRIC considered both the International Accounting
Standards Board’s amendment to IAS 21 in 2005 and the objective of hedging a
net investment described in IAS 39 in addition to the guidance on implementing
IAS 39.
BC28 In 2005 the Board was asked to clarify which entity is the reporting entity in
IAS 21 and therefore what instruments could be considered part of a reporting
entity’s net investment in a foreign operation. In particular, constituents
questioned whether a monetary item must be transacted between the foreign
operation and the reporting entity to be considered part of the net investment in
accordance with IAS 21 paragraph 15, or whether it could be transacted between
the foreign operation and any member of the consolidated group.
BC29 In response the Board added IAS 21 paragraph 15A to clarify that ‘The entity that
has a monetary item receivable from or payable to a foreign operation described
in paragraph 15 may be any subsidiary of the group.’ The Board explained its
reasons for the amendment in paragraph BC25D of the Basis for Conclusions:
The Board concluded that the accounting treatment in the consolidated financial
statements should not be dependent on the currency in which the monetary item
is denominated, nor on which entity within the group conducts the transaction
with the foreign operation.
In other words, the Board concluded that the relevant reporting entity is the
group rather than the individual entity and that the net investment must be
viewed from the perspective of the group. It follows, therefore, that the group’s
net investment in any foreign operation, and its foreign currency exposure, can
be determined only at the relevant parent entity level. The IFRIC similarly
concluded that the fact that the net investment is held through an intermediate
entity does not affect the economic risk.
BC30 Consistently with the Board’s conclusion with respect to monetary items that
are part of the net investment, the IFRIC concluded that monetary items (or
derivatives) that are hedging instruments in a hedge of a net investment may be
held by any entity within the group and the functional currency of the entity
holding the monetary items can be different from those of either the parent or
the foreign operation. The IFRIC, like the Board, agreed with constituents who
noted that a hedging item denominated in a currency that is not the functional
3 IFRS 9 replaced IAS 39.
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IFRIC 16 BC
currency of the entity holding it does not expose the group to a greater foreign
currency exchange difference than arises when the instrument is denominated
in that functional currency.
BC31 The IFRIC noted that its conclusions that the hedging instrument can be held by
any entity in the group and that the foreign currency is determined at the
relevant parent entity level have implications for the designation of hedged
risks. As illustrated in paragraph AG5 of the application guidance, these
conclusions make it possible for an entity to designate a hedged risk that is not
apparent in the currencies of the hedged item or the foreign operation. This
possibility is unique to hedges of net investments. Consequently, the IFRIC
specified that the conclusions in the Interpretation should not be applied by
analogy to other types of hedge accounting.
BC32 The IFRIC also noted that the objective of hedge accounting as set out in IAS 39 is
to achieve offsetting changes in the values of the hedging instrument and of the net
investment attributable to the hedged risk. Changes in foreign currency rates
affect the value of the entire net investment in a foreign operation, not only the
portion IAS 21 requires to be recognised in profit or loss in the absence of hedge
accounting but also the portion recognised in other comprehensive income in
the parent’s consolidated financial statements. As noted in paragraph BC25, it is
the total change in the hedging instrument as result of a change in the foreign
currency rate with respect to the parent entity against whose functional
currency the hedged risk is measured that is relevant, not the component of
comprehensive income in which it is recognised.
Reclassification from other comprehensive income to

profit or loss (paragraphs 16 and 17)
BC33 In response to requests from some respondents for clarification, the IFRIC
discussed what amounts from the parent entity’s foreign currency translation
reserve in respect of both the hedging instrument and the foreign operation
should be recognised in profit or loss in the parent entity’s consolidated
financial statements when the parent disposes of a foreign operation that was
hedged. The IFRIC noted that the amounts to be reclassified from equity to
profit or loss as reclassification adjustments on the disposition are:
(a) the cumulative amount of gain or loss on a hedging instrument
determined to be an effective hedge that has been reflected in other
comprehensive income (IAS 39 paragraph 102), and
(b) the cumulative amount reflected in the foreign currency translation
reserve in respect of that foreign operation (IAS 21 paragraph 48).
BC34 The IFRIC noted that when an entity hedges a net investment in a foreign
operation, IAS 39 requires it to identify the cumulative amount included in the
group’s foreign currency translation reserve as a result of applying hedge
accounting, ie the amount determined to be an effective hedge. Therefore, the
IFRIC concluded that when a foreign operation that was hedged is disposed of,
the amount reclassified to profit or loss from the foreign currency translation
reserve in respect of the hedging instrument in the consolidated financial
statements of the parent should be the amount that IAS 39 requires to be
identified.
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IFRIC 16 BC
Effect of consolidation method

BC35 Some respondents to the draft Interpretation argued that the method of
consolidation creates a difference in the amounts included in the ultimate
parent entity’s foreign currency translation reserve for individual foreign
operations that are held through intermediate parents. These respondents
noted that this difference may become evident only when the ultimate parent
entity disposes of a second tier subsidiary (ie an indirect subsidiary).
BC36 The difference becomes apparent in the determination of the amount of the
foreign currency translation reserve that is subsequently reclassified to profit or
loss. An ultimate parent entity using the direct method of consolidation would
reclassify the cumulative foreign currency translation reserve that arose
between its functional currency and that of the foreign operation. An ultimate
parent entity using the step-by-step method of consolidation might reclassify the
cumulative foreign currency translation reserve reflected in the financial
statements of the intermediate parent, ie the amount that arose between the
functional currency of the foreign operation and that of the intermediate
parent, translated into the functional currency of the ultimate parent.
BC37 In its redeliberations, the IFRIC noted that the use of the step-by-step method of
consolidation does create such a difference for an individual foreign operation
although the aggregate net amount of foreign currency translation reserve for
all the foreign operations is the same under either method of consolidation. At
the same time, the IFRIC noted that the method of consolidation should not create
such a difference for an individual foreign operation, on the basis of its
conclusion that the economic risk is determined in relation to the ultimate
parent’s functional currency.
BC38 The IFRIC noted that the amount of foreign currency translation reserve for an
individual foreign operation determined by the direct method of consolidation
reflects the economic risk between the functional currency of the foreign
operation and that of the ultimate parent (if the parent’s functional and
presentation currencies are the same). However, the IFRIC noted that IAS 21
does not require an entity to use this method or to make adjustments to produce
the same result. The IFRIC also noted that a parent entity is not precluded from
determining the amount of the foreign currency translation reserve in respect of
a foreign operation it has disposed of as if the direct method of consolidation
had been used in order to reclassify the appropriate amount to profit or loss.
However, it also noted that making such an adjustment on the disposal of a
foreign operation is an accounting policy choice and should be followed
consistently for the disposal of all net investments.
BC39 The IFRIC noted that this issue arises when the net investment disposed of was
not hedged and therefore is not strictly within the scope of the Interpretation.
However, because it was a topic of considerable confusion and debate, the IFRIC
decided to include a brief example illustrating its conclusions.
Transition (paragraph 19)

BC40 In response to respondents’ comments, the IFRIC clarified the Interpretation’s
transitional requirements. The IFRIC decided that entities should apply the
conclusions in this Interpretation to existing hedging relationships on adoption
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IFRIC 16 BC
and cease hedge accounting for those that no longer qualify. However, previous
hedge accounting is not affected. This is similar to the transition requirements
in IFRS 1 First-time Adoption of International Financial Reporting Standards
paragraph 30,4 for relationships accounted for as hedges under previous GAAP.
Effective date of amended paragraph 14
BC40A The Board amended paragraph 14 in April 2009. In ED/2009/01 the Board
proposed that the amendment should be effective for annual periods beginning
on or after 1 October 2008, at the same time as IFRIC 16. Respondents to the
exposure draft were concerned that permitting application before the
amendment was issued might imply that an entity could designate hedge
relationships retrospectively, contrary to the requirements of IAS 39.
Consequently, the Board decided that an entity should apply the amendment to
paragraph 14 made in April 2009 for annual periods beginning on or after 1 July
2009. The Board also decided to permit early application but noted that early
application is possible only if the designation, documentation and effectiveness
requirements of paragraph 88 of IAS 39 and of IFRIC 16 are satisfied at the
application date.
Summary of main changes from the draft Interpretation
BC41 The main changes from the IFRIC’s proposals are as follows:
(a) Paragraph 11 clarifies that the carrying amount of the net assets of a
foreign operation that may be hedged in the consolidated financial
statements of a parent depends on whether any lower level parent of the
foreign operation has hedged all or part of the net assets of that foreign
operation and that accounting has been maintained in the parent’s
consolidated financial statements.
(b) Paragraph 15 clarifies that the assessment of effectiveness is not affected

by whether the hedging instrument is a derivative or a non-derivative
instrument or by the method of consolidation.
(c) Paragraphs 16 and 17 and the illustrative example clarify what amounts
should be reclassified from equity to profit or loss as reclassification
adjustments on disposal of the foreign operation.
(d) Paragraph 19 clarifies transitional requirements.
(e) The appendix of application guidance was added to the Interpretation.
Illustrative examples accompanying the draft Interpretation were
removed.
(f) The Basis for Conclusions was changed to set out more clearly the
reasons for the IFRIC’s conclusions.
4 Paragraph B6 in the revised version of IFRS 1 issued in November 2008.
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IFRS 9 (Hedging) – Class notes
DERIVATIVES
A financial instrument or other contract with all three of the following characteristics:
(a) its value changes in response to the change in a specified interest rate, financial instrument price,
commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other
variable (called the ‘underlying’).
(b) it requires no initial net investment or an initial net investment that is smaller than would be required
for other types of contracts that would be expected to have a similar response to changes in market
factors.
(c) it is settled at a future date.
Examples:
Forward – a forward contract is a binding contract to buy or sell a specified amount of a specified item
(e.g. currency, oil, gold etc.) on a specified date. Normally a commission is paid at the time of contract.
Future – a future contract is a contract to buy or sell standard amount of a particular item (e.g. currency,
copper, shares etc.) on a standard date at a price determined in market. Futures are traded in an organized
market where these contracts are mostly settled by closing out by taking opposite position (e.g. sell now
and buy later) and net gain/loss is settled.
Option – an option contract is a right to its holder to buy or sell a particular item (e.g. shares, currency, oil
etc.) at a specified price on a specified date. Holder is not obligated to exercise the option rather it may
exercise the option only when beneficial. A premium (i.e. charges for option) is paid at the time of contract
irrespective of whether the option is eventually exercised or not.
Swap – a swap is an agreement between parties to exchange a series of cashflow at an agreed rate. Most
commonly used type of swap arrangement is an interest rate swap where two parties agree to exchange
interest payments calculated on a notional principal. Sometimes a fee is also paid to a bank that arranges
the swap and the said fee is also generally agreed as a % of notional principal.
Use of derivatives:
- Speculation
- Hedging
Measurement:
If used for speculation, derivates are termed as “held for trading” and measured at fair value through P&L.
Embedded derivatives
An embedded derivative is a component of a hybrid contract that also includes non-derivative host.
IFRS 9 requires embedded derivatives that would meet the definition of a separate derivative
instrument to be separated from the host contract.
However, if the host contract is a financial asset as per IFRS 9, then whole contract is accounted for as
per IFRS 9 and derivative is not separated.
HEDGING
Hedging refers to an entity’s risk management activities that use financial instruments to manage
exposures arising from particular risks that could affect profit or loss or OCI.
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Hedged item
A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net
investment in a foreign operation that (a) exposes the entity to risk of changes in fair value or future cash
flows and (b) is designated as being hedged.
Hedging instrument
A hedging instrument is a designated derivative or (for a hedge of the risk of changes in foreign currency
exchange rates only) a designated non-derivative financial asset or non-derivative financial liability whose
fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated
hedged item.
Hedge effectiveness
Hedge effectiveness is the degree to which changes in the fair value or cash flows of the hedged item that
are attributable to a hedged risk are offset by changes in the fair value or cash flows of the hedging
instrument.
Hedge ratio
Hedge ratio is the relationship between the quantity of the hedging instrument and the quantity of the
hedged item in terms of their relative weighting.
HEDGING ACCOUNTING
A hedging relationship qualifies for hedge accounting only if all of the following criteria are met:
(a) the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
(b) at the inception of the hedging relationship there is formal designation and documentation of the
hedging relationship and the entity’s risk management objective and strategy for undertaking the
hedge. That documentation shall include identification of the hedging instrument, the hedged item,
the nature of the risk being hedged and how the entity will assess whether the hedging relationship
meets the hedge effectiveness requirements (including its analysis of the sources of hedge
ineffectiveness and how it determines the hedge ratio).
(c) the hedging relationship meets all of the following hedge effectiveness requirements:
(i) there is an economic relationship between the hedged item and the hedging instrument (i.e. the
hedging instrument and the hedged item have values that generally move in the opposite
direction because of the same risk, which is the hedged risk).
(ii) the effect of credit risk does not dominate the value changes that result from that economic
relationship (i.e. the gain or loss from credit risk does not frustrate the effect of changes in the
underlying on the value of the hedged item or hedging instrument); and
(iii) the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the
hedged item that the entity actually hedges and the quantity of the hedging instrument that the
entity actually uses to hedge that quantity of hedged item.
Example of hedge ratio
An entity owns 120,000 gallons of oil. It enters into 1 futures contract to sell 40,000 gallons of
oil at a fixed price. It wishes to designate this as a fair value hedge, with 120,000 gallons of oil
as the hedged item and the futures contract as the hedging instrument. If deemed effective,
this would mean that the fair value gain or loss on the hedged item (the oil) and the fair value
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664
loss or gain on the hedging instrument (the futures contract) would be recorded and recognized
in profit or loss.
However, the hedge ratio means that the gain or loss on the item would probably be much
bigger than the loss or gain on the instrument. This would create volatility in profit or loss that
is at odds with the purpose of hedge accounting. Therefore, the hedge ratio must be adjusted
to avoid the imbalance. It may be that the hedged item should be designated as 40,000 gallons
of oil, with the hedging instrument as 1 futures contract. The other 80,000 gallons of oil would
be accounted for in accordance with normal accounting rules (IAS 2 Inventories).
An entity shall discontinue hedge accounting prospectively only when the hedging relationship (or a part
of a hedging relationship) ceases to meet the qualifying criteria. This includes instances when the hedging
instrument expires or is sold, terminated or exercised.
There are three types of hedging relationships:

1) fair value hedge
2) cash flow hedge
3) hedge of a net investment in a foreign operation (IAS 21)
1) Fair value hedge

It is a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized
firm commitment, or a component of any such item, that is attributable to a particular risk and could
affect profit or loss (e.g. hedging the fair value of fixed rate loan notes due to changes in interest rates).
Accounting for fair value hedge:

(a) the hedging gain or loss on the hedged item shall adjust the carrying amount of the hedged item.
[When a hedged item is an unrecognized firm commitment, an asset or a liability is recognized for
cumulative gain or loss on hedged item]
(b) the hedging gain or loss on the hedged item and the gain or loss on hedging instrument both shall
be:
If the hedged item is an investment in equity In all other cases:

instruments measured fair value through OCI:
Recognized in OCI Recognized in P&L
2) Cash flow hedge

It is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated
with all, or a component of, a recognized asset or liability (such as all or some future interest payments
on variable-rate debt) or a highly probable forecast transaction, and could affect profit or loss.
Accounting for cash flow hedge:

(a) the separate component of equity associated with the hedged item (cash flow hedge reserve) is
adjusted to the lower of the following (in absolute amounts):
(i) the cumulative gain or loss on the hedging instrument from inception of the hedge; and
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665
(ii) the cumulative change in fair value (present value) of the hedged item (i.e. the present value of
the cumulative change in the hedged expected future cash flows) from inception of the hedge.
(b) the gain or loss on the hedging instrument is accounted for as follows:
(i) the portion of the gain or loss that is determined to be an effective hedge [i.e. the portion that is
offset by the change in the cash flow hedge reserve calculated in accordance with (a)] shall be
recognized in other comprehensive income.
(ii) any remaining gain or loss on the hedging instrument [or any gain or loss required to balance the
change in the cash flow hedge reserve calculated in accordance with (a)] is hedge ineffectiveness
that shall be recognized in profit or loss.
(c) the amount that has been accumulated in the cash flow hedge reserve in accordance with (a) shall be
accounted for as follows:
(i) if a hedged forecast transaction subsequently results in the recognition of a non-financial asset or
non-financial liability, or a hedged forecast transaction for a non-financial asset or a non-financial
liability becomes a firm commitment for which fair value hedge accounting is applied, the entity
shall remove that amount from the cash flow hedge reserve and include it directly in the initial
cost or other carrying amount of the asset or the liability.
(ii) for cash flow hedges other than those covered by (i), that amount shall be reclassified from the
cash flow hedge reserve to profit or loss as a reclassification adjustment in the same period or
periods during which the hedged expected future cash flows affect profit or loss (for example, in
the periods that interest income or interest expense is recognized or when a forecast sale occurs).
(iii) however, if that amount is a loss and an entity expects that all or a portion of that loss will not be
recovered in one or more future periods, it shall immediately reclassify the amount that is not
expected to be recovered into profit or loss as a reclassification adjustment.
3) Hedges of a net investment in a foreign operation
It shall be accounted for similarly to cash flow hedges as follows:

(a) the portion of the gain or loss on hedging instrument that is determined to be an effective hedge shall
be recognized in OCI; and
(b) the ineffective portion shall be recognized in P&L.
The cumulative gain or loss that has been accumulated in foreign currency translation reserve shall be
reclassified from equity to P&L as a reclassification adjustment on the disposal of the foreign operation.
Nasir Abbas FCA

666
IFRS 9 (Hedging) – QUESTIONS
PRACTICE QUESTIONS
Question 1
Journalize each of the following independent derivative transactions, entered into for speculation purposes:
(a) On May 1, 2020 A limited entered into a forward contract with Bank XYZ to purchase $ 50,000 on July 31, 2020 at an
agreed rate of Rs/$ 160. A forward commission of Rs. 0.1 per USD was paid at the time of contract. Following exchange
rates are available:
Date Forward rate (Rs/$) Spot rate (Rs/$)
01-05-20 160 (3-month forward) 158.20
30-06-20 (year-end) 162.25 (1 month forward) 161.30
31-07-20 - 163.50
(b) On June 1, 2020 B limited purchased 2000 call options on shares of ML, a listed company, on following terms:
Exercise price Rs. 45 per share
Exercise date August 31, 2020
Premium Rs. 2 per share (it is also considered as fair value of option on that date)
Fair value of option and shares of M limited are as follows:

