FAR-2 Complete Book by Sir Dawood

CAF-05
FAR-2 Book
CFE College of Accountancy and Finance
Financial Accounting and

Reporting-II
Autumn 2024
By Sir Dawood Shahid

Financial Accounting and Reporting-II Book
Serial number Chapter Name Page
1 Lease Part 1 1
2 IAS 21 Foreign Exchange Rate 15
3 IAS 12 Income Tax 54
4 IAS-16 & IAS-12 127
5 IAS-38 Intangible Asset 142
6 SIC-32 182
7 Consolidation 188
8 IFRS-3 296
9 Consolidation & IAS-28 Practice Questions 318
10 IAS-28 Complete 354
11 IFRS-9 Financial Instruments 383
12 IAS 10 & 37 447
13 IFRIC 1 Complete 536
14 IFRS-8 Operating Segments 554
15 IAS-41 Agriculture 578
16 Lease Part 2 594
17 Lease Part 3 645
18 IFRS-15 Revenue 651
19 IFRS-15 Appendix Examples 701
20 Final Account Part 2 727
21 Final Account Part 3 750
22 Ethics 767
Leases
Present Value
Discounting a single payment Discounting of series of payments

(1+i)-n Annuity
where
i=interest rate
n= no of years
Example:1 A company is required to pay 100,000 at the end of five years and suppose interest rate is 10%.
Calculate PV.
=100,000 (1.1)-5
=Rs 62,092
Example:2 A company is required to pay 100,000 at the end of each year for next five years.
 Interest rate = 10%
 Suppose today’s date is 1-1-2020
31-12-2020 100,000 x (1+0.1)-1 90,909
31-12-2021 100,000 x (1+0.1)-2 82,645
31-12-2022 100,000 x (1+0.1)-3 75,131
31-12-2023 100,000 x (1+0.1)-4 68,301
31-12-2024 100,000 x (1+0.1)-5 62,092
379,079
Important point to remember
In order to simplify the above calculation of PV, we can use formula of annuity if there are more than one
instalments. However, this formula can only be used if amounts are same and time interval between
amounts is constant.
1  (1  0.1) 5 
PV  100000  = Rs 379,079
 0.1 
Example:3
Find present Value of Four annual instalments of Rs 71,465 payable at the end of each year. Interest rate is
16%.
1  (1  0.16) 4 
PV  71,465  = Rs 199,972
 0.16 
Example:4
Four annual instalments of Rs 2,000 payable at the beginning of each year. Interest rate is 10%.
1-1-2020 2,000
1-1-2021 2,000
1-1-2022 2,000
1-1-2023 2,000
1  (1  0.1) 3 
PV = 2,000 + 2,000 
 0.1 
1
PV = Rs 6,974
A contract that conveys *right to use an asset for a period of time in exchange for consideration.
*For example property, plant and machinery, vehicles etc.
There are two parties involved in a lease contract.
Lessor:
An entity that provides the right of use an asset for a period of time in exchange for consideration.
Lessee:
An entity that obtains the right of use an asset for a period for time in exchange for the consideration.
Q.1 On 1 January 2020 a company obtains a small bottling and labeling machine from a leasing company under a
lease. The cash price of the machine was Rs 7,710 while the amount to be paid was Rs 10,000. The agreement
required the immediate payment of a Rs 2,000 deposit with the balance being settled in four equal annual
Installments commencing on 31 December 2020. The charge of Rs 2,290 represents Interest of 15% per annum,
calculated on the remaining balance of the liability during each accounting period. Depreciation on the plant
is to be provided for at the rate of 20% per annum on a straight line basis assuming a residual value of nil.
Ownership of asset is expected to be transferred to lessee at the end of lease term.
Required:
a) Calculate lease payments (LP) and PV of LP.
b) Prepare journal entries in the books of lessee for the year ended 31-12-2020 and 31-12-2021.
c) Prepare extracts from statement of financial position as on 31 December 2001 and statement of
comprehensive income for the year then ended including comparatives.
Q.2 An asset with a cash value of Rs 200,000 is leased over a period of 4 years.
 The asset is depreciated over 4 years to a nil residual value.
 Annual installments of Rs 71,475 are payable in arrears.
 The discount rate (interest rate implicit) is 16% per annum.
 The lease commenced on 1 March 2005. The first installment is payable on 28 February 2006 and the
financial year of the lessee ends on 31 December.
Required: For lessee:
a) Draft the journal entries for the year ended 31 December 2005
b) Statement of Financial Position extracts as on 31 December 2005
c) Statement of Comprehensive Income extracts for the year ended 31 December 2005
d) Draft the journal entries for the year ended 31 December 2006
e) Statement of Comprehensive Income extracts for the year ended 31 December 2006
f) Statement of Financial Position extracts as on 31 December 2008 (with comparatives)
g) Statement of Comprehensive Income extracts for the year ended 31 December 2008 (with
comparatives)
h) Statement of Financial Position extracts as on 31 December 2006 (with comparatives)
i) Statement of Comprehensive Income extracts for the year ended 31 December 2006 (with
comparatives)
2
Treatment of Lease in the Books of Lessee:
At the commencement date*, a lessee shall recognise a right to use asset and a lease liability.
*Commencement date; means the date, lessor makes the asset available for use to the lessee.
Initial Measurement:
The entry shall initially be made at the present value of lease payments*.
Lease Payments: means all relevant payments payable by lessee under the lease contract.
Subsequent Measurement of Right to use Asset:

After the commencement date, a lessee shall measure the right to use asset applying the cost model or
revaluation model. If revaluation model is applied then lessee shall apply the revaluation model to all of the
right to use assets that relate to that class of property, plant & equipment. However, generally cost model is
used.
Cost Model: [Para 30]

If asset is measured at cost model, then lessee shall measure the right to use the asset at cost less accumulated
depreciation and accumulated impairment losses.
Depreciation Policy: [Para 32]
If the lease transfers ownership of the asset to lessee by the end of the lease term or if it is reasonably certain
that lessee will exercise the purchase option available in the lease contract, lessee shall depreciate the asset
over useful life. If this is not the case, the lessee shall depreciate the asset over the shorter of lease term and
useful life e.g. let’s consider the following examples by assuming no transfer of ownership or purchase option
in lease contract.
Lease A Lease B
Commencement date 1-1-2015 1-1-2015
Useful life 31-12-2020 (6 Years) 31-12-2025 (11 Years)
Lease term 31-12-2025 (11 Years) 31-12-2020 (6 Years)
Depreciate over 6 years 6 years
Presentation: [Para 47]
A lessee shall present in statement of Financial Position [Para 47]:
(a) Right to use assets separately from other assets in non-current assets.
(b) Lease liabilities separately from other liabilities by segregating the amounts into current and non-current
liabilities.
In the statement of profit or loss, a lessee shall present interest expense on lease liability and depreciation
charge for the right to use asset. Interest expense is a component of financial charges in statement of profit or
loss. [Para 49]
In statement of cash flows; a lessee shall classify:
(a) Payment of principal portion of lease liability from lease rental in financing activities;
(b) Payment of interest portion from lease rental in either operating or financing activities; preferably in
operating activities [Para 50]
Disclosures
3
 A schedule of right to use asset as like in IAS-16 [Para 53]
 If the lessee measures the right to use asset at revalued amounts as per IAS-16, the lessee shall disclose
the revaluation related disclosures for that right to use asset (as discussed in IAS 16) [Para 57]
 A lessee shall disclose the maturity analysis of lease liability for the remaining contractual future lease
payments (without discounting) of each of the first five years plus a total amount for the remaining
years.
 A narrative disclosure about leasing activities of lessee [Para 59] e.g:
a) Nature of lessee’s leasing activities
b) Information about purchase options or guaranteed residual values (if any)
c) Interest rate
d) amount of instalments
e) Restrictions imposed by lessors in lease agreements.
Q.3 On 1 July 2010, Miracle Textile Limited (MTL) acquired a machine on lease, from a bank. Details of the lease
are as follows:
1) Cost of machine is Rs. 20 million.
2) The lease term and useful life is 4 years and 10 years respectively.
3) Installment of Rs. 5.80 million is to be paid annually in advance on 1 July
4) The interest rate implicit in the lease is 15.725879%.
5) At the end of lease term, MTL has an option to purchase the machine on payment of Rs. 2 million. The
fair value of the machine at the end of lease term is expected to be Rs. 3 million. It is reasonably certain
at the inception of the lease that lessee will exercise the option to purchase the asset.
MTL depreciates the machine on the straight line method to a nil residual value.
Required:
a) Prepare journal entries for the year ended 30-6-2011, 2012 & 2013.
b) Prepare relevant extracts of the statement of financial position and related notes to the financial statements
for the year ended 30 June 2012 along with comparative figure.
Note:
1. If notes are required in case of lease, lessee will disclose the leased asset (as per IAS-16) as well as
maturity analysis of lease liability (as per IFRS 16).
2. In addition, a narrative information about lease (as given in question) is also required to be written
after the disclosure.
3. If the question is silent that in whose books working is required, then follow the sequence of the
question to identify the entity.
Q.4 A lease was signed on April 1, 2004 for five years. Annual rental payable at the beginning of each year is Rs.
5,000. Useful life of equipment was 8 years and interest rate implicit in the lease was 25%.
Fair value of the equipment was Rs. 17,037. The lease contains a purchase option to be exercised at 700. It is
reasonably certain that option will be exercised by lessee. Year-end of lessee is 31 December.
Required:
a) Lease amortization schedule for entire lease [ Finance Charge Allocation Table]
b) Extracts from the lessee’s statement of financial position as at December 31,2004
c) Also prepare a disclosure of lease in the notes to the financial statements for the year ended December 31,
2004.
Q.5 On 31 December 1990 a company leases a machine with an expected useful life of four years. The cost of the
machine is Rs 50,000 and the lease is for four years. A rental of Rs 4,291 is payable at the end of each quarter,
so that the total lease payment will be (16 X Rs 4,291 = Rs. 68,656)
The company depreciate plant of this type over a period of four years by straight line method.
The allocation of interest is based on the use of an implicit rate of 16% as a discounting factor.
4
Required:
a) Indicate the way in which the machine and the lease liability will appear in the company’s statement of
financial position in the year 31-12-1990 to 31-12-1994.
b) Prepare disclosures for the year ended 31-12-1990 and 31-12-1991 related to maturity analysis of lease
liability.
Q.5A Nouman Engineering entered into a lease arrangement for which following information is available
a. Fair value of Assets is Rs. 20,000,000.
b. Date of agreement is 1.07.2009
c. Lease payments are Rs. 2,500,000 semiannual in arrears.
d. Useful life is 8 Years.
e. Interest rate implicit in lease is 13.731% p.a
f. Lease term are 6 years.
(Question is silent regarding transfer of ownership, then ignore it, ie assume no-transfer of ownership
at the end of lease term.)
Required:
a) Prepare journal Entries (in lessee’s Book) for the year ended 30.06.2010 and 30.06.2011.
b) Prepare statement of Financial Position extracts and notes to financial statements for the year ended
30.06.2011 along with comparatives.
ANSWER MISSING
Note: if question is silent regarding transfer of ownership or purchase option then ignore it.
Q.6 Mr. A entered into a lease arrangement, for which following information is available
 Fair value of Assets is Rs. 150,000.
 Date of agreement is 1-1-2005
 Lease payments are Rs. 30,000(per Annum) in arrears and a lump sum amount of Rs. 58,424 on 31
December 2009.
 Useful life is 10 Years.
 Ownership of asset is expected to be transferred to lessee at the end of lease term.
 Interest rate implicit in lease is 10%
 Lease term is 5 years.
Required:
1. Prepare journal Entries (in lessee’s Book) for the year ended 31 December 2005 & 31 December 2009
2. Prepare statement of Financial Position extracts and notes as on 31 December 2005.
Note: if more than one payments are on the same date them simply combine them while preparing the
finance charge allocation table (repayment schedule).
Q.6A
Commencement of lease 1-1-2011
Lease term 12 years
Fair Value of Asset Rs 80,000
Annual Rental Payments Rs 10,791 (Payable at beginning of Year)
Interest rate 12%
Economic Life 12 years
Purchase option Rs 20,000
Required:
Prepare a maturity analysis of future contractual lease payments as on 31.12.2011. Calculate the current and non-current
portion of lease liability at 31.12.2011.
5
Q.7 (spring 2023)
Gold Limited (GL) is a dealer of specialized engines. GL acquires each engine from a manufacturer at a cost of Rs. 58
million and sells it for Rs. 71 million on cash. The estimated
economic life of an engine is five years.
On 1 January 2022, Lead Limited (LL) leased an engine from GL on four years lease term. The first annual instalment of
Rs. 16 million was paid on 1 January 2022 and all subsequent annual instalments are payable on 1 January subject to
increase of Rs. 2 million in each year. LL incurred initial direct cost of Rs. 4 million, out of which GL reimbursed Rs. 1.5
million. GL estimates the residual value of the engine at the end of lease term to be Rs. 5 million. However, LL has
guaranteed an additional amount of Rs. 3 million at the end of lease term. Market rate for similar transaction is 15% per
annum. As an incentive to LL for entering into the lease, GL has incorporated an implicit rate of 10% per annum which
is known to LL. LL is also obliged to incur decommissioning cost of Rs. 9 million at the end of the lease term.
Discount rate of 12% per annum may be assumed wherever required but not given.
Required:
In accordance with IFRSs:
(a) prepare journal entries in the books of GL for the year ended 31 December 2022. (07)
(b) prepare relevant extracts from LL’s statement of profit or loss for the year ended
30 September 2022 and statement of financial position on that date. (10)
Q.08
On 1 January 2022, Namal Leasing Limited (NLL) leased a manufacturing plant to HalejiLimited (HL). Details
are as follows:
The non-cancellable lease term is five years during which annual instalment of Rs. 60 million is payable
by HL in arrears. The interest rate implicit in the lease is 16% per annum. NLL incurred an initial direct cost of
Rs. 4 million for arranging the lease. The estimated residual value of the plant at the end of the lease is Rs. 125
million, of which Rs. 90 million has been guaranteed by HL. The following information is also available:
NLL’s profit before tax for the year after all adjustments was Rs. 350 million.
Applicable tax rate is 30%. Tax authorities treat each lease as an operating lease.
Required:
Prepare the relevant extracts from NLL’s statement of profit or loss for the year ended31 December 2022, and the
statement of financial position as on that date.(Autumn 23) (08)
6
SOLUTIONS
A.1
a) LP
= 2,000 + 2,000 x 4
=10,000
PV of LP
=2,000 + 2,000 [1-(1+0.15)-4]
0.15
=7,710
b) i) Accounting entries for the year ended 31-12-2000
1-1-2000 Right to use Asset 7,710
Lease Liability 7,710
1-1-2000 Lease Liability 2,000
Cash 2,000
Interest Expense 856
Cash 2,000
31-12-2000 Depreciation 1,542
Acc Depreciation 1,542
(7,710 x 20%)
ii) Accounting entries for the year ended 31-12-2001
Interest Expense 685
Cash/Bank 2,000
c)i) Statement of Financial Position (Extracts)

As on 31-12-2001
Non-Current Assets 2001 2000
Right to use Plant 7,710 7,710
Accumulated Depreciation (3,084) (1542)
4,626 6,168
Non-Current Liability
Lease liability 1,739 3,251
Current Liability
Current Portion of Lease 1,512 1,315
ii) Statement of Comprehensive Income (Extracts)

For the year ended 31-12-2001
2001 2000
Depreciations 1,542 1,542
Interest Expense 685 856
7
Working
Lease Amortization Schedule/ Finance charge allocation table
Date Rental Principal Interest Balance
1-1-2000 7,710
1-1-2000 2,000 2,000 - 5,710
31-12-2000 2,000 1,144 856 4,566
31-12-2001 2,000 1,315 685 3,251
31-12-2002 2,000 1,512 488 1,739
31-12-2003 2,000 1,739 261 -
A.2
a) Journal Entries
Leased Liability 200,000
(200,000/4 x 10/12)
31-12-2005 Interest expense 26,667
Interest expense payable 26,667
(32,000 x 10/12)
LP = 71,475 x 4 = Rs 285,900
PV of LP
= 71,475 1-(1.16)-4
0.16
= Rs 200,000
Finance Charge Allocation table

Table is always based on the date of agreement
Date Rentals Principal Interest Balance

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

As on 31-12-2005
Non-current Asset
Right to use Asset 200,000
Less Acc Dep (41,667)
158,333
Non-Current Liability
Current Liability
Portion of non-current 39,475
Interest Payable 26,667
8
c) Statement of Comprehensive Income
Interest Expense 26,667
Depreciation Expense 41,667
d) Accounting Entries for the year ended 31-12-2006

28-2-2006 Interest payable 26,667
Bank 71,475

(200,000/4)
31-12-2006 Interest Expense 21,403
Interest Expense payable 21,403
(160,525 x 10/12 )
e) Statement of Comprehensive Income

Interest Expense (21,403 + 5,333) 26,736
Depreciation Expense (200,000/4) 50,000
f) Statement of Financial Position (Extracts)

As on 31-12-2008
2008 2007
Non-current Asset
Right to use Asset 200,000 200,000
Less Acc dep (191,667) (141,667)
8,333 58,333
Non-current Liability
Leased Liability - 61,616
Current Liability
Portion of current liability 61,616 53,118
Interest Expense Payable (9,859 x 10/12) 8,216 15,298
g) Statement of Comprehensive Income

2008 2007
Interest Expense 11,276 19,579
Depreciation Expense 50,000 50,000
2007 (25,684 x 2/12 + 18,357 x 10/12)
2008 (18,357 x 2/12 + 9,859 x 10/12)
h) Statement of Financial Position (Extracts)

As on 31-12-2006
9
2006 2005
Non-current Asset
Right to use Asset 200,000 200,000
Less Acc depreciation (91,667) (41,667)
108,333 158,333
Leased Liability 114,734 160,525
Current Liability
Portion of Lease liability 45,791 39,475
Interest Expense Payable 21,403 26,667
i) Statement of Comprehensive Income

2006 2005
Interest Expense As in (e) & (c) above 26,736 26,667
Depreciation Expense 50,000 41,667
A.3 Miracle Textile Limited
a)
Journal Entries for the year ended 30-6-2011
1-7-2010 Right to use Asset 20,000,000
Leased Liability 20,000,000
1-7-2010 Leased Liability 5,800,000
Cash/Bank 5,800,000
30-6-2011 Depreciation (20,000,000/10) 2,000,000
Accumulated depreciation 2,000,000
30-6-2011 Interest Expense 2,233,075
Interest Expense Payable 2,233,075

1-7-2011 Leased liability 3,566,925
Cash/Bank 5,800,000
30-6-12 Depreciation 2,000,000
Acc Depreciation 2,000,000

1-7-2012 Leased liability 4,127,855
Cash/Bank 5,800,000
30-6-13 Depreciation 2,000,000
b)
Statement of financial position (Extracts)
10
As at 30 June 2012
2012 2011
ASSETS Rupees
Non-current assets
Property, plant and equipment (Right to use Asset) 16,000,000 18,000,000
LIABILITIES
Non-current liabilities
Obligation under lease 6,505,219 10,633,074
Current liabilities 4,127,856 3,566,925

Current portion of obligation under lease
Interest Payable 1,672,144 2,233,075
Miracle Textile Limited
Notes to the financial statements (Extracts)
As at 30 June 2012
Property, plant and equipment 2012 2011
Right to use Asset Rupees
Cost
Opening balance 20,000,000 -
Addition during the year - 20,000,000
20,000,000 20,000,000
Accumulated depreciation
Opening balance (2,000,000) -
Depreciation for the year (2,000,000) (2,000,000)
(4,000,000) (2,000,000)
Carrying Amount 16,000,000 18,000,000
Disclosures of Lease
For the year ended 30-Jun-2012
Maturity analysis – contractual undiscounted lease payments
Less than one year 5,800,000
One to two year (5,800,000 + 2,000,000) 7,800,000
Two to three years -
Total undiscounted lease payments 15,600,000
For the year ended 30 June 2011
One to two year 5,800,000
Two to three years (5,800,000 + 2,000,000) 7,800,000
The Company has entered into a lease agreement with a bank in respect of a machine. The lease liability bears
interest at the rate of 15.725879% per annum. The company has the option to purchase the machine by paying
an amount of Rs. 2 million at the end of the lease term. The lease rentals are payable in annual installments.
There is no financial restriction in the lease agreement.
Workings
(W-1) LP = 5,800,000 x 4 + 2,000,000
11
=23,200,000 + 2,000,000
= Rs 25,200,000
PV of LP = 5,800,000 + 5,800,000 1- (1+0.15725879)-3 +2,000,000 (1+0.15725879)-4
= 18,884,914.63 + 1,115,085.178
= 20,000,000 (approx.)
(W-2)
Payment Rentals Principal Interest @ Closing
Date repayment 15.725879% Principal
01-Jul-10 - 20,000,000
01-Jul-10 5,800,000 5,800,000 - 14,200,000
01-Jul-11 5,800,000 3,566,925 2,233,075 10,633,075
0l-Jul-12 5,800,000 4,127,856 1,672,144 6,505,219
0l-Jul-13 5,800,000 4,776,997 1,023,003 1,728,222
30-Jun-14 2,000,000 1,728,222 271,778 -
25,200,000 20,000,000 5,200,000
This schedule is not a part of financial statements. It is an internal working of management of the entity for
the purpose of preparing accounting records.
A.4
a) Lease Amortization Schedule
1-4-2004 17,037
1-4-2004 5,000 5,000 - 12,037
1-4-2005 5,000 1,991 3,009 10,046
1-4-2006 5,000 2,488 2,512 7,558
1-4-2007 5,000 3,110 1,890 4,448
1-4-2008 5,000 3,888 1,112 560
31-3-2009 700 560 140 -
Note: This table starts from date of agreement.
b) Company Name
As on 31-12-04
Non-Current Asset
Right to use Asset 17,037
Less: Accumulated Depreciation (1,597)
15,440
Non-Current Liabilities
Lease Liability 10,046
Current Liabilities
Interest Payable (3009 x 9/12) 2,257
Current portion of lease liability 1,991
c) Company Name
Notes to the Financial Statements
Less than one year 5,000
One to two year 5,000
Two to three years 5,000
12
Three to four years (5,000 + 700) 5,700
Total undiscounted lease payments 20,700
(schedule of fixed assets missing)
The Company has entered into a lease agreement with a bank in respect of an equipment. The lease liability
bears interest at the rate of 25% per annum. The company has the option to purchase the equipment by paying
an amount of Rs. 700 at the end of the lease term. The lease rentals are payable in annual installments. There
are no financial restriction in the lease agreement.
Workings
LP = 5000 x 5 + 700
= 25,000 + 700
= 25,700
Present Value of LP
5,000 + 5000 [1- (1 + 0.25)-4 ] + 700 (1.25)-5 = 17,037
0.25
Depreciation = 17037/8 x 9/12 = 1,597
If purchase option is reasonably certain, asset is depreciated over useful life.
A.5
a) Company Name
Statement of Financial Position (Extracts)
As on 31-12 ….
1990 1991 1992 1993 1994
Non-Current Assets
Right to use Asset 50,000 50,000 50,000 50,000 50,000
Less Accumulated Depreciation (-) (12,500) (25,000) (37,500) (50,000)
50,000 37,500 25,000 12,500 -
Liability Under lease 40,271 28,890 15,576 - -
Current Liabilities
Current Maturity 9,729 11,381 13,314 15,576 -
b) Company Name
Notes to Financial Statements
Disclosure for the year ended 31-12-1990
Less than one year (4,291 x 4) 17,164
One to two years (4,291 x 4) 17,164
Two to three years (4,291 x 4) 17,164
Three to four years (4,291 x 4) 17,164
Less than one year (4,291 x 4) 17,164
One to two years (4,291 x 4) 17,164
Two to three years (4,291 x 4) 17,164
Workings
13
LP = 16 x 4,291
= Rs 68,656
PV of LP = 4,291 1-(1+ 16%/4)-16
16%/4
= Rs 50,000
Finance charge allocation
Date Rental Principal Finance Charge Balance
31-12-1990 - - 50,000
31-3-1991 4,291 2,291 2,000 47,709
30-6-1991 4,291 2,383 1,908 46,326
30-9-1991 4,291 2,478 1,813 42,848
31-12-1991 4,291 2,577 1,714 40,271
31-3-1992 4,291 2,680 1,611 37,591
30-6-1992 4,291 2,787 1,504 34,804
30-9-1992 4,291 2,899 1,392 31,905
31-12-1992 4,291 3,015 1,276 28,890
31-3-1993 4,291 3,135 1,156 25,755
30-6-1993 4,291 3,261 1,030 22,494
30-9-1993 4,291 3,391 900 19,103
31-12-1993 4,291 3,527 764 15,576
31-3-1994 4,291 3,668 623 11,908
30-6-1994 4,291 3,815 476 8,093
30-9-1994 4,291 3,967 324 4,126
31-12-1994 4,291 4,126 165 Nil
68,656 50,000 18,656 Nil
14
Concept of Foreign exchange rates
PURCHASE TRANSACTION:
1) A Pakistani company bought goods from an Australian supplier on 1-12-2016 for AU$10,000 paying by
cheque on the same date.
Exchange rate on 1-12-2016 was Rs.75 per 1 AU$.
01-12-2016:
Purchases 750,000
Bank (10,000 x 75) 750,000
2) Suppose purchase was on credit and amount was paid on 15-12-2016 when exchange rate was Rs.78 per 1 AU$.
01-12-2016:
Purchases 750,000
Payable (10,000 x 75) 750,000
15-12-2016:
Payable 750,000
Exchange Loss (bal.) 30,000
Bank (10,000 x 78) 780,000
3) Suppose purchase was on credit but amount was paid on 15-1-2017 when exchange rate was Rs.77 per 1 AU$.
Year-end of Pakistani company is 31-12-2016, when exchange rate was Rs. 79 per 1 AU$.
01-12-2016:
Purchases 750,000
Payable (10,000 x 75) 750,000
31-12-2016:
Exchange Loss 40,000
Payable (10,000 x 79 –750,000) 40,000
15-01-2017:
Payable (750,000 + 40,000) 790,000
Exchange gain(bal.) 20,000
Bank (10,000 x 77) 770,000
SALE TRANSACTION:
1) A Pakistani company sells goods to a customer in Saudi Arabia on 15-6-2018 for 10,00 Riyals, receiving
the amount on the same date, by cheque.
Exchange rate on 15-6-2018 was Rs.30 per 1 Riyal.
15-06-2018:
Bank(10,000 x 30) 300,000
Sales 300,000
2) Suppose sale was on credit and amount was received on 25-06-2018 when exchange rate was Rs.32 per 1 Riyal.
15-06-2018:
Debtor (10,000 x 30) 300,000
Sales 300,000
25-06-2018:
Bank(10,000 x 32) 320,000
Forex Gain (bal.) 20,000
Debtor 300,000
3) Suppose sale was on credit and amount was received on 05-07-2018 when exchange rate was Rs.33 per 1 Riyal.
Year-end of Pakistani company is 30-06-2018, when exchange rate was Rs. 34 per Riyal.
15-06-2018:
Debtor 300,000
Sales 300,000
30-06-2018:
Debtor [(10,000 x 34) – 300,000] 40,000
Forex Gain 40,000
05-07-2018:
Bank(10,000 x 33) 330,000
Forex loss (bal.) 10,000
Debtor (300,000+40,000) 340,000
Page 1 of 46
15
Foreign Currency Transactions IAS 21
Many businesses have transactions that are denominated in a foreign currency.
Individual companies often enter into transactions in a foreign currency. These transactions need to be
translated into the company’s own currency in order to record them in its ledger accounts. For example:
a Pakistani company may take out a loan from a French bank in Euros but will record the loan in
its ledger accounts in Rupees; or
a Pakistani company may sell goods to a Japanese company invoiced in Yen but will record
thesale and the trade receivable in Rupees in its ledger accounts.
IAS 21 deals with the translation of these transactions when they occur and at subsequent reporting
dates when re-translation at a different exchange rate may be necessary.
The two main accounting issues
Transactions, receivables and payables in foreign currencies are translated or converted from the foreign
currency into the currency of the reporting entity. The process of translation would be quite simple if
exchange rates between currencies remained fixed. However, exchange rates are changing continuously.
The two main accounting issues when accounting for foreign currency items are:
What exchange rate(s) should be used for translation?
How to account for the gains or losses that arise when exchange rates change?
Terms and definitions used in IAS 21
IAS 21 uses the following terms to describe which exchange rate should be used in the translation.
Definitions
Exchange rate: The rate of exchange between two currencies
Example: quoted exchange rates
You are quoted an exchange rate on 1 March 2011 of £1: $2.
Required:
A. If you had £1 000 to exchange, how many $ would you receive (i.e. buy) from the currency dealer?
B. If you had $1 000 to exchange, how many £ would you receive (i.e. buy) from the currency dealer?
C. Restate the exchange rate in the format £ …: $1.
Solution to example: quoted exchange rates
A: £1 000 / 1 x 2 = $2 000
B: $1 000 / 2 x 1 = £500
C: £1 / 2 = £0.5 therefore, the exchange rate would be £0.5: $1
Spot rate: The exchange rate at the date of the transaction
Closing rate: The spot exchange rate at the end of the reporting period
For example, suppose that on 16 November a Pakistani company buys goods from a US supplier, and the goods
are priced in US dollars. The financial year of the Pakistani company ends on 31 December, and at this date the
goods have not yet been paid for.
The spot rate is the rupees/dollar exchange rate on 16 November, when the transaction occurred.
The closing rate is the exchange rate at 31 December.
Exchange difference: A difference resulting from translating a given number of units of one
currency into another currency at different exchange rates.
Example:
On 31 January an entity has a foreign debtor of US$2 000, to be received on 15 April.
The local currency is denominated as rupees and the foreign currency is denominated as US$.
The exchange rates of US$: Rs are as follows:
Required: 31 January: $1:Rs4
A. Calculate the value $1:Rs7
28 February: of the foreign debtor in local currency at the end of the months January,
31 March: $1:Rs6
16
February and March.
B. Calculate the exchange differences arising during February and March and in total.
C. Show how the debtor and exchange differences would be journalised in the entity’s books on 31
January, 28 February and 31 March. Assume the debtor was created on 31 January through a sale of
goods. Ignore the journal required for the cost of the sale.
D. Solution to example:
A.
On 31 January the foreign debtor would be worth US$2 000 x Rs4 = Rs8 000.
On 28 February the foreign debtor would be worth US$2 000 x Rs7 = Rs14
000. On 31 March the foreign debtor would be worth US$2 000 x Rs6 = Rs12
000.
B.
Between 31 January and 28 February, an exchange difference (gain) of Rs6 000 arises: [14,000-8,000].
Between 28 February and 31 March, an exchange difference (loss) of Rs2 000 arises: [12,000-14,000].
In total, between 31 January and 31 March, a net exchange difference (net gain) of Rs4,000 arises:
[12,000-8,000].
C.
Journals:
Debit Credit
31 January
Foreign debtor 8 000
Sales 8 000
Sold goods to foreign customer
28 February
Foreign exchange gain 6 000
Translating foreign debtor
31 March
Foreign exchange loss 2 000
Translating foreign debtor
NOTE: Notice how the amount of sales income recognized is unaffected by changes in the exchange
rates. Sale would be recorded at exchange rate on the date of transaction.
Monetary items: Units of currency held and assets and liabilities to be received or paid (in cash), in a fixed
number of currency units. Examples of monetary items include cash itself, loans, trade payables, trade
receivables and interest payable etc. [in other words monetary items include receivables and payables]
Non-monetary items: they are items that are not monetary items. They include non-current assets,
investment properties and inventories etc.
Types of transactions:
The rules of IAS 21 apply when an entity:

buys or sells goods or services that will be paid for in a foreign currency;

borrows or lends money when the interest payments and repayments of principal are in a foreign
currency;

purchases or disposes of non-current assets in another currency; or

receives or pays dividends in another currency
17
Dates
Dates involved with foreign currency transactions are very important because exchange rates differ from
day-to-day. The following dates are significant when recording the foreign currency transaction:
 transaction date – this is when a loan is raised (obtained)/made (given) or an item is purchased or
sold;
 settlement date – this is when cash changes hands in settlement of the transaction (e.g. the
creditor is paid or payment is received from the debtor); and
 translation date – this is the financial year-end of the local entity.
Initial measurement:
The foreign currency transaction is measured by applying to the foreign currency amount the spot rate
between the foreign currency and the functional (means local) currency.
If the company purchases goods on many different dates during the period in the foreign currency, it might
be administratively difficult to record every transaction at the actual spot rate. For practical reasons, IAS 21
therefore allows entities to use an average rate for a time period (means average rate of the past week or
month), provided that the exchange rate does not fluctuate significantly over the period.
For example, an entity might use an average exchange rate for a week or a month for translating all the
foreign currency-denominated transactions in that time period.
Subsequent measurement: monetary items
Overview
As an exchange rate changes (and most exchange rates fluctuate on a daily basis), the measurement of
amounts owing to or receivable from a foreign entity changes. For example, an exchange rate of US$1:
Rs.140 in January can change to an exchange rate of US$1: Rs.145 in February and strengthen back to
US$1: Rs.142 in March. Due to this, a foreign debtor or creditor will owe different amounts depending on
which date the balance is measured.
Monetary items (amounts payable or receivable) are translated to the latest exchange rates:
 on each subsequent reporting date; and
 on settlement date.
Exchange differences
The translation of monetary items will almost always result in exchange differences: gains or losses (unless
there is no change in the exchange rate since transaction date).
Treatment:
The exchange differences on monetary items are recognised in profit or loss in the period in which they
arise.
Detailed discussion of Import and export transactions
Transaction and settlement on the same day (cash transaction)
If the date on which the transaction is recorded (transaction date) is the same date on which cash changes
hands in settlement of the transaction (settlement date), then there would obviously be no exchange
differences to account for.
Settlement deferred (credit transactions)

Exchange differences arise when the settlement date is after transaction date. The initial transaction (e.g.
asset acquired, expense incurred or sale earned) is recorded at the spot rate on the transaction date. Any
movement in the exchange rate after transaction date relating to the amount outstanding (payable or
receivable) is recorded as a foreign exchange gain (income) or foreign exchange loss (expense).
Settlement of a credit transaction before year-end
When the settlement of a credit transaction occurs before year-end:
 record the initial transaction at spot rate on transaction date;
 convert the outstanding balance (owing or receivable) to the spot rate on settlement date; and
 record the payment (made or received).
Settlement of a credit transaction after year-end
When the settlement of a credit transaction occurs after year-end:
18
 record the initial transaction at spot rate on transaction date;
 translate the outstanding balances (owing or receivable) to the spot rate on translation date
(year-end);
 convert the outstanding balances (owing or receivable) to the spot rate on settlement date;
 record the payment (made or received).
Foreign loans
Another type of possible transactions is the granting of loans to foreign entities or the receipt of a loan froma
foreign lender.
Treatment of interest
Interest income (on loans given) or interest expense (on loans received) must be calculated based on the
outstanding foreign currency amount and then translated into the local currency at the average rate over the
period that the interest was incurred or earned.
Approach:
The easiest way to do this correctly is:
1. calculate the loan amortization table in the foreign currency;
2. journalize the payment at the spot rate;
3. journalize the interest income or expenses at the average rate; and
4. calculate the difference between the carrying amount of the loan and the value of the balance
owing at spot rate at year end (means closing rate) and recognize the exchange differences.
Example: foreign loans
BS Limited, a Pakistani company, obtained a five-year long term loan from Gill Bates, living in the
CaymanIslands. The terms of the loan were as follows:
Gill transfers EUR100 000 into BS’s bank account on 1 January 2014.
The interest rate on the loan was 7. 931% p.a.
BS is required to make repayments of EUR25 000 inclusive of principal and interest annually, with the
first payment falling due on 31 December 2014.
BS Limited has the Rupees as its functional currency. The

currency used in the Cayman Islands is the EUR (Euro). BS Limited has a
31 December financial year-end.
Relevant exchange rates are:
Date Spot rates Average rates
1 January 2014 EUR1: Rs8
31 December 2014 EUR1: Rs8.5
31 December 2015 EUR1: Rs7.5
2014 EUR1: Rs8.20
2015 EUR1: Rs7.70
Required:
Show the journal entries required to record the above loan transaction in BS Limited’s
accounting records for the years ended 31 December 2014 and 31 December 2015.
Solution to example: foreign loans
Journals:
Debit Credit
1 January 2014
Bank 100,000 x 8 800,000
Long-term loan 800,000
Proceeds received on the foreign loan raised from Cayman Islands
31 December 2014
Finance cost 7,931 (W1) x 8.2 = 65,034 65,034
19
Interest expense on the foreign loan (converted at average rates)
Long-term loan 25,000 x 8.5 212,500
Bank 212,500
Payment of instalment on loan: (at spot rate on payment date)
82 931 (W1) x 8.5 – balance so far:
Foreign exchange loss 52,380
Long-term loan (800 000 + 65 034 – 212500)=652,534 52,380
Translating foreign loan at year end (at spot rate at year-end)
31 December 2015
Finance cost 6 577 (W1) x 7.70 50,643
Interest expense raised on loan (converted at average rates)
Long-term loan 25 000 x 7.5 187,500
Bank 187,500
Payment of instalment on loan: (at spot rate on pmt date)
64 508 (W1) x 7.5 – balance sofar:
Foreign exchange gain (82 931 x 8.5 + 50 643 – 187500) =568,057
Translating foreign loan at year end (at spot rate at year-end) 84,247
Working
Effective interest rate table in foreign currency: Euros
1-1-2014 100,000
31-12-2014 25,000 17,069 7,931 82,931
31-12-2015 25,000 18,423 6,577 64,508
31-12-2016 25,000 19,884 5,116 44,624
31-12-2017 25,000 21,461 3,539 23,163
31-12-2018 25,000 23,163 1,837 0
Example:
A Pakistani company whose functional currency is the rupee deposited $90,000 into a dollar current account
in a bank on 30 June 2018. The company paid an additional $10,000 into the account on 30 September 2018.
There were no other movements on this account.
Exchange rates over the period were as follows:
30 June: Rs.100/$.
30 September Rs.99/$.
31 December (year-end): Rs.95/$.
Required: Calculate the exchange differences on 31 December 2018.
Solution:
The exchange difference arising at 31 December can be calculated as follows:
The following approach simply records all items at the appropriate rates and identifies the exchange
difference as a balancing figure.
$ Rate Rs.
Amount deposited on (30 June) 90,000 100 9,000,000
Amount paid in (30 Sept.) 10,000 99 990,000
Exchange loss (bal) (490,000)
Balance at end (31 Dec.) 100,000 95 9,500,000

Example:
A Pakistani company whose functional currency is the rupee borrowed $90,000 on 30 June 2018. The
company recognised an interest accrual of $10,000 at its year-end (31 December 2018).
20
Exchange rates over the period were as follows:
30 June: Rs.100/$.
Average for the period from 30th June to 31st Dec 2018 is
Rs.99/$. 31 December (year-end): Rs.95/$.
Required:
Calculate the total loan payable inclusive of interest as on 31 December 2018.
Exchange difference (interest at average rate)
$ Rate Rs.
Amount borrowed on (30 June) 90,000 100 9,000,000
Interest 10,000 99 990,000
Exchange gain(bal) (490,000)
Balance at end (31 Dec.) 100,000 95 9,500,000
There is an exchange gain because the company has a dollar liability but the dollar has weakened
against the rupee over the period.
Practice question
A Pakistani company bought a machine from a German supplier for €200,000 on 1 March 2018 when the
exchange rate was Rs. 120/€. By 31 December 2018, the end of the company’s accounting year, the exchange
rate was Rs. 110/€. At 31 December 2018, the Pakistani company had not yet paid the German supplier any of
the money that it owed for the machine.
Required
Show the journal entries that must be recorded for the year ended 31.12. 2018.
Solution:
1.03.
Debit Credit
Machinery 24,000,000
Payable (200,000 x 120) 24,000,000
31.12
Payable 2,000,000
Foreign exchange Gain 2,000,000
[24,000,000 – (200,000 x 110)]
Practice question
A Pakistani company sells goods to a customer in Saudi Arabia for SR 72,000 on 12 September 2018, when
the exchange rate was Rs.28/SR (Saudi riyal). It received payment on 19 November 2018, when the exchange
rate was Rs.30/SR.The financial year-end is 31 December 2018.
Required
Show the journal entries that must be recorded for the year ended 31.12. 2018..
Solution:
The sale will be initially translated at the spot rate giving rise to revenue and receivables of Rs.
2,016,000 (SR 72,000 x Rs.28).
The receipt of the payment is recorded at Rs. 2,160,000 (SR 72,000 x
Rs.30). The necessary double entries are as follows:
On 12 September Debit Credit
Receivables 2,016,000
Revenue (72,000 x 28) 2,016,000
On 19 November
Bank (72,000 x 30) 2,160,000
Foreign exchange Gain 144,000
21
TREATMENT OF MONRTARY AND NON-MONRTARY ITEMS
CONCEPT OF MONETARY AND NON MONETARY
Monetary items 1. Debtor and other receivables (cash is receivable)
(receivable/payable) 2. creditor (cash payable)
3. accruals (payables in cash such as rent payable)
Money is receivable/payable 4. loan receivable and payable
5. interest receivable and payable
6. cash dividend and payable
7. cash in hand (currency unit)
8. cash at bank (currency unit) (including term deposit)
9. investment in debt securities/debentures
10. lease receivable
11. lease liability
12. advance (to received back in cash)
13. current tax asset/liabilities
14. deferred tax asset/liabilities
15. refund liabilities (payable in cash)
16. provisions (to be paid in cash)
17. provisions for employee benefits
Non-Monetary items 1. property plant and equipment

2. investment property (IAS-40)
3. intangible assets
4. investment in shares
5. biological assets (IAS-41)
6. right of use of asset
7. inventory
8. advance paid for goods/services
9. advance received for goods (liability to provide service) (contract
liability) (advance from customer)
10. prepaid expenses
11. provisions (not be settled in cash)
12. differed government grant
13. equity items appearing in balance sheet (share capital and reserve)
NON-MONETRY ITEMS
1. On initial recognition Recorded at the spot rate on the date of the transaction
2. At the end of a financial No retranslation is required. The transaction is left at the original spot rate
year Note: if a non-monetary is carried at fair value than re-translate at the
exchange rate prevailing at the date when fair value is determined. The
exchange difference is recognized in the same location as the revaluation
gain or loss. The revaluation gains (where there is no previous loss) under
IAS -16 And IAS-38 is recorded in other comprehensive income therefore
exchange difference is also recorded in the other comprehensive income.
The fair value gain under IAS-40 is recorded in profit and loss therefore
exchange difference is also recorded in profit and loss.
MONETARY ITEMS
1. On Initial Recognition - a transaction must be translated at the spot rate on the date of the
transaction.
NOTE: if transaction is settled before year end, this retranslation is not
required.
2. At year end of a financial - The monetary items must be retranslated at the rate ruling at balance
year sheet date.
- The exchange difference is recognized in the statement of profit or loss
NOTE: if transaction is settled before year end, this retranslation will not be
required.
22
3. When the transaction is -
The receipt or payment must be recorded at the rate ruling at the date of
settled the receipt and payment.
- The exchange difference is recognized in the settlement of profit or loss.
NOTE: Interest incomes and expenses are recorded on average rate over the period.
Summary of the rules for monetary and non-monetary items:
Asset or liability Accounting treatment Treatment of exchange difference
Monetary items Re-translate at the closing Recognised in P&L

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

carried at cost model transaction is left at the
original spot rate.
Non-monetary items Re-translate at the exchange recognise in the same
carried at fair value rate ruling at the date of the location as gain/loss
fair value adjustment.
Subsequent measurement: non-monetary items
Non-monetary items include assets such as:
property, plant and equipment;
intangible assets; and
inventories.
They could have been purchased using foreign currency, in which case they are converted into the local
currency at the spot rate, and are thereafter denominated in the local currency (also called the functional
currency)
The subsequent measurement of non-monetary items occurs simply in terms of the relevant IFRS.
These items are not affected by subsequent changes in exchange rates if carried at cost model. For
example, if an item of plant is purchased where the purchase was denominated in a foreign currency, this is
converted into the local currency and the plant is then measured in terms of IAS 16 Property, plant and
equipment.
e.g. plant purchased 100,000 Riyals on 01.01.2018, when exchange rate was Rs. 30 / 1 Riyal to be paid after
30 days.
01.01.2018
Debit Credit
Plant 3,000,000
Payable (100,000 x 30) 3,000,000
After that plant will be measured according to requirements of IAS 16 and 3,000,000 will be treated as cost.
Impairment loss: if carrying amount is more than recoverable amount, difference is called as impairment loss.
Recoverable amount is higher of:
Fair value less cost to sell
Value in use.
Example: non-monetary item: measurement of plant bought from a foreign supplier (At Cost
Model) On 1 January 2011, a Pakistani company bought plant from an American company for $100
000. The Pakistani company settled the debt on 31 March 2011.
Spot rates
Date (Rupees:
Dollar)
1 January 2011 Rs6.0: $1
31 March 2011 Rs6.3: $1
31 December 2011 Rs6.5: $1
31 December 2012 Rs6.2: $1
The plant is depreciated to a nil residual value over 5 years using the straight-line method.
The recoverable amount was calculated on 31 December 2012: Rs320 000.
23
Required:
Show all journal entries relating to plant for the years ended 31 December 2011 and 2012 in the books of
the Pakistani company.
Solution to example: non-monetary item: journals
1 January 2011 Debit Credit
Plant: cost $100 000 x Rs6 600,000
Foreign creditor 600,000
Purchased plant from a foreign supplier (translated at spot rate)
31 March 2011
$100,000 x Rs6.30 – R600,000
Foreign exchange loss 30,000

Bank ($100 000 x Rs6.30) 630,000
Payment of foreign creditor
31 December 2011
Depreciation (600 000 – 0) / 5 years 120,000
Plant: accumulated depreciation 120,000
Depreciation of plant
31 December 2012
Depreciation (600 000 – 0) / 5 years 120,000
Depreciation of plant
CA: 600 000 –120 000 –120
Impairment loss 000 40,000
Plant: accumulated impairment – Recoverable amount: 320
loss 000 40,000
CA= 360,000; Recoverable amount
= 320,000 = 40,000
Notice how the measurement of the non-monetary asset (plant) is not affected by the changes in the
exchange rates.
Revaluation of non-current assets
If the company is using revaluation model in IAS 16 for the property, plant and equipment then these non-
current assets might be revalued.
For example, a Pakistani company might own a property in Thailand. The cost of the property would have
been recorded at the spot rate when the property was originally purchased. However, it might
subsequently have been revalued if revaluation model of IAS 16 is applied. The revaluation will almost
certainly be in Thai baht (foreign currency). This revalued amount must be translated into the functional
currency of the entity (in this example, rupees).
Example:
A Pakistani company (with the rupee as its functional currency) has a financial year ending on 31 December.
It bought a building classified as property, plant and equipment in Bahrain on 1 jan 2016 for 100,000 Bahraini
dinar (BD) by paying the amount on same date. Building has a useful life of 50 years.
The building was revalued to BD 120,000 on 31 December 2016.
Exchange rates:
1 Jan 2016 Rs.275/BD1
31 December 2016 Rs.290/BD1
The transaction would be recorded as follows:
24
On 1 Jan 2016
Debit Credit
Property, plant and equipment 27,500,000
Bank (Rs. 275 x BD100,000) 27,500,000
Being the initial recognition of building bought in a foreign currency
On 31 December 2016
BD Rate Rs.
Building on initial recognition 100,000 275 27,500,000
Depreciation(27,500,000/50) 550,000
Carrying amount 26,950,000
Revaluation surplus and Exchange gain (balance) 7,850,000
Building at year end 120,000 290 34,800,000
Accounting entries will be:
Debit Credit
Accumulated depreciation 550,000
Building 550,000
Building 7,850,000
Revaluation surplus (OCI) 7,850,000
Being the recognition of revaluation gain and exchange gain on retranslation of carrying amount of a
building denominated in a foreign currency.
Treatment of exchange gain or loss:
Any gain or loss arising on retranslation of this property is recognized in the same place as the gain or loss
arising on the revaluation that led to the retranslation.
If a revaluation gain is recognized in other comprehensive income (i.e within equity) in accordance with IAS
16, the exchange difference would also be recognized in other comprehensive income. If, however
revaluation loss is recognized in profit or loss in accordance with IAS 16, the exchange difference would
alsobe recognized in profit or loss.
Investment property (IAS 40)
it is a property (land or buildings or part of a building or both)
held by an owner
to earn rentals or for capital appreciation or both, rather than for:
 use in the production or supply of goods and services or for administrative use (Owner-occupied property
IAS 16); or
 sale in ordinary course of business (Inventories IAS 2)
Measurement at initial recognition

Investment property should be measured initially at cost plus any directly attributable expenditure
(means transaction taxes e.g. legal fees, property transfer taxes and other transaction costs) incurred to
acquire the property.
Measurement after initial recognition
After initial recognition an entity may choose as its accounting policy:
the fair value model; or
the cost model.
The chosen policy must be applied to all the investment properties of the entity unless fair value of an
investment property is not reliably measurable.
1. Under the fair value model, the entity should:
revalue its investment property to ‘fair value’ at the end of each financial year; and
recognize any resulting gain or loss in profit or loss for the period.
This is different to the revaluation model of IAS 16, where gains are reported as other
25
comprehensive income and accumulated as a revaluation surplus.
The investment property measured under fair value model would not be depreciated.
2. Cost model for investment property
The cost model in IAS 40 follows the provisions of IAS 16. The property is measured at cost
less accumulated depreciation (related to the non-land element) and less impairment loss if any.
Example: Accounting for investment property under both the models
On 1 January 2011 Entity P purchased a property for its investment potential. The property cost Rs. 1
million with transaction costs of Rs. 10,000.
The building component of the property at this date was Rs. 300,000 and the remaining portion is land.
The building has a useful life of 50 years.
At the end of 2011 the property’s fair value had risen to Rs. 1.3 million.
The amounts which would be included in the financial statements of Entity P at 31 December 2011, under
the cost model are as follows:
Cost model
The property will be included in the statement of financial position as follows:
Rs.
Cost (1,000,000 + 10,000) 1,010,000
Accumulated depreciation (300,000 ÷ 50 years) (6,000)
Carrying amount 1,004,000
The statement of profit or loss will include depreciation of Rs. 6,000. Fair value of Rs. 1.3 million will be
only disclosed in notes to financial statements.
Fair value model
The amounts which would be included in the financial statements of Entity P at 31 December 2011, under the
fair value model are as follows:
The property will be included in the statement of financial position at its fair value of Rs. 1,300,000.
The statement of profit or loss will include a gain of Rs. 290,000 (Rs. 1,300,000 –
Rs. 1,010,000) in respect of the fair value adjustment.
The investment property measured under fair value model would not be depreciated.
IAS 40 with IAS 21
The subsequent measurement of non-monetary items occurs simply in terms of the relevant IFRS. For
example, if an investment property is purchased and purchase was denominated in a foreign currency, this is
converted into the local currency and the investment property is then measured in terms of IAS 40. These
items are not affected by subsequent changes in exchange rates if carried at cost model.
Revaluation of non-current assets
If the company is using fair value model in IAS 40 for the investment properties, then these non-current assets
might be revalued.
Example:
A Pakistani company (with the rupee as its functional currency) has a financial year ending on 31 December.
It bought a building classified as investment property in Bahrain on 1 December 2016 for 100,000 Bahraini
dinar (BD) by paying the amount on same date. Building has a useful life of 50 years.
The building was revalued to BD 120,000 on 31 December 2016 according to fair value model in IAS 40.
Exchange rates:
The transaction would be recorded as follows:
On 1 December 2016
26
Debit Credit
Investment property 27,500,000
Bank (Rs. 275 x BD 100,000) 27,500,000
Being the initial recognition of building bought in a foreign currency
As fair value model of IAS 40 is used therefore there is no concept of
any depreciation.
31 December 2016
Building at year end 120,000 290 34,800,000
Fair value gain is [34,800,000 – 27,500,000 = 7,300,000]
As the building is an investment property carried at fair value, revalued following the rules in IAS 40
thecredit of Rs. 7,300,000 would be to the statement of profit or loss.
Debit Credit
Building 7,300,000
P.L Other income 7,300,000
Determining the transaction date (Further discussion)
The first thing that must be determined in a foreign currency transaction is the transaction date. A general
rule for purchase or sale transaction is that the transaction date would be when the risks and rewards of
ownership transfer from one entity to the other entity.
For regular import or export transactions, establishing the date that risks and rewards are transferred is
complicated by the fact that goods sent to or ordered from other countries usually spend a considerable
time in transit.
Common ways of shipping goods between countries:
 Free on Board (F.O.B); or
 Cost, Insurance, Freight (C.I.F).
If a transaction is arranged on a Free on Board (F.O.B) basis, the situation is:

 generally, as soon as the entity shipping the goods has delivered the goods to the port of departure
and they have been loaded onto a ship, the risks of the remaining voyage transfers to the entity that
will be receiving those goods; and therefore
 the transaction date will generally be the date that the goods are loaded onto a ship (by seller).
If a transaction is arranged on a Cost Insurance Freight (C.I.F) basis, the situation is:
 generally, the entity shipping the goods retains the risks of the voyage until the goods arrive in
the receiving port and are cleared through customs; and therefore
 the transaction date will generally be the date that the goods are offloaded at the destination harbor
(means port) and are cleared through customs (means goods arrive at the buyer’s port).
The exact wording of the terms of the shipping documentation must, however, always be investigated first
before determining the transaction date.
Determining the settlement date
The settlement date is the date on which:
 a foreign creditor is fully or partially paid; or
 full or partial payment is received from a foreign debtor.
Determining the translation date:

It is possible for a foreign currency transaction to spread over more than one financial year. In other words,
where such a transaction is spread over more than one financial year, at least one year-end occurs between
transaction date and settlement date. The year-end/s falling between transaction and settlement date is
known as the translation date.
Example: determining transaction, settlement and translation dates
 On 13 January 2014, Home Limited faxed an order for 1 000 yellow bicycles to Far Away Limited, a
bicycle manufacturer in Iceland, to be paid on 30 April 2014.
 On 16 January 2014, Home Limited received a faxed confirmation from Far Away Limited informing
them that the order had been accepted.
27
On 25 January 2014, Far Away Limited finished production of the required bicycles and packed
them for delivery.
 On 1 February 2014, the bicycles were delivered to one of Iceland’s many harbours and were loaded
onto a ship
 The ship set sail on 4 February 2014.
 Due to stormy weather it only arrived at the port in Home Limited’s country on 31 March 2014.
 The bicycles were offloaded and released from customs on the same day.
 On 5 April 2014, the bicycles finally arrived in Home Limited’s warehouse.
 Far Away Limited was paid on 30 April 2014.
 Home Limited has a 28 February financial year-end.
Required:
A. State the transaction, translation and settlement dates assuming the bicycles were shipped F.O.B.
B. State the transaction, translation and settlement dates assuming the bicycles were shipped C.I.F.
Solution to example: determining transaction, settlement and translation dates
A. If shipped on FOB basis:
The transaction date is 1 February 2014: in terms of an F.O.B. transaction, the risks of ownership of the
bicycles would pass to Home Limited on the date the bicycles are loaded onto the ship.
The translation date is 28 February 2014 since this is Home Limited’s year-end on which date the
foreign currency monetary item (foreign creditor) still exists, (the transaction date has occurred and the
settlement has not yet happened).
The settlement date is 30 April 2014 being the date on which Home Limited pays the foreign creditor.
B. If shipped on CIF basis:
The transaction date is 31 March 2014: in terms of a C.I.F. transaction, the risks of ownership of the
bicycles would pass to Home Limited on the date that the bicycles are cleared from customs.
There is no translation date because at 28 February 2014 no foreign currency monetary item (foreign
creditor) existed. Thus there are no items to translate at either year-end.
The settlement date is 30 April 2014 being the date when the foreign creditor was paid.
Terms and definitions used in IAS 21:
IAS 21 identifies three types of currency: the presentation currency, the functional currency and foreign
currency.
Presentation currency: The currency in which the financial statements of an entity are presented
Functional currency: The currency of the primary economic environment in which an entity
operates. Foreign currency: A currency other than the functional currency of the entity
Example
Madina limited is a UK-registered mining company whose shares are traded on the London Stock Exchange.
Its operating activities take place in the gold and diamond mines of South Africa.
 What is the presentation currency of Madina limited?
 What is its functional currency?
 Madina limited bought specialised mining equipment from the US, invoiced in US dollars.
What type of currency is the US dollar?
Answer
 The presentation currency (reporting currency) is sterling (UK pounds). This is a
requirement of the UK financial markets regulator for UK listed companies.
 The functional currency is likely to be South African Rand, even though the company is based in
the UK. This is because its operating activities take place in South Africa and so the company will be
economically dependent on the Rand if the salaries of most of its employees, and most operating
expenses and sales are in Rand.
28
 The US dollars are ‘foreign currency’ for the purpose of preparing Madina Limited’s accounts.
Presentation currency
An entity is permitted to present its financial statements in any currency. This reporting currency is often
the same as the functional currency, but does not have to be. [Generally the presentation currency is same as
functional currency].
Functional currency
When a reporting entity records transactions in its financial records, it must identify its functional currency
and make entries in that currency. It will also, typically, prepare its financial statements in its functional
currency.
Steps to be followed (summary of above paragraph)
 Record the transactions in functional currency.
 Company will first prepare its financial statements in its functional currency.
 If presentation currency is different from functional currency, then translate the financial statements
prepared in functional currency into financial statements prepared in presentation currency.
IAS 21 describes the functional currency as
1. The currency that mainly influences: [Para 9]
 sales prices for goods and services
 labour, material and other costs of providing goods or services.
2. The following factors may also provide an evidence of an entity’s
functionalcurrency: [Para 10]
 The currency in which funds are generated by issuing debt and equity
instrument.
 The currency in which receipts from operating activities are usually
retained.
IAS -21 Self-Test questions
Q. 1: An entity based in America sells goods to the UK for £200,000 on 28 February 2013 when the exchange
rate was £0.55: $1.
The customer pays on 15 April 2013 when the rate was
£0.60: $1. The functional currency of the entity in America
is the $.
Required: How does the US entity account for the transaction in its financial statements for the year ended 31
July 2013.
Q. 2: A US entity sells apples to an entity based in Moldovia where the currency is the Moldovian pound (Mol).
The apples were sold on 1 October 2011 for Mol 200,000 and were paid for in February 2012.
The rate on 1 October 2011 is US $1: Mol 1.55.
The rate on 31 December 2011 (the reporting date) is US $1: Mol 1.34. The functional currency of the
entity is the $.
Required: How does the US entity account for the transaction in its financial statements for the year ended 31
December 2011?
Q.3: On August 1, 2018, a Pakistani firm purchased goods costing US$ 10,000 from a US firm to be paid on
January 31, 2019
The firm’s accounting year is December 31.
Spot rates at various dates were:
Transaction date at Aug 1, 2018 Rs. 120
SOFP date at Dec. 31, 2018 Rs. 122
Settlement date at Jan 31, 2019 Rs. 121
Required: Prepare all necessary journal entries in the books of Pakistani firm
Q.4 On August 1, 2018 a Pakistani firm sold goods costing US Dollar 10,000 to a US firm to be received on
January 31, 2019
The firm’s accounting year is December 31,
Spot rates al various dates were
Transaction date August 1, 2018 Rs, 120
SOFP date December 31, 2018 Rs. 122
29
Settlement dated January 31, 2019 Rs. 121
Required: Prepare all necessary journal entries in the books of Pakistani firm
Q.5 Safeer (Pakistan) Textile limited (SPTL) is a multinational company. The company is principally engaged
in manufacturing and selling of Men’s wear. The company exports designer dresses to the United Kingdom
(UK), United Arab Emirates (UAE) and United States of America (USA). The company prepares its financial
statements on June 30. During the year, following transactions were incurred in foreign currency.
 On April 15, 2017 SPTL sold dresses to a customer in UAE on account for Dhs 20,000. The customer
settled the transaction after one month and the company received Dhs 20,000 on May 15, 2017.
 On May 01, 2017, the company has imported a machinery from the USA. The invoice for the machinery
was for US $110,000 which will be paid to the vendor on August 20, 2017.
 The company’s functional currency is Pakistan Rupee (PKR) and its exchange rate to UAE Dhs and US
$ are as follows:
PKR TO US $ PKR to UAE Dhs
April 15,2017 103.50 27.50
May 01, 2017 103.75 27.30
May 15, 2017 102.50 28.50
June 30, 2017 102.75 29.00
August 20, 2017 103.50 27.00
Required: Prepare accounting entries for the year ended 30-06-2017 and 2018.
Q 6: Akram International Limited (AIL) is a retailer of fine furniture based in Pakistan. On October 19, 2017,
AIL purchased identical tables from a US-based supplier for a total of US $1,500,000. AIL has a year-end of
December 31 and uses Pak Rupees (PKR) as its functional currency. The exchange rates, on various dates during
the year, are as follows:
Date PKR US $
October 19, 2017 1 0.0080
December 15, 2017 1 0.0085
December 20, 2017 1 0.0090
December 31, 2017 1 0.0095
February 03, 2018 1 0.0100
OR
Date US $ PKR
October 19, 2017 1 125
(1/0.0080)
December 15, 2017 1 117.64
December 20, 2017 1 111.11
December 31, 2017 1 105.26
February 03, 2018 1 100.00
Required: Determine, in accordance with the IAS 21 – The Effects of Changes in Foreign Exchange Rates, the
impact of the above transaction on the profit of Akram International Limited (AIL) for the year ended December
31, 2017 and on the statement of financial position at that date for each of the following alternatives:
(i) If all the tables were sold on December 20, 2017 and were paid for by AIL on December 15, 2017.
(ii) If all the tables were sold on February 03, 2018 and were paid for by AIL on December 15, 2017.
(iii) If all the tables were sold on December 15, 2017 and were paid for by AIL on February 03, 2018.
(iv) If 75% tables were sold on December 15, 2017 with the remaining 25% tables being sold on
February 03, 2018. All the tables were paid for by AIL on February 03, 2018.
Q.7: Johar Inc. has its functional currency as the US $. It trades with several suppliers overseas and bought
goods costing 400,000 dinars on 1-12-2017. Johar Inc. paid for goods on 10-Jan-2018. Johar’s years-end is 31-
Dec.
The exchange rates were as follows:
01-12-2017 4.1 Dinar : 1 US $
31-12-2017 4.3 Dinar : 1 US $
10-01-2018 4.4 Dinar : 1 US $
Required:
Show how the transaction would be recorded in the books of Johar Inc. for the year ended 31-12-2017; and
30
entry on settlement date.
Q. 8: [Revaluation Model]
Flower Inc. an American company acquired a machinery on 1-1-2011 at a cost of 72 million dinars. The
machinery classified as property, plant and equipment under IAS 16 is depreciated over 20 years on a straight
line basis with a nil residual value. At 31-12-2015, the machinery was revalued to 95 million dinars. The
following exchange rates are relevant to the preparation of the financial statement:
1-Jan-2011 3.6 Dinar : 1US $
31-Dec-2015 4.3 Dinar : 1 US $
Required:
Show how the transaction would be recorded in the Flower’s financial statements for the year ended 31-12-2015.
31
Solutions:
Answer 1:
On the sale [28.02.2013]:
Translate the sale at the spot rate prevailing on the transaction date.
£200,000/0.55 = $ 363,636
Receivables 363,636
Sales 363,636
When the cash is received [15.04.2013]:
Dollar value of amount received = £200,000/0.60 =
$333,333 Loss on transaction = 363,636 – 333,333 =
30,303
Bank 333,333
Exchange loss 30,303
Receivables 363,636
Answer 2:
Translate the sale at the spot rate prevailing on the transaction
date. Mol 200,000/1.55 = $129,032
Receivables 129,032
Sales 129,032
At the reporting date [31.12.2011]:
The receivables balance is a monetary item and so must be retranslate using the
closing rate. Mol 200,000/1.34 = $149,254
Gain = 149,254 – 129,032 = 20,222
Receivables 20,222
Forex gain 20,222
Answer 3:
The Pakistani firm will prepare following journal entries:
Rs. Rs.
1/8/2018 Inventory 1,200,000
Accounts payable 1,200,000
31/12/2018 Exchange loss 20,000
Accounts payable[(10,000 x 122) - 20,000
1,200,000]
31/1/2019 Accounts payable (10,000 x 122) 1,220,000
Exchange gain (bal.) 10,000
Bank (10,000 x121) 1,210,000
Answer 4:
The Pakistani firm will prepare following journal entries
1/8/2018 Accounts receivable 1,200,000
Sales 1,200,000
At December 31, 2018, foreign currency monetary item, i.e., receivable will be reported at closing rate.
31/12/2018 Accounts receivable 20,000
Exchange gain 20,000
[(10,000 x 122) - 1,200,000]
31/1/2019 At January 31, 2019, the settlement will be recorded by the
following entry Bank (10,000 x 121) 1,210,000
Exchange loss (bal.) 10,000
Accounts receivable (10,000 x 122)1,220,000
Answer 5:
Accounting entries for the year ended 30-6-2017
Sales:
15-4-2017:
Debtor (20,000 x 27.5) 550,000
Sales 550,000
15-5-2017:
32
Bank (20,000 x 28.5) 570,000
Exchange gain (bal) 20,000
Debtor 550,000
Purchase of Machinery:
1-5-2017:
Machinery (110,000 x 103.75) 11,412,500
Payable 11,412,500
30-6-2017:
Payable 110,000
Exchange gain 110,000
[(110,000 x 102.75) – 11,412,500] = 110,000
Closing balance of payable is (110,000 x 102.75) =
11,302,500 Or (11,412,500 – 110,000) = 11,302,500
Accounting entries for the year ended 30-06-2018
20-08-2017:
Payable 11,302,500
Exchange loss (bal) 82,500
Bank (110,000 x 103.5) 11,385,000
Answer 6:
(a) (i) If all the tables were sold on December 20, 2017 and were paid for on December 15,2017
Statement of Profit or Loss:
Purchase/cost of sale = US $ 1,500,000 / 0.0080 = PKR
187,500,000 Exchange gain on = (US $
1,500,000 / 0.0080) – (US $ 1,500,000 / 0.0085)
Settlement of payable
= 187,500,000 – 176,470,588
= PKR 11,029,412
The US $ has weakened between the date of the transaction and the date of settlement, so the cost of settling
the trade payable in terms of Pak Rupees has reduced thereby producing an exchange gain, which will be
recognized in profit or loss.
Statement of Financial Position:
No balances are outstanding, as all the inventories have been sold and the trade payable is settled before the year-
end.
(ii) If all tables were sold on February 03, 2018 and were paid for on
December 15, 2017: Statement of profit or Loss:

Purchase = US $ 1,500,000 / 0.0080 = PKR 187,500,000
Less: Closing stock = 187,500,000
Cost of sale = 0
Exchange gain on Settlement of payable = PKR 11,029,412
Statement of Financial Position
Inventories=US $ 1,500,000 / 0.0080 = PKR 187,500,000
All the purchases were held in inventory at the year end. As a non-monetary item, inventories remain at their
original cost (i.e. at the exchange rate at the date of the original purchase)
(iii) If all the tables were sold on December 15, 2017 and were paid for on February 03, 2018:
Purchase/cost of sale = US $ 1,500,000 / 0.0080 = PKR 187,500,000
Exchange gain on = (US $ 1,500,000 / 0.0080) – (US $ 1,500,000 / 0.0095)
Settlement of payable
= 187,500,000 – 157,894,737
= PKR 29,605,263
The exchange gain is now determined with respect to the value of the trade payable at the year-end (as a
monetary item trade payables are translated at the year-end exchange rate). The US $ has weakened between
the date of the transaction and the year end, so the cost of settling of the trade payable in terms of PKR has
33
reduced, thereby producing an exchange gain, which is recognized in profit or loss. The reminder of any
exchange gain/loss between the year end and the date of eventual settlement is recognized in the 2018 financial
statements.
Inventories = Nil
All the inventory is sold during the year.
Trade payables = (US $ 1,500,000 / 0.0095) = PKR 157,894,737
(iv) If 75% of the tables were sold on December 15, 2017 with the remaining 25% tables sold on
February 03, 2018. All the tables were paid for on February 03, 2018:
Purchase = US $ 1,500,000 / 0.0080 = PKR 187,500,000
Less: Closing stock = (PKR 46,875,000)
Cost of sales = 140,625,000
Exchange gain on year-end = (US $ 1,500,000 / 0.0080) – (US $ 1,500,000 / 0.0095)
retranslation of payable
= 187,500,000 – 157,894,737
= PKR 29,605,263
Inventories = 25% x (US $1,500,000 / 0.0080) = PKR 46,875,000
Trade payables = (US $ 1,500,000 / 0.0095) = PKR 157,894,737
25% of the purchases were still held in inventory at the year-end. As a non-monetary item, these inventories
remain at their original cost (i.e. at the exchange rate at the date of original purchase).
Answer 7
Journal
entries:
1-12-2017
Purchases 97,561
Payable(400,000/4.1) 97,561
31-12-2017
Now balance of payable is (400,000 / 4.3) =
93,023 Exchange gain = 97,561 – 93,023 =
4,537
Payable 4,537
Forex gain 4,537
10-1-2018
Payable (97,561 – 4,537) 93,023
Forex gain (bal) 2,114
Bank (400,000/4.4) 90,909
Answer 8:
Cost (1-1-2011) 20 (72M/3.6)
Depreciation (20/20) x 5 (5)
C.A (As on 31-12-2015 15 M
FV (95M/4.3) 22.1 M
Surplus (OCI) 7.1 M
After revaluation 22.1 M will be depreciated over remaining useful life of 15 years.
Extra practice questions:
Question 1
Musketeers Limited, a Pakistani tourist company, bought 16 cartwheels to use in the construction of a replica
seventeenth century ox-wagon. The cartwheels were imported from a specialist in Great Britain for a total of
GBP 20 000. The cartwheels were ordered to the British specialist on 25 March 2015, were shipped on 15 July
2015 and arrived in Pakistan on 25 July 2015. The cartwheels were shipped free on board (FOB).
The ox-wagons are to be used to transport tourists. The ox-wagons were completed on 31 July 2015 (at a further
cost of Rs 55 000), were available for use on 1 September 2015 and were first brought into use on 1 October
2015. The ox-wagons have a residual value of Rs 30 000 and a useful life of 10 years.
34
Musketeers Limited paid the British specialist on 31 August 2015.
The relevant exchange rates between Rupees and GBP were as follows:
Date Spot Rate
Pak Rupees: GB Pound
25 March 2015 9.00:1
15 July 2015 9.25:1
25 July 2015 9.60:1
31 August 2015 9.90:1
Required:
Show all related journal entries in the books of Musketeers Limited for the year ended 31 December 2015.
Question 2
Spyware Limited is a Pakistani company involved in private investigation and the supply of related products.
Spyware Limited imported a large batch of advanced monitoring devices from an American company for a total
invoice price of USD 100 000. The advanced monitoring devices were ordered from the American company on
25 March 2015, were shipped on 15 July 2015 (customs, insurance and freight basis: CIF) and arrived in Pakistan
on 25 July 2015.
The advanced monitoring devices are to be sold via one of its retail outlets. On 31 December 2015, 80% of the
advanced monitoring devices had been sold (at a mark-up of 20% on cost).
Spyware Limited paid the American company on 2 February 2016. Spyware Limited has a 31 December year
The relevant exchange rates were as follows:
Date Spot Rate
Pak Rupees: US Dollar
25 March 2015 7.00:1
15 July 2015 7.20:1
25 July 2015 7.60:1
31 December 2015 7.10:1
2 February 2016 6.90:1
Required;
Show all related journal entries in the books of Spyware Limited for its years ended 31 December 2015 and
2016.
Question 3
Badar Limited is an American company that sells bed sheets. Badar Limited sold a batch of bed sheets to a
British company for GBP 50 000. The order from the British company was received on 25 March 2015, the
sheets were loaded on 15 July 2015 and arrived in Great Britain on 25 July 2015. The bed sheets were loaded free
on board (FOB).
The bed sheets cost the American company USD 20 000. The British company paid badar Limited as follows:
 GBP 25 000 on 31 October 2015
 GBP 25 000 on 31 January 2016
Related exchange rates are as follows:
Date Spot Rate
US Dollar: GB POUND
25 March 2015 2.00:1
15 July 2015 2.20:1
25 July 2015 2.50:1
31 October 2015 2.65:1
31 December 2015 2.40:1
31 January 2016 2.90:1
Badar has a 31 December year end.
Required:
Show all related journal entries in the books of Badar Limited for its years ended 31 December 2015 and
2016.
Question 4
On 1 July 2017, Warren Limited (a Pakistani company) granted a loan of AU$20 000 to a foreign company
based in Australia, Byron Limited.
35
 The loan is repayable in 8 instalments of AUS $3,000 each (including both principal and interest),
payable annually in arrears.
 Warren limited has a functional currency of Rupees.
 Interest is compounded annually at an effective rate of 4.24%
p.a
The spot and average exchange rates on the
respective dates were as follows:
Date Spot Rate
Rs : AUS $
1 July 2017 1:0.20
31 December 2017 1:0.17
30 June 2018 1:0.22
31 December 2018 1:0.24
Average for 1 July 2017 to 31 12 2017 1:0.19
Average for 1. 1 .2018 to 30.06.2018 1:0.21
Average for 1 July 2018 to 31 12 2018 1:0.22
Required:
Prepare journal entries to record the above information in the books of Warren Limited for the year ended 31
December 2017 and 2018.
Question 5
On 1 January 2020 an American bank transfers USD 1 million to a local company in Pakistan, Bilal Limited
(BL) in return for a promise to pay fixed interest of 8% per year for two years (due at the end of each year of the
loan period, i-e. 31 December) and a payment of $ 1 million at the end of the two-year period.
At the inception of the loan, 8% is the market rate for similar two –year fixed-interest $ denominated loans.
The BL’s functional currency is PKR. Exchange rates over the period of loan are:
 1 January 2020: Rs. 150 = $ 1
 Average exchange rate in 2020: Rs. 150.5 = $ 1
 31 December 2020: Rs. 151 = $ 1
 Average exchange rate in 2021: Rs 151.75 = $ 1
 31 December 2021: Rs. 152.5 = $ 1
Required:
Prepare journal entries for the year ended 31-12-2020 and 2021 in the books of BL
Question 6
Ahmed, a foreign qualified accountant, has recently returned to Pakistan and has joined a newly incorporated
company Radium Limited (RL), a subsidiary of a listed company. Ahmed has been entrusted with preparing the
notes on ‘Property, plant and equipment’ in the financial statements of RL for the year ended 28 February 2023.
While preparing the notes, Ahmed has complied with all the disclosure requirements of IAS 16, however, he is
unaware of additional disclosures required by the Companies Act, 2017.
Required
List down the disclosure requirements related to ‘Fixed Assets’ as provided in the fourth schedule of the
Companies Act, 2017.
(10)
36
Solution 1
Debit Credit
15 July 2015
Cartwheels in transit 185,000
FOB Importation of 16 cartwheels: GBP 20 000 x 9.25
(spot rate on transaction date)
25 July 2015
Cartwheels 185,000
Cartwheels in transit 185,000
31 July 2015
Vehicles: cost 240,000
Cartwheels 185,000
Bank 55,000
Further costs incurred on construction of the ox-wagons
31 August 2015
Foreign exchange loss (expense) 13,000
Bank 198,000
Payment of foreign creditor: GBP 20 000 x 9.90 (spot rate on payment date);
foreign exchange loss 198 000 – 185 000 = 13 000
31 December 2015
Depreciation 7,000
Vehicles: accumulated depreciation 7,000
Depreciation of ox wagons from date first available foruse: (185,000+ 55,000 –
30,000) / 10 years x 4/12)
Note:
When goods are shipped on a FOB basis (free on board), the risks and rewards of ownership transfer on the date
that the goods are loaded onto the ship:
In this case, it means that the transaction date is 15 July 20X5.
Solution 2 -----Rupees-----
Debit Credit
25 July 2015
Inventory 760,000
CIF Importation of advanced monitoring devices: USD 100,000 x 7.60
(spot rate on transaction date)
31 December 2015
Foreign exchange gain 50,000
Translation of foreign creditor at year-end: 100 000 x 7.10 (spot rate
at year-end) – 760 000
Cost of inventory expense 608,000
Inventory 608,000
Cost of goods sold (760 000 x 80%)
Debtors/ Bank 729 600
Sales 729 600
Revenue from sale of goods (608 000/100 x120)
2 February 2016
Foreign creditor (760,000 – 50,000) 710 000
Bank (10,000 x 6.9) 690 000
37
Payment of foreign creditor; gain made 710 000 – 690 000
Note:
When goods are shipped on a CIF basis (customs, insurance and freight), the risks and rewards of ownership
transfer on the date that the goods arrive safely at their destination:
In this case, it means that the transaction date is 25 July 2015. Had the transaction been FOB, the risks and
rewards of ownership would have transferred on the date that the goods were shipped – in which case the
transaction date would have been 15 July 2015.
Solution 3
US Dollars
Debit Credit
$
15 July 2015
Sales 110 000
Export of sheets to British company: GBP 50 000 x 2.20
(spot rate on
the FOB transaction date) see note 1
Cost of inventory expense 20 000
Inventory 20 000
Cost of goods sold (given: 20 000)
31 October 2015
Foreign exchange gain 11,250
Bank (25 000 x 2.65) 66 250
Foreign debtor (25,000 x 2.2) 55,000
31 December 2015
Translation of foreign debtor at year-end:
[(25,000 x 2.4)-(25,000 x 2.2)]
31 January 2016
Bank (25 000 x 2.90) 72 500
Foreign debtor (25,000 2.2 +5,000) 60 000
Note 1:
If the goods had been shipped on a CIF basis (customs, insurance and freight), the risks and rewards of ownership
would have transferred on the date that the goods arrive safely at their destination, in which case the transaction
date would have been 25 July 20X5.
Solution 4
Debit Credit
1 July 2017
Foreign loan receivable 20,000 / 0.2 100,000
Bank 100,000
Issue of loan
31 December 2017
Foreign loan receivable (W1: 848 x 6/12) / 0.19 2,232
Interest income 2,232
Interest for the year
38
Foreign loan receivable (W1: c/b 20 424 / 0.17) – 17,909
(capital 100,000 + interest 2,232)
Forex gain (P/L) 17,909
Exchange difference on translation of loan balance at year-end
20,000/0.17 = 117 647 (loan receivable)
Breakup
Current assets (2,152/0.17) =12,658
Non-Current assets (17,848/0.17) =104,988
Interest receivable in current assets=848 x 6/12/0.17=2,494
30 June 2018
Interest for 6 months
Bank 3,000 / 0.22 13,636
Foreign loan receivable 13,636
1st instalment received
31 December 2018
Interest for 6 months
Forex loss (expense) 34,301
Foreign loan receivable 34,301
Exchange difference on translation of loan balance at year-end
[(17 848+757x6/12)0/.24=75,943-(100 000+2 232+17 909+2 019+1 720 -13 636)] =34 301
17,848/0.24 = 74 367 (loan receivable)
Breakup
Current assets (2,243/0.24) =9,346
Non-Current assets (15,605/0.24) =65,021
Interest receivable in current assets=757 x 6/12/0.24=1,577
The table (in Aus Dollars) for the entire 8 years
Working
Effective interest rate table in foreign currency: AUS Dollars
Date Rental Principa Interest Balance
l
01-07-2017 20,000
30-06-2018 3,000 2,152 848 17,848
30-06-2019 3,000 2,243 757 15,605
30-06-2020 3,000 2,338 662 13,267
30-06-2021 3,000 2,437 563 10,830
30-06-2022 3,000 2,541 459 8,289
30-06-2023 3,000 2,649 351 5,640
30-06-2024 3,000 2,761 239 2,879
30-06-2025 3,000 2,878 122 0
39
Solution 5
As there are no transaction costs, the effective interest rate (which is computed in the currency in which the loan is
denominated (i-e. $)) is 8%.
Time Carrying Interest at 8% Cash outflow Carrying
amount amount
at 31 December
2020 1,000,000 0.08 (80,000) 1,000,000
2021 1,000,000 0.08 (1,080,000) -
The journal entries are:
On 1 January 2020 the loan is recorded on initial recognition as follows:
Debit Credit
Amount in PKR
Bank 150,000,000
Loan payable — financial liability 150,000,000
($1,000,000 x Rs.150/$)
To recognise the borrowing transaction.
Year ended 31 December 2020
During 2020 BL records interest expense as follows:
Interest expense 12,040,000
Loan payable—financial liability 12,040,000
($80,000 x 150.5)
To recognise interest on loan payable in 2020.
On 31 December 2020 the year’s interest is paid and the following journal entry needs to be recognised:
Bank 12,080,000
($80,000 x Rs.151/$)
To recognise the payment of 2020 interest on financial liability.
At 31 December 2020 the loan is to be recorded at Rs.151 million ($1 million x Rs.151/$).
An exchange loss of Rs. 1,040,000 arises, which is due to the difference between Rs.151 million (calculation:
USD 1 million x Rs.151/$) recorded at 31 December 2020 and the opening loan balance (Rs.150 million)
adjusted for the interest expense (Rs. 12,040,000) and its cash payment (Rs.12,080,000).
Consequently, a further journal entry on 31 December 2020 is:
Exchange loss (P&L) 1,040,000
[(150,000 + 12,040,000 – 12,080,000) – (1,000,000 x 151)] = 1040,000
To recognise differences arising on translating monetary items at rates different from those at which they were
translated on prior recognition
Year ended 31 December 2021
In 2021 BL records interest expense as follows:
Profit or loss — interest expense 12,140,000
($ 1 million @ 8% p.a x Rs.151.75 / $)
To recognise interest on loan payable in 2021.
On 31 December 2021 yearly interest and loan principal are paid, so the following journal entry is
recognised:
40
Bank 164,700,000
[$1,080,000 x Rs.152.5 / $]
To recognise the payment of 2021 interest and principal
At 31 December 2021 the loan is fully repaid (last interest payment plus principal).
An exchange loss of Rs.1.56 million arises due to the difference between the Rs.164.7 million paid on 31
December 2021 and the opening loan balance adjusted for the interest.
Consequently, a further journal entry on 31 December 2021 is:
Exchange loss (P/L) 1,560,000
To recognise differences arising on translating monetary items at rates different from those at
which they were translated on prior recognition (calculation Rs.164.7 million less (Rs.151
million+ Rs.12.14 million). (151,000,000 + 12,140,000 – 164,700,000) – 0 = 1,560,000
41
IAS-21 Q.B
Question-1:
DND Ltd is a listed company, having its operations within Pakistan. During the year ended December
31,2016, the company contracted to purchase plants and machineries from a US company. The terms and
conditions thereof are given below:
I. Total cost of contract = US$ 100,000
II. Payment to be in accordance with the following schedule:
Payment dates Amount
Payable
On signing the contract July 01, 2016 US$ 20,000
On shipment* September US$ 50,000
30,2016
After installation and test January 31,2017 US$ 30,000
run
*(risk and rewards of ownership are transferred on shipment)
The contract went through in accordance with the schedule and the company made all the payments on
time. The following exchange rates are available:
Dates Exchange
Rates
July 1,2016 US$ 1= Rs. 60.50
September 30,2016 US$ 1= Rs. 61.00
December 31 ,2016 US$ 1= Rs. 61.20
January 31,2017 US$ 1= Rs. 61.50
Required:
Prepare journals to show how the above contract should be accounted for under IAS- 21.
Question-2:
Orlando is the company whose functional currency is the US dollar. It prepares its financial statements to
30 June each year. The following transactions take place on 21, May 2014 when the spot exchange rate
was $1=€0.8.
1. Goods were sold to Koln, a customer in Germany, for €96,000.
2. A specialized piece of machinery was bought from Frankfurt, a German supplier. The invoice for the
machinery
is for €1,000,000.
The company receives €96,000 from Koln on 12, June 2014.
At 30 June 2014 the machinery purchased from Frankfurt is not yet
available for use. The liability for the machine is settled on 31, July 2014
Relevant $/€ exchange rates are:
12 June 2014 $1=€0.9
30, June 2014 $1=€0.7
31 July 2014 $1=€0.8
Required:
Show the effect on profit or loss of these transactions for :
(a) The year to 30 June 2014; and
(b) The year to 30 June 2015
Question-3:
MZA Limited a dollar based entity, was involved in the following transactions in foreign currencies
during the year ended December 31, 2018.
a) MZA Limited bought equipment for 130,000 Dinars on March 04, 2018 and paid for on August 25, 2018.
b) On February 27, 2018 MZA Limited sold goods which had cost $ 46,000 for 476,000 Krams to a company
whose functional currency was Krams. The proceeds were received on May 25, 2018.
c) On September 02, 2018 MZA Limited sold goods which cost $ 17,000 for 53,376 Sarils to a company whose
42
functional currency was Sarils. The amount was outstanding at December 31, 2018 but the proceeds were
received in sarils on February 07, 2019 when the exchange rate was S 2.306 = $1.
d) MZA Limited borrowed 426,000 rolands on May 25, 2018 and is repayable in two years’ time. Ignore
interest for the period.
Exchange rate is relevant to the above transactions to $1 are given below:
Date Rolan Dinars Krams Sarils
s
27-Feb-18 - - 7.000 -
4-Mar-18 - 0.650 - -
25-May- 1.500 - 6.700 -
18
25-Aug- - 0.500 - -
18
2-Sep-18 - - - 2.224
31-Dec- 1.800 0.540 7.500 2.250
18
Required:
For each of the above transactions prepare accounting entries for the year ended December 31, 2018 and
December 31, 2019 as required by IAS-21.
Question-4:
Kangaro limited(KL), a Pakistan based company is preparing its financial statements for the year ended 31
December 2017.Following transitions were carried out during the year.
Foreign currency transactions:
1. KL purchased an investment property in United States for USD 2.6 million 10%.10% advanced payment was
made on 1 may 2017 and 70% payment was made on 1 July 2017 on transfer of title and possession of the
property. The remaining amount was paid on 1 August 2017.
2. On 1 September 2017, KL rented out this property at annual rent of USD 0.24 million for one year and
received full amount in advance on the same date
3. Kl uses fair value model for its investment property. On 31 December 2017, an independent valuer
determined that fair value of the property was USD 2.5 million
Question-5
Ahmed, a foreign qualified accountant, has recently returned to Pakistan and has joined a newly incorporated
company Radium Limited (RL), a subsidiary of a listed company. Ahmed has been entrusted with preparing
the notes on ‘Property, plant and equipment’ in the financial statements of RL for the year ended 28 February
2023. While preparing the notes, Ahmed has complied with all the disclosure requirements of IAS 16,
however, he is unaware of additional disclosures required by the Companies Act, 2017.
Required: List down the disclosure requirements related to ‘Fixed Assets’ as provided in the fourth
schedule of the Companies Act, 2017
Answer-1:
Date Descriptio Dr. Cr
n .
Rs. Rs
.
1- July- Advance to suppliers 1,210,0000
16 Cash/Bank (20,000 x 60.5) 1,210,000
30- Sep- PPE in-transit (bal) 6,090,000
16 Advance to suppliers 1,210,000
Cash/Bank(50,000x61) 3,050,000
Payable to suppliers(30,000x61) 1,830,000
(Recording of asset on the delivery date as risk

and rewards are transferred to the company)
43
31- Dec- Exchange loss 6,000
16 Payable to 6,000
suppliers
(Adjustment of exchange rate as of reporting