Date Option Share of ML
(Rs/share) (Rs/share)
01-06-20 2.00 38
30-06-20 (year-end) 5.50 43
31-08-20 12.00 57
(c) On June 1, 2020 C limited bought 12 crude oil future contracts, with a contract size of 150 barrels, having 30th
September maturity. Following are the future prices quoted in future market for 30 th September crude oil futures:
Date Future price
(Rs/barrel)
01-06-20 10,000
30-06-20 (year-end) 9,800
30-09-20 9,450
Question 2
On December 1, 2019 A limited acquired 10,000 ounces of a Material XYZ, at a cost of Rs. 220 per ounce, which it held in
its inventories. A limited was concerned that the price of XYZ would fall, so on December 1, 2019 it sold 10,000 ounces in
future market at a price of Rs. 215 per ounce with a maturity date of March 31, 2020.
At December 31, 2019 (i.e. accounting year-end) the fair value of XYZ was Rs. 200 per ounce while the future price moved
to Rs. 198 per ounce. On March 1, 2020 A limited sold entire stock of XYZ at market price of Rs. 195 per ounce whereas
future price of 31st March XYZ future at date was Rs. 193.
Required:
All journal entries for above transactions.
Question 3
B limited has a firm commitment to buy a machine for $ 2 million on March 31, 2020. The directors are worried about
exchange rate fluctuations. On October 1, 2019, when exchange rate was Rs/$ 150, B limited entered into a future contract
to buy $ 2 million with a maturity date of March 31, 2020 at a price of Rs. 155 per $.
At December 31, 2019 (i.e. accounting year-end) spot exchange rate moved to Rs/$ 154.50. On that date future price of
31st March $ future moved to Rs. 159 per $.
Required:
Explain the accounting treatment of the above in financial statements for the year ending December 31, 2019 if:
(a) Hedge accounting was not used.
(b) On October 1, 2019 the future contract was designated as a fair value hedge for the firm commitment of purchase
machine.
667
NASIR ABBAS FCA
IFRS 9 (Hedging) – QUESTIONS
Question 4
OneAir is a successful international airline. A key factor affecting OneAir’s cashflows and profits is the price of jet fuel. On
October 1, 2019, OneAir entered into a forward contract to hedge its expected fuel requirements for the second quarter
of 2020 for delivery of 28m gallons of jet fuel on March 31, 2020 at a price of Rs. 204 per gallon. The spot price on October
1, 2029 of jet fuel was Rs. 190 per gallon.
The airline intended to settle the contract net in cash and purchase the actual required quantity of jet fuel in the open
market on March 31, 2020.
At the company’s year end (i.e. December 31, 2019) the forward price for delivery on March 31, 2020 had risen to Rs. 216
per gallon of fuel. Whereas spot price on that day was Rs. 200 per gallon.
All necessary documentation was set up at inception for the contract to be accounted for as a hedge. On March 31, 2020
the company settled the forward contract net in cash and purchased 30m gallons of jet fuel at the spot price on that day
of Rs. 219 per gallon.
Required:
Journal entries for above transactions.
Question 5
Beta limited signed a contract on October 1, 2019 to purchase a machine on September 30, 2020 from Ceta limited for £8
million. Beta limited hedged this transaction by entering into a forward contract to buy £8 million at an agreed rate of
Rs/£ 200. Spot and forward exchange rates were as follows:
Date Forward rate (Rs/£) Spot rate (Rs/£)
01-10-19 200 (1-year forward) 180
31-12-19 (year-end) 214 (9-months forward) 190
30-09-20 - 222
On September 30, 2020 the machine was purchased as per commitment and accordingly brought into use. Its useful life
was estimated at 10 years.
Required:
668
NASIR ABBAS FCA
IFRS 9 (Hedging) – SOLUTIONS
SOLUTIONS
Solution No. 1
Dr. Cr.
(a) ------------ Rs. -----------
01-05-20 P&L [0.1 x $ 50,000] 5,000
Cash 5,000
[Transaction cost paid]
30-06-20 Financial asset [(162.25 - 160) x $ 50,000] 112,500

P&L 112,500
[Fair value gain at year end]
31-07-20 Financial asset [(163.50 - 162.25) x $ 50,000] 62,500

P&L 62,500
[Fair value gain on settlement date]
31-07-20 Cash [(163.50 - 160) x $ 50,000] 175,000

[Forward contract settled]
(b)
01-06-20 Financial asset [2 x 2000] 4,000
Cash 4,000
[Initial recognition of option contract]
30-06-20 Financial asset [(5.50 - 2) x 2,000] 7,000

P&L 7,000
[Fair value gain at year end]
31-08-20 Financial asset [(12 - 5.50) x 2,000] 13,000

P&L 13,000
[Fair value gain on settlement date]
31-08-20 Cash [(57 - 45) x 2,000] 24,000

[Gain on exercise of call options]
(c)
01-06-20 No entry
30-06-20 P&L (W-1) 360,000

[Fair value loss at year end]
30-09-20 P&L (W-1) 630,000

[Fair value loss on settlement date]
669
NASIR ABBAS FCA
30-09-20 Financial liability (W-1) 990,000

Cash 990,000
[Loss settlement on future close out]
W-1
30-06-20 Rs.
Buy 10,000
Sell 9,800
Loss (200)
Total loss [200 x 150 x 12] (360,000)
30-09-20 Rs.
Buy 10,000
Sell 9,450
Loss (550)
Total loss [850 x 150 x 12] (990,000)
Total loss previously recognized (360,000)
(630,000)
Solution No. 2
Dr. Cr.
------------ Rs. -----------
01-12-19 Inventory [10,000 x 220] 2,200,000
Cash 2,200,000
[Purchase of 10,000 ounces of XYZ]
31-12-19 P&L [(220 - 200) x 10,000] 200,000

Inventory 200,000
[Fair value loss on inventory at year end]

P&L (W-1) 170,000
[Fair value gain on future at year end]
01-03-20 P&L [(200 - 195) x 10,000] 50,000

Inventory 50,000
[Fair value loss on inventory on sale date]

P&L (W-1) 60,000
[Fair value gain on future on sale date]
01-03-20 Cash [195 x 10,000] 1,950,000

Cost of sales 1,950,000
Inventory 1,950,000
Sales 1,950,000
[Sale of goods]
670
NASIR ABBAS FCA
01-03-20 Cash (W-1) 230,000

[Gain settlement on future close out]
W-1
31-12-19 Rs.
Sell 215
Buy 198
Gain 17
Total gain [17 x 10,000] 170,000
01-03-20 Rs.
Sell 215
Buy 192
Gain 23
Total gain [23 x 10,000] 230,000
Total gain previously recognized 170,000
60,000
Solution No. 3
(a) The futures contract is a derivative and is measured at fair value with all movements being accounted for through
profit or loss. The fair value of the futures contract at October 1, 2019 was nil. By the year end, it had risen to Rs. 8
million [i.e. (159 – 155) x $2m]. Therefore, at December 31, 2019, B limited will record this gain as:
Dr. Financial asset Rs. 8 million

Cr. P&L Rs. 8 million
(b) If the relationship had been designated as a fair value hedge then the movement in the fair value of the hedging
instrument (the future) and the fair value of the hedged item (the firm commitment) since inception of the hedge are
accounted for through profit or loss. The derivative has increased in fair value from nil at October 1, 2019 to Rs. 8
million at December 31, 2019. Purchasing $ 2 million at December 31, 2019 would cost B limited Rs. 9 million [i.e.
(154.50 – 150) x $ 2m] more than it would have done at October 31, 2019. Therefore, the fair value of the firm
commitment has fallen by Rs. 9 million. In summary, the double entries are as follows:
Dr. Financial asset (i.e. future) Rs. 8 million

Cr. P&L Rs. 8 million
Dr. P&L Rs. 9 million

Cr. Firm commitment (liability) Rs. 9 million
Solution No. 4
Dr. Cr.
------------ Rs. million --------
01-10-19 No entry
31-12-19 Financial asset (W-1) 336.00

Cashflow hedge reserve [OCI] (W-1) 280.00
P&L (balancing) 56.00
[Gain on hedging instrument]
671
NASIR ABBAS FCA
31-03-20 P&L (Fuel cost) [30m x 219] 6,570.00

Cash 6,570.00
[Purchase of jet fuel from spot market]
31-03-20 Cashflow hedge reserve 280.00

Cash [(219 - 204) x 28m] 420.00
Financial asset 336.00
[Net settlement of forward and OCI reclassified to P&L]
W-1
31-12-19 Rs. million
Cumulative loss on hedged item [(200 - 190) x 28m] 280.00
Cumulative gain on hedging instrument [(216 - 204) x 28m] 336.00
Cash flow hedge reserve [i.e. lower of above] 280.00
Solution No. 5
Dr. Cr.
------------ Rs. million --------
01-10-19 No entry

[Gain on hedging instrument at year-end]

[Gain on hedging instrument on settlement date]
30-09-20 Machine [£8m x 222] 1,776.00

Financial asset (W-2) 176.00
Cash [£8m x 200] 1,600.00
[Purchase of machine and payment through forward]
30-09-20 Cashflow hedge reserve [OCI] (W-2) 176.00

Machine 176.00
[Transfer of cash flow hedge reserve to cost of Machine]
31-12-20 Depreciation [(1,776 - 176) ÷ 10 x 3/12] 40.00

672
NASIR ABBAS FCA
W-1
Cumulative loss on hedged item [(190 - 180) x £8m] 80.00
Cumulative gain on hedging instrument [(214 - 200) x £8m] 112.00
W-2
Cumulative loss on hedged item [(222 - 180) x £8m] 256.00
Cumulative gain on hedging instrument [(222 - 200) x £8m] 176.00
Additional gain on hedging instrument [176 - 112] 64.00

Change in cash flow hedge reserve [176 - 80] 96.00
673
NASIR ABBAS FCA
NBP MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES

AS AT JUNE 30, 2020
2020 2019
ASSETS Note ------------- Rupees in '000 -------------
Bank balances 5 22,428,934 19,789,023

Investments 6 6,043,726 797,633
Mark-up accrued 7 17,435 215,717
Deposit and prepayment 8 337 315
Receivable against transfer of units 9 118,817 -
Total assets 28,609,249 20,802,688
LIABILITIES
Payable to NBP Fund Management Limited - Management Company 10 66,177 35,699

Payable to Central Depository Company of Pakistan Limited - Trustee 11 1,724 1,637
Payable to the Securities and Exchange Commission of Pakistan 12 5,730 18,052
Payable against redemption of units 13 82,968 45
Accrued expenses and other liabilities 14 216,488 148,293
Total liabilities 373,087 203,726
NET ASSETS 28,236,162 20,598,962
UNIT HOLDERS' FUND (as per statement attached) 28,236,162 20,598,962
Contingencies and commitments 15
------------ Number of units -----------
Number of units in issue 16 2,857,199,837 2,087,303,211
------------------ Rupees ------------------
Net asset value per unit 9.8825 9.8687
The annexed notes from 1 to 32 form an integral part of these financial statements.
For NBP Fund Management Limited

(Management Company)
Chief Financial Officer Chief Executive Officer Director
20 674
INCOME STATEMENT
FOR THE YEAR ENDED JUNE 30, 2020
2020 2019
INCOME Note ---------------- Rupees in '000 ----------------
Return / mark-up on:

- bank balances 2,316,399 1,451,663
- government securities 1,173,494 759,722
- letter of placements 38,949 113,445
- commercial papers 163,560 30,871
- sukuk 16,006 13,527
Net gain / (loss) on sale of investments 106,234 (27,512)
Net unrealized gain on re-measurement of investments 11,389 -
classified as "financial assets at fair value through profit or loss"
Total income 3,826,031 2,341,716
EXPENSES
Remuneration of NBP Fund Management Limited - Management Company 10.1 79,256 184,316
Sindh Sales Tax on remuneration of the Management Company 10.2 10,303 23,961
Reimbursement of operational expenses to the Management Company 10.3 28,650 24,070
Selling and marketing expenses 10.4 187,692 -
Remuneration of Central Depository Company of Pakistan Limited - Trustee 11.1 18,622 16,692
Sindh Sales Tax on remuneration of the Trustee 11.2 2,421 2,170
Annual fee to the Securities and Exchange Commission of Pakistan 12 5,730 18,052
Settlement charges 927 214
Bank charges 1,176 1,055
Auditors' remuneration 17 753 729
Legal and professional charges 126 78
Fund rating fee 452 420
Annual listing fee 28 28
Printing charges 197 6
Total expenses 336,333 271,791
Net income from operating activities 3,489,698 2,069,925
Provision for Sindh Workers' Welfare Fund 18 (69,794) (41,399)

Net income for the year before taxation 3,419,904 2,028,526
Taxation 19 - -
Net income for the year after taxation 3,419,904 2,028,526
Earnings per unit 20
Allocation of net income for the year:

Income already paid on units redeemed (509,864) (487,900)
2,910,040 1,540,626
Accounting income available for distribution:
Relating to capital gain 34,766 -
Excluding capital gain 2,875,274 1,540,626
2,910,040 1,540,626

Chief Financial Officer Chief Executive Officer irector

D
21
675

2020 2019
---------------- Rupees in '000 ----------------
Other comprehensive income - -
Total comprehensive income for the year 3,419,904 2,028,526

22 676
STATEMENT OF MOVEMENT IN UNITHOLDERS' FUND

2020 2019
---------------------------------------------------- (Rupees in '000) ----------------------------------------------------
Capital Undistributed Capital Undistributed
value income Total value income Total
Net assets at beginning of the year 20,465,978 132,984 20,598,962 22,493,568 698,826 23,192,394
Issuance of 9,591,078,275 units (2019: 6,395,628,543 units)

- Capital value 94,653,595 - 94,653,595 63,009,093 - 63,009,093
- Element of income 573,445 - 573,445 511,482 - 511,482
Total proceeds on issuance of units 95,227,040 - 95,227,040 63,520,575 - 63,520,575
Redemption of 8,821,181,649 units (2019: 6,537,295,519 units)

- Capital value (87,053,595) - (87,053,595) (64,404,782) - (64,404,782)
- Element of loss (63,482) (509,864) (573,346) (74,118) (487,900) (562,018)
Total payments on redemption of units (87,117,077) (509,864) (87,626,941) (64,478,900) (487,900) (64,966,800)
Total comprehensive income for the year - 3,419,904 3,419,904 - 2,028,526 2,028,526
Final distribution at the rate of Re. 0.5531 per unit declared

on July 04, 2018 as cash dividend - - - (632,525) (600,319) (1,232,844)
Interim distributions made during the year (note 31) (510,049) (2,872,754) (3,382,803) (436,740) (1,506,149) (1,942,889)
Net assets at end of the year 28,065,892 170,270 28,236,162 20,465,978 132,984 20,598,962
Undistributed income brought forward
- Realised 132,984 698,826

- Unrealised - -
132,984 698,826
Accounting income available for distribution
- Relating to capital gain 34,766 -

- Excluding capital gain 2,875,274 1,540,626
2,910,040 1,540,626
Final distribution - (600,319)

Interim Distribution during the year (2,872,754) (1,506,149)
(2,872,754) (2,106,468)
Undistributed income carried forward 170,270 132,984
Undistributed income carried forward
- Realised 158,881 132,984

- Unrealised 11,389 -
170,270 132,984
- (Rupees) - - (Rupees) -
Net assets value per unit at beginning of the year 9.8687 10.4050
Net assets value per unit at end of the year 9.8825 9.8687

23 677
B570
IAS 1 IG
XYZ Group – Statement of changes in equity for the year ended 31 December 20X7
(in thousands of currency units)
Share capital Retained earnings Translation of Investments in Cash flow hedges Revaluation surplus Total Non-controlling Total equity
foreign operations equity instruments interests
Balance at 1 January
20X6 600,000 118,100 (4,000) 1,600 2,000 – 717,700 29,800 747,500
Changes in accounting
policy – 400 – – – – 400 100 500
Restated balance 600,000 118,500 (4,000) 1,600 2,000 – 718,100 29,900 748,000
© IFRS Foundation
Changes in equity for

20X6
Dividends – (10,000) – – – – (10,000) – (10,000)
Total comprehensive
income for the year(a) – 53,200 6,400 16,000 (2,400) 1,600 74,800 18,700 93,500
Balance at 31
December 20X6 600,000 161,700 2,400 17,600 (400) 1,600 782,900 48,600 831,500
continued...
678
...continued
XYZ Group – Statement of changes in equity for the year ended 31 December 20X7
Changes in equity for
20X7
Issue of share capital 50,000 – – – – – 50,000 – 50,000

Dividends – (15,000) – – – – (15,000) – (15,000)
Total comprehensive
income for the year(b) – 96,600 3,200 (14,400) (400) 800 85,800 21,450 107,250
Transfer to retained
© IFRS Foundation
earnings – 200 – – – (200) – – –
Balance at 31
December 20X7 650,000 243,500 5,600 3,200 (800) 2,200 903,700 70,050 973,750
(a) The amount included in retained earnings for 20X6 of 53,200 represents profit attributable to owners of the parent of 52,400 plus remeasurements of defined benefit
pension plans of 800 (1,333, less tax 333, less non-controlling interests 200).
The amount included in the translation, investments in equity instruments and cash flow hedge reserves represent other comprehensive income for each component, net
of tax and non-controlling interests, eg other comprehensive income related to investments in equity instruments for 20X6 of 16,000 is 26,667, less tax 6,667, less
non-controlling interests 4,000.
The amount included in the revaluation surplus of 1,600 represents the share of other comprehensive income of associates of (700) plus gains on property revaluation of
2,300 (3,367, less tax 667, less non-controlling interests 400). Other comprehensive income of associates relates solely to gains or losses on property revaluation.
(b) The amount included in retained earnings for 20X7 of 96,600 represents profit attributable to owners of the parent of 97,000 plus remeasurements of defined benefit
pension plans of 400 (667, less tax 167, less non-controlling interests 100).
The amount included in the translation, investments in equity instruments and cash flow hedge reserves represents other comprehensive income for each component, net
of tax and non-controlling interests, eg other comprehensive income related to the translation of foreign operations for 20X7 of 3,200 is 5,334, less tax 1,334, less
non-controlling interests 800.
The amount included in the revaluation surplus of 800 represents the share of other comprehensive income of associates of 400 plus gains on property revaluation of 400
(933, less tax 333, less non-controlling interests 200). Other comprehensive income of associates relates solely to gains or losses on property revaluation.
IAS 1 IG
B571
679
IAS 1 IG
...continued
XYZ Group – Statement of financial position as at 31 December 20X7

31 Dec 20X7 31 Dec 20X6
Current liabilities
Trade and other payables 115,100 187,620
Short-term borrowings 150,000 200,000
Current portion of long-term borrowings 10,000 20,000
Current tax payable 35,000 42,000
Short-term provisions 5,000 4,800
Total current liabilities 315,100 454,420
Total liabilities 492,750 692,700
Total equity and liabilities 1,466,500 1,524,200
Examples of statement of profit or loss and other comprehensive income when

IAS 39 Financial Instruments: Recognition and Measurement is applied
XYZ Group – Statement of profit or loss and other comprehensive income for the
year ended 31 December 20X7
(illustrating the presentation of profit or loss and other comprehensive income in
one statement and the classification of expenses within profit or loss by function)
20X7 20X6
Revenue 390,000 355,000
Cost of sales (245,000) (230,000)
Gross profit 145,000 125,000

Distribution costs (9,000) (8,700)
Administrative expenses (20,000) (21,000)
Other expenses (2,100) (1,200)
Finance costs (8,000) (7,500)
Share of profit of associates(a) 35,100 30,100

Income tax expense (40,417) (32,000)
Profit for the year from continuing operations 121,250 96,000

Loss for the year from discontinued operations – (30,500)
PROFIT FOR THE YEAR 121,250 65,500

continued...
680
IAS 1 IG
...continued
Examples of statement of profit or loss and other comprehensive income when

IAS 39 Financial Instruments: Recognition and Measurement is applied
XYZ Group – Statement of profit or loss and other comprehensive income for the
year ended 31 December 20X7
(illustrating the presentation of profit or loss and other comprehensive income in
one statement and the classification of expenses within profit or loss by function)
20X7 20X6
Items that will not be reclassified to profit or loss [Refer:
paragraph 82A(a)(i)]:
Gains on property revaluation 933 3,367
Remeasurements of defined benefit pension plans (667) 1,333
Share of other comprehensive income of associates(b) 400 (700)
Income tax relating to items that will not be reclassified (c) (166) (1,000)
500 3,000
Items that may be reclassified subsequently to profit or
loss [Refer: paragraph 82A(a)(ii)]:
Exchange differences on translating foreign operations(d) 5,334 10,667
Available-for-sale financial assets(d) (24,000) 26,667
Cash flow hedges (d) (667) (4,000)
Income tax relating to items that may be reclassified (c) 4,833 (8,334)
(14,500) 25,000
Other comprehensive income for the year, net of tax (14,000) 28,000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 107,250 93,500

Owners of the parent 97,000 52,400
Non-controlling interests 24,250 13,100
121,250 65,500

Owners of the parent 85,800 74,800
Non-controlling interests 21,450 18,700
107,250 93,500
Earnings per share (in currency units):

Basic and diluted 0.46 0.30
continued...
681
(Rupees ‘000)
Aggregate
31 December 31 December
2019 2018
25. NET INSURANCE PREMIUM / CONTRIBUTION REVENUE
Gross premium / contribution

Regular premium / contribution individual policies
First year 6 999 756 6 845 943
Second year renewal 5 084 034 4 267 430
Subsequent year renewal 15 369 434 14 067 312
Single premium / contribution individual policies 950 813 2 588 947

Group policies with cash values 54 046 61 538
Group policies without cash values 3 530 594 3 125 315
Less: Experience refund ( 238 593 ) ( 166 078 )
Total gross premium / contribution 31 750 084 30 790 407
Less: Reinsurance premium / retakaful

contribution ceded
On individual life first year business 27 073 50 966
On individual life second year business 27 024 39 947
On individual life renewal business 154 994 199 403
On group policies 500 631 469 073
Less: Experince refund from reinsurers ( 90 651 ) ( 113 106 )
Less: Reinsurance commission on risk premium ( 10 621 ) ( 20 144 )
Total reinsurance premium / retakaful
contribution ceded 608 450 626 139
Net premium / contribution 31 141 634 30 164 268
26. INVESTMENT INCOME 2019 2018
Income from equity securities
Fair Value through Profit and Loss

(designated upon initial recognition)
Dividend income 895 686 1 460 907
Available for sale
Dividend income 20 396 22 848
Income from debt securities
Fair Value through Profit and Loss
(designated upon initial recognition)
Return on debt securities 1 915 258 524 761
On government securities 6 237 695 3 888 358
Held to Maturity
On government securities 485 416 320 128
Income from term deposits
Return on term deposits 2 034 673 725 389
11 589 124 6 942 391
682
143
(Rupees ‘000)
Aggregate
2019 2018
27. NET REALISED FAIR VALUE GAINS (LOSSES) ON FINANCIAL ASSETS
Available for sale
Realised gains on:
– Equity securities 29 565 2 235 330
Realised losses on:
– Equity securities ( 7 835 917 ) ( 5 971 322 )
– Government securities ( 1 573 ) ( 3 402 )
( 7 807 925 ) ( 3 739 394 )
28. NET FAIR VALUE GAINS (LOSSES) ON FINANCIAL
ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
Net unrealised losses on investments in financial assets - Government securities
and Debt Securities (fair value through profit and loss designated upon initial recognition) 511 196 ( 1 174 039 )
Net unrealised gains on investments at fair value
through profit or loss (designated upon initial recognition)- Equity Securities 2 531 842 ( 1 889 638 )
Total investment income 3 043 038 ( 3 063 677 )
Exchange Gain 23 606 26 908
Provision / (Reversal) of Impairment in value of available for sale securities 13 350 ( 14 427 )
Less: Investment related expenses ( 5 427 ) ( 7 101 )
3 074 567 ( 3 058 297 )
29. OTHER INCOME
Gain on sale of fixed assets 33 569 39 990
Return on loans to employees 21 032 14 137
Fees charged to Policyholders 9 924 9 150
64 525 63 277
30. NET INSURANCE BENEFITS 31 December 31 December

Gross claims 2019 2018
Claims under individual policies

by death 930 204 602 244
by insured event other than death 21 269 4 360
by maturity 1 225 700 1 289 748
by surrender 11 712 081 9 577 998
Total gross individual policy claims 13 889 254 11 474 350
Claims under group policies
by death 2 116 325 1 997 744
by insured event other than death 72 227 102 957
by maturity 399 114
by surrender 37 236 14 601
Total gross group claims 2 226 187 2 115 416
Total gross claims 16 115 441 13 589 766
Less: Reinsurance / retakaful recoveries
On individual life claims 148 050 106 753
On group life claims 298 340 397 298
Total reinsurance / retakaful recoveries 446 390 504 051
Add: Claims related expenses 8 382 8 736
Net insurance benefit expense 15 677 433 13 094 451
683
144
30.1 Statement of Age wise Break up of Unclaimed Insurance Benefits
As on 31 December 2019
This represents outstanding claims in respect of which cheques have been issued by the Company for claim settlement.
However, the same have not been encashed by the claimant. Following is the aging as required by the SECP Circular
no.11 of 2014 dated 19 May 2014:
(Rupees ‘000)
Total 1 to 6 7 to 12 13 to 24 25 to 35 Beyond 36
Particulars Amount months months months months months
Unclaimed Maturity Benefits 235 415 137 558 55 381 33 413 5 716 3 347
Unclaimed Death Benefits – – – – – –
Unclaimed Disability Benefits – – – – – –
Claims not encashed 10 211 7 956 – 2 255 – –
Other Unclaimed benefits – – – – – –
Total 245 626 145 514 55 381 35 668 5 716 3 347
(Rupees ‘000)
Aggregate
2019 2018
31. ACQUISITION EXPENSES
Remuneration to insurance intermediaries on individual policies:

- Commission to agent on first year premiums / contributions 2 773 833 2 847 314
- Commission to agent on second year premiums / contributions 520 408 451 418
- Commission to agent on subsequent renewal premiums / contributions 426 603 386 606
- Commission to agent on single premiums / contributions 26 025 76 816
- Override commission to supervisors 599 520 546 778
Other benefits to insurance intermediaries
- Salaries, allowances and other benefits 1 521 678 1 335 376
Remuneration to insurance intermediaries on group policies:
- Commission 404 258 385 240
- Other benefits to insurance intermediaries 86 710 73 452
- Traveling expenses (including cost of contests conventions etc.) 141 903 45 382
- Printing and stationery 26 820 17 267
- Depreciation 305 134 94 130
- Rent rates and taxes 6 311 111 322
- Electricity gas and water 51 075 35 035
- Entertainment 45 200 30 317
- Vehicle running expenses 20 764 12 310
- Office repairs & maintenance 19 784 22 441
- Postages telegrams and telephone 51 773 39 601
- Medical fees 20 500 22 967
- Finance Cost 42 888 –
- Others 127 537 128 233
Other acquisition costs - policy stamps 104 262 88 974
7 322 986 6 750 979
684
145
(Rupees ‘000)
Aggregate
Note 2019 2018
32. MARKETING AND ADMINISTRATION EXPENSES
Employee benefit cost 32.1 758 156 634 886

Traveling expenses 38 114 86 715
Advertisements and sales promotion 116 255 189 438
Printing and stationery 59 683 47 491
Depreciation 153 690 126 176
Amortisation 12 871 14 285
Rent rates and taxes 22 743 15 987
Legal and Professional charges - business related 104 726 82 971
Electricity gas and water 36 629 31 627
Entertainment 50 258 33 080
Vehicle running expenses 5 871 7 157
Office repair and maintenance 85 719 62 784
Appointed actuary fees 13 009 11 399
Bank charges 17 158 13 339
Postage internet and telephone 87 937 76 079
Fees and subscription 33 462 25 541
Annual supervision fee SECP 50 000 50 000
Miscellaneous 115 046 93 861
1 761 327 1 602 816
32.1 Employee Benefit Cost
Salaries allowances and other benefits 712 587 628 697
Charges for post employment benefit 45 569 6 189
758 156 634 886
33. OTHER EXPENSES
Printing and Stationery 1 264 758

Advertisements and publicity 4 088 1 259
Travelling 666 890
Auditor's remuneration 33.1 8 940 7 755
Directors' fee 1 900 2 700
Donation 33.2 9 024 6 865
Fees and Subscription 600 –
26 482 20 227
33.1 Auditor's remuneration

Annual Audit Fee 1 800 1 650
Half yearly review 250 250
Review of code of corporate governance 275 250
Other certifications 5 756 4 755
Out-of-pocket expenses 859 850
8 940 7 755
685
146
(Rupees ‘000)
2019 2018
33.2 Donations
Donations include the following in whom the directors are interested:
Name of Directors Interest in donee Name and Address of donee
Saifuddin N.Zomkawala Board Member Sindh Institute of Urology and

Transplantation, Civil Hospital Karachi 1 939 1 114
Syed Salman Rashid Spouse (Trustee) Anjuman Kashana -E- Atfal-O-Naunihal 50 50
Rafique R. Bhimjee Spouse (Trustee) The Garage School – 500
33.3 Donations to a single party exceeding Rs.500,000
The Citizen Foundation 573 –
Family Educational Services Foundation 997 570
Dar Ul Sukun 841 848
Afzaal Memorial Thalassemia Foundation 1 000 1 000
Layton Rahmatullah Benevolent Trust 1 579 1 080
33.4 In 2017, The Honourable Supreme Court of Pakistan (SCP) passed a judgement declaring the insertion of amendments
introduced in the Finance Act pertaining to Workers Welfare Fund Ordinance 1971, as unlawful and thereby striking
down such amendments. Pursuant to the SCP judgement, the Company filed a rectification application for assessment
year 2008 – 2015 to the tax department. In 2019 the assessment orders were rectified. Based on the revised assessment
orders, the Company reversed the expenses previously charged on account of WWF, amounting to Rs. 127 million.
2019 2018
(Restated)
34. TAXATION
For the year
Current 668 367 656 848
Deferred 71 909 ( 51 366 )
For the prior years

Current 64 633 131 152
804 909 736 634
34.1 Relationship between tax expenses and accounting profit 31 December 31 December
2019 2018
(Restated)
Effective tax rate %
Tax at applicable rate 29% (2018: 29%) 29.00 29.00
Tax effect of income subject to lower tax rates – –
Prior year adjustment 2.75 5.74
Others 2.44 ( 2.47 )
Tax charge for the year 34.19 32.27
686
147
(Rupees ‘000)
2019 2018
(Restated)
35. EARNINGS PER SHARE
Profit (after tax) for the year 1 549 264 1 546 303
(Number in ‘000)
Weighted average number of ordinary shares 100 000 100 000

(Rupees)
Earnings per share – basic and diluted 15.49 15.46
36. REMUNERATION OF DIRECTORS, CHIEF EXECUTIVE AND EXECUTIVES

31 December 2019 31 December 2018
Chief Chief
Executive Directors Executives Executive Directors Executives
Fees – 1 900 – – 2 700 –

Managerial remuneration 28 794 – 445 376 26 693 – 403 075
Bonus 7 171 – 37 279 8 722 – 38 782
Retirement benefits 4 726 – 27 475 4 382 – 23 555
Utilities 779 – 987 824 – 1 837
Medical expenses 336 – 7 545 872 – 5 762
Leave passage 554 – 1 098 585 – 115
42 360 1 900 519 760 42 078 2 700 473 126
Number of persons 1 6 62 1 6 62
The Chief Executive is provided with Company maintained cars, furnished accommodation and medical insurance cover.
The Executives are provided with Company maintained cars, Medical insurance cover and in certain cases, household
items and furniture in accordance with their terms of employment. The chairman is provided with free use of Company
car, medical insurance cover and residential utilities.
36.1 The Non Executive Directors were paid directors meeting fee of Rs. 1.9 million (2018: Rs. 2.7 million). No other remuneration
were paid to Non Executive Directors.
687
148
Statement of Financial Position
As At 31 December 2019
(Rupees ‘000)
Note 2019 2018
(Restated)
Assets
Properties and equipments 6 2 883 687 2 431 627
Intangible assets 7 24 733 27 038
Investments
Equity securities 8 10 472 542 33 542 712
Government securities 9 76 203 542 52 972 866
Debt securities 10 9 319 491 4 078 872
Term deposits 11 19 659 000 15 049 100
Open-ended mutual funds 12 410 714 177 087
Insurance / reinsurance receivables 13 253 999 169 600
Other loans and receivables 14 3 235 945 3 110 438
Taxation - payments less provision 1 061 222 337 727
Prepayments 16 51 216 81 182
Cash & Bank 17 5 713 548 4 786 362
Total Assets 129 289 639 116 764 611
Equity and Liabilities
Capital and reserves attributable to Company's equity holders
Authorised share capital
[150 000 000 ordinary shares (2018: 150 000 000) of Rs.10 each] 1 500 000 1 500 000
Ordinary share capital:100 000 000(2018:100 000 000) ordinary shares of Rs.10 each 18 1 000 000 1 000 000
Retained earnings arising from business other than participating business
attributable to shareholders (Ledger account D) 18.3 1 730 534 1 679 256
Reserves 19 2 000 000 2 150 000
Surplus on revaluation of available for sale investment - net of tax 50 986 75 713
Unappropriated profit 1 126 420 1 053 434
Total Equity 5 907 940 5 958 403
Liabilities
Insurance Liabilities 20 119 153 655 107 695 796
Deferred taxation 15 743 179 681 367
Premium received in advance 969 354 714 419
Insurance / reinsurance payables 21 258 031 193 218
Other creditors and accruals 22 2 257 480 1 521 408
4 228 044 3 110 412
Total Liabilities 123 381 699 110 806 208
Total Equity and Liabilities 129 289 639 116 764 611
Contingency(ies) and commitment(s) 24
The annexed notes 1 to 48 form an integral part of these financial statements.
TAHER G. SACHAK SYED SHAHID ABBAS HASANALI ABDULLAH MUNEER R. BHIMJEE RAFIQUE R. BHIMJEE
Managing Director & Chief Financial Director Director Chairman
Chief Executive Officer
Karachi February 07, 2020
688
113
Statement of Profit and Loss Account
For The Year Ended 31 December 2019
(Rupees ‘000)
Note 2019 2018
(Restated)
Premium / Contribution Revenue 31 750 084 30 790 407

Premium / Retakaful ceded to reinsurers ( 608 450 ) ( 626 139 )
Net premium revenue 25 31 141 634 30 164 268
Investment income 26 11 589 124 6 942 391

Net realised fair value losses on financial assets 27 ( 7 807 925 ) ( 3 739 394 )
Net fair value gains / (losses) on financial assets at fair value through profit or loss 28 3 074 567 ( 3 058 297 )
Other income 29 64 525 63 277
6 920 291 207 977
Net income 38 061 925 30 372 245
Insurance benefits 16 115 441 13 589 766

Recoveries from reinsurers ( 446 390 ) ( 504 051 )
Claims related expenses 8 382 8 736
Net Insurance Benefits 30 15 677 433 13 094 451
Net Change in Insurance Liabilities (other than outstanding claims) 11 046 950 6 620 835
Acquisition expenses 31 7 322 986 6 750 979
Marketing and administration expenses 32 1 761 327 1 602 816
Other expenses 33 26 482 20 227
Reversal of WWF ( 127 426 ) –
Total Expenses 20 030 319 14 994 857
Profit before tax (Refer note below) 2 354 173 2 282 937
Income tax expense 34 ( 804 909 ) ( 736 634 )
Profit for the year 1 549 264 1 546 303
Earnings per share - Rupees 35 15.49 15.46
Note:
Profit before tax is inclusive of the amount of the profit before tax of the Shareholders' Fund the Surplus Transfer from the Revenue Account of the
Statutory Funds to the Shareholders' Fund based on the advice of the Appointed Actuary and the undistributed surplus in the Revenue Account of
the Statutory Funds which also includes the solvency margins maintained in accordance with the Insurance Rules 2017. For details of the Surplus
Transfer from the Revenue Account of the Statutory Funds to the Shareholders' Fund aggregating to Rs. 1 961 million (2018: Rs.1 992 million) please
refer to note 38 relating to segmental information - Revenue Account by Statutory Fund.
689
114
Statement of Comprehensive Income
For The Year Ended 31 December 2019
(Rupees ‘000)
2019 2018
(Restated)
Profit for the year - as per Profit and Loss Account 1 549 264 1 546 303
Other Comprehensive Income:
Items that may be reclassified to profit and loss in subsequent periods:
Change in unrealised gains / (losses) on available-for-sale financial assets ( 48 054 ) ( 30 767 )