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

was Rs. 61.5/US$1)
Answer-2:
(a) Year to June 2014
On 21.05.2014, the revenue and receivable for the sale of €96,000 should be translated at the spot rate
of 0.8 (i.e 96,000/0.8) $120,000
21-5-2014
Debtor $120,000
Sales $120,000
The capital expenditure of €1m should also be translated at the spot rate of 0.8:
Debit: Property, Plant and Equipment $1,250,000
Credit: Payables $1,250,000 (1,000,000/0.8)
The receipt on 12 June relating to the receivable is translated at the rate of 0.9 on that date. This generates
cash of $106,667 to settle a receivable of $ 120,000. Hence an exchange loss of $ 13,333 is recognized in
profit and loss.
12-6-2014
Bank (96,000/0.9) $106,667
Forex loss (bal.) $13,333
Debtor $120,000
The non-current asset is not re-translated at the year-end because it is a non monetary asset, but the
outstanding payable (a monetary item) must be re-stated to the year–end exchange rate of 0.7. This gives a
year-end payable of $1,428,571. This has increased from the initial $1,250 000; therefore an exchange loss
of $178,571 will be recognized in profit and loss.
30-6-2014
Forex loss 178,571
Payable 178,571
[(1,000,000/0.7)-1,250,000]
(b) Year to June 2015
When the payable is settled after the year end at the spot of 0.8, it results in a payment of $1,250,000. There
is an exchange gain of $178,571 compared with the carrying value at the end of 2014.
Payable $1,428,571
Gain (bal.) $178,571
Bank (100,000/0.8) $1,250,000
Answer-3:
44
a)
Date Description Dr. Cr.
$ $
4-Mar-18 Equipment
Accounts payable (130,000 / 0.65) 200,000.00 200,000.00
Purchase of equipment
25-Aug-18 Accounts payable 200,000.00
Exchange gain (bal.) 60,000.00
Bank (130,000/0.5) 260,000.00
Payment of accounts payable
b)
27-Feb-18 Accounts receivable (476,000/7) 68,000.00
Sales 68,000.00
Revenue recognition
27-Feb-18 Cost of sales 46,000.00
Inventory 46,000.00
Cost recognition
25-May-18 Bank (476,000/6.7) 71,044.78
Accounts receivables 68,000.00
Exchange gain 3,044.78
Receipt of accounts receivable
c)
2-Sep-18 Accounts receivable (53,376/2.224) 24,000.00
Sales 24,000.00
Revenue recognition
2-Sep-18 Cost of sales 17,000.00

Inventory 17,000.00
Cost recognition
31-Dec-18 Exchange loss 277.33
Accounts receivable 277.33
Year-end closing rate[24,000-(53,376/2.25)]
7-Feb-19 Bank (53,376/2.306) 23,146.57
Exchange loss (bal.) 576.09
Accounts receivable (53,376/2.25) 23,722.67
Receipt of accounts receivable
25-May-18 Bank 284,000.00
Loan (426,000 x 1.5) 284,000.00
Receipt of loan
31-Dec-18 Loan 47,333.33
Exchange gain 47,333.33
Year-end closing rate[284,000 – (426,000/1.8)]
Extra practice questions
Q.1 Copper Limited (CL) entered into following transactions during the year ended 30 June 2019:
1. On 1 October 2018, CL imported a machine from China for USD 250,000 against 60% advance payment
which was made on 1 July 2018. The remaining payment was made on 1 April 2019.
2. On 1 January 2019, CL sold goods to a Dubai based company for USD 40,000 on credit. CL received 25%
amount on 1 April 2019, however, the remaining amount isstill outstanding.
Following exchange rates are available:
45
Date 1 Jul 2018 1 Oct 2018 1 Jan 2019 1 Apr 2019 30 Jun 2019 Average
1 USD Rs. 121 Rs. 124 Rs. 137 Rs. 140 Rs. 163 Rs. 135
Required:
Prepare journal entries in CL’s books to record the above transactions for the year ended 30 June 2019. (08)
A.1 Copper Limited
General Journal
Date Particular Debit Credit
s --------- Rupees ---------
1-Jul-18 Advance payment – 250,000×60%×121 18,150,000
Machine 18,150,000
Cash/Bank
1-Oct-18 Machine (bal) 30,550,000
Advance payment 18,150,000
Payable 250,000×40%×124 12,400,000
1-Jan-19 Account receivable 40,000×137 5,480,000
Sales 5,480,000
1-Apr-19 Cash/Bank 40,000×25%×140 1,400,000
Account receivable 5,480,000×25% 1,370,000
Exchange gain (P&L) Balancing figure 30,000
1-Apr-19 Payable 12,400,000
Exchange loss (P&L) Balancing figure 1,600,000
Cash/Bank 250,000×40%×140 14,000,000
30-Jun-19 Account receivable 40,000×75%×26(163–137) 780,000
Exchange gain (P&L) 780,000
(5,480,000 – 1,370,000) -40,000 x 75% x 163
46
Test Date:
Q.1 Ahmad Limited (AL) is a group of companies based in Pakistan. Following Foreign Currency
transactions were carried out during the year.
(a) On August 1, 2019, AL purchase identical mobiles for resale from a US based supplier for a total of
US $25,000 on credit. It sold 65% mobiles on December 20, 2019 with the remaining 35% mobiles
being sold on February 27, 2020. 70% of the amount was paid on 15 September and remaining on
27 January 2020.
(b) AL purchased an investment property in United States for USD 115,000. 10% advance payment was
made on 1 May 2019 and 70% payment was made on 01 July 2019 after transfer of title and
possession of the property. The remainingamount was paid on 1 August 2019.
AL uses fair value model for its investment property. On 31 December 2019, an independent valuer
determined that fair value of the property was USD 110,000.
(c) On 1 August 2019, AL imported cattle feed amounted to USD 150,000 against 70% payment for its
live stock. AL also paid 5% custom duty on import. The feed is specially designed to provide vital
nutrients to cows that keep them healthy and improve the quality of their produce. At year-end, 30% of
the amount is payable whereas 40% of the feed is unused.
Following spot exchange rates are available:
Date 1-May-2019 1-Jul-2019 1-Aug-2019 15-Sept-2019 31-Dec-2019
USD 1 Rs. 140 Rs. 145 Rs. 150 Rs. 155 Rs. 160
Requirement:
(a) Pass the necessary Journal Entries to record these transactions in the books of Ali Limited for the
year ended 31 December 2019. (12)
(b) Prepare extracts from statement of comprehensive income for the year ended 31-12-2019
and statement of financial position as on that date.
(4)
Q.2 On 1 January 2014, SL acquired five vehicles costing Rs. 8.5 million on lease. As per the lease
agreement, four annual installments of Rs. 2.5 million each are payable in advance on 1 January, each
year. The market rate of interest is 14%.
Required:
a) Prepare journal Entries(in lessee’s Book) for the year ended 31.12.2014 and 31.12.2015. (4)
b) Prepare statement of Financial Position extracts and notes to financial statements for the (6)
year ended 31.12.2015 along with comparatives.
Q-1
A) Journal Entries ‘000’
Date Accounting Entries Dr. Cr.
(a)
01-08-2019 Inventory / Purchases 3,750
Creditors (25,000 x 150) 3,750
15-09-2019 Creditor (25,000 x 70% x 150) 2,625
Forex Loss (bal.) 87.5
Bank (25,000 x 70% x 155) 2,712.5
20-12-2019 Debtor x
x
Sales xx
Cost of sales 2,437.5
Inventory(3,750 x 65%) 2,437.5
31-12-2019 Forex Loss (w-1) 75
Creditor 75
(b)
01-05-2019 Advance for investment property 1,610
Bank (115,000 x 10% x 140) 1,610
01-07-2019 Investment Property (bal.) 16,617.5
Page 33 of 46
47
Advance 1,610
Bank (115,000 x 70% x 145) 11,672.5
Payable (115,000 x 20% x 145) 3,335
01-08-2019 Forex Loss 115
Payable 3,335
Bank (115,000 x 20% x 150) 3,450
31-12-2019 Investment Property (w-2) 982.5
F.V Gain (I/S) 982.5
(c)
01-08-2019 Cattle feed inventory (150,000 x 150) 22,500
Bank (150,000 × 70% × 150) 15,750
Payable (150,000 x 30% x 150) 6,750
01-08-2019 Cattle feed inventory (22,500 x 5%) 1,125
Cash / Bank 1,125
31-12-2019 Cattle feed consumed 14,175
Cattle feed inventory(22,500 + 1,125) x 60% 14,175
31-12-2019 Forex Loss (w-3) 450
Payable 450
W-1)
W-2)
Creditors [as per entries] (25,000 x 30% x 150) 1,125
Creditors [Should be] (25,000 x 30% x 160) or (3,750-2,625) 1,200Forex
Loss 75
Investment Property C.A 1,617.5
F.V (110000 x 160) 1,7600
F.V Gain 982.5
W-3) Payable recorded in books 6,750

Payable as on 31-12-2019 7,200
(150000 x 30% x 160)
Forex Loss 450
B) Statement of Comprehensive Income(Extracts)

Rs. ‘000’
Cost of sales 2,437.5
Fair value gain 982.5
Forex Loss (87.5 + 75 + 115 + 450) (727.5)
Cattle feed consumed (14,275)
C) Balance Sheet [Extracts]
As on 31-12-2019
Rs.’000’
Non-Current Assets
Investment Property 17,600
Current Assets
Inventory (3,750 x 35%) 1,312.5
Cattle feed inventory (22,500 + 1,125) x 40% or (22,500 + 1,125 -14,175) 9,450
Current Liabilities
Creditors for mobiles 1,200
Payable for feed 7,200
Q-2
Page 34 of 46
48
a) SL
Journal Entries
For the Year Ended 31 December 2014
Rs. In “millions”
Dr. Cr.
01-01-2014 Right of use-machines (w-2) 8.3
Lease Liability 8.3
01-01-2014 Lease Liability 2.5
Bank 2.5
31-12-2014 Interest expense 0.81
Interest payable 0.81
31-12-2014 Depreciation (8.3/4) 2.08
Accumulated depreciation 2.08
01-01-2015 Lease Liability 1.69
Bank 2.5
31-12-2015 Interest expense 0.58
31-12-2015 Depreciation 2.08
b)
SL
(extracts) As on 31 December 2015
Rs. In “millions”
2015 2014
Assets:
Non-Current Assets:
Right of Use – Machines 8.3 8.3
Less: Accumulated Depreciation (4.16) (2.08)
4.14 6.22
Liabilities:
Non-Current Liabilities:
Lease Liability 2.19 4.11
Current Liabilities:
Lease Liability 1.92 1.69
Interest payable 0.58 0.81
SL
Rs. “millions”
In 2014
2015
1- Schedule of Property Plant and Equipment
Cost: Opening Balance 8.3 -
Additions - 8.3
Closing balance 8.3 8.3
Accumulated Depreciation: Opening Balance 2.08 -
Page 35 of 46
49
Depreciation for the year 2.08 2.08
Carrying amount 4.16 6.22
2- Maturity Analysis- contractual undiscounted lease payments 2015 2014

Less than one year 2.5 2.5
One to two years 2.5 2.5
Two to three years - 2.5
Total undiscounted lease payments 5 7.5
SL has entered into a lease agreement to acquire five vehicles. The market price of these vehicles is Rs.
8.5 million. Four annual installments of Rs 2.5 million each are payable in advance on 1 January each
year. Market rate of interest is 14%. No financial restrictions were imposed by lessor.
Working
W-1)
Finance Charge AllocationTable
01-01-2014 - - - 8.30
01-01-2014 2.5 2.5 - 5.8
01-01-2015 2.5 1.69 0.81 4.11
01-01-2016 2.5 1.92 0.58 2.19
01-01-2017 2.5 2.19 0.31 -
W-2)
1−(1+0.14)−3
PV = 2.5 + 2.5×[ ]= 8.30
0.14
Asset or Liability Monetary / Non-monetary
Property, plant and equipment Non-monetary
Intangible assets Non-monetary
Investment in associates Non-monetary
Equity investments (e.g. shares) Non-monetary (share prices fluctuate)
Investments in debt securities Monetary (except when amount to be received on

redemption or disposal is not fixed or determinable)
Biological assets Non-monetary
Deferred tax asset Monetary (IAS 12 Income Taxes indirectly indicates

that the deferred tax assets and liabilities are monetary
items, because it notes that the exchange rate
differences on deferred foreign tax liabilities or assets
are recognized in the statement of comprehensive
income).
Inventories Non-monetary
Trade receivables Monetary
Other receivables Monetary
Page 36 of 46
50
Advances and prepayments It depends (if advance will be received back in cash it is
monetary item. On the other hand advance to supplier
for goods to be received later is non-monetary item).
Cash and bank Monetary
Lease liability Monetary
Deferred tax liability Monetary (see deferred tax assets above)
Loans and borrowings Monetary
Accruals and other payables Monetary (other than those items where fixed amount
of cash outflow is not required, e.g. advance from
customer for goods to be delivered later)
Provisions Non-monetary
Trade payables Monetary
Current tax liability Monetary
Page 37 of 46
51
Translation from functional currency to presentation currency
An entity may present its financial statements in any currency (or currencies). If the presentation currency
differs from the entity’s functional currency, financial statements need to be translated to presentation
currency. For example, when a group contains individual entities with different functional currencies, the
results and financial position of each entity are expressed in a common currency so that consolidated
financial statements may be presented. The following procedure is used:
Item Translated at
Assets and liabilities for each statement of the closing rate at the date of that statement
financial position presented (i.e. including of financial position.
comparatives)
Income and expenses for each statement the exchange rates at the dates of the
presenting profit or loss and other transactions (average rate for the period may
comprehensive income (i.e. including also be used only if it approximates the
comparatives). exchange rates at the dates of transactions.
All resulting exchange differences Other comprehensive income
Example 06: Adeel Limited

Question: Adeel Limited (AL) commenced business on January 1, 20X6 with an opening share
capital of Rs. 656 million. The financial statements for the year ended December 31, 20X6 are
as follow:
Statement of Comprehensive Income for the year ended December 31, 20X6
Rs. 000
Revenue 5,280,000
Cost of sales (3,795,000)
Gross profit 1,485,000
Distribution costs (495,000)
Administrative expenses (330,000)
Profit before tax 660,000
Tax expense (165,000)
Profit for period 495,000
Statement of financial position as at December 31,
20X6
Rs. 000
Share capital 656,000
Retained earnings (equal to profit, as no dividend was paid) 495,000
1,151,000
Trade payables 492,000
Total equity and liabilities 1,643,000
Property, plant & Equipment 823,000
Current assets 820,000

ALTotal
wishes to open a branch in Nebraska, USA to be financed by a loan from a commercial
assets bank
1,643,000
in USA. AL’s functional currency is the PKR and it has prepared the above financial statements
Page 38 of 46
52
accordingly, However, to apply the bank loan in USA, AL is required to present its financial
statements using the US$ as its presentation currency. The exchange rates in the 20X6 were:
$1=PK
R
January 01, 20X6 166
December 31, 20X6 164
Average rate (the rate did not fluctuate significantly during the year) 165
Required:
Translate AL’s financial statements for the year ended 31 December 20X6 from the
functional currency to presentation currency (US$).
Answer:
Statement of Comprehensive Income for the year ended December 31, 20X6
$
Revenue [Rs. 5,280,000 / 165] 32,000
Cost of sales [Rs. 3,795,000 / 165] (23,000)
Gross profit 9,000
Distribution costs [Rs. 495,000 / 165] (3,000)
Administrative expenses [Rs. 330,000 / 165] (2,000)
Tax expense [Rs. 165,000 / 165] (1,000)
Profit for period 3,000
Other comprehensive income

Gain on currency translation (Rs. 495,000 / 164 - $3,000) 18
Total comprehensive income 3,018
Statement of financial position as at

December 31, 20X6
$
Share capital [Rs. 656,000 / 164] 4,000
Retained earnings (equal to profit as no dividend was paid) 3,000
Translation reserve [balancing] 18
7,018
Trade payables [Rs. 492,000 / 164] 3,000
Total equity and liabilities 10,018
Property, plant & Equipment [Rs. 823,000 / 164] 5,018
Current assets [Rs. 820,000 / 164] 5,000

Total assets 10,018
Page 39 of 46
53
Income Taxes (IAS-12)
Income Tax
Current Tax Deferred Tax Prior Period Tax

Current Tax:
Amount of tax on taxable profits for the period.
Accounting Profit
Profit which is calculated on the basis of requirements of IFRS (Accounting Standards).
Profit before tax calculated in income statements is known as Accounting Profit for the purpose of IAS-12.
Taxable Profit:
Profit which is calculated on the basis of requirements of Income Tax Ordinance.
It means to calculate the current tax; company needs to convert the accounting profits into taxable profits.
For example
Working of Current Tax
Rs
Profit before tax (Accountings Profit) 1,000,000
Add Accounting Depreciation (calculated as per IAS-16) 500,000
Less Tax Depreciation (calculated as per ITO) (400,000)
Taxable Profit 1,100,000
Tax @30%
Current Tax 330,000
Accounting Entry of Current Tax

Current Tax Expense 330,000
Current Tax Payable 330,000
54
Summary of Accounting and Tax Treatments of different items
S.No Particulars As Per IFRS As Per Income Tax ordinance
1 IAS-2 Inventory Lower of Cost or NRV Lower of Cost or NRV

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

 Salaries and wages
 Utilities
 Entertainment
 Travelling expenses etc.
Incomes are taxable; while expenses are deductible.

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

1. Gratuity:
Amount payable to employees at the time of their retirement/termination.
Accounting Entries:
Gratuity Expense Xxx
Gratuity Payable Xxx
(As the services are provided on yearly basis)
Gratuity Payable Xxx
Cash Xxx
(When the amount is paid to employees)
Treatment in calculation of current tax:
Gratuity expense is added back in profit before tax, while gratuity payment is deducted.
55
2. Bad Debts:
Actual bad debts if no allowance
Bad debt xxx
Debtor xxx
Entry of estimated bad debts:

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

Debtors xxx
Less: Allowance for bad debts (15,000)
xxx
2014: Current Tax Rs

Profit before tax-Assumed 800,000
Add: Bad debt expense 15,000
Taxable profit 815,000
Now suppose actual bad debts are Rs 15,000 in 2015

Debtor 15,000
(This entry will have no effect on income statement)
2015: Current Tax Rs

Profit before tax- Assumed 900,000
Less: Bad debt written off (actual bad debts) (15,000)
Treatment in calculation of current tax:

Bad debts expense is added back while bad debts written off is deducted.
3. Borrowing Cost:
As per IAS-23 Borrowing cost is recognized as an expense unless it relates to a qualifying asset.
However, it is treated as an expense in income tax ordinance.
Suppose during the year, Rs 20,000 borrowing cost is capitalized.
Current Tax Rs
Profit before tax-Assumed 1,200,000
Less: Borrowing cost (20,000)
Taxable profit 1,180,000
Calculation of carrying amount and tax base in case of borrowing cost
capitalized: IFRS Income Tax Ordinance
CWIP-Building (Assumed) 500,000 CWIP-Building (Assumed) 500,000
Borrowing cost 20,000 Borrowing cost -
Carrying Amount 520,000 Tax Base 500,000
56
4.
Dividend
Company Shareholder
When dividend is When dividend is
declared: Dividend(R/E) declared: Dividend
xxx Receivable xxx
Dividend Payable xxx Dividend Income xxx
(No effect on income statement) (Dividend income is added in
other income)
When dividend is paid: When dividend is received
Dividend Payable xxx Cash/Bank xxx
Cash/Bank xxx Dividend Receivable xxx
(No effect on income statement) (No effect on income statement)
Dividend declared/paid by company to its shareholders is neither an accounting expense nor a tax expense.
Scenario 1
Accounting Profit (Profit before Tax) for each of the first four years of business = Rs 100,000/ annum.
Purchase of machinery for Rs 100,000 at the start of Y1.
Useful life is = 4 years
Tax Depreciation is follows
Y1 40,000
Y2 30,000
Y3 20,000
Y4 10,000
Assume tax @ 30%.
Required:
Calculate the current tax, deferred tax and also prepare extracts from statement of comprehensive income for
four years.
Note: If a tax treatment is given in question then follow the question. If, however, tax treatment is not
given then follow the income tax ordinance.
Solution
a)Current Tax
Y1 Y2 Y3 Y4
Profit before Tax 100,000 100,000 100,000 100,000
Add Accounting Depreciation 25,000 25,000 25,000 25,000
Less Tax Depreciation (40,000) (30,000) (20,000) (10,000)
Taxable Profit 85,000 95,000 105,000 115,000
Tax @ 30% 25,500 28,500 31,500 34,500
Deferred Tax:
Year 1
 In the first year we have earned profit of Rs 100,000 according to accounting standards. However, we
are paying tax on Rs 85,000 according to Income Tax Ordinance, in the current period.
 Tax on Rs 15,000 amounting to Rs 4,500 (15,000 x 30%) will be paid in future.
 According to accrual concept this tax of Rs 4,500 should be recognized as an expense in the year 1.
 This tax (Rs 4,500) which is deferred to future years is called as deferred tax.
Deferred tax expense (DTE) 4,500
Deferred tax liability (DTL) 4,500
57
At the end of year 1:
Carrying Amount = 100,000 – 25,000 = Rs 75,000
Tax base = 100,000 – 40,000 = Rs 60,000
Difference 15,000
15,000 x 30% Rs 4,500 DTL
Year 2:
 In the second year we have earned profit of Rs 100,000 according to accounting standards.
However, we are paying tax on Rs 95,000 according to Income Tax Ordinance, in the current period.
Tax on Rs 5,000 amounting to Rs 1,500 (5,000 x 30%) will be paid in future.
 According to accrual concept this tax of Rs 1,500 should be recognized as an expense in the year 2.
 This tax (Rs 1,500) is called deferred tax.
Deferred tax expense (DTE) 1,500
Deferred tax liability (DTL) 1,500
Tax base = 100,000 – 70,000 = Rs 30,000

Difference 20,000
20,000 x 30% Rs 6,000 DTL
 If we compare profits it will result into income statement figure (for the year)
 If we compare carrying amount with tax base it will result into statement of financial position
figures (closing balance)
Year 3:
 We have earned profit of Rs 100,000 according to accounting standards. However, we are paying
tax on Rs 105,000 according to Income Tax Ordinance, in the current period.
 During the year we are paying extra tax of Rs 1,500 (5,000 x 30%) related to previous years,
therefore our DTL is starting to be settled and reversed.
Deferred tax liability 1,500
Deferred tax expense 1,500

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

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

Carrying Amount = 100,000 – 100,000 = 0
Tax base = 100,000 – 100,000 = 0
Difference 0
0 x 30% 0 DTL
Summary
If DTL increases
Deferred tax expense xxx
Deferred tax liability xxx
58
If DTL decreases
Deferred tax liability xxx
Deferred tax expense xxx
Important Definitions:
Carrying Amount:
Amount at which asset or liability is presented in statement of financial position (figures in statement of financial
position; if it is prepared according to accounting standards).
Tax Base:
Amount attributed to asset or liability for tax purposes (figures in statement of financial position; if it is prepared
according to income tax ordinance)
Summary of carrying amounts at tax base discussed in the scenario:
Carrying Amount Tax Base Difference x 30%
END OF Y1 75,000 60,000 15,000 4,500 DTL
END OF Y2 50,000 30,000 20,000 6,000 DTL
END OF Y3 25,000 10,000 15,000 4,500 DTL
END OF Y4 - - - DTL
End of Year 1:
Future accounting depreciation will be Rs 75,000. However, future tax depreciation will be Rs 60,000. It means future
tax depreciation will be less by Rs 15,000. It will result into increase in future taxable profits by Rs 15,000. Therefore,
we have to pay extra tax of Rs 4,500 (15,000 x 30%) in future.
End of Year 2:
Future accounting depreciation will be Rs 50,000, however future tax depreciation will be Rs 30,000. It means future
we have to pay extra tax of Rs 6,000 (20,000 x 30%) in future.
End of Year 3:
Future accounting depreciation will be Rs 25,000. However, future tax depreciation will be Rs 10,000. It means future
we have to pay extra tax of Rs 4,500 in future.
End of Year 4:
Future accounting depreciation will be Nil. Future tax depreciation will also be Nil. It means we have to pay no extra
tax in future periods, therefore we have no deferred tax liability.
Deferred Tax Liability
Year 1
Bal b/d -
Bal c/d 4,500 DTE 4,500
Year 2
Bal b/d 4,500
Bal c/d 6,000 DTE 1,500
Year 3
DTE 1,500 Bal b/d 6,000
Bal c/d 4,500
Year 4
DTE 4,500 Bal b/d 4,500
Bal c/d -
b)
Income Statement (Extracts)
For the year ended
Y1 Y2 Y3 Y4
Profit before tax 100,000 100,000 100,000 100,000
Current Tax (25,500) (28,500) (31,500) (34500)
Deferred Tax (4,500) (1,500) 1,500 4,500
(30,000) (30,000) (30,000) (30,000)
59
Profit after Tax 70,000 70,000 70,000 70,000
Scenario 2:
Bad Debts
End of First year of Business i.e. 30-6-2014
Carrying Amount Tax Base Difference
Debtor 500,000 500,000
Less Allowance (5%) (25,000) -
475,000 500,000 25,000
Current Tax:
30-6-2014
Rs
Add bad debt expense 25,000
Taxable Profits 225,000
Current Tax (225,000 x 30%) 67,500
Deferred Tax
We have earned accounting profits of Rs 200,000 however we are paying tax on taxable profits of Rs 225,000. It
means we are paying extra tax on Rs 25,000 amounting to Rs 7,500 (25,000 x 30%), related to future periods. This
prepaid tax as on 30-6-2014 is called as deferred tax asset.
Deferred tax Asset (DTA) 7,500
Deferred tax expense ( DTE) 7,500