Reclassification adjustment relating to available-for-sale investments sold during the year 13 227 7 657
( 34 827 ) ( 23 110 )
Related deferred tax 10 100 6 702
Other comprehensive income for the year- net of tax ( 24 727 ) ( 16 408 )
Total comprehensive income for the year 1 524 537 1 529 895
690
115
ANNUAL REPORT
The Income Tax Department (Audit) has made an assessment order for assessment year 2002-2003 by adding certain Rupees ‘000
items. The Company had filed an appeal before Commissioner Income Tax (Appeals). The appeal was decided in the
favour of the Company. The Department had filed an appeal before the Income Tax Appellate Tribunal (ITAT) and 2019 2018
the same has been decided in the favour of the Company. The Department has filed appeal before Honourable High
Court of Sindh against the order of the Income Tax Appellate Tribunal (ITAT) in respect of estimated liability of claims,
excess perquisites and retrocession commission. If the appeal is decided against the Company a tax liability of Rs. 76 25. Net Insurance claim expense
million would arise.
Claims Paid 4 897 302 4 956 502
The Commissioner Inland Revenue (Audit) has amended the tax assessment of the Company for tax year 2005 to
2007 by disallowing prorated expense. The Company has filed appeals before Commissioner Income Tax (Appeals). Outstanding claims including IBNR - closing 6 273 372 5 176 757
The appeals were decided in the favour of the Company. The Department then filed appeals before the Income Tax Outstanding claims including IBNR - opening ( 5 176 757 ) ( 5 572 347 )
Appellate Tribunal (ITAT). The Income Tax Appellate Tribunal (ITAT) had passed an order in favour of the Company.
Claims expense 5 993 917 4 560 912
The Department then filed reference before the Honourable High Court of Sindh. The Honourable High Court of
Sindh maintained the decision of Income Tax Appellate Tribunal (ITAT). The Department has filed appeals for the tax
year 2005 to 2007 before the Honourable Supreme Court of Pakistan against the decision of the Honourable High
Less:
Court of Sindh in respect of proration of expenses and if the appeals are decided against the Company, a tax liability
of Rs. 37 million would arise. Reinsurance and other recoveries received 1 726 602 1 647 175
The Department has filed an appeal for tax year 2008 before the Honourable High Court of Sindh against the order Reinsurance and other recoveries in respect of
of Income Tax Appellate Tribunal (ITAT) in respect of tax on reinsurance premium. If the appeal is decided against outstanding claims - opening ( 3 363 439 ) ( 3 538 572 )
the Company, a tax liability of Rs. 5 million would arise. Reinsurance and other recoveries in respect of
The Department has filed an appeal for tax years 2014 to 2016 before the Income Tax Appellate Tribunal (ITAT) outstanding claims - closing 4 081 849 3 363 439
against the order of Commissioner (Appeal) in respect of Dividend Income taxed at reduced rate. If the appeal is 1 472 042
decided against the Company, a tax liability of Rs. 355 million would arise. Reinsurance and other recoveries revenue 2 445 012
Net Insurance claim expense 3 548 905 3 088 870
The Commissioner Inland Revenue (Audit) has made an addition to the income of Tax years 2017 and 2019 on account
of fair market value of motor vehicles. The Company has filed appeals before Commissioner Income Tax (Appeals).
The Commissioner Income Tax (Appeals) has confirmed the action of the Commissioner, Inland Revenue (Audit). The
Company then filed appeals before the Income Tax Appellate Tribunal (ITAT). If the appeal is decided against the 25.1 Claim development
Company, a tax liability of Rs. 2 million would arise.
The Company maintains adequate reserves in respect of its insurance business in order to protect against adverse
No provision has been made in these unconsolidated financial statements for the above contingencies, as the
future claims experience and developments. The uncertainties about the amount and timing of claim payments are
management, based on tax advisor's opinion, is confident that the decision in this respect will be received in favour
of the Company. normally resolved within one year.
23.2 In 2014, 2015, 2016, 2017 and 2018, the Searle Company Limited issued bonus shares (453,612, 312,993, 664,632, Claims which involve litigation and in the case of marine, general average adjustments take longer for the final
472,284 and 443,697 shares respectively) after withholding 5 percent of bonus shares (22,680, 15,650, 34,981, amounts to be determined which exceed one year. All amounts are presented in gross numbers before reinsurance.
24,857 and 21,360 shares respectively). In this regard, a constitutional petition had been filed by the Company in Claims of last five years are given below:
Honourable High Court of Sindh challenging the applicability of withholding tax provision on bonus shares received
by the Company. The Honourable High Court of Sindh decided the case against the Company. Subsequently, the
Rupees ‘000
Company filed an appeal with a larger bench of the Honourable High Court of Sindh and in response; the Sindh High
Court has suspended the earlier judgement until the next date of hearing, which has not yet been decided. Consequently,
the Company has not paid / provided an amount of Rs. 37 million being withholding tax on bonus shares. Accident year 2015 2016 2017 2018 2019
23.3 There are no commitments as at 31 December 2019 (31 December 2018: Nil).
Estimate of ultimate claims costs:
Rupees ‘000
– At end of accident year 62 928 60 052 90 497 – 4 509
2019 2018 – One year later 59 103 66 533 71 354 – –
– Two years later 44 729 66 533 81 233 – –
24. Net Insurance premium – Three years later 45 179 67 746 – – –
Written gross premium 19 774 236 18 780 177 – Four years later 54 443 – – – –
Unearned premium reserve - opening 8 354 109 8 496 686
Current estimate of cumulative claims 54 443 67 746 81 2
3 – 4 509
Unearned premium reserve - closing ( 9 143 972 ) ( 8 354 109 )
Premium earned 18 984 373 18 922 754 Cumulative payments to date 23 529 3 619 53 500 – 760
Less: Liability recognized in statement of
Reinsurance premium ceded 12 201 530 11 321 603 financial position 30 914 64 127 27 733 – 3 749
Prepaid reinsurance premium - opening 5 073 281 5 112 083
Prepaid reinsurance premium - closing ( 5 750 008 ) ( 5 073 281 )
Reinsurance expense 11 524 803 11 360 405
Net insurance premium 7 459 570 7 562 349
152 EFU GENERAL INSURANCE LTD. EFU GENERAL INSURANCE LTD.

691153
ANNUAL REPORT
Rupees ‘000 Rupees ‘000

Note 2019 2018
Note 2019 2018
26. Net commission expense
Commission paid or payable 1 420 727 1 428 082 28. Investment income
Deferred commission expense - opening 600 740 689 587
Income from subsidiary - available-for-sale
Deferred commission expense - closing ( 598 669 ) ( 600 740 )
Dividend income 684 717 650 881
Net commission 1 422 798 1 516 929
Income from equity securities - available-for-sale
Less: Dividend income 165 643 261 020
Commission received or recoverable 902 581 862 511
Income from debt securities - available-for-sale
Unearned reinsurance commission - opening 394 848 461 616
Return on debt securities 961 973 566 051
Unearned reinsurance commission - closing ( 430 936 ) ( 394 848 )
Income from term deposits
Commission from reinsurers 866 493 929 279
Return on term deposits 18 517 12 354
Net commission expense 556 305 587 650 1 490 306
1 830 850
Net realized gains / (losses) on investments
27. Management expenses
available-for-sale financial assets
Salaries, wages and benefits 27.1 1 628 589 1 534 876 Realized gains on:
Bonus 117 511 115 327
Equity securities 606 407 177 993
Gratuity 22 525 16 737
Rent, rates and taxes 5 784 43 602 Realized losses on:
Telephone 21 134 19 536 Equity securities ( 114 416 ) ( 27 246 )
Postage and telegram 9 249 8 027 491 991 150 747
Gas, electricity and fuel 53 869 51 278 2 322 841 1 641 053
Printing and stationery 38 516 37 863
Impairment in value of available-for-sale equity securities ( 60 013 ) ( 27 510 )
Travelling, club and entertainment 86 464 105 246
Depreciation 338 193 262 972 Investment related expenses ( 600 ) ( 1 207 )
Repair and maintenance 61 712 53 491 Total Investment income 2 262 228 1 612 336
Publicity 42 442 51 617
Service charges ( 50 198 ) ( 52 748 ) 29. Rental income
Bank charges and commission 4 885 5 625
Tracker monitoring 192 041 151 533 Rental income 161 034 152 161
Bad debts 140 533 41 437 Less: Expenses of investment property ( 48 685 ) ( 48 170 )
Inspection fee 14 890 28 019
112 349 103 991
Annual supervision fee of SECP 37 554 32 080
Training 5 946 5 210 30. Other income
Insurance 3 914 3 893 Gain on sale of property and equipment 35 435 33 836
Levy to IAP 2 000 1 500 Return on loans to employees 285 373
Business procurement 13 993 3 657 Exchange gains 45 289
26 507
Security service 9 176 8 104
Return on bank balances 156 746 81 729
Meeting and conference 4 223 8 047
Conveyance 11 452 10 111 218 973 161 227
Miscellaneous 32 848 31 985 31. Other expenses
2 579 025 Legal and professional fee other than business related 13 532 14 825
2 849 245
Auditors’ remuneration 31.1 5 493 4 465
27.1 These include Rs. 27.73 million (2018: Rs. 26.28 million) being contribution for employees' provident fund. Subscription to association 19 064 15 243
Charity and donations 12 824 15 594
50 913 50 127

692155
ANNUAL REPORT
2019 2018
2019 2018
31.1 Auditors’ remuneration
33. Taxation
Audit fee 2 500 2 250
Special certifications and sundry advisory services 2 450 1 836 For current year
Out-of-pocket expenses 543 379 Current 1 017 243 962 829
5 493 4 465 Deferred 139 389 ( 87 005 )
Super tax – 66 636
31.2 Donations 1 156 632 942 460
Donations include the following in whom the directors are interested: For prior year(s)
Rupees ‘000
Prior year tax 62 123 46 339
Super tax – 102 292
Name of Director Interest in donee Name and address of donee 2019 2018 62 123 148 631
1 218 755 1 091 091
Saifuddin N. Zoomkawala Board Member Shaukat Khanum Memorial Trust 1 900 500
7A Block R-3, M.A. Johar Town,
Lahore 33.1 Relationship between tax expense and accounting profit
Saifuddin N. Zoomkawala Board Member SIUT Civil Hospital, New Labour 900 500 Effective tax rate % Rupees ‘000
Colony, Nanakwara, Karachi
2019 2018 2019 2018
Saifuddin N. Zoomkawala Board Member Fakhr-e-Imdad Foundation 300 330
and Ali Raza Siddiqui Mirpurkhas Digri Road,
Profit before taxation 3 827 335 3 262 364
Mirwah Gorchani, Mirpurkhas
Hasanali Abdullah Board Member The Aga Khan Hospital and Tax at the applicable rate 29.00 29.00 1 109 927 946 086
Medical College Foundation, – 715 Tax effects of deductions not allowed 0.62 0.16 23 778 5 341
Stadium Road, Karachi. Tax effects of exempted income 0.60 ( 2.32 ) 22 927 ( 75 604 )
Prior year tax 1.62 1.42 62 123 46 339
32. Window takaful operations - Operator’s Fund Average effective tax rate charged on income 31.84 28.26 1 218 755 922 162
Wakala fee 659 174 497 644 Effect of super tax – 5.18 – 168 929
Management expenses ( 288 932 ) ( 236 364 ) Total average effective tax rate 31.84 33.44 1 218 755 1 091 091
Commission expense ( 229 689 ) ( 171 788 )
Investment income 59 198 22 664
Other income 15 026 6 014 34. Earnings per share - basic and diluted
Other expenses ( 634 ) ( 718 ) 2019 2018
214 143 117 452

Profit (after tax) for the year (Rupees '000) 2 608 580 2 171 273
Weighted average number of ordinary shares (Numbers '000) 200 000 200 000
Earnings per share (Rupees) 13.04 10.86

693157
Note 2019 2018
--------(Rupees in '000)--------
5 CASH AND BALANCES WITH TREASURY BANKS
In hand
Local currency 5.1 15,799,677 11,801,703
Foreign currency 5.2 2,418,292 5,711,022
18,217,969 17,512,725
With State Bank of Pakistan in
Local currency current account 5.3 44,854,841 31,122,141
Foreign currency current account 5.4 5,551,990 4,413,423
Foreign currency deposit account 5.5 14,084,512 10,931,812
64,491,343 46,467,376
With other central banks in
Foreign currency current account 5.6 8,529,825 2,733,265
Foreign currency deposit account 5.6 659,039 744,879
9,188,864 3,478,144
With National Bank of Pakistan in local currency current account 8,469,281 14,931,225
Prize bonds 364,416 18,230
100,731,873 82,407,700
5.1 This includes cash in transit amounting to Rs. 3,465.118 million (2018: Rs. 77.743 million).
5.2 This includes cash in transit amounting to Rs. 219.079 million (2018: Rs. 478.410 million).
5.3 This includes statutory liquidity reserves maintained with the SBP under Section 22 of the Banking Companies Ordinance, 1962.
5.4 As per BSD Circular No. 9 dated December 3, 2007, cash reserve of 5% is required to be maintained with the State Bank of
Pakistan on deposits held under the New Foreign Currency Accounts Scheme (FE-25 deposits).
5.5 Special cash reserve of 15% is required to be maintained with the State Bank of Pakistan on FE-25 deposits as specified in BSD
Circular No. 14 dated June 21, 2008. Profit rates on these deposits are fixed by SBP on a monthly basis. These deposits carry
interest rates ranging from 0.70% to 1.51% per annum (2018: 0.56% to 1.35%).
5.6 These represent deposits with other central banks to meet their minimum cash reserves and capital requirements pertaining to the
overseas operations of the Bank. The deposit accounts carry interest 0.71 % to 3.67% (2018: 0.62% to 1.71%).
Note 2019 2018

--------(Rupees in '000)--------
6 BALANCES WITH OTHER BANKS
In Pakistan in current account 574,335 432,345
Outside Pakistan
In current account 6.1 3,535,371 2,184,134
In deposit account 6.2 600,262 1,258,476
4,135,633 3,442,610
4,709,968 3,874,955
231 l Bank Alfalah

694
6.1 This includes amount held in Automated Investment Plans. The Bank is entitled to earn interest from the correspondent banks at
agreed upon rates when the balance exceeds a specified amount.
6.2 This includes placement of funds generated through foreign currency deposits scheme (FE-25) and non-contractual deposits at
interest rates ranging from 2.00% to 9.75% per annum (2018: 1.00% to 3.00% per annum).
Note 2019 2018

--------(Rupees in '000)--------
7 LENDINGS TO FINANCIAL INSTITUTIONS
Call / clean money lendings 7.1 30,552,042 15,166,288

Repurchase agreement lendings(Reverse Repo) 7.2 & 7.3 24,931,724 37,214,313
Bai Muajjal receivable
with State Bank of Pakistan 7.3 9,018,518 -
with other financial institutions 7.3 6,942,429 9,811,504
15,960,947 9,811,504
71,444,713 62,192,105
Less: expected credit loss - overseas branches (9,818) (19,818)
Lending to Financial Institutions - net of provision 71,434,895 62,172,287
7.1 These represent lendings to financial institutions at markup rates ranging from 2.35% to 12.00% per annum (2018: 0.50% to
9.90% per annum) having maturities upto March 2020 (2018: June 2019).
7.2 These represent short term lending to financial institutions against investment securities. These carry markup rates ranging from
2.04% to 13.37% per annum (2018: 3.00% to 10.45% per annum) with maturities upto January 2020 (2018: January 2019).
7.3 These represent Bai Muajjal agreements entered into with State Bank of Pakistan (SBP) and other commercial banks. The rates of
return range from 9.70% to 13.40% per annum (2018: 9.90% to 10.05% per annum), and these are due to mature by February
2022 (2018: March 2019).
7.4 Particulars of lending - gross
In local currency 62,722,732 55,400,871

In foreign currencies 8,721,981 6,791,234
71,444,713 62,192,105
7.5 Securities held as collateral against lending to financial institutions
2019 2018
Held by Further given Held by Further given

Total Total
Bank as collateral Bank as collateral
---------------------------------------(Rupees in '000)------------------------------------
Market Treasury Bills 15,179,737 - 15,179,737 28,757,067 - 28,757,067

Pakistan Investment Bonds 9,751,987 - 9,751,987 8,457,246 - 8,457,246
Total 24,931,724 - 24,931,724 37,214,313 - 37,214,313
Annual Report 2019 l 232

695
8 INVESTMENTS Note 2019 2018
Cost / Provision for Surplus / Cost / Provision for Surplus /

8.1 Investments by type: Carrying Value Carrying Value
Amortised cost diminution (Deficit) Amortised cost diminution (Deficit)
--------------------------------------------------(Rupees in '000)--------------------------------------------------
Held-for-trading securities
Federal Government Securities
Market Treasury Bills 20,533,478 - (14,058) 20,519,420 45,898,957 - (13,261) 45,885,696
Pakistan Investment Bonds 5,148,051 - (12,795) 5,135,256 1,209,673 - (13,174) 1,196,499
Shares
Ordinary shares / units - Listed 449,778 - 4,858 454,636 155,944 - (22,122) 133,822
Foreign Securities
Overseas Bonds - Sovereign 915,694 - 2,043 917,737 302,699 - 6,151 308,850
27,047,001 - (19,952) 27,027,049 47,567,273 - (42,406) 47,524,867
Available-for-sale securities
Pakistan Investment Bonds 92,232,030 - 3,220,117 95,452,147 26,490,800 - (464,211) 26,026,589
Government of Pakistan Sukuks 4,212,347 - 86,367 4,298,714 15,726,083 - (120,264) 15,605,819
Government of Pakistan Euro Bonds 1,925,652 - 40,577 1,966,229 2,440,076 - (134,045) 2,306,031
Shares
Ordinary shares - Listed 5,605,847 (1,029,285) 2,506,441 7,083,003 7,371,290 (22,383) 712,253 8,061,160
Ordinary shares - Unlisted 1,151,285 (59,661) - 1,091,624 382,055 (59,661) - 322,394
Preference Shares - Listed 108,835 (108,835) - - 108,835 (108,835) - -
Preference Shares - Unlisted 25,000 (25,000) - - 25,000 (25,000) - -
Non Government Debt Securities
Term Finance Certificates 1,753,977 (409,577) (22,887) 1,321,513 1,504,126 (359,706) (12,071) 1,132,349
Sukuks 4,817,886 (96,510) 170,457 4,891,833 4,775,082 (96,510) 323,930 5,002,502
Foreign Securities
Overseas Bonds - Sovereign 10,206,335 - 144,151 10,350,486 1,357,353 - (49,426) 1,307,927
Overseas Bonds - Others 19,409,473 - 330,542 19,740,015 9,147,217 - (223,671) 8,923,546
Redeemable Participating Certificates 2,727,165 - - 2,727,165 2,362,923 - - 2,362,923
216,749,596 (1,728,868) 6,460,988 221,481,716 186,583,991 (672,095) (8,407) 185,903,489
Held-to-maturity securities
Pakistan Investment Bonds 25,968,179 - - 25,968,179 26,280,990 - - 26,280,990
Government of Pakistan Euro Bonds - - - - 243,011 - - 243,011
Other Federal Government Securities 7,216,366 - - 7,216,366 4,122,215 - - 4,122,215
Non Government Debt Securities -
Term Finance Certificates 714,266 (524,266) - 190,000 524,266 (524,266) - -
Sukuks 1,255,831 (120,898) - 1,134,933 2,689,965 (141,399) - 2,548,566
Foreign Securities
Overseas Bonds - Sovereign 13,901,861 - - 13,901,861 8,185,947 - - 8,185,947
Overseas Bonds - Others 771,808 - - 771,808 690,721 - - 690,721
49,828,311 (645,164) - 49,183,147 42,737,115 (665,665) - 42,071,450
Associates 8.1.1 1,177,606 - - 1,177,606 1,816,343 - - 1,816,343
Subsidiaries 8.1.1 300,000 (42,981) - 257,019 430,493 (42,981) - 387,512
General provision and expected

credit loss - Overseas operations - (28,422) - (28,422) - (43,258) - (43,258)
Total Investments 295,102,514 (2,445,435) 6,441,036 299,098,115 279,135,215 (1,423,999) (50,813) 277,660,403
233 l Bank Alfalah

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2019 2018
8.1.1 Particulars of Assets and Liabilities of Subsidiaries and Associates --------(Rupees in '000)--------
SUBSIDIARIES
Alfalah CLSA Securities (Private) Limited (formerly: Alfalah Securities (Private) Limited)
Percentage of holding: 61.20% (2018: 97.91%)

Country of incorporation: Pakistan
Audited financial statements as of December 31, 2019

Assets 789,032 564,793
Liabilities 551,172 430,395
Revenue 134,366 130,807
Loss for the year (39,983) (75,556)
Total comprehensive loss (29,037) (97,279)
ASSOCIATES
Alfalah GHP Investment Management Limited *
Percentage of holding: 40.22% (2018: 40.22%)


Assets 1,246,271 1,063,569
Liabilities 250,200 206,309
Revenue 469,739 469,820
Profit for the year 138,812 164,221
*Classified to investment in associates during the year.
Alfalah Insurance Company Limited

Percentage of holding: 30% (2018: 30%)
Assets 4,009,075 3,186,871
Liabilities 2,659,419 2,120,005
Revenue 1,583,734 1,302,298
Profit for the year 185,514 65,766
Sapphire Wind Power Company Limited

Percentage of holding: 30% (2018: 30%)
Un-audited financial statements as of December 31, 2019

Assets 16,641,391 17,382,836
Liabilities 9,643,298 11,241,054
Revenue for the year 3,400,281 2,897,048
Profit for the year 1,452,381 1,463,469
Total comprehensive income 1,452,381 1,463,469
TriconBoston Consulting Corporation (Private) Limited

Classified to available for sale securities during the year.

697
2019 2018
Cost / Cost /
Provision for Surplus / Carrying Provision for Surplus / Carrying
Amortised Amortised
diminution (Deficit) Value diminution (Deficit) Value
8.2 Investments by segments: cost cost
-----------------------------------------------------------(Rupees in '000)-----------------------------------------------------------
Federal Government Securities:
Pakistan Investment Bonds 123,348,260 - 3,207,322 126,555,582 53,981,463 - (477,385) 53,504,078
Government of Pakistan Euro Bonds 1,925,652 - 40,577 1,966,229 2,683,087 - (134,045) 2,549,042
Other Federal Government Securities 7,216,366 - - 7,216,366 4,122,215 - - 4,122,215
Government of Pakistan Sukuks 4,212,347 - 86,367 4,298,714 15,726,083 - (120,264) 15,605,819
229,809,867 - 3,305,431 233,115,298 237,304,956 - (785,857) 236,519,099
Shares:
Listed Companies 6,164,460 (1,138,120) 2,511,299 7,537,639 7,636,069 (131,218) 690,131 8,194,982
Unlisted Companies 1,176,285 (84,661) - 1,091,624 407,055 (84,661) - 322,394
7,340,745 (1,222,781) 2,511,299 8,629,263 8,043,124 (215,879) 690,131 8,517,376
Listed 651,745 1,785 12,091 665,621 651,765 1,785 12,091 665,641
Unlisted 7,890,215 (1,153,036) 135,479 6,872,658 8,841,674 (1,123,666) 299,768 8,017,776
8,541,960 (1,151,251) 147,570 7,538,279 9,493,439 (1,121,881) 311,859 8,683,417
Foreign Securities
Government securities 25,023,890 - 146,194 25,170,084 9,845,999 - (43,275) 9,802,724
22,908,446 - 330,542 23,238,988 12,200,861 - (223,671) 11,977,190
Non Government Debt securities
47,932,336 - 476,736 48,409,072 22,046,860 - (266,946) 21,779,914
Associates
Alfalah Insurance Company Limited 68,990 - - 68,990 68,990 - - 68,990

Sapphire Wind Power Company Limited 978,123 - - 978,123 978,123 - - 978,123
TriconBoston Consulting Corporation (Private)
Limited * - - - - 769,230 - - 769,230
Alfalah GHP Investment Management Limited ** 130,493 - - 130,493 - - - -
1,177,606 - - 1,177,606 1,816,343 - - 1,816,343
Subsidiaries
Alfalah Securities (Private) Limited 300,000 (42,981) - 257,019 300,000 (42,981) - 257,019
Alfalah GHP Investment Management Limited ** - - - - 130,493 - - 130,493
300,000 (42,981) - 257,019 430,493 (42,981) - 387,512
General provision and expected credit loss-

Overseas operations - (28,422) - (28,422) - (43,258) - (43,258)
Total Investments 295,102,514 (2,445,435) 6,441,036 299,098,115 279,135,215 (1,423,999) (50,813) 277,660,403
*Classified to available for sale securities during the year.

**Classified to investment in associates during the year.
8.2.1 Investments given as collateral 2019 2018

---------(Rupees in '000)---------
Market Treasury Bills 10,243,269 39,445,702

Pakistan Investment Bonds 10,841,800 15,854,600
Overseas Bonds 4,630,519 4,818,676
Sukuk Bonds 4,641,103 3,885,659
30,356,691 64,004,637
The market value of securities given as collateral is Rs. 30,746.266 million (2018: Rs. 63,858.995 million).
8.3 Provision for diminution in value of investments
8.3.1 Opening balance 1,423,999 1,427,028

Exchange and other adjustments 3,548 13,876
Charge / reversals
Charge for the year 1,589,125 128,747
Reversals for the year (49,130) (180,884)
Reversal on disposals (522,107) -
1,017,888 (52,137)
Transfers - net - (3,947)

Provision adjusted during the year - (43,632)
Afghanistan classified as discontinued operation - 82,811
Closing Balance 2,445,435 1,423,999
235 l Bank Alfalah

698
8.3.1.2 Particulars of provision against debt securities 2019 2018
Category of classification NPI Provision NPI Provision
------------------------(Rupees in '000)------------------------
Domestic
Loss 1,151,251 1,151,251 1,121,881 1,121,881
Overseas - - - -
Total 1,151,251 1,151,251 1,121,881 1,121,881
8.4 Quality of Available for Sale Securities
Details regarding quality of Available for Sale (AFS) securities are as follows:
2019 2018
Cost
-------(Rupees in '000)-------
8.4.1 Federal Government Securities - Government guaranteed
Market Treasury Bills 72,573,764 114,893,151
Government of Pakistan Sukuks 4,212,347 15,726,083
Government of Pakistan Euro Bonds 1,925,652 2,440,076
170,943,793 159,550,110
8.4.2 Shares 2019 2018

Cost
8.4.2.1 Listed Companies -------(Rupees in '000)-------
Ordinary Shares
Automobile Parts & Accessories - 169,581
Cement 452,244 1,224,060
Chemicals 17,909 17,909
Commercial Banks 1,433,176 1,596,590
Engineering 110,496 333,633
Fertilizer 430,828 308,635
Insurance - 92,708
Investment Banks 15,000 15,000
Oil and Gas Exploration Companies 1,666,312 1,754,619
Oil and Gas Marketing Companies 347,886 534,549
Pharmaceuticals 102,392 202,738
Power Generation & Distribution 602,191 749,175
Real Estate Investment Trust 372,093 372,093
Textile Composite 55,320 -
5,605,847 7,371,290
Preference Shares
Fertilizer 108,835 108,835
5,714,682 7,480,125

699
2019 2018
8.4.2.2 Unlisted Companies Break up value Cost Breakup value Cost Breakup value
as at ----------------------(Rupees in '000)----------------------
Ordinary Shares
Al-Hamara Avenue (Private) Limited June 30, 2010 50,000 47,600 50,000 47,600
Pakistan Export Finance Guarantee
Agency Limited June 30, 2010 5,725 286 5,725 286
Pakistan Mobile Communication Limited Dec 31, 2018 22,235 71,986 22,235 53,150
Pakistan Mortgage Refinance Company Limited Dec 31, 2018 300,000 304,476 300,000 300,686
Society for worldwide Interbank Financial
Telecommunication Dec 31, 2016 4,095 11,754 4,095 11,754
TriconBoston Consulting Corporation (Private)
Limited * June 30, 2019 769,230 941,130 N/A N/A
1,151,285 1,377,232 382,055 413,476
Preference Shares
Trust Investment Bank Limited Dec 31, 2017 25,000 27,784 25,000 27,784
1,176,285 1,405,016 407,055 441,260

*Classified to available for sale securities during the year.
2019 2018
Cost
8.4.3 Non Government Debt Securities -------(Rupees in '000)-------
8.4.3.1 Listed
Categorised based on long term rating by Credit Rating Agency :
- AA+, AA, AA- 450,000 450,000

- A+, A, A- 100,000 199,980
- BBB+, BBB, BBB- 99,960 -
- Unrated 987,446 1,785
1,637,406 651,765
8.4.3.2 Unlisted
Categorised based on long term rating by Credit Rating Agency:
- AAA 4,430,154 4,444,440

- Unrated 504,303 1,183,003
4,934,457 5,627,443
8.4.4 Foreign Securities 2019 2018

Cost Rating Cost Rating
8.4.4.1 Government Securities ----------------------(Rupees in '000)----------------------
Kingdom of Saudi Arabia 2,300,570 A 672,170 A1

People's Republic of China 2,319,136 A+ - -
Sultanate of Oman 1,085,187 BB+ - -
Abu Dhabi 1,534,677 AA 685,183 AA
Republic of Korea 154,594 AA - -
Republic of South Africa 544,583 BB+ - -
Italy 905,970 BBB - -
United Mexican States 85,929 BBB - -
Republic of Kazakhstan 346,587 BBB- - -
Sharjah 929,102 BBB+ - -
10,206,335 1,357,353
237 l Bank Alfalah

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8.4.4.2 Non Government Debt Securities
Unlisted 2019 2018

-------(Rupees in '000)-------
Categorised based on long term rating by Credit Rating Agency
- AAA 10,361,622 -
- A+, A, A- 4,870,744 8,040,314
- BBB+, BBB, BBB- 2,947,365 1,106,903
- BB+, BB, BB- 232,275 -
- Unrated 3,724,632 2,362,923
22,136,638 11,510,140
2019 2018
Cost
-------(Rupees in '000)-------
8.5 Particulars relating to Held to Maturity securities are as follows:
Federal Government Securities - Government guaranteed

Government of Pakistan Euro Bonds - 243,011
Other Federal Government Securities 7,216,366 4,122,215
33,184,545 30,646,216
Unlisted
Categorised based on long term rating by Credit Rating Agency
- AAA 1,041,670 1,041,670

- AA+, AA, AA- - 566,667
- A+, A, A- 283,263 190,230
- Unrated 645,164 1,415,664
1,970,097 3,214,231
Foreign Securities
2019 2018
Government Securities Cost Rating Cost Rating
----------------------(Rupees in '000)----------------------
People's Republic of Bangladesh 12,364,315 Unrated 7,497,232 Unrated

State of Qatar 1,537,546 AA- 688,715 AA-
13,901,861 8,185,947
Non Government Debt Securities 2019 2018

Cost
Unlisted -------(Rupees in '000)-------
- BBB+, BBB, BBB- 771,808 690,721

771,808 690,721
8.5.1 The market value of securities classified as held-to-maturity as at December 31, 2019 amounted to Rs. 49,648.885 million
(December 31, 2018 : Rs. 40,750.384 million).

701
9 ADVANCES
Note Performing Non Performing Total
2019 2018 2019 2018 2019 2018
-------------------------------------------(Rupees in '000)-------------------------------------------
Loans, cash credits, running finances, etc. 9.1 403,040,273 402,385,420 20,686,613 17,284,834 423,726,886 419,670,254
Islamic financing and related assets 9.2 87,309,952 85,660,964 1,532,279 1,393,959 88,842,231 87,054,923
Bills discounted and purchased 17,203,494 11,524,510 198,336 143,478 17,401,830 11,667,988
Advances - gross 507,553,719 499,570,894 22,417,228 18,822,271 529,970,947 518,393,165
Provision against advances

- Specific 9.5 - - (17,740,415) (15,883,399) (17,740,415) (15,883,399)
- General 9.5 (994,583) (873,314) - - (994,583) (873,314)
(994,583) (873,314) (17,740,415) (15,883,399) (18,734,998) (16,756,713)
Advances - net of provision 506,559,136 498,697,580 4,676,813 2,938,872 511,235,949 501,636,452
9.1 Includes Net Investment in Finance Lease as disclosed below:
2019 2018
Later than Later than

Not later than one and less Over five Not later than one and less Over five
Total Total
one year than five years one year than five years
years years
------------------------------------------------------(Rupees in '000)------------------------------------------------------
Lease rentals receivable 430,979 2,864,065 52,356 3,347,400 1,403,651 2,030,833 41,335 3,475,819
Residual value 222,973 718,226 11,353 952,552 594,353 998,436 13,347 1,606,136
Minimum lease payments 653,952 3,582,291 63,709 4,299,952 1,998,004 3,029,269 54,682 5,081,955
Financial charges for future
periods (17,117) (537,608) (19,354) (574,079) (220,675) (258,985) - (479,660)
Present value of minimum lease

payments 636,835 3,044,683 44,355 3,725,873 1,777,329 2,770,284 54,682 4,602,295
9.1.1 Advances include an amount of Rs. 147.568 million (2018: Rs. 82.953 million), being Employee Loan facilities allowed to Citibank, N.A, employees,
which were either taken over by the Bank, or were granted afresh, under a specific arrangement executed between the Bank and Citibank, N.A, Pakistan. The
said arrangement is subject to certain relaxations as specified vide SBP Letter BPRD/BRD/Citi/2017/21089 dated September 11, 2017.
The said arrangement covers only existing employees of Citibank, N.A, Pakistan, and the relaxations allowed by the SBP are on continual basis, but subject to
review by BID and OSED departments. These loans carry markup at the rates ranging from 9.46% to 24.46% (2018: 9.46% to 20.30%) with maturities up
to December 2039 (2018: December 2038).
9.2 These represents financing and related assets placed under shariah permissible modes and presented in Annexure-II.
2019 2018
9.3 Particulars of advances (Gross) -------(Rupees in '000)-------

529,970,947 518,393,165
239 l Bank Alfalah

702
9.4 Advances include Rs. 22,417.228 million (2018: Rs. 18,822.271 million) which have been placed under non-performing status as detailed below:
Category of Classification 2019 2018

Non- Non-
Performing Provision Performing Provision
Loans Loans
----------------------------(Rupees in '000)-----------------------
Domestic
Other Assets Especially Mentioned 1,712,714 8,347 104,121 3,330
Substandard 2,382,226 579,152 3,077,658 762,678
Doubtful 1,918,480 947,661 552,920 235,663
Loss 15,868,239 15,777,510 14,590,618 14,517,512
21,881,659 17,312,670 18,325,317 15,519,183
Overseas
Not past due but impaired
Overdue by:
Upto 90 days - - - -
91 to 180 days - - 42,787 3,536
181 to 365 days - - 104,384 46,637
˃ 365 days 535,569 427,745 349,783 314,043
535,569 427,745 496,954 364,216
Total 22,417,228 17,740,415 18,822,271 15,883,399
9.5 Particulars of provision against advances
2019 2018
Note Specific General Total Specific General Total
-------------------------------------------(Rupees in '000)-------------------------------------------
Opening balance 15,883,399 873,314 16,756,713 15,683,771 842,737 16,526,508

Impact of adoption of IFRS 9 - - - - 25,297 25,297
Exchange and other adjustments 36,327 26,819 63,146 62,512 2,944 65,456
Charge for the year 4,262,029 94,450 4,356,479 3,007,907 - 3,007,907
Reversals (2,222,967) - (2,222,967) (2,631,522) (31,511) (2,663,033)
2,039,062 94,450 2,133,512 376,385 (31,511) 344,874
Amounts written off (201,332) - (201,332) (179,305) - (179,305)

Amounts charged off - agriculture financing (17,041) - (17,041) (59,964) - (59,964)
9.6 (218,373) - (218,373) (239,269) - (239,269)
Afghanistan classified as discontinued operation - - - - 33,847 33,847
Closing balance 17,740,415 994,583 18,734,998 15,883,399 873,314 16,756,713
9.5.1 Particulars of provision against advances 2019 2018

Specific General Total Specific General Total
-------------------------------------------(Rupees in '000)-------------------------------------------
In local currency 16,404,371 768,497 17,172,868 14,707,026 698,705 15,405,731

In foreign currencies 1,336,044 226,086 1,562,130 1,176,373 174,609 1,350,982
17,740,415 994,583 18,734,998 15,883,399 873,314 16,756,713
9.5.2 The additional profit arising from availing the forced sales value (FSV) benefit - net of tax at December 31, 2019 which is not available for distribution as either
cash or stock dividend to shareholders/ bonus to employees amounted to Rs. 38.426 million (2018: Rs. 30.106 million).
9.5.3 General provision includes provision against consumer loans being maintained at an amount equal to 1% of the fully secured performing portfolio and 4% of the
unsecured performing portfolio. Provision against Small Enterprise(SE) portfolio is being maintained at an amount equal to 1% against unsecured performing SE
portfolio as required by the Prudential Regulations issued by the State Bank of Pakistan. General provision also includes provision held at overseas branches to
meet the requirements of regulatory authorities of the respective countries in which overseas branches operates.
9.5.4 Although the Bank has made provision against its non-performing portfolio as per the category of classification of the loan, the Bank holds enforceable
collateral in the event of recovery through litigation. These securities comprise of charge against various tangible assets of the borrower including land, building
and machinery, stock in trade etc.

703
Note 2019 2018
9.6 PARTICULARS OF WRITE OFFS: -------(Rupees in '000)-------
9.6.1 Against Provisions 9.6.2 218,373 239,269

Directly charged to Profit & Loss account - -
218,373 239,269
9.6.2 Write Offs of Rs. 500,000 and above
- Domestic 9.7 88,452 130,566
- Overseas - -
Write Offs of Below Rs. 500,000 129,921 108,703
218,373 239,269
9.7 DETAILS OF LOAN WRITE OFF OF Rs. 500,000/- AND ABOVE
In terms of sub-section (3) of Section 33A of the Banking Companies Ordinance, 1962 the Statement in respect of written-off loans or any other financial relief of rupees five hundred
thousand or above allowed to a person(s) during the year ended December 31, 2019 is given in Annexure-I.
Note 2019 2018

10 FIXED ASSETS -------(Rupees in '000)-------
Capital work-in-progress 10.1 643,413 175,339

Property and equipment 10.2 19,256,348 18,096,876
Right-of-use assets 2.2.2 9,187,267 -
29,087,028 18,272,215
10.1 Capital work-in-progress
Civil works 328,506 115,840

Equipment 295,383 55,670
Advances to suppliers - 1,075
Others 19,524 2,754
643,413 175,339
10.2 Property and Equipment

2019
Building on
Leasehold Building on Freehold land Lease hold Furniture and Office
Freehold land Leasehold Vehicles Total
land improvement fixture equipment
land
-----------------------------------------------------------------(Rupees in '000)----------------------------------------------------------------
At January 1, 2019
Cost / Revalued amount 6,150,446 3,278,701 1,440,029 3,038,083 5,272,656 1,996,822 11,520,228 349,844 33,046,809
Accumulated depreciation - - - - (3,695,795) (1,654,117) (9,361,666) (238,355) (14,949,933)

Net book value 6,150,446 3,278,701 1,440,029 3,038,083 1,576,861 342,705 2,158,562 111,489 18,096,876
Year ended December 2019

Opening net book value 6,150,446 3,278,701 1,440,029 3,038,083 1,576,861 342,705 2,158,562 111,489 18,096,876
Additions - - 215,304 141,288 591,629 100,953 1,922,612 39,135 3,010,921
Disposals (61,950) (192,501) - (2,700) (646) (750) (13,589) (8,024) (280,160)
Depreciation charge - - (39,725) (83,576) (291,695) (94,039) (1,056,370) (50,453) (1,615,858)
Exchange rate adjustments - - - - 810 4,855 8,930 2,130 16,725
Other adjustments / transfers 63,450 - (7,600) (11,288) (17,144) (114) 540 - 27,844
Closing net book value 6,151,946 3,086,200 1,608,008 3,081,807 1,859,815 353,610 3,020,685 94,277 19,256,348
At December 31, 2019

Accumulated depreciation - - (47,325) (93,186) (4,021,878) (1,741,943) (10,230,292) (272,727) (16,407,351)