Rs.
Profit before Tax 200,000
Tax:
Current Tax (67,500)
Deferred Tax 7,500
(60,000)
Profit after Tax 140,000
Let’s assume during the year ended 30-6-2015 Rs 25,000 becomes actual bad debts and no additional allowance
was required at the end of the year:
Allowance for bad debt 25,000
Debtor 25,000
Current Tax:
30-6-2015
Rs.
Less Actual bad debt (25,000)
Current Tax (275,000 x 30%) 82,500
Deferred Tax
We have earned accounting profits of Rs 300,000 however we are paying tax on taxable profits of Rs 275,000. It
means we are paying less tax on Rs 25,000 amounting to Rs 7,500 (25,000 x 30%), because it had been paid
already in previous period. Therefore, we have obtained benefit of our deferred tax asset created last period. It
means our deferred tax asset is reversed in this year.
Deferred tax asset 7,500
Income Statement (Extracts) 30-6-2015

Rs
60
Less: Tax
Current tax (82,500)
Deferred Tax expense (7,500)
(90,000)
Profit after tax 210,000
Deferred Tax Asset (For both years)
Year 1
Bal b/d -
DTE 7,500 Bal c/d 7,500
Year 2
Bal b/d 7,500 DTE 7,500
Bal c/d -
Summary of Entries
If liability increases If Asset increases
DTE xxx DTA xxx
DTL xxx DTE xxx
If liability decreases If Asset decreases
DTL xxx DTE xxx
DTE xxx DTA xxx
Scenario 2 Summary
End of 2014:
 Bad debts expense of Rs 25,000 has been recognized in 2014 on estimated bases as per accounting standards.
However, this expense will be allowed on actual basis in future according to Income Tax Ordinance.
 It will result into reduction in future taxable profit. Therefore, future tax expense will be less by Rs 7,500
(25,000 x 30%). This future tax saving is called as deferred tax asset.
Deferred Tax Asset 7,500
Deferred Tax Expense 7,500
End of 2015:
As the tax has been saved during 2015 because of actual bad debts, therefore DTA has been reversed.
Scenario 3:Gratuity:
Gratuity is an employee benefit payable at the time of retirement/termination. It is recognized as an expense on
accrual basis in accounting. However, it is deductible for tax purposes on payment basis.
Suppose first year of business i.e 30-6-2014
Gratuity Expense 100,000
Provision for Gratuity/Gratuity Payable 100,000
Suppose no payment on account of gratuity is made during the year
As on 30-6-2014
Gratuity Payable 100,000 - 100,000
Deferred Tax
This amount of Rs 100,000 has been recognized as an expense as per accounting standards on accrual basis
however, this amount will be allowed as an expense on cash basis in future while calculating future taxable
profits. It will result into reduction in future taxable profits. Therefore, we are expecting tax saving of
Rs 30,000 in future (100,000 x 30%).This saving is called as deferred tax asset.
Deferred Tax Asset 30,000
Deferred Tax Expense 30,000
 When the gratuity will be paid to employees in future periods then tax saving will occur and DTA
will reverse.
Summary:
If carrying amount of an asset is more than Tax base it results into Deferred Tax Liability. [Page 6]
61
If carrying amount of an asset is less than Tax base it results into Deferred Tax Asset. [Page 7]
If carrying amount of a liability is more than Tax base it results into Deferred Tax Asset. [Page 9]
If carrying amount of a liability is less than Tax base it results into Deferred Tax Liability.
Q.1 The following Information for the financial year ended 31 Dec 2010 related to Galaxy Limited (GL); a
listed company which was incorporated on Jan 1, 2009:
 The profit before tax for the year amounted to Rs. 60 million (2009: Rs. 45 million)
 The detail of accounting and tax depredation on fixed assets is as follows:
Rs. millions
2010 2009
Accounting Dep. 15 15
Tax Dep. 6 45
GI Purchased the fixed assets on 1-1-2009 for Rs. 100 Million
 Gl operates a gratuity scheme. The provision made during the year 2009 and 2010 amounting to Rs. 1.7
million and 2.2 million respectively. No payment has been made on account of gratuity during these
periods.
 During the year, GI sold an asset for Rs, 3 million and recognized a profit of Rs. 0.5 million. The tax
base of asset was 2 million. No other addition or deletion was made during 2009 & 2010.
 Bad debts expense recognized during the year was 5 million (2009: Rs. 7million)
 Bad debts written off during the year amounted to Rs. 3 million (2009: Rs 4million)
 Applicable tax rate is 35%.
Required:
Prepare Extracts from Statement of comprehensive Income for the year ended 31 Dec, 2010 (including
comparatives); starting from profit before tax.
(International Accounting Standard 12: Income Taxes Para:7)

The tax base of an asset
Examples
1) A machine cost 100. For tax purposes, depreciation of 30 has already been deducted in the current and
prior periods and the remaining cost will be deductible in future periods, either as depreciation or
through a deduction on disposal. The tax base of the machine is 70.
2) Interest receivable has a carrying amount of 100. The related interest revenue will be taxed on a cash
basis. The tax base of the interest receivable is nil.
3) Trade receivables have a carrying amount of 100. The related revenue has already been included in
taxable profit. The tax base of the trade receivables is 100.
4) Dividends receivable from a subsidiary have a carrying amount of 100. The dividends are not
taxable.
The tax base of the dividends receivable is 100.
(International Accounting Standard 12: Income Taxes Para:8)
The tax base of a liability
Examples
1) Current liabilities include accrued expenses with a carrying amount of 100. The related expense will
be deducted for tax purposes on a cash basis. The tax base of the accrued expenses is nil.
2) Current liabilities include interest revenue received in advance, with a carrying amount of 100. The
related interest revenue was taxed on a cash basis. The tax base of the interest received in advance
is nil.
3) Current liabilities include accrued expenses with a carrying amount of 100. The related expense has
already been deducted for tax purposes. The tax base of the accrued expenses is 100.
4) Current liabilities include accrued fines and penalties with a carrying amount of 100. Fines and
penalties are not deductible for tax purposes. The tax base of the accrued fines and penalties is
100.
62
Differences
Temporary Differences
Permanent Differences


Differences arise in one period
Differences which arise
and then reverse in one or more
in one period and then
subsequent periods.
do not reverse in
 subsequent periods.
Deferred tax is only on temporary

differences.
There is no concept of
deferred tax on
permanent differences
Taxable Deductible
Temporary Temporary
Differences Differences
(TTD) (DTD) Exempt Income Inadmissible Expenses
are examples of permanent differences.
In case of permanent differences, assume
carrying amount is equal to tax base
Differences which Differences which

result into increase in result into decrease
future taxable profits in future taxable
 profits
It will result into DTL 
It will result into DTA
Conclusion
Therefore; deferred tax is taxation effect of temporary differences.
 If an income or expense is taxable / deductible on cash basis, then there will be no tax base.
 There will be no tax base against allowance for bad debts.
Q.2 Given below is the statement of comprehensive income of Shakir Industries for the year ended December 31, 2018:
2018
Rupees in million
Sales 143.00
Cost of goods sold (96.60)
Gross profit 46.40
Operating expenses (28.70)
Operating profit 17.70
Other income 3.40
Profit before interest and tax 21.10
Financial charges (5.30)
Profit before tax 15.80
Following information is available:
i. Operating expenses include an amount of Rs. 0.7 million paid as penalty to SECP on noncompliance of certain
requirements of the Companies ACT 17.
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
63
million. As at December 31, 2008, obligations against assets subject to lease stood at Rs.1.2 million. The
movement in assets held under lease is as follows:
Rupees in million
Opening balance - 01/01/2018 2.50
Depreciation for the year (0.7)
Closing balance - 3 1/12/2018 1.80
iv. The details of owned fixed assets are as follows:
Accounting Tax
Rupees in million
Opening balance - 01/01/2018 12.50 10.20
Purchased during the year 5.30 5.30
Depreciation for the year (1. 1 ) (1.65)
Closing balance - 31/12/2018 16.70 13.85
v. Capital work-in-progress as on December 31, 2018 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, 2018 was Rs. 0.55 million and Rs. 0.7 million
respectively.
vii. Applicable income tax rate is 35%.
Required:
Based on the available information, compute the current and deferred tax expenses for the year ended December 31,
2018.
Q.3 The draft statement of comprehensive income of Hobbit Ltd. For the year ended 31 December 20X1 is
shown below
Hobbit Limited
Draft Statement of Comprehensive Income
Revenue 1,000,000
Cost of sales (400,000)
Gross profit 600,000
other income 300,000
other expenses (403,000)
Profit before taxation 497,000
The following end of year adjustments need to be accounted for:
(i) Rent received in advance of Rs. 5,000 is included in “other Income” (taxable in 20X1)
(ii) Rates prepaid of Rs. 6,000 in respect of 20X2 are included in “other expenses” (deductible for tax
purposes in 20X1).
(iii) Advertising costs payable at year-ended total Rs. 10,000 (deductible for tax purposes in 20X1).
(iv) Interest income of Rs, 20,000 is receivable at year-end (taxable in 20X1)
Other relevant Information:
 Dividend income of Rs 30,000 is included in ‘other income’ (exempt from tax).
 Fines of Rs. 9,000 are included in "other expenses’ (not deductible for tax purposes).
 Dividends of Rs. 80,000 have been declared on 30 December 20X1.
 The deferred tax account at 31 December 20X0 had a credit balance of Rs 12,000 which related purely to
taxable temporary differences arising from capital allowances (tax depreciation) on plant. The tax base of the
plant at 31 December 20X0 was Rs 115,000. At 31 December 20X1 the carrying amount of the plant
amounted to Rs 120,000 and the tax base amounted to Rs. 85,000: No plant was sold or purchased during the
year.
Assume that the statutory normal tax rate has remained unchanged for many years at 30%.
Required:
a) Prepare an extract from statement of comprehensive income of Hobbit Limited for Dec 31, 2001
starting with profit before tax.
b) Prepare extracts from statement of financial position as on 31-12-2001 with comparatives.
Note:
Deferred tax liability is presented as a non-current liability in statement of financial position. Deferred tax
64
asset is presented as a non-current asset in statement of financial position.
Effect of Rate Change:
Current Tax:
Use the tax rate which is applicable in relevant period. E.g
2014 40% use this rate against taxable profit.
2015 35% use this rate against taxable profit etc.
Deferred Tax:
Use the tax rate which is applicable at the end of reporting period.
Example 1
Opening DTL=10,000 calculated @ 30%
Closing DTL = 25,000 calculated @ 35%
DTL
b/d (30%) 10,000
DTE [rate change] 1,667
c/d (35%) 25,000 DTE (bal) [other than rate change] 13,333
=10,000 x 5% =1,667
30%
If there is change in tax rate during an accounting period, then the opening balance is remeasured according to the revised
rate. Difference if any is recognized in income statement for the period, as an effect of rate change.
Rs
Profit before Tax -
Tax
Current Tax (-)
Deferred Tax (13,333 + 1.667) (15,000)
Example 2
DTL
b/d (35%) 4,000
DTE (bal) [other than rate change] 2,571 DTE [rate change] 571
c/d (40%) 2,000
=4,000 x 5% =571
35%
Rs
Profit before Tax -
Tax
Current Tax (-)
Deferred Tax (2,571-571) 2,000
Note: increase in tax rate results into increase in deferred tax liability and vice versa. Similarly, increase in tax rate results
into increase in deferred tax assets and vice versa.
Example 3
Opening DTA=5,000 calculated @ 25%
Closing DTA = 6,000 calculated @ 35%
DTA
b/d (25%) 5,000
DTE [rate change] 2,000 DTE (bal)[other than rate change] 1,000
c/d (35%) 6,000
=5,000 x 10% =2,000
25%
65
Rs
Profit before Tax -
Tax
Current Tax (-)
Deferred Tax (2,000-1,000) 1,000
Example 4
Closing DTA = 6,000 calculated @ 30%
DTA/DTL
b/d (35%) 5,000
DTE [rate change] 714
DTE(bal) [other than rate change] 10,286 C/D (30%) 6,000
=5,000 x 5% =714
35%
Rs
Profit before Tax -
Tax
Current Tax (-)
Deferred Tax (10,286+714) 11,000
Example 5
Opening DTA=10,000 calculated @ 30%
DTA\DTL a/c
b/d (30%) 10,000
DTE [rate change] 1,667 DTE (bal) [other than rate change] 23,667
c/d (35%) 12,000
=10,000 x 5% = 1,667
30%
Rs
Profit before Tax -
Tax Expense
-Current Tax (-)
-Deferred Tax (23,667-1,667) (22,000)
Deferred Tax
1. It is a taxation effect of temporary differences.
Taxable Temporary Deductible

Temporary Differences Differences
DTL DTA
2. It is a taxation effect of carry forward of unused tax loses.
Tax Losses: -
Working of Current Tax
Rs
Profit before Tax -
-
-
66
Tax Loss (-)
If there is a negative figure as a result in working of current tax, it is called as tax loss.
Current Tax: Working
Tax Loss (500,000)
Current Tax Nil
As per ITO 2001 Tax loss can be carry forward and set off against taxable profits of next six years. Continuing from previous
example;
Current Tax Rs
Profit before Tax -
-
-
Taxable Profit 700,000
Less: C/f losses (500,000)
Taxable Profit after adjustment of losses 200,000
Current tax @ 30% 60,000
Deferred Tax:
As on 30-6-2015
Tax loss (500,000)
This tax loss will reduce future taxable profits therefore it will result into future tax
saving. 500,000 x 30% = 150,000 DTA As on 30-6-2015
Accounting Entry
First Scenario: If during the year ended 30-06-2016, taxable profits are Rs 700,000 (as discussed above) then all
tax loss brought forward will be adjusted and therefore no closing deferred tax asset (which means deferred tax
asset is reversed).
Second Scenario: If suppose during the year ended 30-06-2016; instead of taxable profits of Rs 700,000, taxable
profit are Rs 400,000, then:
Current Tax Working
Less C/F tax losses (500,000)
Tax loss after adjustment of losses (100,000)
Current Tax Nil
Now, closing balance of DTA will be 100,000 x 30% = Rs 30,000 as on 30-06-2016.
Third Scenario: if suppose during the year ended 30-06-2016, instead of taxable profits of Rs 700,000, there is a
tax loss of Rs 200,000 then:
Current Tax Working
Tax Loss (200,000)
Less C/F tax losses (500,000)
Tax loss after adjustment of losses (700,000)
Current Tax Nil
Now closing of DTA will be 700,000 x 30% = 210,000
200,000 out of 700,000 can be c/f for next 6 years from 2016.Remaining 500,000 can be c/f to next 5 years.
Q.4
Cost of vehicle purchased on 1 January 20X1 120,000
Depreciation on vehicles to nil residual value 3 years straight-line
Capital allowance (depreciation allowed by the tax authorities) 2 years straight-line
Income tax rate 30%
67
Profit or loss before tax (after deducting any depreciation on the vehicle) for the year ended:
31 December 20X1 Loss: 40,000
31 December 20X2 Loss: 20,000
31 December 20X3 Profit: 100,000
Required:
A. Calculate the taxable profits and current tax per the tax legislation for 20X1 to 20X3.
B. Calculate the Deferred tax balances for 20X1 to 20X3.
C. Prepare:
(i) Income Statement (Extracts) for the year ended 31-12-2003, 2002 & 2001
(ii) Statement of Financial position extracts as on 31-12-2003, 2002 & 2001. (Only disclose the
deferred tax balance).
Q.5 The following information relates to Aman Ltd for financial year ended 31-12-2013
i. Profit before tax Rs 120M (2012: 75M)
ii. Company paid a penalty for non-compliance with income tax ordinance Rs 2M during the year.
iii. Accounting depreciation for the year is 15M (2012: 8M), whereas tax depreciation for the year is 12M
(2012: 6M)
iv. During the year company started a construction of new factory building and capitalized borrowing cost of
Rs 1M. Building is not yet complete.
v. Company operates a gratuity scheme for its eligible employees. Expense recognized for the year ended
31-12-2013 and 2012 was 1M and 2M respectively. There was no payment made during the respective
years, on account of gratuity.
vi. Carrying amount of Property, Plant and Equipment was 290M and tax base was 180M as on 31-12- 2012.
vii. Company earned a capital gain of Rs 12M (2012: NIL) on sale of shares of listed company. The income is
exempt from tax.
viii. During the year company sold a machine for Rs 6M and recognized a profit of 1M. The tax WDV of the
machine was 4M. There were no other additions/disposals of fixed assets in 2013 and 2012.
ix. Bad debts expense recognized during the year was Rs 10M (2012: 14M)
x. Bad debts expense written off during the year amounting to Rs 6M (2012: 8M).
xi. The balances of provision for gratuity and provision for bad debts were 10M and 18M respectively as on
31-12-2011.
xii. Company’s assessed losses up to 31-12-2011 amounted to Rs 40M.
xiii. Applicable tax rates were:
31-12-2011 30%
31-12-2012 40%
31-12-2013 35%
Required:
Prepare a note on taxation for inclusion in the company’s financial statements for the year ended 31-12-2013
giving an appropriate disclosure relating to current and deferred tax expense including comparative figures for 2012
and a tax expense reconciliation.
Q.6 The following information relates to Galaxy International (GI), a listed company, which was incorporated on
January 1, 2009.
i. The (loss) / profit before taxation for the years ended December 31, 2009 and 2010 amounted to (Rs.
1.75 million) and Rs. 23.5 million respectively.
ii. The details of accounting and tax depreciation on fixed assets is as follows:
2010 2009
Rs. in million
Accounting depreciation 15 15
Tax depreciation 6 45
iii. In 2009, GI accrued certain expenses amounting to Rs. 2 million which were disallowed by the tax authorities.
However, these expenses will be allowed on the basis of payment in 2010.
iv. GI earned interest on Special Investment Bonds amounting to Rs. 1.0 million and Rs. 1.25 million in the years
2009 and 2010 respectively. This income is exempt from tax.
68
v. GI operates an unfunded gratuity scheme. The provision during the years 2009 and 2010 amounted to Rs. 1.7
million and Rs. 2.2 million respectively. No payment has so far been made on account of gratuity.
vi. The applicable tax rate is 35%.
Required:
Prepare a note on taxation for inclusion in the company’s financial statements for the year ended December 31,
2010 giving appropriate disclosures relating to current and deferred tax expenses including a reconciliation to
explain the relationship between tax expenses and accounting profit.
Note: Even if the question of taxation is silent regarding comparative figures and those figures are available, then always
prepare one year comparative figures as well.
Q.7 The following information relates to Apricot Limited (AL), a listed company, for the financial year ended 31
December 2011:
i. The profit before tax for the year amounted to Rs. 60 million (2010: Rs. 45 million).
ii. The accounting and tax written down value of fixed assets as on 31 December 2010 was Rs.95 million and Rs.
90 million respectively. Accounting depreciation for the year is Rs. 10 million (2010: Rs. 9 million) whereas
tax depreciation for the year is Rs. 8 million (2010: Rs. 7 million).
iii. During the year, AL sold a machine for Rs. 3 million and recognized a profit of Rs. 0.5 million. The tax written
down value of the machine as on 31 December 2010 was Rs. 2 million. There were no other
additions/disposals of fixed assets in 2010 and 2011.
iv. AL earned capital gain of Rs. 6 million (2010: Nil) on sale of shares of a listed company. This income is
exempt from tax.
v. Bad debt expenses recognized during the year was Rs. 5 million (2010: Rs. 7 million).
vi. Bad debts written off during the year amounted to Rs. 3 million (2010: Rs. 4 million).
vii. Deferred tax liability and provision for bad debts as on 31 December 2009 was Rs.18.90 million and Rs. 9
million respectively.
viii. The company’s assessed brought forward losses up to 31 December 2009 amounted to Rs. 19.25 million.
ix. Applicable tax rate is 35%.
Required:
Prepare a note on taxation for inclusion in AL’s financial statements for the year ended 31 December 2011 giving
appropriate disclosures relating to current and deferred tax expenses including comparative figures for 2010 and a
reconciliation to explain the relationship between tax expense and accounting profit.
Q.8 Following information relates to H limited for the year ended June 30, 2014:
i. Property plant and equipment has a net book value at year end of Rs. 24.5 million. During the year equipment
having carrying amount of Rs.3.5 million was sold at a loss of Rs. 0.1 million. Tax gain on this sale was Rs. 0.3
million. There was no other disposal during the year. Additions during the year amount to Rs. 6 million. Tax
written down value of property plant and equipment at start of year was Rs. 19.5 million. Accounting
depreciation for the year was 4.75 million whereas tax depreciation for the year was Rs. 7 million.
ii. Provision for gratuity at start of year was Rs. 8.25 million. During the year a further provision for Rs. 1.5 million
was recognized. Gratuity payment during the year amount to Rs. 5 million.
iii. During the year Rs. 0.45 million were spent on advertisement and treated as expense. As per tax rules such
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:
a) Calculate current tax expense for the year ended and deferred tax liability as at June30, 2014.
b) Prepare reconciliation between accounting profit and tax expense for the year ended 30 June2014.
Q.9 Waqar Limited has provided you the following information for determining its tax and deferred tax expense for the
year 2014 and 2015:
 During the year ended December 31, 2015, the company’s accounting profit before tax amounted to Rs. 40
million (2014: Rs. 30 million). The profit includes capital gains amounting to Rs. 10 million (2014: Rs. 8
million) which are exempt from tax.
69
 The accounting written down values of the fixed assets, as at December 31, 2013 were as follows:
Accumulated Written down
Cost Accumulated Written down
Depreciation value
Rs. m Rs. m Rs. m
Machinery 200 25 175
Furniture and fittings 50 10 40

 Machinery was acquired on January 1, 2013 and is being depreciated on straight- line basis over its estimated
useful life of 8 years. The tax base of machinery as at December 31, 2013 was Rs. 90 million.
 Furniture and fittings are also depreciated on the straight line basis at the rate of 10% per annum. The tax base
of furniture and fittings as at December 31, 2013 was Rs. 40.5 million.
 Normal rate of tax depreciation on both types of assets is 10% on written down value.
 The tax rates for 2013, 2014 and 2015 were 35%, 35% and 30% respectively.
Required
For each year:
a) Calculate the corporate income tax liability for the year.
b) Calculate the deferred tax balance that is required in the statement of financial position as at the year end.
c) Prepare a note showing the movement on the deferred tax account and thus calculate the deferred tax charge
for the year.
d) Prepare the statement of profit or loss note which shows the compilation of the tax expense.
e) Prepare a note to reconcile the product of the accounting profit and the tax rate to the tax expense.
(QB#12.6)
*Note: If a movement on deferred tax account is required in a question then prepare a ledger and then its
information is presented in a statement form.
Q.10 Triangle Limited (TL) was incorporated in 2017. The following information has been gathered for preparing the
disclosures related to taxation for the year ended 31 December 2018:
 Profit before tax for the year amounted to Rs. 125 million (2017: Rs. 110 million)
 Accounting depreciation for the year was Rs. 25 million (2017: Rs. 18 million)
 Tax depreciation for the year was Rs. 21 million (2017: Rs. 42 million)
 Rent is allowed for tax purposes on payment basis. Rent accrued as at 31 December 2018 amounted to
Rs. 1 million (2017: Rs. 3 million)
 Insurance is also allowed for tax purposes on payment basis. Prepaid insurance as at 31 December 2018
amounted to Rs. 5 million (2017: Rs. 4 million)
 Other income includes:
(i) Interest received of Rs. 10 million (2017: Rs. 7 million). Interest income is exempt from tax.
(ii) Dividend received of Rs. 6 million (2017: Rs. 8 million). Dividend was taxable as a separate block of
income @ 15% (2017: 15%)
 Borrowing cost of Rs. 2 million was capitalized in 2018 on an under construction building. Borrowing
cost is allowed for tax purposes in the year in which it is incurred.
 Applicable tax rates for 2018 is 35% (2017: 30%).
Required:
Prepare the following:
a) Note on taxation for inclusion in TL's financial statements for the year ended 31 December 2018
and a reconciliation to explain the relationship between tax expense and accounting profit.
(Show comparative figures). (11)
b) Computation of deferred tax liability/asset in respect of each temporary difference as at 31
December 2017 and 2018.
70
Taxes
Current Tax Deferred Tax Prior Period Tax
Prior Period Tax (Under/Over Provision of tax of Previous Periods)

Suppose in 2014 current tax is 500,000.
Current Tax 500,000
Tax Payable 500,000
 A tax return is filed with income tax department.
 Income tax department will verify the figures (Assessment)
 Suppose assessment of 2014 is finalized in 2016, and tax assessed is Rs 550,000. Therefore,
under Provision (Under charge) of tax is Rs 50,000 in 2014.
 In 2016, this Rs 50,000 is recorded as a change in accounting estimate as follows
Current Tax-Prior Period 50,000
Tax Payable/cash 50,000
Tax Rs
Current Tax (-)
Deferred Tax (-)
Prior period tax (50,000)
Suppose in 2016, instead of tax assessed Rs 550,000, tax assessed is Rs 460,000. Therefore, over provision (over
charged) of tax is Rs 40,000 in 2014. In this case in 2016, this Rs 40,000 is recorded as a change in accounting
estimate as follows
Cash/Tax Receivable 40,000
Current Tax-Prior Period 40,000
Tax Rs
Current Tax (-)
Deferred Tax (-)
Prior period tax 40,000
Tax Treatment of Lease Books of Lessee

LEASE
IFRS TAX
 Capitalized the asset and depreciate.  Rental are allowed as an expense, when paid.
 Interest is recognized as an expense  No asset or liability is recorded
Current Tax
Profit before tax xxx
Add: Accounting Depreciation xxx
Add: Interest Expense xxx
Less: Rentals Paid (xxx)
Taxable Profit xxx
Deferred Tax
There will be carrying amount of right to use asset and lease liability and in some cases interest payable
but there will be no corresponding tax base against any accounting head.
71
Example
Mars Limited (ML) is engaged in the manufacturing of chemicals. On July 1, 2008 it obtained a motor vehicle on
lease from a bank. Details of the lease agreement are as follows:
(i) Cost of motor vehicle is Rs. 1,600,000.
(ii) Installments of Rs. 480,000 are to be paid annually in advance.
(iii) The lease term and useful life is 4 years and 5 years respectively.
(iv) The interest rate implicit in the lease is 13.701%.
ML follows a policy of depreciating the motor vehicle on the straight-line method. However, the tax department
allows only the lease payments as a deduction from taxable profits.
The tax rate applicable to the company is 30%. ML’s accounting profit before tax for the year ended June 30, 2009
is Rs. 4,900,000.
There are no temporary differences other than those evident from the information provided above.
Required:
a) Prepare journal entries in the books of Mars Limited for the year ended June 30, 2009 to record the above
transactions including current tax and deferred tax.
b) Prepare a note to the financial statements related to disclosure of maturity analysis of lease liability, in
accordance with the requirements of International Accounting Standards.
(Ignore comparative figures.)
Solution
Date Particulars Debit Credit
l-Jul-08 Right to use Vehicle 1,600,000
Obligations under the lease 1,600,000
(Capitalize the lease assets and recoding of corresponding liability)
l-Jul-08 Obligations under the lease 480,000
Bank 480,000
(Record the first lease payment made in advance)
30-Jun-09 Finance charges 153,451
Accrued finance charges 153,451
(Accrue the finance charges for the year ended June 30, 2009)
30-Jun-09 Depreciation 400,000
Accumulated depreciation - Motor Vehicle 400,000
(Charge the depreciation for the year ended June 30, 2009)
Working: Rs. 1,600,000/4 = Rs. 400,000.
(Assuming that there is no reasonable certainty about transfer of ownership at the end of lease term).
30-Jun-09 Current Tax (W-1) 1,492,035
Tax payable 1,492,035
(To record the tax expense for the year ended June 30, 2009)
30-Jun-09 Deferred Tax Asset (W-2) 22,035
Deferred tax Expense 22,035
(To raise the deferred tax asset)
W-1 Tax computation Rupees

Accounting profit before tax 4,900,000
Add: Depreciation on leased assets 400,000
Add: Finance charges 153,451
Less: Lease payment (480,000)
Taxable profit 4,973,451
Tax @ 30% 1,492,035
W-2 Deferred tax