Net book value 6,151,946 3,086,200 1,608,008 3,081,807 1,859,815 353,610 3,020,685 94,277 19,256,348
Rate of depreciation (percentage) - - 2.5% 2.5% 10% - 20% 10% - 25% 12.5% - 50% 25%
241 l Bank Alfalah

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2018
Building on
Leasehold Building on Lease hold Furniture and Office
Freehold land Leasehold Vehicles Total
land Freehold land improvement fixture equipment
land
-----------------------------------------------------------------(Rupees in '000)----------------------------------------------------------------
At January 1, 2018
Accumulated depreciation - (33,745) (71,991) (156,504) (3,375,387) (1,541,720) (8,509,580) (227,143) (13,916,070)
Net book value 4,376,934 2,926,185 1,171,315 2,587,601 1,734,935 431,518 2,645,734 201,866 16,076,088

Opening net book value 4,376,934 2,926,185 1,171,315 2,587,601 1,734,935 431,518 2,645,734 201,866 16,076,088
Additions 11,000 - 9,114 75,031 193,907 29,643 645,457 18,479 982,631
revalued during the year 1,773,512 624,804 321,619 473,718 - - - - 3,193,653
Deficit on revaluation recognised in the

(11,000) (12,273) (24,027) (19,569) - - - - (66,869)
profit and loss account - net
Disposals - (242,490) - - (12,367) (3,643) (8,137) (43,361) (309,998)
Depreciation charge - (17,525) (37,992) (78,698) (327,113) (116,751) (1,076,100) (68,662) (1,722,841)
Afghanistan classified as discontinued
- - - - 520 698 3,218 - 4,436
operation
Exchange rate adjustments - - - - 988 1,559 4,779 3,179 10,505
Other adjustment / transfer - - - - (14,009) (319) (56,389) (12) (70,729)
Closing net book value 6,150,446 3,278,701 1,440,029 3,038,083 1,576,861 342,705 2,158,562 111,489 18,096,876
At December 31, 2018

Accumulated depreciation - - - - (3,695,795) (1,654,117) (9,361,666) (238,355) (14,949,933)
Net book value 6,150,446 3,278,701 1,440,029 3,038,083 1,576,861 342,705 2,158,562 111,489 18,096,876
Rate of depreciation (percentage) - 1% - 3% 2.5% 2.5% 10% - 20% 10% - 25% 12.5% - 50% 25%
10.2.1 Land and buildings were last revalued on December 31, 2018 on the basis of market values, determined by independent valuer M/s Akbani & Javed Associates, M/s Harvester Service
(Private) Limited and M/s Hamid Mukhtar & Co. (Private) Limited. Had there been no revaluation, the net book value of the office premises would have been Rs.5,577.693 million
(2018: Rs. 5,443.968 million).
2019 2018
Net book Net book Net book Net book
value at Cost value at value at Cost value at
Revalued Revalued
amount amount
---------------------------(Rupees in '000)---------------------------
Freehold land 1,567,670 6,151,946 1,536,928 6,150,446

Leasehold land 1,281,564 3,086,200 1,441,656 3,278,701
Buildings on freehold land 1,221,557 1,608,008 1,043,992 1,440,029
Buildings on leasehold land 1,506,902 3,081,807 1,421,392 3,038,083
5,577,693 13,927,961 5,443,968 13,907,259
10.2.2 Included in cost of building and equipment are fully depreciated items still in use having cost of Rs. 11,740.137 million (2018: Rs. 9,773.910 million).
Note 2019 2018

-------(Rupees in '000)-------
10.2.3 Carrying amount of idle and held for sale properties. 42,000 299,150
10.2.4 Sale of fixed assets to related parties are disclosed in Annexure III to these unconsolidated financial statements.
11 INTANGIBLE ASSETS
Capital work-in-progress / Advance payment to suppliers 253,483 180,901

Software 11.1 1,003,878 1,102,615
1,257,361 1,283,516
11.1 At January 1
Cost 3,761,047 3,448,109
Accumulated amortisation and impairment (2,658,432) (2,105,528)
Net book value 1,102,615 1,342,581

Opening net book value 1,102,615 1,342,581
Additions - directly purchased 373,826 249,669
Amortisation charge (472,739) (488,400)
Exchange rate adjustments 398 1,170
Other adjustments (222) (2,405)
Closing net book value 1,003,878 1,102,615
At December 31
Cost 4,140,395 3,761,048
Accumulated amortisation and impairment (3,136,517) (2,658,433)
Net book value 1,003,878 1,102,615
Rate of amortisation (percentage) 20% 20%
Useful life 5 years 5 years
11.2 Included in cost of intangible assets are fully amortized items still in use having cost of Rs. 1,925.272 million (2018: Rs. 1,349.493 million).

705
Note 2019 2018
-------(Rupees in '000)-------
12 OTHER ASSETS
Income/ Mark-up accrued in local currency - net of provision 21,292,325 11,861,352

Income/ Mark-up accrued in foreign currency - net of provision 1,092,865 538,855
Advances, deposits, advance rent and other prepayments 1,842,797 2,347,511
Advance against subscription of share 82,312 50,000
Non-banking assets acquired in satisfaction of claims 12.1.1 763,935 615,517
Dividend receivable 1,070 2,768
Mark to market gain on forward foreign exchange contracts 2,436,300 4,519,604
Mark to market gain on derivatives 20,977 68,224
Stationery and stamps on hand 23,164 37,631
Defined benefit plan 38.4 1,019,177 923,633
Branch adjustment account 247,174 311,104
Account receivable 829,639 527,067
Receivable against fraud and forgeries 12.2 117,010 206,651
Acceptances 16,645,791 13,319,265
Others 689,837 221,880
47,104,373 35,551,062
Less: Provision held against other assets 12.3 (230,236) (389,766)
Other Assets (Net of Provision) 46,874,137 35,161,296
Surplus on revaluation of non-banking assets acquired in
satisfaction of claims 12.1.1 242,759 159,530
47,116,896 35,320,826
12.1 Market value of Non-banking assets acquired in satisfaction of claims - properties only 987,862 748,865
The Non-banking assets (properties) of the Bank have been revalued by independent professional valuers as at December 31, 2019.
The revaluation was carried out by M/s. Josheph Lobo (Pvt) Ltd, M/s. Harvester Services (Pvt) Ltd and M/s. Hamid Mukhtar & Co.
(Pvt) Ltd on the basis of professional assessment of present market values which resulted in an increase in surplus by
Rs. 89.447 million (2018: Rs. 33.421 million).
12.1.1 Non-banking assets acquired in satisfaction of claims
Opening Balance 775,047 775,211

Additions 222,278 -
Revaluation 89,447 33,421
Disposals 12.1.2 (7,350) (24,775)
Transfer to Property and Equipment (63,450) -
Closing Balance 1,006,694 775,047
12.1.2 Gain/Loss on Disposal of Non-banking assets acquired in satisfaction of claims
Disposal Proceeds 7,350 24,775

less
- Cost 7,350 24,775
- Impairment / Depreciation (7,350) (24,775)
- -
Gain/Loss 7,350 24,775
243 l Bank Alfalah

706
12.2 This represents fraud and forgery amount receivable from the insurance company and other sources. Provision has been held
against amount non-recoverable.
Note 2019 2018

-------(Rupees in '000)-------
12.3 Provision held against other assets
Advances, deposits, advance rent & other prepayments 219,631 371,811

Non banking assets acquired in satisfaction of claims 10,605 17,955
230,236 389,766
12.4 Movement in provision held against other assets

Charge for the year 72,108 421,760
Reversals (54,540) (452,135)
17,568 (30,375)
Amount Written off (167,949) (144,945)

Exchange and other adjustments (9,149) (29,750)
Afghanistan classified as discontinued operation - 441,787
13 BILLS PAYABLE
In Pakistan 16,950,808 35,825,039

Outside Pakistan 218,251 163,186
17,169,059 35,988,225
14 BORROWINGS
Secured
Borrowings from State Bank of Pakistan
Under export refinance scheme 14.1 31,680,935 26,344,557
Long-Term Finance Facility 14.2 17,892,935 11,199,254
Financing Facility for Storage of Agriculture Produce (FFSAP) 14.3 325,330 263,033
Repurchase agreement borrowings 14.4 5,000,000 35,962,700
54,899,200 73,769,544
Repurchase agreement borrowings 14.5 16,064,786 11,163,509

Bai Muajjal 14.6 19,192,374 22,268,894
Total secured 90,156,360 107,201,947
Unsecured
Call borrowings 14.7 10,126,463 14,951,967
Overdrawn nostro accounts 14.8 939,151 947,547
Others
- Pakistan Mortgage Refinance Company 14.9 494,646 200,000
- Karandaaz Risk Participation 14.10 502,375 436,780
- Borrowing from other financial institutions 14.11 623,335 -
Total unsecured 12,685,970 16,536,294
102,842,330 123,738,241

707
14.1 This facility is secured against a demand promissory note executed in favour of the State Bank of Pakistan. The mark-up rate on
this facility ranges from 1.00% to 2.00% per annum (2018: 1.00% to 2.00% per annum) payable on a quarterly basis.
this facility ranges from 2.00% to 5.00% per annum (2018: 2.00% to 5.00% per annum) payable on a quarterly basis.
this facility is 6.00% per annum (2018: 6.00% per annum) payable on a quarterly basis.
14.4 This represents repurchase agreement borrowing from SBP at the rate 13.32% per annum (2018: 5.78% to 10.16% per annum)
having maturing in March 2020 (2018: January 2019).
14.5 This represents repurchase agreement borrowing from other banks at the rate of ranging from 2.04% to 13.32% per annum
(2018: 2.78%% to 10.25% per annum) having maturities upto January 2020 (2018: January 2019).
14.6 This represents borrowings from financial institutions at mark-up rates ranging from 10.85% to 13.25% per annum (2018: 6.10% to
9.70%) having maturities upto October 2020 (2018: March 2019).
14.7 This represents borrowings from financial institutions at mark-up rates ranging from 0.40% to 3.15% per annum (2018: 0.50% to
10.25%) having maturities upto November 2020 (2018: June 2019).
14.8 This represents book overdrawn balances appearing under certain nostro accounts which are due for settlement and the balance
exist only due to timing differences. These do not carry any interest rates.
14.9 This includes borrowing from Pakistan Mortgage Refinance Company Limited (PMRC) to extend housing finance facilities to the
Bank's customers on the agreed terms and conditions. This borrowing carries mark-up rate of 3 years PKRV less 50bps.
14.10 This includes borrowing from Karandaaz Pakistan Limited in lieu of Risk Participation Agreement to support venture into
SME segments. The participation carries a mark-up rates ranging from 13.84% to 25.24% per annum. (December 2018:7.93% to
14.62%).
14.11 This represents borrowing from financial institution at the rate of 3.15% per annum (2018: Nil) having maturity upto December
2020.
2019 2018
-------(Rupees in '000)-------
14.12 Particulars of borrowings with respect to Currencies

102,842,330 123,738,241
245 l Bank Alfalah

708
15 DEPOSITS AND OTHER ACCOUNTS
2019 2018
In Local In Foreign In Local In Foreign
Total Total
Currency currencies Currency currencies
----------------------------------------------(Rupees in '000)----------------------------------------------
Customers
Current deposits 270,761,170 66,720,895 337,482,065 253,826,090 31,077,261 284,903,351
Savings deposits 191,837,354 33,470,756 225,308,110 182,286,764 29,222,301 211,509,065
Term deposits 106,891,979 52,368,120 159,260,099 103,144,924 42,383,783 145,528,707
Others 9,393,064 2,215,457 11,608,521 10,007,520 1,920,061 11,927,581
578,883,567 154,775,228 733,658,795 549,265,298 104,603,406 653,868,704
Financial Institutions
Current deposits 1,885,877 468,616 2,354,493 2,133,977 533,400 2,667,377
Savings deposits 28,412,020 56,425 28,468,445 30,625,516 53,409 30,678,925
Term deposits 17,579,094 78,196 17,657,290 14,220,573 1,401,959 15,622,532
Others 144,086 1,087 145,173 47,926 9,816 57,742
48,021,077 604,324 48,625,401 47,027,992 1,998,584 49,026,576
626,904,644 155,379,552 782,284,196 596,293,290 106,601,990 702,895,280
2019 2018
-------(Rupees in '000)-------
15.1 Composition of deposits
- Individuals 361,511,449 347,805,455
- Government (Federal and Provincial) 31,193,413 45,416,762
- Public Sector Entities 57,074,016 46,524,311
- Banking Companies 6,225,840 528,326

- Non-Banking Financial Institutions 42,399,561 48,498,250
- Private Sector / Others 283,879,917 214,122,176

782,284,196 702,895,280
15.2 Deposits include Eligible Deposits of Rs. 417,047.985 million (2018: Rs. 400,654.623 million) protected under Depositors Protection
Mechanism introduced by the State Bank of Pakistan.

709
MEEZAN ISLAMIC FUND
STATEMENT OF ASSETS AND LIABILITIES
AS AT JUNE 30, 2020
2020 2019
Note ------------Rupees in '000------------
Assets
Balances with banks 5 1,755,340 1,340,974

Investments 6 23,381,047 25,014,329
Receivable against sale of investments 73,789 152,085
Receivable against conversion of units 82,856 62,891
Dividend receivable 52,314 117,132
Advances, deposits and other receivables 7 13,419 18,566
Total assets 25,358,765 26,705,977
Liabilities
Payable to Al Meezan Investment Management Limited- Management Company 8 32,677 79,964

Payable to Central Depository Company of Pakistan Limited - Trustee 9 2,349 2,579
Payable to the Securities and Exchange Commission of Pakistan 10 5,024 32,360
Payable against redemption and conversion of units 116,155 74,075
Payable against purchase of investments 158,826 122,665
Dividend payable 152,480 -
Payable to Meezan Bank Limited 654 135
Accrued expenses and other liabilities 11 818,415 653,860
Total liabilities 1,286,580 965,638
NET ASSETS 24,072,185 25,740,339
UNIT HOLDERS' FUND (AS PER STATEMENT ATTACHED) 24,072,185 25,740,339
CONTINGENCIES AND COMMITMENTS 12
NUMBER OF UNITS IN ISSUE 514,682,160 537,113,594
Rupees
NET ASSET VALUE PER UNIT 46.7710 47.9235
For Al Meezan Investment Management Limited

Chief Executive Chief Financial Officer Director
710
Annual Report 2020 | 44
MEEZAN ISLAMIC FUND
INCOME STATEMENT
Note 2020 2019

----------- Rupees in '000------------
Income
Dividend income 1,074,874 1,528,402
Profit on saving account with banks 194,252 193,892
Realised gain / (loss) on sale of investments 888,371 (2,223,676)
2,157,497 (501,382)
Net unrealised diminution on re-measurement of investments
classified as 'financial assets at fair value through profit or loss' 6.2 (794,988) (7,380,729)
Total income / (loss) 1,362,509 (7,882,111)
Expenses
Remuneration of Al Meezan Investment Management Limited -
Management Company 8.1 502,387 681,257
Sindh Sales Tax on remuneration of the Management Company 8.2 65,310 88,563
Allocated expenses 8.3 25,119 34,063
Selling and marketing expenses 8.4 100,477 136,251
Remuneration of Central Depository Company of Pakistan Limited - Trustee 9.1 26,119 35,063
Sindh Sales Tax on remuneration of the Trustee 9.2 3,396 4,558
Annual fees to the Securities and Exchange Commission of Pakistan 10.1 5,024 32,360
Auditors' remuneration 13 721 740
Fees and subscription 2,802 3,989
Legal and professional charges 160 160
Brokerage expense 35,261 19,869
Bank and settlement charges 3,190 3,614
Printing expenses - 297
Provision for Sindh Workers' Welfare Fund (SWWF) 11,221 -
Charity expense 11.1 31,482 27,448
Total expenses 812,669 1,068,232
Net income / (loss) for the year before taxation 549,840 (8,950,343)
Taxation 15 - -
Net income / (loss) for the year after taxation 549,840 (8,950,343)
Allocation of net income for the year

Net income for the year after taxation 549,840 -
Income already paid on units redeemed (22,945) -
526,895 -
- Relating to capital gains 93,383 -
- Excluding capital gains 433,512 -
526,895 -

711
MEEZAN ISLAMIC FUND
2020 2019
----------- Rupees in '000------------
Net income / (loss) for the year after taxation 549,840 (8,950,343)
Other comprehensive income for the year - -
Total comprehensive income / (loss) for the year 549,840 (8,950,343)

712
MEEZAN ISLAMIC FUND
STATEMENT OF MOVEMENT IN UNIT HOLDERS’ FUND
2020 2019
Unrealised Unrealised
Undistributed
appreciation appreciation
Capital Accumulate Over Capital Income /
on 'available Total on 'available Total
Value d loss distribution Value (Accumulate
for sale' for sale'
d loss)
investments investments
(Rupees in '000) (Rupees in '000)
Net assets at the beginning of the year as 27,600,726 (1,860,387) - - 25,740,339 32,024,698 6,467,562 622,394 39,114,654
previously reported (Audited)
Impact of change in accounting policy - - - - - - 622,394 (622,394) -
Net assets at the beginning of the year 27,600,726 (1,860,387) - - 25,740,339 32,024,698 7,089,956 - 39,114,654
Issue of 629,460,674 units (2019: 372,029,911 units)

- Capital value (at net asset value per unit at the
beginning of the year) 30,165,966 - - - 30,165,966 23,560,654 - - 23,560,654
- Element of income / (loss) 1,364,752 - - - 1,364,752 (2,065,476) - - (2,065,476)
Total proceeds on issuance of units 31,530,718 - - - 31,530,718 21,495,178 - - 21,495,178
Redemption of 651,892,108 units (2019: 452,548,171 units)

- Capital value (at net asset value per unit at the
beginning of the year) 31,240,951 - - - 31,240,951 28,659,876 - - 28,659,876
- Element of loss / (income) 1,248,523 22,945 - - 1,271,468 (2,740,726) - - (2,740,726)
Total payments on redemption of units 32,489,474 22,945 - - 32,512,419 25,919,150 - - 25,919,150
Total comprehensive income / (loss) for the year - 549,840 - - 549,840 - (8,950,343) - (8,950,343)
Distribution during the year - (526,895) (709,398) - (1,236,293) - - - -
Income / (loss) for the year less distribution - 22,945 (709,398) - (686,453) - (8,950,343) - (8,950,343)
Net assets at the end of the year 26,641,970 (1,860,387) (709,398) - 24,072,185 27,600,726 (1,860,387) - 25,740,339
(Accumulated loss) / undistributed income brought forward

- Realised income 5,520,342 12,814,145
- Unrealised loss (7,380,729) (6,346,583)
(1,860,387) 6,467,562
Impact of change in accounting policy - 622,394
(1,860,387) 7,089,956
- Relating to capital gains 93,383 -
- Excluding capital gains 433,512 -
526,895 -
Net loss for the year after taxation - (8,950,343)
Distribution during the period: Rs. 2.5 per unit i.e 5.0%
of the par value of Rs. 50/- each [June 30, 2019:Nill) (526,895) -
Accumulated loss carried forward (1,860,387) (1,860,387)
Accumulated loss carried forward

- Realised loss / (income) (1,065,399) 5,520,342
- Unrealised loss (794,988) (7,380,729)
(1,860,387) (1,860,387)
(Rupees) (Rupees)
Net assets value per unit at the beginning of the year 47.9235 63.3300
Net assets value per unit at the end of the year 46.7710 47.9235