Carrying Tax base Difference
amount
Leased assets 1,200,000 - 1.200.000 TTD
72
Obligations under finance lease 1,120,000 - 1,120,000 DTD
Accrued finance charges 153,451 153,451 DTD
Net Deductible temporary difference 73,451 DTD
Deferred tax @ 30% (Asset) 22,035
b) Mars Limited
Two to three years (5,800,000 + 2,000,000) 480,000
The company has entered into a lease agreement. The lease payment has been discounted at an interest
rate of 13.701% to arrive at their present value. Rentals are paid in annual installments in advance.
W-3: Repayment Schedule
Dates Annual Principal Interest Closing
payment Repayment 13.701% Balance
1-7-2008 1,600,000
1-7-2008 480,000 480,000 - 1,120,000
1-7-2009 480,000 326,549 153,451 793,451
1-7-2010 480,000 371,289 108,711 422,162
1-7-2011 480,000 422,162 57,838 -
73
Self-Test Questions
Q.1 A summarized trial balance of Green Limited for its first year is given below:
(Rs. in million)
Particulars Debit Credit
Paid up capital - 131.5
Payables - 3.5
Land 60 -
Buildings 35 -
Other fixed assets – tangible 22 -
Product research costs 15 -
Product development costs 12 -
Stocks 6.5 -
Accounts receivables 5.5 -
Cash and bank balances 8 -
Revenues - 108
Expenditures 79 -
243 243
All adjustments have been made except for the following;
(i) Depreciation has to be charged on buildings and other fixed assets at the rate of 15%. The rate of tax
depreciation is 30%.
(ii) Half of the research and development costs are allowable for tax purposes in the first year. The balance
amount shall he permanently disallowed.
(iii) The company amortizes intangible assets over a period of three years.
(iv) The company’s profit is subject to tax at the rate of 35%.
(v) Interest of Rs. 1.25 million was paid on a short term loan received from directors, which is not an
allowable expense under the tax laws.
Required:
a) Prepare journal entries for necessary adjustments including taxation. Show necessary workings.
b) Prepare extracts from income statement for the period.
c) Prepare a reconciliation between accounting profit and tax expense for the period.
Q.2 Intelligent Technologies Limited (ITL) earned profit before tax amounting to Rs. 11 million, during the year ended
31 December 2012. The following information is available for calculation of tax liability:
i. Accounting depreciation for the year is Rs. 30 million, whereas tax depreciation is Rs. 25.6 million.
ii. The accounting and tax written-down values of the fixed assets as at 31 December 2012 were Rs. 90 million
and Rs. 102.4 million respectively.
iii. During the year, ITL realized capital gain of Rs. 2 million on sale of shares of listed companies. This income
is exempt from tax.
iv. It is expected that taxation authorities would add back expenses amounting to Rs. 0.9 million of which Rs.
0.5 million would be allowed in 2015.
v. During the year, expenses amounting to Rs. 3 million that pertained to year ended 31 December 2010 were
disallowed. ITL had initially expected that the entire expense would be allowed but now has decided not to
file an appeal against the decision.
vi. As at 31 December 2011, ITL had assessed brought forward losses of Rs. 21 million.
vii. Deferred tax asset as on 01 January 2012 amounted to Rs. 10.15 million.
viii. Applicable tax rate for the company is 35%.
Required:
Prepare a note on taxation (expense) for inclusion in ITL’s financial statements for the year ended 31 December
2012 giving appropriate disclosures relating to current and deferred tax expenses and a reconciliation to explain
the relationship between tax expenses and accounting profit.
(Ignore comparative figures and minimum turnover tax)
74
SOLUTION
A.1
Galaxy Limited
Statement of Comprehensive Income(Extracts)
2010 2009
Profit before tax 60 45
Tax:
Current Tax (W-1) (25.795) (6.895)
Deferred Tax (W-2) 4.795 (8.855)
(21.00) (15.75)
Profit after Tax 39.00 29.25
W-1 Current Tax: 2010 2009

Profit before Tax 60 45
Add
Gratuity Expense 2.2 1.7
Taxable Gain (3-2) 1 -
Bad Debts expense 5 7
Less
Tax depreciation (6) (45)
Accounting Gain (0.5) -
Bad Debts written off (3) (4)
Taxable Profits 73.7 19.7
Tax @ 35% 25.795 6.895
Deferred Tax
Balance Sheet Approach

Income Statement Approach


Compare carrying amount of an asset
Compare accounting profits and tax
and liability with its tax base
profits


Differences
Differences
DTA DTL
Deferred tax expense Reversal of DTE
According to this approach, closing balances are According to this approach amounts for the period are
calculated. calculated. This approach is only used if required by
This is recommended by IAS-12 question or there is no information of carrying
amounts and tax bases of assets and liabilities.
75
W-2 Deferred Tax as on 31-12-2009
Fixed Assets 85 55 30 T.T.D
Gratuity Payable 1.7 - 1.7 D.T.D
Allowance for bad debts 3 3 D.T.D
- 25.3 T.T.D
x 35% 8.855 D.T.L
DTL
- B/D -
C/D 8.855 DTE 8.855
As on 31-12-2010
Fixed Asset (w) 67.5 47 20.5 T.T.D
Gratuity Payable 3.9 - 3.9 D.T.D
Allowance for 5 - 5 D.T.D
bad Debts
11.6 T.T.D
x 35% 4.06 D.T.L
Allowance
Debtors 4 B/D -
Bad Debts 7
C/D 3
Debtors 3 B/D 3
Bad Debts 5
C/D 5
DTL
DTE 4.795 B/D 8.855
C/D 4.06
(W) Fixed Assets:

Carrying Amount = 85 – 15 – 2.5 = 67.5
Tax Base = 55 – 6 – 2 = 47.0
Gratuity Payable
b/d -
c/d 1.7 Gratuity exp 1.7
b/d 1.7
c/d 3.9 Gratuity exp 2.2
A.2 Shakir Limited

a) Current Tax
Rs in millions
Add: Penalty 0.7
Gratuity 2.4
Finance Charges 0.15
76
Depreciation 0.7
Depreciation – Other Asset 1.1
Less
Lease Rentals (0.65)
Depreciation-Tax Base (1.65)
Financial Charges- CWIP (2.3)
Gratuity Paid (1.60)
Taxable profit 14.65
Current Tax 35% 5.13
b) Deferred Tax Calculation
Assets

Lease hold Asset 1.8 - 1.8
Owned Assets 16.70 13.85 2.85
CWIP 2.3 - 2.3
Taxable Temporary Difference 6.95
Liabilities
Provisions for gratuity (w-2) 1.5 - 1.5

Obligation under finance lease 1.2 - 1.2
Deductible Temporary Difference 2.7
Net Taxable Temporary Difference 4.25
@35% 1.4875 DTL
W-1 W-2
Deferred Tax Liability Provision Gratuity
B/D 0.55 B/D 0.7
DTE 0.9375 Cash 1.6 Expense 2.4
C/D 1.4875 C/D 1.5
77
A.3 Solution
Hobbit Limited a)
Income Statement Extracts for the year ended 31-12-01
Profit before tax (W-1) 508,000
Tax
Current Tax (W-2) (147,300)
Deferred Tax (W-3) 1,200
(146,100)
Profit after Tax 361,900
W-1 Calculation of corrected Profit before Tax
Less: Rent received in advance (5,000)
Advertisement Expense (10,000)
Add: Interest income 20,000

Prepared Rates 6,000
W-2 Current Tax

Profit before tax (W-1) 508,000
Add:
Fines 9,000
Accounting Depreciation (w) 35,000
Rental income 5,000
Less
Exempt Income (30,000)
Tax Depreciation (w) (30,000)
Rates Prepaid (6,000)

Current Tax (491,000 x 30%) 147,300
W-3 Deferred tax as on 31-12-01

Carrying Tax Base Difference
Amount
Plant 120,000 85,000 35,000 T.T.D
Unearned rental income 5,000 - 5,000 D.T.D
Prepaid rates 6,000 - 6,000 T.T.D
Advertisement payable 10,000 10,000 -
Interest Receivable 20,000 20,000 -
Dividend Receivable 30,000 30,000 -
Fines Payable 9,000 9,000 -
Dividend Payable 80,000 80,000 -
Net differences 36,000 T.T.D
x 30% 10,800 D.T.L
DTL
DTE 1,200 b/d 12,000
c/d 10,800
78
Journal Entries (Not required in question just for additional information)
Adjustment 1 Other income 5,000
Unearned rental income 5,000
Adjustment 2 Prepaid Rates 6,000

Other Expense 6,000
Adjustment 3 Advertisement Expense 10,000

Advertisement Expense Payable 10,000
Adjustment 4 Interest Receivable 20,000
Interest Income 20,000
Calculation of Accounting and Tax Depreciation:
Carrying Tax Difference
Amount Base
Opening 155,000 115,000 40,000 X 30% = 12,000
Depreciation 35,000 30,000
Closing 120,000 85,000
Deferred Tax Income Statement Approach (Not required in question only for additional
Information)
1. If accounting profits (after adjustment of permanent differences) are more than taxable profits it will
result into deferred tax expense.
2. If accounting profits (after adjustment of permanent differences) are less than taxable profits it will
result into reversal of deferred tax expense.
Income Statement Approach to calculate Deferred Tax
Rs
Adjustment of permanent difference
Dividend Income (30,000)
Fines Expense 9,000
Profit before tax after adjustment of permanent differences 487,000

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

Rule of Tax Expense:
If accounting profits are multiplied with tax rate; then the resulting figure should be equal to
sum of current tax and deferred tax (means tax expense).
This rule is applicable if there is no permanent difference and no effect of rate change.
Sometimes in questions of IAS-12 a reconciliation between expected tax and actual tax is required
in notes as a disclosure.
Notes:
Disclosure
Reconciliation of Accounting profit with Tax Expense:
Rs
Tax Rate 30%
Expected Tax Expense 152,400
Effect of permanent differences
Dividend Income (30,000 x 30%) (9,000)
Fines Expenses (9,000 x 30%) 2,700
79
Actual Tax Expense 146,100
b)
Hobbit Limited
Extracts of Statement of Financial
Position As on 31-12-2001
Rs Rs
2001 2000
Non-current Asset
Plant 120,000 155,000
Current Asset
Prepaid Rates 6,000
Interest Receivable 20,000
Dividend Receivable 30,000
Deferred tax liability 10,800 12,000
Current Liability
Unearned rental Income 5,000
Advertisement Payable 10,000
Fines Payable 9,000
Dividend Payable 80,000
Current tax Payable 147,300
A.4 Solution:
a)
Calculation of current normal tax 20X3 20X2 20X1
Profit/loss before tax 100,000 (20,000) (40,000)
Add back depreciation (120,000 / 3 years) 40,000 40,000 40,000
Less capital allowance (120,000 / 2 years) 0 (60,000) (60,000)
Taxable Profit/Tax Loss for the period 140,000 (40,000) (60,000)
Tax loss brought forward (100,000) (60,000) 0
Net Taxable profits/ (tax loss) 40,000 (100,000) (60,000)
Current normal tax at 30% 12,000 nil Nil
b) Deferred Tax
Vehicles Carrying Temporary Deferred
amount Tax base difference tax at 30% Deferred tax
31 December 20X1 80,000 60,000 20,000 6,000 D.T.L
31 December 20X2 40,000 0 40,000 12,000 D.T.L
31 December 20X3 0 0 0 0 D.T.L
Tax loss as on Tax base (IAS-12) Deferred tax at 30% Deferred tax
31 December 20X1 60,000 18,000 D.T.A
31 December 20X2 100,000 30,000 D.T.A
31 December 20X3 0 0 D.T.A
DTA
b/d -
DTE 12,000 c/d 12,000
b/d 12,000
DTE 6,000 c/d 18,000
80
b/d 18,000 DTE 18,000
c/d -
c) (i) Income Statement (Extracts) for the year ended 31-12

2003 2002 2001
Profit/Loss before tax 100,000 (20,000) (40,000)
Tax:
Current Tax (12,000) -- --
Deferred Tax (18,000) 6,000 12,000
(30,000) 6,000 12,000
Profit/(Loss) after Tax 70,000 (14,000) (28,000)
(ii) Statement of Financial Position (Extracts) as on 31-12

2003 2002 2001
Non-current Assets
Deferred Tax Asset -- 18,000 12,000
A.5
Solution: Aman Ltd
a) Note on Taxation Rs. millions
2013 2012
Current tax (W-1) (41.3) (18)
Deferred tax (W-2) 6.5 (16.4)
(34.8) (34.4)
b) Reconciliation of accounting profits with Tax expense

2013 2012
Profit after Tax 120 75
Tax Rate 35% 40%
Expected Tax 42 30
Tax effect of permanent difference:
Penalty (2M x 35%) 0.7 -
Capital Gain (12M x 35%) (4.2) -
Effect of rate change (3.7) 4.4
Tax Expense 34.8 34.4
Workings
W-1 Current Tax
2013 2012
Penalty 2 -
Tax Depreciation (12) (6)
Financial Charges (1) -
Gratuity Expense 1 2
Capital Gain (12) -
Accounting Profit (1) -
Taxable Gain 2 -
Bad debts expense 10 14
Bad debts written off (6) (8)
Taxable Profit 118 85
81
B/F losses - (40)
Taxable Profit 118 45
Tax Rate 35% 40%
Current Tax 41.3 18
W-2
Deferred tax as on 31-12-2011 (To calculate opening balance of 31-12-2012, which is not given
in question)
Amount
Property Plant & Equipment 298 (298 + 8) 186 (180+6) 112 TTD
Gratuity Payable 10 - 10 DTD
Provisions for bad debts 18 - 18 DTD
Tax Losses 40
Net Differences 44 TTD
x30% 13.2 DTL
As on 31-12-2012
Amount
Property Plant & Equipment 290 180 110 TTD
Gratuity Payable (10 +2) 12 - 12 DTD
Provisions for bad debts (w) 24 - 24 DTD
x 40% 29.6 DTL
Provision D.T.L
Debtor 8 B/D 18 B/D 13.2
D.T.E (Rate change) 4.4
C/D 24 Expense 14 C/D 29.6 D.T.E 12
Effect of rate change 13.2 x 10% = 4.4
30%
As on 31-12-2013
Property Plant & Equipment (W) 270 164 106 TTD
Capital Work in progress X+1 X+0 1 TTD
Gratuity Payable (12 + 1) 13 - 13 DTD
Provisions for bad debts (W) 28 - 28 DTD
x 35% 23.1 DTL
D.T.L
DTE (Rate change) 3.7 B/D 29.6
DTE 2.8
C/D 23.1
Effect of rate change 29.6 x 5% = 3.7
40%
PPE – C.A PPE – Tax Base

B/D 290 Depreciation 15 B/D 180 Depreciation 12
Disposal 5 Disposal 4
C/D 270 C/D 164
Provision
Debtors 6 B/D 24
82
C/D 28 Exp 10
Not required (for additional information)

Income statement approach (Deferred Tax)
Taxable Profits 118 45
Difference 8 30
35% 40%
Deferred Tax 2.8 12
Reversal of D.T.E D.T.E
A.6 Solution
Galaxy International
2010 2009
a)Taxation Rs. in million
Current - for the year (W - 1) (0.84) -
Deferred (W - 2) (6.95) 0.96
(7.79) 0.96
b)Relationship between tax expense and accounting profit
Profit/(Loss) before taxation 23.50 (1.75)
Tax rate 35% 35%
Expected Tax 8.23 (0.61)
Effect of Permanent Differences:
Tax effect of exempt income (1.25 x 35%) / (1 x 35%) (0.44) (0.35)
Actual Tax 7.79 (0.96)
W-1 : Computation of Current Tax

(Loss) / profit before tax 23.50 (1.75)
Accounting depreciation 15.00 15.00
Gratuity expense 2.20 1.70
Accrued expenses (2.00) 2.00
Tax depreciation (6.00) (45.00)
Interest income from SIBs (Exempt) (1.25) (1.00)
Taxable income / (loss) 31.45 (29.05)
Loses carried forward (29.05) -
Net Taxable Profit/Loss 2.4 (29.05)
Current Tax @ 35% 0.84 -
Amount
Acc Depreciation 15 45 30 TTD
Accrued Expenses 2 - 2 DTD
Provision for gratuity 1.7 - 1.7 DTD
Net differences 26.3 TTD
Tax losses c/f 29.05
2.75
DTA @ 35% 0.96 DTA
b/d -
DTE 0.96 c/d 0.96
Acc Depreciation 30 51 21 TTD
83
Accrued Expenses - - - DTD
Provision for gratuity 3.9 - 3.9
DTD Net differences 17.1
TTD
Tax losses c/f -
17.1
@ 35% 5.985 DTL
DTA
b/d 0.96
DTE 6.945
c/d 5.985
Deferred tax income statement approach (For additional information not required in question)
2010 2019
Profit before Tax 23.5 (1.75)
Permanent difference -
Exempt Income (1.25) (1.0)
Profit before tax-After adjustment 22.25 (2.75)
Taxable Profit 2.4 -
Difference 19.85 (2.75)
Tax Rate 35% 35%
6.9475 0.9625
DTE Reversal of DTE
Important points to remember while applying income statement approach of deferred tax
 If there is accounting profit (after adjustment of permanent differences) and tax loss, then simply multiply the
rate with accounting profits to calculate deferred tax for the year.
 If there is an accounting loss (after adjustment of permanent differences) and tax loss, then simply multiply
the rate with adjusted accounting loss and it results into reversal of deferred tax expense.
A.7 Solution
Apricot
a) Taxation 2011 2010
Rs. in million
Current (W-l) (20.48) (10.76)
Deferred (W-2) 1.58 21.35
(18.90) 10.59
b) Relationship between tax expense and accounting profit
2011 2010
Profit before taxation 60.00
Expected Tax at the applicable rate of 35% 21.00
Less: Tax effect of exempt income (2.10)
Actual Tax expense 18.90
W-l Computation of Current Tax
Profit before tax as per books 60.00 45.00
Add: Allowable income / Disallowed expenses
Accounting depreciation 10.00 9.00
Tax profit on sale of fixed assets 1.00 -
Bad debt expense 5.00 7.00
Less: Disallowed income / Allowable expenses
Tax depreciation (8.00) (7.00)
Accounting profit on sale of fixed assets (0.50) -
Capital gain (6.00) -
84
Bad debts written off (3.00) (4.00)
Taxable income-before adjustment of losses 58.50 50.00
Tax losses to be brought forward - (19.25
)
Taxable income 58.50 30.75
Tax liability (@ 35%) 20.48 10.76
2011 2010
Rs. in million
W-2: Computation of Deferred Tax
Fixed assets (2010: 95-90,2011: 82.5-80) (W-2.1) 0.87 DTL 1.75 DTL
Provision for bad debts (2010:12x35%, 2011:14x35%) [W- 4.90 DTA 4.20 DTA
2.2]
Closing Balance of deferred tax 4.03 DTA 2.45 DTA
D.T.L / D.T.A
D.T.E 21.35 B/D 18.9
C/D 2.45
B/D 2.45
D.T.E 1.58 C/D 4.03
W-2.1 Movement of Fixed Assets Accounting Tax

Opening balance 95.00 90.00
Disposal during the year (2.50) (2.00)
Depreciation for the year – 2011 (10.00) (8.00)
W-2.2 Movement of provision for bad debts 2011 2010

Opening balance 12.00 9.00
Expenses for the year 5.00 7.00
Write off during the year (3.00) (4.00)
Not required in question (for additional Information)

In the original question of ICAP, opening balance of D.T.L as on 31-12-2009 is 18.9 million,
which is not correct. Therefore, in original ICAP solution, reconciliation of 2010 is not prepared.
Correct opening balance as on 31-12-2009 can be calculated as follows:

Provision for bad debts 9 - 9 D.T.D
Fixed Assets 104 (95+9) 97 (90+7) 7 T.T.D
2 D.T.D
x 35% 0.7 D.T.A
Tax loss =19.25 x 35% 6.7375 D.T.A
D.T.A as on 31-12- 7.4375
2009
Based on this Opening balance, deferred tax for the year ended 31-12-2010 is:
D.T.A
B/D 7.4375
D.T.E 4.9875
C/D 2.45
85
Therefore tax note should appear as follows in 2010
2010
Current Tax (10.76)
Deferred Tax (4.9875)
(15.7475)
Therefore, reconciliation of 2010 can be prepared as follows:
Reconciliation :
Profit before tax 45
Tax Rate 35%
Expected Tax 15.75
Actual Tax 15.75
(No permanent difference in 2010)
A.8 Solution H Limited

a)
(i) Current tax expense for the year
Rs. 000
Accounting profit 6,500
Accounting depreciation 4,750
Capital allowance (7,000)
Loss on disposal (W-2) 100
Tax gain on disposal (W-2) 300
Gratuity expense 1,500
Gratuity Paid (5,000)
Advertisement [450 -150] 300
Bad Debts expense 175
Bad Debts written off (100)
Exempt income (50)
1,475
Current Tax 35% 516
(ii)Calculation Of Deferred Tax Liability CA TB Diff
PPE - Given 24,500 15,400 (W-1) 9,100 T.T.D
Advertisement - 300 300 D.T.D
Provision for bad debt [350+175-100] 425 - 425 D.T.D
Provision for Gratuity [8,250+1,500-5,000] 4,750 - 4,750 D.T.D
Net difference 3,625 T.T.D
Deferred Tax liability 35% 1,269
W-1 Tax Base of PPE

Rs.
OOO
Year start balance 19,500
Addition 6,000
Disposal [1300 -100 - 300] (3,100)
Depreciation (7,000)
Year-end balance 15,400
W-2
Disposal Accounting Disposal Tax
Asset 3,500,000 Cash Asset 3,100,000 Cash
3,400,000 3,400,000
Loss 100,000 Gain 300,000
b) Reconciliation between accounting profit and tax expense
86
Rs 000
Tax Rate 35%
Expected Tax 2,275
Effect of exempt income (50x35%) (17.5)
Tax Expense 2,257.5

Not required (Just for additional Information)
Question does not require deferred tax for the year because opening balance is not available. However, a
reverse working can be made to calculate the opening balance of deferred tax.
Total Tax Expense As per reconciliation 2,257.5
Current Tax (516)
Deferred Tax expense 1,714.5
D.T.L / D.T.A
B/D (Bal) 472.5
D.T.E 1,741.5
C/D (a ii) 1,269
However, to make the concepts clear, opening balance can also be calculated as follows:
Figures in millions
PPE (W-1) 26.75 19.5 7.25 T.T.D
Provisions for bad debts 0.35 - 0.35 D.T.D
Provision for gratuity 8.25 - 8.25 D.T.D
Net 1.35 D.T.D
Difference
x35% 0.4725 D.T.A
(W 1)PPE - C.A
B/D (bal) 26.75 Disposal 3.5
Depreciation 4.75
Cash 6 C/D 24.5
A.9 Solution
Waqar Limited
a) Computation of current period income tax liability
2015 2014
Rs. m Rs. m
Accounting profit before tax 40 30
Add:
Accounting depreciation on machinery 25 25
Accounting depreciation on furniture and fittings 5 5
Less:
Exempt Income-Capital Gain (10.00) (8.00)
Tax depreciation on furniture and fittings (40.5 x 10%) (4.05)
40.5 (1-10%) x 10% (3.65)
Tax depreciation on Machinery (90 x 10%) (9)
90 (1-10%) x 10% (8.10)
Taxable profit 48.25 38.95
Tax rate 30% 35%
Current tax 14.4765 13.6325
b) Deferred taxation computation
87
Carrying Tax base Temporary
Amount difference
Rs.m Rs.m Rs.m
At December 31, 2013
Machinery 175 90 85 TTD
Furniture and fittings 40 40.5 0.5 DTD
84.5 DTL
Deferred tax liability at December 31, 2013 (35%) Rs 29.575
At December 31, 2014
Machinery 150 81 69 TTD
67.55 TTD
As at December 31, 2015
Machinery 125 72.90 52.10 TTD
49.295 TTD
c)Movement on deferred taxation account 2015 2014

At January 1 23.64 29.57
Change due to change in rate (23.64 x 5/35) (W-1) (3.38) -
20.26 29.57
For the year (balancing figure) (W-1) (5.47) (5.93)
At December 31 14.79 23.64
d)Tax expense 2015 2014

Current tax (14.48) (13.63
)
Deferred tax 5.47 5.93
Due to change in rate 3.38
Tax expense (5.6225) (7.7)
e)Tax reconciliation 2015 2014

Accounting profit 40.0 30.0
Tax rate 30% 35%
Expected tax expense 12.0 10.5
Effect of Permanent Difference
Capital Gain 30% x 10.0 (3.0)
35% x 8.0 (2.8)
Effect of rate change (3.37)
Tax expense 5.6225 7.7
W-1
31-12-13 c/d 29.575

1-1-14 b/d (35%) 29.575
DTE 5.9325
31-12-14 c/d (35%) 23.6425
1-1-15 b/d (35%) 23.6425
DTE [rate change] 3.3775
88
DTE 5.4765
31-12-15 c/d (30%) 14.7885
Ans.10
Triangle Limited (TL)
a) Note in TL’s financial statements
For the year ended 31-12-2018.
2018 2017
Current Tax (W-1) (38.7) (22.2)
Deferred Tax (W-2) (1.6) (7.5)
(40.3) (29.7)
Reconciliation b/w tax expense and accounting profit

2018 2017
Accounting Profit 125 110
Tax@ 35% ; 30% 35% 30%
Expected tax expense 43.75 33
Effect of Permanent difference:

Interest income (2017 : 7 x 30%), (2018 : 10 x 35%) (3.5) (2.1)
Dividend income (2017 : 8 x 15%), (2018 : 6 x 20%) (1.2) (1.2)
Effect of rate change 1.25 -
40.3 29.7
W-1 Current tax:
2018 2017
Add: Accounting depreciation 25 18
Rent expense 1 3
On tax insurance expense 4 -
Less: Tax depreciation (21) (42)
Rent (W) (3) -
Insurance paid (5) (4)
Borrowing cost (2) -
Interest income (10) (7)
Dividend income (6) (8)
Taxable profit 108 70
35% 30%
37.8 21
Dividend taxed as a separate block of income (6 x 15%) ; (8 x 15%) 0.9 1.2
Current tax 38.7 22.2
Rent Accrual Prepaid Insurance

Payment 3 b/d 3 b/d 4
Expense 1 Cash 5 Expenses 4
c/d 1 c/d 5
Interest Income
b/d 7
Cash 3
89
c/d 10
b) Deferred tax Asset/ Liability as at 31 – 12 - 2017

CA TB Difference
Accrued Rent 3 - 3 DTD
Prepaid Insurance 4 - 4 TTD
Acc. depreciation 18 42 24 TTD
25 TTD
7.5
(25 x 30%)
DTL
b/d -
DTE 7.5
c/d 7.5
Deferred tax Asset/ Liability as at 31 – 12 - 2018

CA TB Difference
CWIP 2 - 2 TTD
Accrued Rent 1 - 1 DTD
Prepaid Insurance 5 - 5 TTD
Accumulated depreciation 43 63 20 TTD
(18+25) (42+21)
26 TTD
9.1
(26 x 35%)
DTL
b/d 7.5
DTE (rate change) 1.25
c/d 9.1 DTE 0.35
90
Self-Test Question Solution
A.1 Solution
Green Limited
a) Journal Entries Rs in millions
(i) Depreciation-Building 5.25
Acc Depreciation 5.25 (35 x 15%)
(ii) Depreciation-other fixed asset 3.30

Acc Depreciation 3.30 (22 x 15%)
(iii) Amortization 4 (12/3)

Acc Depreciation 4
(iv) Interest on loan 1.25

Bank 1.25
(v) Deferred Tax Expense 3.13
Deferred Tax Liability 3.13
Workings
W-1 Income Statement
Revenue 108
Expenses
Expenditure (79)
Depreciation-Building (5.25)
-Other Fixed Asset (3.30)
Amortization on development cost (4.00)
Research cost (15.00)
Interest Expense (1.25)
W-2 Calculation of Current Tax:

Add
Accounting Depreciation
-building 5.5
-other fixed asset 3.3
Research cost 15.0
Development cost amortized 4.00
Interest 1.25
Less
Tax Depreciation
-Building (35 x 30%) (10.5)
-Other fixed Assets (22 x 30%) (6.6)
Research Cost (15/2) (7.50)
Development cost (12/2) (6.00)
Tax Loss (1.6)
Current Tax Nil
W-3 Calculation of Deferred Tax Liability

Building (35-5.25) 29.75 (35-10.5) 24.50 5.25 TTD
Other Fixed Assets (22-3.3) 18.7 (22.6-6) 15.40 3.3 TTD
Product Development (12-4) 8 6* 2 TTD
*Restricted up to permanent difference
10.55 TTD
Tax Losses 1.6
91
Net Differences 8.95 TTD
Deferred tax Liability @ 35% 3.1325

B/D -
DTE 3.13
C/D 3.13
b)Income Statement (Extracts)
Tax
Current Tax -
Deferred Tax 3.13 (3.13)
Loss after Tax (2.93)
c)Reconciliation between Profit before tax with Tax Expense
Tax Rate 35%
Expected Tax 0.07
Tax effect of permanent differences
-Interest (1.25 x 35%) 0.4375
-Research Expense (7.5 x 35%) 2.625
Actual Tax Expense 3.1325
Not required (Just for additional information)
Income Statement Approach to Calculate Deferred Tax:
Profit before Tax 0.2

Permanent Difference
Interest Expenses 1.25
Research Expense 7.50
8.95
Taxable Profit -
Differences 8.95
@35% 3.1325 DTE
Note: If there is accounting profit (after adjustment of permanent differences) and tax loss then only multiply the
rate with accounting profits to calculate deferred tax for the year.
A.2
Intelligent Technologies Limited
For the year ended 31 December 2012
Rs. in
million
a) Taxation
Current (W-l) -
Deferred (W-2) (3.285)
(3.285)
Prior Period (3 x 35%) (W-3) (1.05)
(4.335)
b) Reconciliation of tax charge for the year

2012
Rs. in
million
92
Accounting profit before tax 11.00
Applicable tax rate 35%
Expected Tax 3.85

Effect of Permanent Differences:
Less: Effect of exempt income (2 x 35%) (0.70)
Add: Permanent difference (0.4 million x 35%) 0.14
Actual Tax Expense 3.29
W-l : Computation of current tax expense
2012
Rs. in million
Add: Allowable income / disallowed expenses
Accounting depreciation 30.00
Expenses expected to be disallowed 0.90
Less: Exempt income / allowable expenses
Tax depreciation (25.60)
Capital gain (2.00)
Taxable Profit 14.30
Less: Assessed brought forward losses (21.00)
Taxable loss to be carried forward (6.70)
Current Tax @ 35% Nil
Fixed Asset 90 102.4 12.4 DT
D
Prepaid Expenses - 0.5 0.5 DT
D
Net differences 12.9 DT
D
Tax losses c/f 6.7
19.6
@ 35% 6.86 DT
A
DTA
b/d 10.15 DTE 3.285
c/d 6.86
W-3 Prior period tax: The Company would have paid less tax after deducting Rs 3 million in 2010 because it has
claimed Rs 3 million as an expense. Now Rs 3 million has been disallowed and the company has decided not to
file an appeal; therefore, on this Rs 3 million company has to pay tax. This tax related to 2010 has been finalized
in 2012 so it is a prior period tax.
93
Extra practice Question
Question 1
IAS 12 with lease
Following are the relevant extracts from the financial statements of Floor & Tiles Limited (FTL) for the year
ended 31 December 2015:
Rs. In million
Provision for gratuity for the year 12
Bad debts expense for the year 10
Capital gain (exempt from tax) 5
The following information is also available:
(i) Opening balances of deferred tax liability, provision for bad debts and provision for gratuity were Rs. 5.28
million, Rs. 2 million and Rs. 13 million respectively.
(ii) The cost and other details related to buildings (owned) included in property, plant and equipment are as
follows:
Rs. In million
Opening balance (purchased on 1, January 2013) 350
Cost of a building sold on 30 April 2015 (for Rs. 35 million) 30
Purchased on 1 July 2015 40
(iii) Accounting depreciation on buildings is calculated @ 5% per annum on straight line basis whereas tax
depreciation is calculated @ 10% on reducing balance method. Accounting depreciation of all other owned
assets included in property, plant and equipment is same as tax depreciation.
(iv) On 1 January 2015, a machine costing Rs. 120 million was acquired on lease. Some of the relevant
information is as follows:
- The lease term as well as the useful life is 5 years.
- Annual lease rentals amounting to Rs. 30 million are payable in advance.
- The interest rate implicit in the lease is 12.59%.
- This machine would be depreciated over its useful life on straight line method.
The lease of machine is not a low value asset lease.
(v) On 1 June 2015, an amount of Rs. 1 million was paid as penalty to the provincial government due to non-
compliance of environmental laws.
(vi) The amount of gratuity paid to outgoing members was Rs. 10 million.
(vii) During the year, entertainment expenses and repair expenses amounting to Rs. 6 million and Rs. 8 million
respectively, pertaining to year ended 31 December 2013 were disallowed. FTL has decided to file appeal
only against the decision regarding repair expenses.
(viii) Applicable tax rate is 32%.
Required:
Prepare a note on taxation (expense) for inclusion in FTL’s financial statements for the year ended 31 December
2015 giving appropriate disclosures relating to current and deferred tax expenses including a reconciliation to
explain the relationship between tax expense and accounting profit. (17)
Note: Full year policy in ITO: if Assets are purchased before 1 July 2020
Answer 1
94
Note of Taxation:
Rs. In millions
Current tax (W-1) (26.60)
Deferred tax (w-2) 2.28
(24.32)
Prior period tax (W-3) [6 × 32%] (1.92)
(26.60)
Reconciliation of Accounting Profits with tax expense:
Rs. In millions
Tax rate 32%
Expected tax 25.60
Effect of Permanent differences:
Penalty (1 × 32%) 0.32
Exempt Income (5 × 32%) (1.60)
Actual tax expense 24.32
Workings:
(W-1) Current Tax:
Add: Accounting depreciation 17.5
Depreciation on leased Asset (120 ÷ 5) 24
Tax gain 10.7
Finance charge on lease 11.33
Bad debts 10
Gratuity expense 12
Penalty paid 1
Less: Taxation depreciation (29.92)
Accounting gain (8.5)
Gratuity paid (10)
Lease rental paid (30)
Capital gain (5)
Taxable profits 83.11 × 32% = 26.60
Further Detail Working:
Provision for Bad Debts
b/d 2
Expenses 10
c/d 12
95
Provision for Gratuity
Cash 10 b/d 13
Expenses 12
c/d 15
Lease:
Rental Principal Interest Balance

1-1-2015 120*
1-1-2015 30 30 -- 90
1-1-2016 30 18.669 11.331 --
PV of LP:
Depreciation (Accounting)
PPE (Cost)
b/d 350 Disposal 30
Cash 40
c/d 360
Accumulated Depreciation – Accounting
Disposal (1.5 × 2 + 0.5) 3.5 b/d (350 × 5% × 2) 35
Depreciation (W) 17.5
c/d 49
Disposal – Accounting
PPE 30 Cash 35
Accumulated Depreciation 3.5
Gain 8.5
Depreciation for the year:
[350 – 30] × 5% = 16
40 × 5% × 6/12 = 1
30 × 5% × 4/12 = 0.5
Total 17.5
In accounting; as nothing is mentioned therefore time basis of depreciation.
Depreciation (Tax)
PPE (Cost)
b/d 350 Disposal 30
Cash 40
c/d 360
Accumulated Depreciation – Tax
Disposal (3 + 2.7) 5.7 b/d (W) 66.5
Depreciation 29.92
c/d 90.72
Disposal – Account - Tax
PPE 30 Cash 35
96
Gain 10.7
Workings:
350 × 10% = 35
[350 – 35] × 10 = 31.5
66.5
For the year:
[350 – 30] = 320
[66.5 – 5.7] = (60.8)
259.2
× 10% = 25.92
+ 40 × 10% = 4.00
29.92
In tax; as nothing is mentioned therefore we should follow income tax ordinance, i.e full year basis.
(W 2) Deferred tax as on 31.12.2015
Carrying amount Tax base Difference
PPE 311 269.28 41.72 TTD
[360-49] [360-90.72]
Leased asset 96 - 96 TTD
[120-24] 90 DTD
Lease liability 90 - 11.3 DTD
Interest payable 11.3 - 15.0 DTD
Provision for Gratuity 15 - 12.0 DTD
Provision for bad debts 12 -
X 32% 3.00 DTL
Deferred tax liability

DTE 2.28 b/d 5.28
c/d 3.0
(W3) FTL would have claimed 6 million as entertainment expense during the year ended 31.12.2013. in 2015,
that expense is disallowed. Now FTL has decided not to file the appeal (means FTL has accepted the decision). It
means FTL will have to pay extra tax on 6 million amounting to Rs. 1.92 (6 x 32%). Entry will be
Prior period tax 1.92
Provision for tax 1.92
As the FTL has decided to file appeal against decision regarding repair expenses, therefore that tax is not yet final.
97
PAST PAPERS
Question-1 Rose Limited (Spring 2018 Q.6)

Rose Limited (RL) is finalizing its financial statements for the year ended 31 December 2017.In this respect, the
following information has been gathered:
(i) Applicable tax rate is 30% except stated otherwise.
(ii) During the year RL incurred advertising cost of Rs. 15 million. This cost is to be allowed as tax deduction over
5 years from 2017 to 2021.
(iii) Trade and other payables amounted to Rs. 40 million as on 31 December 2017 which include unearned
commission of Rs. 10 million. Commission is taxable when it is earned by the company. Tax base of remaining
trade and other payables is Rs. 25 million.
(iv) Other receivables amounted to Rs. 17 million as on 31 December 2017 which include dividend receivable of
Rs. 8 million. Dividend income was taxable on receipt basis at 20% in 2017. However, with effect from 1
January 2018, dividend received is exempt from tax. Tax base of remaining other receivables is Rs. 6 million.
(v) On 1 April 2017, RL invested Rs. 40 million in a fixed deposit account for one year at 10% per annum. Interest
will be received on maturity. Interest was taxable on receipt basis at 10% in 2017. However, with effect from 1
January 2018, interest received is taxable at 15%.
(vi) On 1 January 2016, a machine was acquired on lease for a period of 4 years at annual lease rental of Rs. 28
million, payable in advance. Interest rate implicit in the lease is 10%. Under the tax laws, all lease related
payments are allowed in the year of payment.
(vii) Details of fixed assets are as follows:
 On 1 July 2017 RL sold one of its four buildings for Rs. 60 million. These buildings were acquired on 1
January 2013 at a cost of Rs. 100 million each having useful life of 30 years.
 Tax depreciation rate for all owned fixed assets is 10% on reducing balance method. Further, full year’s tax
depreciation is allowed in year of purchase while no depreciation is allowed in year of disposal.
Required: Compute the deferred tax liability/asset to be recognised in RL’s statement of financial position as on 31
December 2017. (16)
Question-2 BILAL ENGINEERING LIMITED (Spring 2010 Q-4)

Bilal Engineering Limited earned profit before tax amounting to Rs. 50 million during the year ended December 31,
2009. The accountant of the company has submitted draft accounts to the Finance Manager along with the following
information which he believes could be useful in determining the amount of taxation:
(i) Accounting deprecation for the year is Rs. 10 million.
(ii) A motor vehicle costing Rs. 1 million was taken on lease in 2009. Related clauses of the lease agreement are as
under:
 Annual instalment of Rs. 0.3million is payable annually in advance.
 The lease term and useful life is 4 years and 5 years respectively.
 The interest rate implicit in the lease is 13.701% per annum.
 Accounting depreciation on the leased vehicle is not included in the depreciation referred to in para (i)
above.
(iii) Tax depreciation on the assets owned by the company is Rs. 7million.
(iv) Research and development expenses of Rs. 15 million were incurred in 2007 and are being amortized over a
period of 15 years. For tax purposes research and development expenses are allowed to be written off in 10
years. However, 10 % of these expenses were not verifiable and have not been claimed.
(v) Expenses amounting to Rs. 0.25 million were disallowed in 2006. Out of these Rs. 0.15 million were allowed in
appeal, during the current year. The company had initially expected that the full amount would be allowed but
has decided not to file a further appeal.
(vi) The applicable tax rate is 35%.
Required:
(a) Prepare journal entries in respect of taxation, for the year ended December 31, 2009.
(b) Prepare a reconciliation to explain the relationship between tax expense and accounting profit as is required to be
disclosed under IAS 12 Income Taxes. (18)
98
Question-3 Orange Limited (OL) (Autumn 2018 Q-1)
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) Expense include:
 accruals of Rs. 26 million which will be allowed for tax purpose on payment basis.
 cash donations of Rs. 5 million which are not allowed as tax expense.
(viii) Other income includes:
 commission receivable of Rs. 12 million.
 dividend receivable of Rs. 35 million.
Both incomes were taxable on receipt basis at 30% up to 30 June 2018. With effect from 1 July 2018
commission income is exempt from tax whereas dividend income is taxable at 10% on receipt basis.
(ix) On 30 June 2018, OL received advance rent of Rs. 16 million. Rent income is taxable on receipt basis.
(x) Net deferred tax liability as on 1 July 2017 arose on account of:
Rs. in million
Property, plant and equipment 34.5
Trademark 5.4
Provision for warranty (14.7)
Total 25.2
(xi) Applicable tax rate is 30% except stated otherwise.
Required:
a) Prepare a note on taxation for inclusion in OL's financial statements for the year ended 30 June 2018 including a
reconciliation to explain the relationship between tax expense and accounting profit. (11)
b) Compute the deferred tax liability/asset in respect of each temporary difference. (07)
(Comparative figures are not required)
Question-4 (Autumn 2020 Q-8)

Dua Limited (DL) is in the process of finalizing its financial statements for the year ended 31 December 2019. The
following information have been gathered for preparing thedisclosures relating to taxation:
(i) Accounting loss before tax for the year amounted to Rs. 140 million. It includes:
 an amount of Rs. 2 million recovered from a customer whose debt had been written off in 2018. As per tax
laws, receivable written offs are allowed as deduction.
 dividend of Rs. 16 million earned against equity investment in a UK based company. As per tax laws, this
dividend income is exempt from tax in Pakistan as 20% tax was paid in UK.
(ii) The movement of owned property, plant and equipment for 2019 is as follows:
Accounting WDV Tax base
------ Rs. in million -------
Opening balance 1,700 1,116
99
Additions 460 480
Impairment (72) -*
Depreciation (470) (284)
Disposals (144) (92)
Closing balance 1,474 1,220
* impairment is not allowed for tax purposes.
Difference of Rs. 20 million in ‘Additions’ represents foreign exchange loss on acquisition which was considered
as part of the cost of the asset as per tax laws.
(iii) As per tax laws, research expense for the year is allowable in the next year. Research expense for the year amounted
to Rs. 25 million (2018: Rs. 64 million).
(iv) Rent expense is allowed for tax purposes on payment basis. Rent prepaid as at 31 December 2019 amounted to
Rs. 6 million (2018: Rs. 1 million).
(v) As on 31 December 2018, DL had carried forward tax losses of Rs. 90 million against which DL had always
expected that it is probable that future taxable profit will be available.
(vi) Tax rate is 35%.
Required:
a) Prepare a note on taxation for inclusion in DL's financial statements for the year ended 31 December 2019 and a
reconciliation to explain the relationship between tax expense and accounting profit. (11)
b) Compute deferred tax liability/asset in respect of each temporary difference as at31 December 2019 and 2018.
(05)
Question-5 Surprise Limited (SL) (Spring 2022 Q.7)

Following information has been gathered for preparing the disclosures related to taxation of Surprise Limited (SL) for the
year ended 31 December 2021:
(i) Accounting profit before tax for the year amounted to Rs. 130 million.
(ii) Tax depreciation exceeds accounting depreciation by Rs. 9 million and revaluation loss recognized against revaluation
surplus is Rs. 6 million. Under tax laws, revaluation has no effect.
(iii) Interest income exceeds interest receipt by Rs. 12 million while commission receipt exceeds commission income by
Rs. 15 million. Under tax laws, both are taxable on receipt basis.
(iv) Out of total donations of Rs. 5 million, only 60% are allowable in tax.
(v) Development cost of Rs. 25 million incurred in 2021 has been expensed out. Under tax laws, development cost are
amortized at the rate of 28% per annum on reducing balance basis.
(vi) Capital work in progress as at 31 December 2021 includes borrowing cost of Rs. 8 million incurred in 2021. Under tax
laws, borrowing cost is allowed in the year in which it is incurred.
(vii) On 1 January 2021, SL acquired shares in Funny Limited (FL) for Rs. 70 million. The investment in FL was
subsequently measured at fair value through profit or loss. During the year, SL received Rs. 4 million as dividend from
FL. At year-end, a gain of Rs. 10 million was recognized as fair value adjustment. Under tax laws, capital gain is
taxable at 15% at the time of sale while dividend received is taxable at 10%. The intention of SL for holding
investment in FL is to take benefit in the form of capital gain.
(viii) Deferred tax liability/(asset) in respect of temporary differences for SL as at 31 December 2020 was as follows:
Rs. in million
Property, plant and equipment 18
Interest receivable 3
Unearned commission (9)
Total 12
(ix) Applicable tax rate is 30% except stated otherwise.
(x) Unused assessed tax losses were Rs. 50 million till 31 December 2020. However, deferred tax asset was recognized
only to the extent of Rs. 12 million (i.e. on tax losses of Rs. 40 million) due to limited availability of expected future
taxable profits.
Required:
100
a) Prepare a note on taxation for inclusion in SL’s financial statements for the year ended 31 December 2021 and a
reconciliation to explain the relationship between the tax expense and accounting profit. (10)
b) Compute deferred tax liability/asset in respect of each temporary difference as at 31 December 2021. (07)
Question-6 (Lux Limited) (Spring 2021 Q.8)

Following information has been gathered for preparing the disclosures related to taxation of Lux Limited (LL) for the
year ended 31 December 2020:
(i) Accounting profit before tax for the year amounted to Rs. 1,270 million.
(ii) Accounting depreciation exceeds tax depreciation by Rs. 100 million (2019: Rs. 150 million). Accounting
depreciation also includes incremental depreciation of Rs. 40 million (2019: Rs. 60 million). As on 1 January
2019, carrying value of property, plant and equipment exceeded their tax base by Rs. 500 million.
(iii) Liabilities of LL as at 31 December 2020 include:
 balances of Rs. 100 million (2019: Rs. 70 million) which are outstanding for more than 3 years. As per tax
laws, liabilities outstanding for more than 3 years are added to income and are subsequently allowed as
expense on payment basis.
 unearned commission of Rs. 80 million (2019: Rs. 15 million). Commission is taxable on receipt basis.
(iv) Interest accrued as at 31 December 2020 amounted to Rs. 40 million (2019: Rs. 30 million). Interest income
for the year is Rs. 55 million. Interest income is taxable at 20% on receipt basis.
(v) Expenses include payments of donations of Rs. 50 million (2019: Rs 80 million). Donation is allowable in tax by
200% of actual amount.
(vi) LL recorded an expense of Rs. 35 million (2019: nil) to bring an inventory item to its net realizable value. This
adjustment is not allowable for tax purposes.
(vii) LL acquired 5% equity in Palmolive Limited for Rs. 425 million on 1 August 2020. The investment was
classified at fair value through other comprehensive income. As at 31 December 2020, LL recorded Rs. 65
million as gain for change in fair value. As per tax laws, gain or loss on investment is taxable at the time of sale.
(viii) Applicable tax rate is 30% except stated otherwise.

Required:
a) Prepare a note on taxation for inclusion in LL’s financial statements for the year ended 31 December 2020 and a
reconciliation to explain the relationship between the tax expense and accounting profit. (09)
b) Compute deferred tax liability/asset in respect of each temporary difference as at 31 December 2020 and 2019.
(08)
Question-7 (Mabroom limited) (Autumn 2021 Q-7)

Following information has been gathered for preparing the disclosures related to taxation of Mabroom Limited (ML)
for the year ended 31 December 2020:
(i) Accounting profit before tax for the year amounted to Rs. 50 million.
(ii) Accounting amortization exceeded tax amortization by Rs. 20 million (2019: Rs. 12 million). As at 31 December
2020, carrying values of intangible assets exceeded their tax base by Rs. 145 million.
(iii) During the year, ML incurred advertising cost of Rs. 12 million. This cost is to be allowed as tax deduction over
3 years from 2020 to 2022.
(iv) During the year, entertainment expenses amounting to Rs. 10 million pertaining to year ended 31 December 2018
were disallowed. Similar entertainment expenses for the current year were amounted to Rs. 7 million.
(v) Provision for warranty as at 31 December 2020 was Rs. 23 million (2019: Rs. 18 million). Under tax laws,
warranty expense is allowed on payment basis.
(vi) During the year, ML recorded dividend income of Rs. 6 million out of which Rs. 2 million was not received till
31 December 2020. Under tax laws, dividend is taxable on receipt basis at the rate of 15%.
(vii) On 1 April 2020, a manufacturing plant was acquired on lease for a period of 4 years at an annual lease rental of
Rs. 40 million, payable in arrears. Interest rate implicit in the lease is 10% per annum. Under tax laws, all lease
rentals are allowed on payment basis.
(viii) Applicable tax rate (other than dividend income) is 35% for 2020 and prior years. However, this rate has been
reduced by 5% for 2021 and future years through
(ix) Finance Act enacted on 20 December 2020.
101
Required:
a) Prepare a note on taxation for inclusion in ML's financial statements for the year ended 31 December 2020 and a
reconciliation to explain the relationship between the tax expense and accounting profit (11)
b) Compute deferred tax liability/asset in respect of each temporary difference as at 31 December 2020 and 2019.
Question 8 (Titanium Limited (TL) (Spring 2023)

The first year’s financial statements of Titanium Limited (TL) for the year ended 31 December 2022 are under
preparation. The following matters have been identified which may have implications of deferred tax:
(i) TL acquired an equity investment for Rs. 85 million which was subsequently measured at fair value
through profit or loss. On 31 December 2022, TL recorded Rs. 20 million as gain for change in the fair
value. Under the tax laws, gain on investment is taxable at the time of sale.
(ii) TL purchased factory building for Rs. 1,200 million in 2022 which was depreciated by Rs. 80 million. On
31 December 2022, the factory building was revalued at Rs. 1,260 million. Under the tax laws,
depreciation at the rate of 10% per annum is allowed as a tax expense while revaluation does not affect
taxable profit.
(iii) Development cost of Rs. 20 million incurred in 2022 has been expensed out. Under the tax laws,
development cost is amortized over ten years.
(iv) TL received government grant of Rs 12 million related to an equipment. The grant is recognised as
income over three years. Under the tax laws, the government grant is exempt from tax.
(v) TL incurred a tax loss of Rs. 260 million for the year ended 31 December 2022. Under the tax laws, all
unused tax losses are adjustable from future profits within next six years. Applicable tax rate is 35%.
Required:
Discuss how the deferred tax related to each of the above matters should be dealt with in TL’s financial statements
for the year ended 31 December 2022.
Question 9 (Uchhali Limited) (Autumn 2023)
The following balances have been extracted from the statement of financial position of Uchhali Limited (UL) as on
31 December 2022:
2022 2021
---- Rs. in million ----
Investment property 420 -
Inventories 840 780
Interest receivable 65 80
Accumulated losses 460 390
Accrued expenses 232 250
Additional information
(i) UL has only one investment property, which was purchased during 2022 at a cost of Rs. 450 million. The fair value
of the property as on 31 December 2022 amounted to Rs. 610 million. UL follows cost model for accounting
purposes.
Under tax laws, capital gain on investment property is taxable at the time of sale, while depreciation is not
allowed.
(ii) Inventories imported during the year 2022 amounted to Rs. 660 million, of which 40% remained unsold as on 31
December 2022. Payment of imported inventoriesresulted in a foreign exchange loss of Rs. 100 million.
Under tax laws, the foreign exchange loss is considered as the part of cost of inventories.
(iii) Interest income for the year 2022 amounted to Rs. 120 million, of which Rs. 65 million was receivable
as on 31 December 2022.
Under tax laws, interest income was taxable on an accrual basis in 2021. However, with effect from 1 January
2022, interest is taxable on a receipt basis.
(iv) Accrued expenses include payables for penalties of Rs.42 million (2021: Rs. 6 million). During the year, UL also
paid penalties of Rs. 56 million. Under tax laws, penalties are not deductible; however, other expenses are allowed
102
on payment basis.
(v) UL has unused tax losses amounting to Rs. 550 million as on 31 December 2022.
(vi) It is expected that, after three years, sufficient taxable profits will be earned to utilise the benefit of unused losses and
deductible temporary differences.
(vii) The applicable tax rates are as follows:
*2023 and onwards 2022 and before
Interest income 20% 15%
All other incomes 30% 25%
*Enacted before 31 December 2022
Required:
Compute the deferred tax liability or asset that should be recognized in UL ‘s statement of financial position as on 31
December 2022. (10)
Question 10 (Spring 2024)
Handsome Limited (HL) is in the process of finalizing its financial statements for the year ended 31 December 2023. The
following information has been gathered for preparing the disclosures related to taxation:
(i) Profit before tax for the year ended 31 December 2023 was Rs. 466 million.
(ii) Tax depreciation exceeds accounting depreciation by Rs. 116 million. An impairment loss of Rs. 50 million was also
recognised in profit or loss. Under tax laws, impairmentdoes not affect taxable profit.
(iii) During the year, HL sold a machine whose tax WDV exceeded accounting WDV byRs. 35 million.
(iv) Interest income for the year was Rs. 60 million, of which Rs. 15 million was accrued as at 31 December 2023.
Through a finance act enacted on 18 December 2023, interest income which was previously exempt, will now be
taxable from 2024 on receipt basis.
(v) Salaries expenses and insurance expenses amounting to Rs. 32 million and Rs. 16 million respectively,
pertaining to the year ended 31 December 2022, were disallowed by tax authorities due to non-deduction of
withholding tax. HL has decided not to file appeal on this.
(vi) Stores and spares as at 31 December 2023 were Rs. 180 million after deducting a loss of Rs. 19 million for net
realizable value. This adjustment is not allowable for tax purposes.
(vii) Dividend income for the year is Rs. 28 million. Dividends are taxable at a reducedrate of 10%.
(viii) During the year, HL paid fines of Rs. 24 million which are not deductible for tax purposes.
(ix) During the year, HL expensed out payments of Rs. 70 million related to the restructuring of one of its business
segments. As per tax laws, these payments are to be allowed as an expense over a period of 5 years from 2023 to
2027.
(x) Net deferred tax asset as on 1 January 2023 arose on account of:
Rs. in million
Unused tax losses (54)
(12)
(xi) During 2022, HL incurred a tax loss of Rs. 284 million, against which HL expected at that time to be able to utilize
Rs. 180 million against future taxable income.
(xii) Applicable tax rate is 30% except for dividend income.
Required:
(a) Prepare a note on taxation for inclusion in HL's financial statements for the year ended31 December 2023,
including a reconciliation to explain the relationship between tax
expenses and accounting profit. (12)
(b) Compute the deferred tax liability/asset in respect of each temporary difference as at 31 December 2023
(Comparative figures are not required) (05)
103
Answer 1
Rose Limited
Computation of deferred tax liability / assets:
As on 31 December 2017 Rs. In millions
Carrying
Tax Base Difference Tax Rate DTA/DTL
Amount
s
Advertisement -- 12 12 DTD × 30% 3.6 DTA
Trade and other Payables: [15(15÷5)]
unearned commission 10 10 --
Others 30 25 5 DTD × 30% 1.5 DTA
Other Receivables:
Dividend receivables 8 8 --
Others 9 6 3 TTD × 30% 0.9 D.T.L
Interest receivable [40 ×10% × 9/12] 3 -- 3 TTD × 15% 0.45 D.T.L
Right of use Machine (W-1) 48.82 -- 48.82 TTD × 30% 14.65 D.T.L
Lease Liability (W-2) 48.60 -- 48.60 DTD × 30% 14.58 D.T.A
Interest payable on lease (W-2) 4.86 -- 4.86 DTD × 30% 1.46 D.T.A
Building 250 177.147 72.85 TTD × 30% 21.86 D.T.L