713
ANNUAL REPORT
Unconsolidated Statement of Financial Position Unconsolidated Profit and Loss Account

As at 31 December 2019 For the year ended 31 December 2019
Note 2019 2018 Note 2019 2018
Assets 7 459 570

Net insurance premium 24 7 562 349
Property and equipment 6 2 967 431 2 615 648
Intangible assets 7 – –
Investment property 8 2 341 470 1 879 093 Net insurance claims 25 ( 3 548 905 ) ( 3 088 870 )
Investment in subsidiary 9 10 169 336 9 897 937 ( 556 305 )
Net commission and other acquisition cost 26 ( 587 650 )
Investments
Equity securities 10 3 271 467 4 970 478 ( 4 105 210 ) ( 3 676 520 )
Insurance claims and acquisition expenses
Debt securities 11 9 654 535 8 228 784
Term deposits 12 444 352 506 607
Loans and other receivables 13 258 679 100 271 Management expenses 27 ( 2 849 245 ) ( 2 579 025 )
Insurance / reinsurance receivables 14 4 012 732 3 577 054
Reinsurance recoveries against outstanding claims 25 4 081 849 3 363 439 Underwriting results 505 115 1 306 804
Salvage recoveries accrued 44 550 42 306
Deferred commission expense 26 598 669 600 740 2 262 228
Investment income 28 1 612 336
Retirement benefit 19 29 689 –
Taxation - payments less provision 22 371 – Rental income 29 112 349 103 991
Prepayments 15 5 850 686 5 198 902
Other income 30 218 973 161 227
Cash and bank 16 1 191 688 1 266 562
44 939 504 42 247 821 Change in fair value of investment property 433 899 10 681
Total assets of window takaful operations - Operator's Fund 759 742 621 302 Other expenses 31 ( 50 913 ) ( 50 127 )
Total assets 45 699 246 42 869 123
Equity and Liabilities 2 976 536 1 838 108
Capital and reserves attributable to 3 481 651 3 144 912
Company's equity holders Results of operating activities
Ordinary share capital 17 2 000 000 2 000 000 Finance cost ( 14 090 ) –
Reserves 18 15 765 886 14 522 985 145 631 –
1 530 185 2 775 470 Reversal of workers' welfare fund
Unappropriated profit
19 296 071 19 298 455 Profit from window takaful operations - Operator's Fund 32 214 143 117 452
Total equity
Surplus on revaluation of property and equipment 1 000 414 859 097 3 827 335 3 262 364
Profit before tax
Liabilities
Underwriting provisions Income tax expense 33 ( 1 218 755 ) ( 1 091 091 )
Outstanding claims including IBNR 25 6 273 372 5 176 757
Unearned premium reserve 24 9 143 972 8 354 109 Profit after tax 2 608 580 2 171 273
Unearned reinsurance commission 26 430 936 394 848
Retirement benefit obligations 19 – 62 704
Deferred taxation 20 667 971 824 875 Earnings (after tax) per share - Rupees 34 13.04 10.86
Premium received in advance 68 262 56 514
Insurance / reinsurance payables 21 6 067 883 5 333 106
Other creditors and accruals 22 2 356 205 2 054 552 The annexed notes 1 to 45 form an integral part of these unconsolidated financial statements.
Taxation - provision less payments – 46 595
Total liabilities 25 008 601 22 304 060
45 305 086 42 461 612
Total liabilities of window takaful operations - Operator's Fund 394 160 407 511
Total equity and liabilities 45 699 246 42 869 123
Contingencies and commitments 23
The annexed notes 1 to 45 form an integral part of these unconsolidated financial statements.
SAAD BHIMJEE MAHMOOD LOTIA ALTAF GOKAL HASANALI ABDULLAH SAIFUDDIN N. ZOOMKAWALA SAAD BHIMJEE MAHMOOD LOTIA ALTAF GOKAL HASANALI ABDULLAH SAIFUDDIN N. ZOOMKAWALA
Director Director Chief Financial Officer Managing Director & Chairman Director Director Chief Financial Officer Managing Director & Chairman
Chief Executive Chief Executive
Karachi 08 February 2020 Karachi 08 February 2020

714125
ANNUAL REPORT
Unconsolidated Statement of Comprehensive Income Unconsolidated Cash Flow Statement

For the year ended 31 December 2019 For the year ended 31 December 2019
2019 2018
2019 2018
Operating cash flows
Profit after tax 2 608 580 2 171 273 a) Underwriting activities
Insurance premium received 19 359 626 18 037 169
Other comprehensive income ( 11 466 752 )
Reinsurance premium paid ( 10 980 508 )
Total items that may be reclassified subsequently to profit and loss account Claims paid ( 4 899 546 ) ( 4 930 350 )
Reinsurance and other recoveries received 1 717 281 1 657 225
Unrealized loss on available-for-sale investments ( 1 443 027 ) ( 1 420 758 )
Commission paid
during the year ( 1 493 294 ) ( 1 305 601 ) Commission received 902 581 862 510
Management expenses paid ( 2 467 993 ) ( 2 291 052 )
Reclassification adjustments relating to available-for-sale
Net cash flow from underwriting activities 1 702 170 934 236
investments disposed off during the year 490 146 149 247
b) Other operating activities
Unrealized gain / (loss) on available-for-sale investments ( 1 077 354 )
Income tax paid ( 985 977 )
during the year of subsidiary company 160 404 ( 1 109 402 ) 50 034 ( 63 216 )
Other operating payments
186 981 136 726
Total unrealized loss on available-for-sale investments ( 842 744 ) ( 2 265 756 ) Other operating receipts
Loans advanced ( 503 ) ( 4 137 )
Deferred tax on available-for-sale investments 290 913 374 417 Loans repayments received 2 497 2 420
Net cash flow used in other operating activities ( 838 345 ) ( 914 184 )
Deferred tax on available-for-sale investments
of subsidiary company 71 988 184 689 Total cash flow from all operating activities 863 825 20 052
Investment activities
Net unrealized loss from window takaful operations - 1 030 730 744 153
Profit / return received
Operator's Fund (net of deferred tax) ( 229 ) ( 940 ) 849 915 915 470
Dividend received
Rentals received 128 261 106 262
( 480 072 ) ( 1 707 590 )
Payment for investments / investment properties ( 38 659 111 ) ( 35 405 602 )
Item not to be reclassified to profit and loss account in Proceeds from investments / investment properties 38 283 983 36 014 646
subsequent year: Fixed capital expenditures ( 524 407 ) ( 397 910 )
Proceeds from sale of property and equipment 43 100 39 447
Actuarial gains / (losses) on defined benefit plans 27 820 ( 9 305 ) 1 152 471 2 016 466
Total cash flow from investing activities
Related deferred tax ( 2 091 170 ) ( 1 934 165 )
( 8 737 ) 2 792 Total cash flow used in financing activities - Dividends paid
( 74 874 ) 102 353
19 083 ( 6 513 ) Net cash flow (used in) / from all activities
Cash and cash equivalents at the beginning of year 1 266 562 1 164 209
Other comprehensive income ( 460 989 ) ( 1 714 103 ) Cash and cash equivalents at the end of year 1 191 688 1 266 562
Reconciliation to profit and loss account
Total comprehensive income for the year 2 147 591 457 170
Operating cash flows 863 825 20 052
Depreciation / amortization expense ( 364 032 ) ( 275 668 )
The annexed notes 1 to 45 form an integral part of these unconsolidated financial statements. Profit on disposal of property and equipment 35 435 33 836
Profit on disposal of investments / investment properties 491 991 150 745
Rental income 112 349 103 991
Dividend Income 850 360 911 901
Other investment income 919 876 549 689
Profit on deposits 156 746 81 729
Other income 26 792 45 663
Change in fair value of investment properties 433 899 10 681
Increase in assets other than cash 1 883 351 348 149
(Decrease) / increase in liabilities other than borrowings ( 3 016 155 ) 73 053
Profit after tax from conventional insurance operations 2 394 437 2 053 821
Profit from window takaful operations - Operator's Fund 214 143 117 452
Profit after tax 2 608 580 2 171 273
The annexed notes 1 to 45 form an integral part of these unconsolidated financial statements.
SAAD BHIMJEE MAHMOOD LOTIA ALTAF GOKAL HASANALI ABDULLAH SAIFUDDIN N. ZOOMKAWALA SAAD BHIMJEE MAHMOOD LOTIA ALTAF GOKAL HASANALI ABDULLAH SAIFUDDIN N. ZOOMKAWALA
Director Director Chief Financial Officer Managing Director & Chairman Director Director Chief Financial Officer Managing Director & Chairman
Chief Executive Chief Executive
Karachi 08 February 2020 Karachi 08 February 2020

715127
716
717
IFRIC 7 IE
IFRIC Interpretation 7
Illustrative example
This example accompanies, but is not part of, IFRIC 7.
IE1 This example illustrates the restatement of deferred tax items when an entity
restates for the effects of inflation under IAS 29 Financial Reporting in
Hyperinflationary Economies. As the example is intended only to illustrate the
mechanics of the restatement approach in IAS 29 for deferred tax items, it does
not illustrate an entity’s complete IFRS financial statements.
Facts
IE2 An entity’s IFRS statement of financial position at 31 December 20X4 (before

restatement) is as follows:
Note Statement of financial position 20X4(a) 20X3

CU million CU million
ASSETS
1 Property, plant and equipment 300 400
Other assets XXX XXX
Total assets XXX XXX
EQUITY AND LIABILITIES

Total equity XXX XXX
Liabilities
2 Deferred tax liability 30 20
Other liabilities XXX XXX
Total liabilities XXX XXX
Total equity and liabilities XXX XXX
(a) In this example, monetary amounts are denominated in ‘currency units (CU)’.
718
IFRIC 7 IE
Notes
Property, plant and equipment
All items of property, plant and equipment were acquired in December 20X2.
Property, plant and equipment are depreciated over their useful life, which is
five years.
The deferred tax liability at 31 December 20X4 of CU30 million is measured

as the taxable temporary difference between the carrying amount of
property, plant and equipment of 300 and their tax base of 200. The
applicable tax rate is 30 per cent. Similarly, the deferred tax liability at
31 December 20X3 of CU20 million is measured as the taxable temporary
difference between the carrying amount of property, plant and equipment of
CU400 and their tax base of CU333.
IE3 Assume that the entity identifies the existence of hyperinflation [Refer: IAS 29
paragraphs 2 and 3] in, for example, April 20X4 and therefore applies IAS 29 from
the beginning of 20X4. The entity restates its financial statements on the basis
of the following general price indices and conversion factors:
Conversion
General price factors at
indices 31 Dec 20X4
December 20X2(a) 95 2.347
December 20X3 135 1.652
December 20X4 223 1.000
(a) For example, the conversion factor for December 20X2 is 2.347 = 223/95.
Restatement
IE4 The restatement of the entity’s 20X4 financial statements is based on the
following requirements:
● Property, plant and equipment are restated by applying the change in a
general price index from the date of acquisition to the end of the
reporting period to their historical cost and accumulated depreciation.
● Deferred taxes should be accounted for in accordance with IAS 12 Income
Taxes.
● Comparative figures for property, plant and equipment for the previous
reporting period are presented in terms of the measuring unit current at
the end of the reporting period.
● Comparative deferred tax figures should be measured in accordance
with paragraph 4 of the Interpretation.
719
IFRIC 7 IE
IE5 Therefore the entity restates its statement of financial position at 31 December
20X4 as follows:
Note Statement of financial position 20X4 20X3

(restated)
ASSETS
1 Property, plant and equipment 704 939
Other assets XXX XXX
Total assets XXX XXX
EQUITY AND LIABILITIES

Total equity XXX XXX
Liabilities
2 Deferred tax liability 151 117
Other liabilities XXX XXX
Total liabilities XXX XXX
Total equity and liabilities XXX XXX
Notes
1 Property, plant and equipment
All items of property, plant and equipment were purchased in

December 20X2 and depreciated over a five-year period. The cost of
property, plant and equipment is restated to reflect the change in the
general price level since acquisition, ie the conversion factor is 2.347
(223/95).
Historical Restated
Cost of property, plant and equipment 500 1,174
Depreciation 20X3 (100) (235)
Carrying amount 31 December 20X3 400 939
Depreciation 20X4 (100) (235)
Carrying amount 31 December 20X4 300 704
continued...
720
IFRIC 7 IE
...continued
2 Deferred tax liability
The nominal deferred tax liability at 31 December 20X4 of CU30

million is measured as the taxable temporary difference between the
carrying amount of property, plant and equipment of CU300 and
their tax base of CU200. Similarly, the deferred tax liability at
31 December 20X3 of CU20 million is measured as the taxable
temporary difference between the carrying amount of property, plant
and equipment of CU400 and their tax base of CU333. The applicable
tax rate is 30 per cent.
In its restated financial statements, at the end of the reporting period

the entity remeasures deferred tax items in accordance with the
general provisions in IAS 12, ie on the basis of its restated financial
statements. However, because deferred tax items are a function of
carrying amounts of assets or liabilities and their tax bases, an entity
cannot restate its comparative deferred tax items by applying a
general price index. Instead, in the reporting period in which an
entity applies the restatement approach under IAS 29, it
(a) remeasures its comparative deferred tax items in accordance with
IAS 12 after it has restated the nominal carrying amounts of its
non-monetary items [Refer: IAS 29 paragraphs 12–14] at the date of the
opening statement of financial position of the current reporting
period by applying the measuring unit at that date, and (b) restates
the remeasured deferred tax items for the change in the measuring
unit from the date of the opening statement of financial position of
the current period up to the end of the reporting period.
In the example, the restated deferred tax liability is calculated as

follows:
CU million
At the end of the reporting period:
Restated carrying amount of property, plant and
equipment (see note 1) 704
Tax base (200)
Temporary difference 504
@ 30 per cent tax rate = Restated deferred tax

liability 31 December 20X4 151
Comparative deferred tax figures:

Restated carrying amount of property, plant and
equipment [either 400 × 1.421 (conversion factor
1.421 = 135/95), or 939/1.652 (conversion factor
1.652 = 223/135)] 568
Tax base (333)
continued...
721
IFRIC 7 IE
...continued
Temporary difference 235
@ 30 per cent tax rate = Restated deferred tax

liability 31 December 20X3 at the general price level
at the end of 20X3 71
Restated deferred tax liability 31 December 20X3 at

the general price level at the end of 20X4
(conversion factor 1.652 = 223/135) 117
IE6 In this example, the restated deferred tax liability is increased by CU34 to CU151
from 31 December 20X3 to 31 December 20X4. That increase, which is included
in profit or loss in 20X4, reflects (a) the effect of a change in the taxable
temporary difference of property, plant and equipment, and (b) a loss of
purchasing power on the tax base of property, plant and equipment. The two
components can be analysed as follows:
CU million
Effect on deferred tax liability because of a decrease in the
taxable temporary difference of property, plant and equipment
((CU235) + CU133) × 30% 31
Loss on tax base because of inflation in 20X4 (CU333 × 1.652
– CU333) × 30% (65)
Net increase of deferred tax liability (34)
Debit to profit or loss in 20X4 34
The loss on tax base is a monetary loss. Paragraph 28 of IAS 29 explains this as
follows:
The gain or loss on the net monetary position is included in net income. The
adjustment to those assets and liabilities linked by agreement to changes in prices
made in accordance with paragraph 13 is offset against the gain or loss on net
monetary position. Other income and expense items, such as interest income and
expense, and foreign exchange differences related to invested or borrowed funds,
are also associated with the net monetary position. Although such items are
separately disclosed, it may be helpful if they are presented together with the gain
or loss on net monetary position in the statement of comprehensive income.
722
Unconsolidated Statement of Financial
Position
As at December 31, 2019
Note 2019 2018
------------(Rupees in '000)------------
ASSETS
Cash and balances with treasury banks 5 100,731,873 82,407,700

Balances with other banks 6 4,709,968 3,874,955
Lendings to financial institutions 7 71,434,895 62,172,287
Investments 8 299,098,115 277,660,403
Advances 9 511,235,949 501,636,452
Fixed assets 10 29,087,028 18,272,215
Intangible assets 11 1,257,361 1,283,516
Deferred tax assets - -
Other assets 12 47,116,896 35,320,826
Assets held for sale 21 - 23,589,489
1,064,672,085 1,006,217,843
LIABILITIES
Bills payable 13 17,169,059 35,988,225

Borrowings 14 102,842,330 123,738,241
Deposits and other accounts 15 782,284,196 702,895,280
Liabilities against assets subject to finance lease - -
Subordinated debt 16 11,987,000 11,989,000
Deferred tax liabilities 17 3,450,993 2,070,702
Other liabilities 18 58,910,931 33,454,124
Liabilities directly associated with the assets held for sale 21 - 20,435,396
976,644,509 930,570,968
NET ASSETS 88,027,576 75,646,875
REPRESENTED BY
Share capital 19 17,771,651 17,743,629

Reserves 26,046,019 23,050,754
Surplus on revaluation of assets 20 11,367,004 7,382,950
Unappropriated profit 32,842,902 27,469,542
88,027,576 75,646,875
CONTINGENCIES AND COMMITMENTS 22
The annexed notes 1 to 50 and annexures I to III form an integral part of these unconsolidated financial statements.
President & Chief Executive Officer Chief Financial Officer Director Director Director

723
Unconsolidated Profit and Loss
Account
Note 2019 2018
---------(Rupees in '000)---------
Mark-up/Return/Interest Earned 24 92,480,855 59,672,279

Mark-up/Return/Interest Expensed 25 47,623,373 27,746,216
Net Mark-up/ Interest Income 44,857,482 31,926,063
NON MARK-UP/INTEREST INCOME
Fee and Commission Income 26 7,034,345 6,479,721

Dividend Income 338,989 576,034
Foreign Exchange Income 2,826,363 2,183,186
(Loss) / gain from derivatives (68,293) 28,095
Gain on securities 27 83,940 950,302
Other Income 28 180,209 213,988
Total non-markup/interest Income 10,395,553 10,431,326
Total Income 55,253,035 42,357,389
NON MARK-UP/INTEREST EXPENSES
Operating expenses 29 29,065,738 24,312,745

Workers Welfare Fund 30 507,668 392,089
Other charges 31 269,203 7,693
Total non-markup/interest expenses 29,842,609 24,712,527
Profit Before Provisions 25,410,426 17,644,862

Provisions and write offs - net 32 3,028,585 26,607
Extra ordinary / unusual items - -
PROFIT BEFORE TAXATION 22,381,841 17,618,255
Taxation 33 9,686,324 6,993,035
PROFIT AFTER TAXATION 12,695,517 10,625,220
Rupees
Basic Earnings per share 34 7.15 5.99

Diluted Earnings per share 35 7.15 5.98
215 l Bank Alfalah

724
Unconsolidated Statement of
Comprehensive Income
2019 2018
---------(Rupees in '000)---------
Profit after taxation 12,695,517 10,625,220
Other comprehensive income
Items that may be reclassified to profit and loss account in subsequent periods:
Effect of translation of net investment in foreign branches 1,720,854 2,974,642
Movement in surplus / (deficit) on revaluation of investments - net of tax 4,001,228 (2,591,788)
5,722,082 382,854
Items that will not be reclassified to profit and loss account in subsequent periods:
Remeasurement gain on defined benefit obligations - net of tax 62,104 126,157
Movement in (deficit) / surplus on revaluation of operating fixed assets - net of tax (95,097) 2,663,884
Movement in surplus on revaluation of non-banking assets - net of tax 77,923 25,606
44,930 2,815,647
Total comprehensive income 18,462,529 13,823,721

725
3: Non-current assets
Any amounts left unallocated are allocated to the other assets (except goodwill) pro rata.
The reversal is recognised in profit or loss, except where reversing a loss recognised on assets
carried at revalued amounts, which are treated in accordance with the applicable IFRS.
For example, an impairment loss reversal on revalued property, plant and equipment reverses the
loss recorded in profit or loss and any remainder is credited to OCI (reinstating the revaluation
surplus) (IAS 36: para. 120).
Goodwill
Once recognised, impairment losses on goodwill are not reversed (IAS 36: para. 124).
Supplementary reading
See Chapter 3 Section 2 of the Supplementary Reading, available in Appendix 2 of the digital
edition of the Workbook, for more activities to test your knowledge of this topic.
3 Fair value measurement (IFRS 13)

IFRS 13 Fair Value Measurement defines fair value and sets out a framework for measuring the fair
value of assets, liabilities and an entity's own equity instruments in a single IFRS.
It applies to all IFRSs where a fair value measurement is required except (IFRS 13: para. 6):
• Share-based payment transactions (IFRS 2)

• Leasing transactions (IFRS 16)
• Measurements which are similar to, but not the same as, fair value, eg:
– Net realisable value of inventories (IAS 2)
– Value in use (IAS 36).
Fair value (IFRS 13): the price that would be received to sell an asset or paid to transfer a
Key term liability in an orderly transaction between market participants at the measurement date.
(IFRS 13: para. 9)
Fair value measurements are based on an asset or a liability's unit of account, which is specified
by each IFRS where a fair value measurement is required. For most assets and liabilities, the unit of
account is the individual asset or liability, but in some instances may be a group of assets or
liabilities (IFRS 13: para. 13).
Illustration 4
Fair value
A premium or discount on a large holding of the same shares (because the market's normal daily
trading volume is not sufficient to absorb the quantity held by the entity) is not considered when
measuring fair value: the quoted price per share in an active market is used.
However, a control premium is considered when measuring the fair value of a controlling interest,
because the unit of account is the controlling interest. Similarly, any non-controlling interest discount
is considered where measuring a non-controlling interest.
59
726
3.1 Measurement
Fair value is a market-based measure, not an entity-specific one. Therefore, valuation
techniques used to measure fair value maximise the use of relevant observable inputs and minimise
the use of unobservable inputs.
To increase consistency and compatibility in fair value measurements and related disclosures,
IFRS 13 establishes a fair value hierarchy that categorises the inputs to valuation
techniques into three levels:
Quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 1 inputs that the entity can access at the measurement date (IFRS 13: para. 76).
Inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly (ie prices) or indirectly (ie derived
Level 2 inputs from prices). For example quoted prices for similar assets in active markets
or for identical or similar assets in non-active markets or use of quoted
interest rates for valuation purposes (IFRS 13: para. 81–82).
Unobservable inputs for the asset or liability, eg discounting estimates of

future cash flows (IFRS 13: para. 86).
Level 3 inputs Level 3 inputs are only used where relevant observable inputs are not
available or where the entity determines that transaction price or quoted
price does not represent fair value.
Active market: a market in which transactions for the asset or liability take place with sufficient
Key term
frequency and volume to provide pricing information on an ongoing basis.
(IFRS 13: Appendix A)
A fair value measurement assumes that the transaction takes place either:
(a) In the principal market for the asset or liability, or
(b) In the most advantageous market (in the absence of a principal market).
The most advantageous market is assessed after taking into account transaction costs and
transport costs to the market. Fair value also takes into account transport costs, but excludes
transaction costs.
The fair value should be measured using the assumptions that market participants would
use when pricing the asset or liability, assuming that market participants act in their best economic
interest.
Illustration 5
Principal market v most advantageous market
An asset is sold in two different active markets at the following prices per item:
European market North American market
$ $
Selling price 53 54
Transport costs to market (3) (6)
50 48
Transaction costs (3) (2)
47 46
60
727
3: Non-current assets
The principal market (the one with the greatest volume and level of activity) is the North American
market. The company normally trades in the European market, but it can access both markets.
The fair value of the asset is therefore $48 per item, ie the price after taking into account transport
costs in the principal market for the asset.
If, however, neither market were the principal market, the fair value would be measured
using the price in the most advantageous market. The most advantageous market is the
European market after considering both transaction and transport costs ($47 in European market v
$46 in the North American market) and so the fair value measure would be $50 per item (as fair
value is measured before transaction costs).
For non-financial assets, the fair value measurement is the value for using the asset in its
highest and best use (the use that would maximise its value) or by selling it to another market
participant that would use it in its highest and best use (IFRS 13: paras. 27–29).
The highest and best use of a non-financial asset takes into account the use that is physically
possible, legally permissible and financially feasible.
Illustration 6
Highest and best use

An entity acquires control of another entity which owns land. The land is currently used as a factory
site.
The local government zoning rules also now permit construction of residential properties in this area,
subject to planning permission being granted. Apartment buildings have recently been constructed in
the area with the support of the local government.
Market values are as follows:
$m
Value in its current use 20
Value as a development site (including uncertainty 30
over whether planning permission would be granted)
Demolition costs to convert the land to a vacant site 2
The fair value of the land is $28m ($30m – $2m) as this is its highest and best use because market
participants would take into account the site's development potential when pricing the land.
The measurement of the fair value of a liability assumes that the liability remains
outstanding and the market participant transferee would be required to fulfil the obligation, rather
than it being extinguished (IFRS 13: para. 34). The fair value of a liability also reflects the effect of non-
performance risk (the risk that an entity will not fulfil an obligation), which includes, but may not be
limited to, an entity's own credit risk (ie risk of non-payment) (IFRS 13: para. 42).
Illustration 7
Fair value of a liability

Energy Co assumed a contractual decommissioning liability when it acquired a power plant from a
competitor.
The plant will be decommissioned in 10 years' time.
61
728
Assumptions made by Energy Co equivalent to those that would be used by market participants,
assuming Energy Co was allowed to transfer the liability, are:
Estimated labour, material
and overhead cost Estimated probability
$6m 40%
$8m 50%
$10m 10%
Third party contractors typically add a 20% mark-up in the industry and expect a premium of 5% of
the expected cash flows (after including the effect of inflation) to take into account risk that cash flows
may be more than expected.
Inflation is expected to be 3% annually on average over the 10 years.
The risk-free interest rate for a 10 year maturity is 4%.
An appropriate adjustment to the risk-free rate for Energy Co's non-performance risk is 2% (giving an
entity-specific discount rate of 4% + 2% = 6%).
Calculation of the fair value of the decommissioning liability:
$m
Expected cash flow [(6 × 40%) + (8 × 50%) + (10 × 10%)] 7.400
Third party contractor mark-up (7.4 × 20%) 1.480
8.880
10
Inflation adjustment ((8.88 × 1.03 ) – 8.88) 3.054
11.934
Risk premium (11.934 × 5%) 0.597
12.531
Fair value (present value of expected cash flow
10
adjusted for market risk 12.531 × 1/1.06 ) 6.997
4 Intangible assets (IAS 38)

Intangible asset: an identifiable non-monetary asset without physical substance. The asset must
Key term
be:
(a) Controlled by the entity as a result of events in the past; and

(b) Something from which the entity expects future economic benefits to flow.
(IAS 38: para. 8)
An asset is identifiable if:
(a) It is separable, or
(b) It arises from contractual/legal rights.
Supplementary reading
For revision of the detail of the definition of intangible assets, refer to Chapter 3 Section 3.1 of the
Supplementary Reading, available in Appendix 2 of the digital edition of the Workbook.
62
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PRACTICE QUESTIONS : SECTION 1
21 MEHRAN (MAR/JUN 16 ADAPTED) Walk in the footsteps of a top tutor
(a) Mehran, a public limited company, has just acquired a company, which comprises a
farming and mining business. Mehran wishes advice on how to fair value some of the
assets acquired.
One such asset is a piece of land, which is currently used for farming. The fair value of
the land if used for farming is $5 million. If the land is used for farming purposes, a
tax credit currently arises annually, which is based upon the lower of 15% of the fair
market value of land or $500,000 at the current tax rate. The current tax rate in the
jurisdiction is 20%.
Mehran has determined that market participants would consider that the land could
have an alternative use for residential purposes. The fair value of the land for
residential purposes before associated costs is thought to be $7.4 million. In order to
transform the land from farming to residential use, there would be legal costs of
$200,000, a viability analysis cost of $300,000 and costs of demolition of the farm
buildings of $100,000. Additionally, permission for residential use has not been
formally given by the legal authority and because of this, market participants have
indicated that the fair value of the land, after the above costs, would be discounted
by 20% because of the risk of not obtaining planning permission.
In addition, Mehran has acquired the brand name associated with the produce from
the farm. Mehran has decided to discontinue the brand on the assumption that it is
similar to its existing brands. Mehran has determined that if it ceases to use the
brand, then the indirect benefits will be $20 million. If it continues to use the brand,
then the direct benefit will be $17 million. Other companies in this market do not
have brands that are as strong as Mehran’s and so would not see any significant
benefit from the discontinuation. (8 marks)
(b) Mehran wishes to fair value the inventory of the entity acquired. There are three
different markets for the produce, which are mainly vegetables. The first is the local
domestic market where Mehran can sell direct to retailers of the produce. The
second domestic market is one where Mehran sells directly to manufacturers of
canned vegetables. There are no restrictions on the sale of produce in either of the
domestic markets other than the demand of the retailers and manufacturers. The
final market is the export market but the government limits the amount of produce
which can be exported. Mehran needs a licence from the government to export its
produce. Farmers tend to sell all of the produce that they can in the export market
and, when they do not have any further authorisation to export, they sell the
remaining produce in the two domestic markets.
It is difficult to obtain information on the volume of trade in the domestic market
where the produce is sold locally direct to retailers but Mehran feels that the market
is at least as large as the domestic market – direct to manufacturers. The volumes of
sales quoted below have been taken from trade journals.
KAPLAN PUBLISHIN G 63
730
PAPER P2 (INT AND UK) : CORPORATE REPORTING
Domestic market Domestic market

– direct to – direct to
retailers manufacturers Export market
Volume – annual Unknown 20,000 tonnes 10,000 tonnes Mehran
– sales per month 10 tonnes 4 tonnes 60 tonnes
Price per tonne $1,000 $800 $1,200
Transport costs per tonne $50 $70 $100
Selling agents’ fees per
tonne – $4 $6
(9 marks)
(c) Mehran owns a non-controlling equity interest in Erham, a private company, and
wishes to fair value it as at its financial year end of 31 March 2016. Mehran acquired
the ordinary share interest in Erham on 1 April 2014. During the current financial
year, Erham has issued further equity capital through the issue of preferred shares to
a venture capital fund.
As a result of the preferred share issue, the venture capital fund now holds a
controlling interest in Erham. The terms of the preferred shares, including the voting
rights, are similar to those of the ordinary shares, except that the preferred shares
have a cumulative fixed dividend entitlement for a period of four years and the
preferred shares rank ahead of the ordinary shares upon the liquidation of Erham.
The transaction price for the preferred shares was $15 per share.
Mehran wishes to know the factors which should be taken into account in measuring
the fair value of their holding in the ordinary shares of Erham at 31 March 2016 using
a market-based approach. (6 marks)
Required:
Discuss the way in which Mehran should fair value the above assets with reference to the
principles of IFRS 13 Fair Value Measurement.
Note: The mark allocation is shown against each of the three issues above.
Professional marks will be awarded in this question for clarity and quality of presentation.
(2 marks)
(Total: 25 marks)
22 EMCEE (MAR/JUN 16) Walk in the footsteps of a top tutor
(a) Emcee, a public limited company, is a sports organisation which owns several football
and basketball teams. It has a financial year end of 31 May 2016. Emcee needs a new
stadium to host sporting events which will be included as part of Emcee’s property,
plant and equipment. Emcee therefore commenced construction on a new stadium on
1 February 2016, and this continued until its completion which was after the year end
of 31 May 2016. The direct costs were $20 million in February 2016 and then
$50 million in each month until the year end. Emcee has not taken out any specific
borrowings to finance the construction of the stadium, but it has incurred finance costs
on its general borrowings during the period, which could have been avoided if the
stadium had not been constructed. Emcee has calculated that the weighted average
cost of borrowings for the period 1 February–31 May 2016 on an annualised basis
amounted to 9% per annum. Emcee needs advice on how to treat the borrowing costs
in its financial statements for the year ending 31 May 2016. (6 marks)
64 KAPLAN PUBLISHING
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PAPER P2 (INT AND UK) : CORPORATE REPORTING
The specific fiscal treatment and the tax to be paid were not linked to bringing the
asset to the condition necessary for its operations, as the asset would have been
operational without the tax. As such, the tax is a cost linked to the activity of Evolve
and should be accounted for as an expense in accordance with IAS 12 Income Taxes
and included in profit or loss for the period.
Marking scheme
Marks
(a) 1 mark per point up to maximum 8
(b) 1 mark per point up to maximum 9
(c) 1 mark per point up to maximum 6
Professional marks 2
––––
Total 25
––––
Examiner’s comments
In part (a), most candidates identified the appropriate classification under IAS 32 Financial
Instruments: Presentation.
Candidates answered part (b) well in general, with a good combination of knowledge and
application to the scenario.
In part (c), most candidates correctly advised over the tax payment, and expanded on the
treatment of the building under IAS 40 Investment Property. Very few answers considered
whether IFRS 3 was relevant in this case (despite reference to this in the question
narrative).
21 MEHRAN (MAR/JUN 16 ADAPTED) Walk in the footsteps of a top tutor
Key answer tips

This question requires a good knowledge of IFRS 13 Fair Value Measurement, as well as
strong application skills. Remember to start off by stating the relevant rules from the
accounting standard before applying these to the specific scenario. One mark is awarded
per valid point, so make sure that you are writing enough to obtain a pass mark.
(a) IFRS 13 and non-financial assets
Tutorial note
IFRS 13 Fair Value Measurement says that the fair value of a non-financial asset is
based on its ‘highest and best use’. This is an important concept. Fair value is also a
market-based measurement, rather than one which is entity specific.
310 KAPLAN PUBLISHING
732
ANSWERS TO PRACTICE QUESTIONS : SECTION 2
IFRS 13 Fair Value Measurement requires the fair value of a non-financial asset to be
measured based on its highest and best use. This is determined from the perspective
of market participants. It does not matter whether the entity intends to use the asset
differently.
The highest and best use takes into account the use of the asset which is physically
possible, legally permissible and financially feasible. IFRS 13 allows management to
presume that the current use of an asset is the highest and best use unless market or
other factors suggest otherwise.
Land
If the land zoned for agricultural use is currently used for farming, the fair value
should reflect the cost structure to continue operating the land for farming, including
any tax credits which could be realised by market participants. Thus the fair value of
the land if used for farming would be $5.1 million ($5m + (20% × $0.5m)).
The agricultural land appears to have an alternative use as market participants have
considered its alternative use for residential purposes. A use of an asset need not be
legal at the measurement date, but it must not be legally prohibited in the jurisdiction.
If used for residential purposes, the value should include all costs associated with
changing the land to the market participant’s intended use. In addition, demolition
and other costs associated with preparing the land for a different use should be
included in the valuation. These costs would include the uncertainty related to
whether the approval needed for changing the usage would be obtained, because
market participants would take that into account when pricing value of the land if it
had a different use. Thus the fair value of the land if used for residential purposes
would be $5.44 million (($7.4m – $0.2m – $0.3m – $0.1m) × 80%).
In this situation, the presumption that the current use is the highest and best use of
the land has been overridden by the market factors which indicate that residential
development is the highest and best use. Therefore the fair value of the land would
be $5.44 million.
Brand
In the absence of any evidence to the contrary, Mehran should value the brand on
the basis of the highest and best use by market participants, even if Mehran intends
a different use. Market participants would not discontinue the brand, because their
existing brands are less strong. As such, market participants would continue to use
the brand in order to obtain the direct benefits. Mehran’s decision to discontinue the
brand is therefore not relevant in determining fair value. As such, the fair value of the
brand is $17 million.
(b) Principal and most advantageous markets
Tutorial note
The price received when an asset is sold may differ depending on the market where
the transaction takes place. IFRS 13 therefore stipulates which particular market(s) to
use when measuring fair value. State the rules from IFRS 13 around the use of ‘the
principal market’ and ‘the most advantageous market’ before applying them to the
scenario. A well justified answer will score highly, even if it differs from the answer
below.
KAPLAN PUBLISHIN G 311
733

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Table of Contents

1- IAS 36 - Class notes 5

This standard shall not apply to:

IDENTIFYING AN ASSET THAT MAY BE IMPAIRED

3. The recoverable amount of an asset or a cash‑generating unit is the higher of:

Nasir Abbas FCA

Timing of impairment testing:

External sources of information

Internal sources of information

Dividend from a subsidiary, joint venture or associate

MEASURING RECOVERABLE AMOUNT

Nasir Abbas FCA

Fair value less cost to sell

2. Estimating the value in use of an asset involves the following steps:

Future cash flows

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3. Estimates of future cash flows shall include:

4. To avoid double‑counting, estimates of future cash flows do not include:

(b) improving or enhancing the asset’s performance.

6. Estimates of future cash flows shall not include:

RECOGNITION AND MEASUREMENT OF IMPAIRMENT LOSS

Impairment loss = Carrying amount – Recoverable amount

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Accounting for impairment loss:

If asset is carried at cost model If asset is carried at revaluation model

Dr. Impairment loss (P&L) Dr. Revaluation surplus

CASH GENERATING UNITS [CGU]

Identifying the CGU to which asset belongs

1. Identification of an asset’s cash‑generating unit involves judgement. If recoverable amount cannot be

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Recoverable amount and carrying amount of CGU

Allocating goodwill to cash‑generating units

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Testing cash‑generating units with goodwill for impairment

Timing of impairment tests

4. Similarly, there may be an indication of an impairment of a cash‑generating unit within a group of

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Impairment loss for a CGU

REVERSING AN IMPAIRMENT LOSS

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Indications of impairment loss reversal

External sources of information

Internal sources of information

Reversal an impairment loss for an individual asset

Upper limit for reversal for individual asset

Accounting for impairment loss reversal:

If asset is carried at cost model If asset is carried at revaluation model

Reversing an impairment loss for a CGU

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Applicable discount rate is 9%.

(iii) Goodwill allocated to this CGU amounts to Rs. 50 million.

Net disposal proceeds at end of year 210

Following information is available for the purpose of impairment testing:

Book value Fair value less cost to sell

(iii) Goodwill appearing in the books is Rs. 100 million.

2017 2018 2019

(v) Pre-tax discount rate of BBL is 9%.

Carrying Fair value Remaining

CGU 1 CGU 2 CGU 3