(W-3) (W-4)
Net D.T.L 16.72
Workings:
(W-1) Present Value of Lease Payment(Machine):
Carrying Amount = [97.63 – (97.63 ÷ 4 × 2)]
= 48.82
(W-2) Finance Charge Table:
1-1-2016 97.63
1-1-2016 28 28 -- 69.63
1-1-2017 28 21.037 6.963 48.593
1-1-2018 28 23.1407 4.859 25.4523
(W-3) Building (Carrying Amount)

b/d 346.67 1-7 Disposal 85
400 100
[400 − × 4)] [100 − × 4.5)]
31-12 Depreciation 11.67
6 
c/d 250
(W-4) Building (Tax Base)
b/d 262.44 Disposal 65.61
[400×0.9×0.9×0.9×0.9] [100×0.9×0.9×0.9×0.9]
Depreciation 19.683
[262.44 – 65.61] × 10%
c/d 177.147
Answer 2
Solution Debit Credit
Bilal Engineering Limited
(a) Journal entries
104
Rs. In million
1 Income tax expenses (W-1) 18.4436
Provision for taxation 18.4436
(Tax provision for 2009)
2 Deferred tax liability/asset (W-2) 0.9436
Deferred Tax expense 0.9436
(Deferred tax credit 2009)
3 Current tax Expense-prior Period (W-3) 0.035
Provision for Current Tax (0.1 x 35%) 0.035
(b) Bilal Engineering Limited

for the year ended December 31,
2009
1.1 Relationship between tax expense and accounting 2009
profit
Rs. in million
Accounting profit before tax 50.000
Tax Rate 35%
Expected tax expense 17.50
Actual tax expense (W-4) 17.5
Workings:
W-1
a) Computation of current taxation Rs. in million
Add: Accounting depreciation on right of use asset (1(W1.1) /4) 0.250
Financial charges on lease liability (1.00 - 0.3) x 13.701% 0.096
Amortization of research and development cost for the year (15/15) 1.000
Less: Tax depreciation (7.000)
Annual installment of lease payment (0.300)
Tax Amortization of research and development cost (15 x 0.9/10) (1.350)
Current year taxable income 52.696
Tax liability for the year (52.696 x 35%) 18.4436
W1.1 [0.3+0.3 x [1-(1 + 0.13701)-3/0.13701] = 1 million.
105
W-2 Deferred Taxation:
Deferred tax: As on 31-12-2009
Acc. Dep. 10 7 3 DTD

Right of use (1-0.25) 0.75 - 0.75 TTD
Lease liability 0.7 - 0.7 DTD
Research and development 12(13-1) 10.95(12.3-1.35) 1.05 TTD
Total 1.996 DTD
X35% 0.6986 DTA
DTL/DTL
b/d (W2.1) 0.245
DTE 0.9436 c/d 0.6986
W-2.1 Deferred Taxation:

Research and 13[15(15/15x2)] 12.3[15x10%=1.5+15x90%=13.5- 0.7 TTD
development (13.5/10x2)]
X35% 0.245 DTL

W-2.2 Deferred Taxation (income statement approach):
Profit before Tax 50.00
Taxable Profit (W-1) 52.696
Difference 2.696
x35% 0.9436
(Reversal of DTE) If for example accounting profits are not available even then we can calculate the deferred
tax for the period as follows:
1. If in current tax working add backs (ignoring permanent differences) are more, than taxable profits will be
more resulting into reversal of deferred tax expense. (credit of DTE)
2. If in current tax working add backs (ignoring permanent differences) are less, than taxable profits will be
less resulting into increase in deferred tax expense. (debit of DTE)
For example:
Add: Accounting depreciation on right of use asset (1(W1.1) /4) 0.250
Financial charges on lease liability (1.00 - 0.3) x 13.701% 0.096
Amortization of research and development cost for the year 1.000
Less: Tax depreciation (7.000)
Annual installment of lease payment (0.300)
Tax Amortization of research and development cost (15 x 0.9/10) (1.350)
Net increase / (decrease) in taxable profits (Ignoring permanent 2.696
differences)[add backs are more]
2.696 x 35% = 0.9436(reversal of deferred tax expense)
106
W-3 Prior Period Tax Liability
Tax liability for prior periods (0.100 x 35%) 0.035
Note: The company would have paid less tax after deducting Rs 0.25M in 2006 because it has claimed Rs
0.25 M as an expense. Now company has been allowed 0.15M but on remaining amount of Rs 0.1M it has to
pay tax. This tax related to 2006 has been finalized in 2009 so it is prior period tax.
W-4 Note of Taxation

Current Tax (W-1) (18.4436)
Deferred Tax (W-2) 0.9436
(17.50)
Prior Period Tax (W-3) (0.035)
(17.535)
Answer 3
(a) Orange Limited
Notes to the financial statements for the
year ended 30 June 2018
Taxation: Rs. in
million
Current tax (W-1) 162.9
Deferred tax [25.2–5.6 req.(b)] (19.6)
143.3
Reconciliation between tax expense and Alterna

accounting profit Rs. in te
million (%)
Tax at applicable rate/applicable tax rate (508×30%) 152.4 30.00
Exempt commission income (12×30%) (3.6) (0.71)
Lower rate on dividend income (35×20%) (7.0) (1.38)
Cash donations not allowable (5×30%) 1.5 0.30
Tax expenses/Average effective tax rate 143.3 28.21
W-1: Computation of current tax Rs. in
million
Accounting profit 508.0
Excess accounting depreciation 45.0
Excess tax gain on disposal / lower tax loss on disposal 15.0
Amortization of trademark (90/10) (9.0)
Warranty expense [35(1,750×2%)–11(49–38)] 24.0
Payments against warranty (54.0)
Restructuring expenses not allowed 17.5
Restructuring expenses allowed over five (17.5/5) (3.5)
years
Unpaid expenses allowable upon payment 26.0
Cash donations not allowable 5.0
Exempt commission income (12.0)
Dividend income taxable at lower rate (35.0)
Unearned rent taxable upon receipt 16.0
Taxable income 543.0
Tax @ 30% 162.9
(b) Deferred tax liability/(asset)
Temporary difference DTL/(A)
Arising in respect of: (Rs. in million) Rate Rs. in
million
Property, plant and equipment 55 30% 16.5
107
[115 (34.5/0.3)–45–15]
Dividend income 35 10% 3.5
Unpaid expense 26 30% (7.8)
Provision for warranty 19 30% (5.7)
[49(14.7÷0.3)+24–54]
Unearned rent 16 30% (4.8)
Trademark 27 30% 8.1
[90–63(90/10×7)]
Restructuring cost 14 30% (4.2)
(17.5–3.5)
5.6
Answer 4
Dua Limited
Notes to the financial statements
Tax expense: Rs. in million
Deferred tax (82.25–150.85)[req. (b)] (68.6)
(51.4)
Reconciliation between tax expense and accounting profit: Rs. in million

Loss before tax (140.0)
Tax @ 35% (49.0)
Effect of low rate on dividend 16×15% (2.4)
(51.4)
W-1: Current Tax: Rs. in million

Loss before tax (140)
Dividend income (16)
Exchange loss capitalized 20
Accounting depreciation exceeded tax depreciation 470–284 186
Impairment loss 72
Lower tax base of disposals 144–92 52
Research for the year disallowed 25
Research for the previous allowed (64)
Rent allowed on cash basis 6–1 (5)
130
Adjustment of unused tax losses (90)
Taxable income 40
Tax @ 35% 14.0

Tax on dividend 16×20% 3.2
17.2
(b) Deferred tax liability/(asset) as at 31 December 2019:
Carrying DTL /(A)
value Tax base Difference @ 35%
------------------- Rs. in million -------------------
PPE 1,474 1,220 254 88.90
Research - 25 (25) (8.75)
Prepaid rent 6 - 6 2.10
82.25
108
Deferred tax liability/(asset) as at 31 December 2018:
Carryin DTL
g Tax base Difference /(A) @
value 35%
---------------- Rs. in million ----------------
PPE 1,700 1,116 584 204.40
Research - 64 (64) (22.40)
Prepaid rent 1 - 1 0.35
182.35
Deferred tax assets on unused tax losses (31.50)
(90×35%)
150.85
Answer 5
2021
Rs. In million
Current tax(w-1) 22
Deferred tax 10.5+1.8(6*30%)-0 12.3
34.3
Reconciliation between tax expense and accounting profit
Tax @ 30% 39
Effect of low rate on dividend 4*20% (0.8)
Effect of low rate on fair value gain on investment 10*15% (1.5)
Effect of disallowed donation 5*40%*30% 0.6
Effect of previously unrecognized deferred tax on unused tax loss 10* 30% (3)
34.3
W-1: Current tax Rs. in million

Tax depreciation exceeding accounting depreciation (9.0)
Interest income exceeding interest receipt (12.0)
Commission receipt exceeding commission income 15.0
Donation disallowed 5×40% 2.0
Dividend income taxable at different rate (4.0)
Development cost expensed out 25.0
Tax amortization of development cost 25×28% (7.0)
Borrowing cost allowed in tax (8.0)
Fair value adjustment not yet taxable (10.0)
Taxable profit 122.0
Unused tax losses (50.0)
109
72.0
Tax @ 30% 21.6

Tax on dividend 4×10% 0.4
22.0
Deferred tax liability / (asset) as at 31 December 2021

Difference Tax rate Liability/(asset)
--------------- Rs. in million ---------------
Property, plant and equipment 63.0 30% 18.9
[60(18÷30%)–6+9]
Interest receivable 30% 6.6

22.0
[10(3÷30%)+12]
Unearned commission (45.0) 30% (13.5)
[30(9÷30%)+15]
Development cost (18.0) 30% (5.4)

(25×72%)
Capital work in progress 30% 2.4

8.0
Investment in FL 10.0 15% 1.5
(80–70)
Net deferred tax liability 10.5
Answer 6
A) Tax expense:
Rs. in million
Deferred tax 18.5(38–19.5) – 85.5 (req. (b) (67)
360.5
Reconciliation between tax expense and accounting profit: Rs. in million
PBT 1,270
Tax @ 30% 381
Donation allowed at 200% 50×30% (15)
Interest income is subject to lower rate of tax 55×10% (5.5)
360.5
W-1: Current Tax: Rs. in million
Accounting depreciation exceed tax depreciation 100
Increase in liabilities outstanding more than 3 years 30
(100 – 70)
Unearned commission (80 – 15) 65
Interest income (55)
Donations (extra) (50)
NRV adjustment disallowed 35
110
Taxable income 1,395
Tax @ 30% 418.5
Interest receipt is subject to tax at 20% 45(30+55–40) × 20% 9.0
427.5
(b) Deferred tax liability / (assets) as at 31 December 2020:

Carrying
Tax base Difference Tax rate DTL /(A)
value
------------------- Rs. in million -------------------
Gain on re-measurement of
equity investment 490 425 65 30% 19.5
PPE (350–100) - (250) 250 30% 75
Liabilities outstanding more
than 3 years (100) - (100) 30% (30)
Unearned commission (80) - (80) 30% (24)
Interest receivable 40 - 40 20% 8
NRV adjustment - 35 (35) 30% (10.5)
38
Deferred tax liability / (assets) as at 31 December 2019:

Carrying
Tax base Difference Tax rate DTL/(A)
value
------------------- Rs. in million -------------------
PPE (500–150) - (350) 350 30% 105
Liabilities outstanding more
than 3 years (70) - (70) 30% (21)
Unearned commission (15) - (15) 30% (4.5)
85.5
Answer 7(A)
Tax expense: Rs. in million
Current tax - for the year (W-1) 41.65
- prior year 10*35% 3.50
Deferred tax(51.45–24.51) (26.94)
18.21
Reconciliation between tax expense and accounting profit:

Tax at 35% 17.50
Effect of low rate on dividend(6×20%(35%–15%)) (1.20)
Effect of prior year taxation(10×35%) 3.50
Effect of disallowed entertainment expense of disallo
2.45
Effect of change in rate(24.51–0.30)×5/30 (4.04)
18.21
W-1: Current tax: Rs. in million

111
Accounting amortization exceeded tax amortization 20.00
Advertising cost 12‒4 8.00
Entertainment expense disallowed 7.00
Excess warranty provision against payment 23‒18 5.00
Dividend income taxable at different rate (6.00)
Interest on lease liability 126.8(40×3.170)×10%×9/12 9.51
Depreciation on plant 126.8/4×9/12 23.78
Taxable Income 117.29
Tax @ 35% 41.05
Tax on dividend income 4×15% 0.60
41.65
b) Deferred tax liability/(assets) as at 31 December 2020:
Carrying Tax
Difference Rate DTL/(A)
value base
Intangible assets 145.00 - 145.00 30% 43.50
Deferred advertising cost - 8.00 (8.00) 30% (2.40)
Provision for warranty (23.00) - (23.00) 30% (6.90)
Dividend receivable 2.00 - 2.00 15% 0.30
ROU asset 126.8–23.78 103.02 - 103.02 30% 30.90
Lease liability 126.8+9.51 (136.31) - (136.31) 30% (40.89)
24.51
Deferred tax liability/(assets) as at 31 December 2019:
Carrying Tax
Difference Tax rate DTL/(A)
value base
Intangible assets 165.00 - 165.00 35% 57.75
Provision for warranty (18.00) - (18.00) 35% (6.30)
51.45
Answer 8
(i) The carrying value of the investment is Rs. 105 million [85+20] while its tax base is Rs. 85 million as at 31
December 2022 i.e. the amount that will be deductible for tax purpose upon sale. This should result in taxable
temporary difference of Rs. 20 million on which deferred tax liability/expense of Rs. 7 million [20×35%] shall be
recognised. Since the fair value gain is reported in profit or loss, the related deferred tax expense is also recognised in
profit or loss.
(ii) The carrying value of the factory building is Rs. 1,260 million while its tax base is Rs. 1,080 million
[1,200×90%] as at 31 December 2022 i.e. the amount that will be deductible for tax purpose in future years. This
should result in taxable temporary difference of Rs. 180 million on which deferred tax liability/expense of Rs. 63
million [180×35%] shall be recognised. The effect arising due to the difference in depreciation i.e. Rs. 14 million
[40(120–80) ×35%], would be taken to profit or loss. While the remaining effect of liability arising due to
revaluation adjustment i.e. Rs. 49 million [140(180–40) ×35%], would be taken to other comprehensive income.
(iii) The carrying value of development cost is Nil (being expensed out) while its tax base is Rs. 18 million [20×90%]
as at 31 December 2022 i.e. the amount that will be deductible for tax purpose in future years. This should result
in deductible temporary difference of Rs. 18 million on which deferred tax asset / income of Rs. 6.3 million
[18×35%] shall be recognised. Since the development cost is taken to profit or loss, the corresponding effect
should also be credited to profit or loss.
(iv) At 31 December 2022, the carrying value of the government grant is Rs. 8 million [12–4(12÷3)] while its tax base
is the same as carrying value as benefit of government grant is not taxable. Therefore, no deferred tax shall arise.
(v) The tax loss of Rs. 260 million for the year 2022 shall result in deferred tax asset of Rs. 91 million [260×35%].
The deferred tax asset shall be recognised to the extent that TL is probable that taxable profit will be available
against which unused tax losses can be utilized. If TL will earn sufficient profits within next six years then
deferred tax asset should be recognized and corresponding effect should be credited to statement of profit or loss.
112
However, if TL is not expected to earn sufficient profit in future than deferred tax asset would not be recognized
and will be reassessed for recognition at each year end.
Answer 9
Carrying Liability/
Tax base Difference
Description value Tax rate (Asset)
---------- Rs. in million ---------- Rs. in million
Investment property 420 450 (30) 30% (9)
Inventories:
- Imported 264 304 (40) 30% (12)
(660×0.4) (264+100×0.4)
- Other 576 576 - -
840 880 (40) 30% (12)
Accrued expenses
- penalties (42) (42) - 30% -
- others (190) - (190) 30% (57)
(232–42)
(232) (42) (190) 30% (57)
Unused tax losses 550×30% (165)
(230)
113
ICAP study text
Recognition of deferred tax liabilities [para 15]
A deferred tax liability must be recognised for all taxable temporary differences, except to the
extent that the deferred tax liability arises from:
 the initial recognition of goodwill; or
 the initial recognition of an asset or liability in a transaction which:
 is not a business combination; and
 at the time of the transaction, affects neither accountingprofit nor taxable profit (tax loss).
There is further guidance on the recognition of deferred tax liabilities in respect of taxable temporary differences
arising in a business combination but that is outside the scope of your syllabus.
Example:
In the year ended 31 December 2016, C Ltd. lent Rs. 100,000 to another company and incurredcosts of Rs. 5,000 in arranging
the loan. The loan is recognised at Rs. 105,000 in the accounts.
Under the tax rules in C Plc’s jurisdiction the cost of arranging the loan is deductible in the period
in which the loan is made.
Carrying amount Tax base Temporary difference
Rs. Rs. Rs.
Loans and advances 105,000 100,000 5,000
Deferred tax on initial recognition 1,500
The exception does not apply as the transaction affects the taxable profits on initialrecognition.
Recognition of deferred tax assets [para 24]
A deferred tax asset must be recognised for all deductible temporary differences to the extent that it is probable that
taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred
tax asset arises fromthe initial recognition of an asset or liability in a transaction that:
 is not a business combination; and
 at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
There is further guidance on the recognition of deferred tax asset in respect of deductible temporary differences
arising in a business combination but that is outside the scope of your syllabus.
A deferred tax asset must only be recognised to the extent that it is probable that taxable profit will be available
against which the deductible temporary difference can be used.
This means that IAS 12 brings a different standard to the recognition of deferred tax assets than it does to deferred tax
liabilities:
 liabilities are always recognised in full (subject to certain exemptions); but
 assets may not be recognised in full (or in some cases at all).
IAS 12 also requires that the carrying amount of a deferred tax asset must be reviewed at the end of each reporting
period to check if it is still probable that sufficient taxable profit is expected to be available to allow the benefit of its
use.
If this is not the case the carrying amount of the deferred tax asset must be reduced to the amount that it is expected
will be used in the future. Any such reduction might be reversed in the future if circumstances change again.
Carry forward of un-used tax losses and tax credits [para 34]
A deferred tax asset shall be recognised for the carry forward of un-used tax losses and un-used tax credits to the
extent that it is probable that future taxable profit will be available against which they can be utilized. However, the
existence of unused tax losses is strong evidence that future taxable profit may not be available. Hence, it should
recognise deferred tax asset on these items, only when there is convincing other evidence that sufficient taxable profit
114
will be available. Carry forward of un-used tax losses or tax credits create future tax relief for companies and are
therefore very valuable.
[para 36] An entity considers the following criteria in assessing the probability that taxable profit will be available
against which the unused tax losses or unused tax credits can be utilized:
1. whether the entity has sufficient taxable temporary differences relating to the same taxation authority and the
same taxable entity, which will result in taxable amounts against which the unused tax losses or unused tax credits
can be utilized before theyexpire;
2. whether it is probable that the entity will have taxable profits before the unused tax losses or unused tax credits
expire;
3. whether the unused tax losses result from identifiable causes which are unlikely to recur; and
4. whether tax planning opportunities are available to the entity that will create taxable profit in the period in which
the unused tax losses or unused tax credits can be utilized.
Reassessment of unrecognized deferred tax assets [para 37]
At the 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. For example, an improvement in trading conditions may make it more
probable that the entity will be able to generate sufficient taxable profit in the future for the deferred tax asset to meet
the recognition criteria.
Example: Reassessment of unrecognized deferred tax assets
F Limited disclosed in its financial statements for the year ended December 31, 2018, that it has available tax losses
of Rs.60 million. The company losses are available for only 5 years. The company expects that it is unlikely to utilize
all the losses and, therefore, does not recognize a deferred tax asset. Tax rate is 35% for the year and will remain
same for future periods.
In 2019, the company restructures its business and expects that this restructuring will result in future taxable profits
upto Rs.50 million in next 5 years. The company, therefore, shall recognize at December 31, 2019 a deferred tax asset
for the available tax losses to the extent future taxable profits will be available i.e., Rs.17.5 (Rs.50 million x 35%).
Presentation
IAS 12: Income taxes contains rules on when current tax liabilities may be offset against current tax assets
Offset of current tax liabilities and assets [para 71]
A company must offset current tax assets and current tax liabilities if, and only if, it:
 has a legally enforceable right to set off the recognised amounts; and
 intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
These are the same rules as apply to assets and liabilities in general as described in IAS 1.
In the context of taxation balances whether a current tax liability and asset may be offset is usually specified in tax
law, thus satisfying the first criterion.
In most cases, where offset is legally available the asset would then be settled on a net basis (i.e. the company would
pay the net amount).
Offset of deferred tax liabilities and assets [para 74]
A company must offset deferred tax assets and deferred tax liabilities if, and only if:
 the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
 the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation
authority on either:
 the same taxable entity; or
 different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to
115
realise the assets and settle the liabilities simultaneously, in each future period in which significant
amounts of deferred tax liabilities or assets are expected to be settled or recovered.
Disclosure [para 80]
Components of tax expense (income)
The major components of tax expense (income) must be disclosed separately. Components of tax expense (income)
may include:
 current tax expense (income);

 any adjustments recognised in the period for current tax of prior periods;
 the amount of deferred tax expense (income) relating to the origination and reversal of temporary differences;
 the amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes;
 the amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of
a prior period that is used to reduce current tax expense;
 deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred tax asset;
 the amount of tax expense (income) relating to those changes in accounting policies and errors that are
included in profit or loss in accordance with IAS 8, because they cannot be accounted for retrospectively.
Tax reconciliation
The following must also be disclosed:
 an explanation of the relationship between tax expense (income) and accounting profit in either or both of the
following forms:
 a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied
by the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are)
computed; or
 a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing
also the basis on which the applicable tax rate is computed;
 an explanation of changes in the applicable tax rate(s) compared to the previous accounting period;
A major theme in this chapter is that the different rules followed to calculate accounting profit and taxable profit lead
to distortion of the relationship that exists between profit before tax in the financial statements, the tax rate and the
current tax expense for the period. Accounting for deferred tax corrects this distortion so that after accounting for
deferred tax the tax expense
This is not the case if there are permanent differences. The above reconciliations show the effect of permanent
differences.
Example: Tax reconciliations

B Ltd. had an accounting profit before tax of Rs. 500,000. This contained income of Rs. 20,000 which is not taxable.
Accounting depreciation in the year was Rs. 100,000 and tax allowable depreciation was Rs. 150,000. This means that
a temporary difference of Rs. 50,000 originated in the year.
B Ltd.’s taxation computation is as follows: Rs.
Accounting profit
Add back inadmissible deductions 500,000
Depreciation 100,000
Deduct admissible deduction
Tax allowable depreciation 150,000
116
Income not taxed 20,000
(170,000)
Tax at 30% 129,000
Tax expense Rs.
Current tax 129,000
Deferred taxation (30% x Rs. 50,000) 15,000
Tax expense 144,000
Tax reconciliation (in absolute numbers) Rs.

Accounting profit 500,000
Applicable tax rate 30%
Accounting profit x the applicable tax rate 150,000
Tax effect of untaxed income (30% of Rs. 20,000) (6,000)
Tax expense 144,000
Tax reconciliation (in percentages)
Applicable tax rate 30.0%

Tax effect of untaxed income (6,000/500,000) (1.2%)
Effective tax rate (144,000/500,000) 28.8%
Rs
Profit before tax xxx
Add:
1- Acc dep xxx
2- Acc loss on disposal xxx
3- Tax gain on disposal
xxx
4- Bad debt exp for the year
5- Gratuity exp for the year xxx
6- Acc dep on leased asset xxx
7- Finance charges on leased asset xxx
8- Deduction not allowed by tax authorities xxx
9- Expense payable xxx
10- Unearned income xxx
11- Revaluation loss
Less:
1- Tax dep (xxx)
2- Tax loss on disposal (xxx)
3- Acc gain on disposal (xxx)
4- Bad debt written off (xxx)
5- Gratuity paid (xxx)
6- Lease rentals paid (xxx)
7- Borrowing cost capitalized by us allowed as deduction by tax
(xxx)
authorities
8- Income exempt from tax (xxx)
9- Prepaid exp (xxx)
117
10- Income receivables (xxx)
Taxable profit before loss adjusting (xxx)
Less assessed brought forward losses
Taxable profit for current year
Current tax
How current tax is presented:
Over understatement of tax:
Tax for current year calculated by company is likely to be an estimate. Tax authorities may change that amount so tax
charge is adjusted as follow:
1- Under estimate of tax on previous year profit
(Recorded as an exp in current year)
Current tax expense PRIOR YEAR (DR)
Current tax payable (CR)
2- Over estimate of tax on previous year profit
(Recorded as a reversal of an exp in current year)
Current tax payable (DR)
Current tax expense PRIOR YEAR (CR)
Deferred tax format:
Fixed asset owned X X
Provision for doubtful debt 15 0 -15 DTA
Provision for gratuity 20 0 -20 DTA
Fixed asset lease 100 0 100 DTL
Lease obligation 80 0 -80 DTA
Interest payable on lease (advance) 5 0 -5 DTA
Prepaid exp (allowed on payment) 10 0 10 DTL
Income receivable (on receipt is taxed) 13 0 13 DTL
Expense payable (allowed on payment basis) 13 0 -13 DTA
Unearned income 16 0 -16 DTA
Unused tax loses -6.7 DTA
Deferred tax approach:
1- Income statement approach
2- Balance sheet approach
In case of income statement approach we compare adjusted accounting profit (after deleting the effect of permanent
difference from accounting profit) with taxable profit to calculate deferred tax expense for the year ( it will not give
c/d)
In case of balance sheet approach, we calculate carrying amount of asset and liabilities and compare it with tax base
to calculate the closing DTA/L acc
CARRYING AMT TAX BASE DIFF TAX
If CA OF ASSET > TAX base of an asset is TTD which will result in DTL
If CA OF ASSET < TAX base of an asset is DTD which will result in DTA
If CA OF LIABILITY> TAX base of an LIABILITY is DTD which will result in DTA
If CA OF LIABILITY < TAX base of an LIABILITY is TTD which will result in DTL
In case of income statement approach:
Adj accounting profit Taxable difference Difference Tax
Adjusted acc profit= acc profit + deduction not allowed -exempt income
Notes to financial statement:
Taxation:
Current
Deferred tax
Current tax prior period
118
Reconciliation between accounting profit before tax with tax expense
PBT
Tax rate
Add: tax effect of inadmissible exp (penalties)
Less: tax effect of exempt income
Tax effect of rate change (general rate)
Effect of prior year taxation
Less rate change effect of any income (separate rate)
Note:
Reconciliation can also be prepared in percentage.
119
IAS 12 with lease
Question No. 1
Following are the relevant extracts from the financial statements of Floor & Tiles Limited (FTL) for the year ended 31
December 2015:
Rs. In million
Provision for gratuity for the year 12
Bad debts expense for the year 10
Capital gain (exempt from tax) 5
The following information is also available:
(i) Opening balances of deferred tax liability, provision for bad debts and provision for gratuity were Rs. 5.28
million, Rs. 2 million and Rs. 13 million respectively.
(ii) The cost and other details related to buildings (owned) included in property, plant and equipment are as
follows:
Rs. In million
Opening balance (purchased on 1, January 2013) 350
Cost of a building sold on 30 April 2015 (for Rs. 35 million) 30
Purchased on 1 July 2015 40
(iii) Accounting depreciation on buildings is calculated @ 5% per annum on straight line basis whereas tax
depreciation is calculated @ 10% on reducing balance method. Accounting depreciation of all other owned
assets included in property, plant and equipment is same as tax depreciation.
(iv) On 1 January 2015, a machine costing Rs. 120 million was acquired on lease. Some of the relevant information
is as follows:
- The lease term as well as the useful life is 5 years.
- Annual lease rentals amounting to Rs. 30 million are payable in advance.
- The interest rate implicit in the lease is 12.59%.
- This machine would be depreciated over its useful life on straight line method.
The lease of machine is not a low value asset lease.
(v) On 1 June 2015, an amount of Rs. 1 million was paid as penalty to the provincial government due to non-
compliance of environmental laws.
(vi) The amount of gratuity paid to outgoing members was Rs. 10 million.
(vii) During the year, entertainment expenses and repair expenses amounting to Rs. 6 million and Rs. 8 million
respectively, pertaining to year ended 31 December 2013 were disallowed. FTL has decided to file appeal only
against the decision regarding repair expenses.
(viii) Applicable tax rate is 32%.
Required:
Prepare a note on taxation (expense) for inclusion in FTL’s financial statements for the year ended 31 December 2015
giving appropriate disclosures relating to current and deferred tax expenses including a reconciliation to explain the
relationship between tax expense and accounting profit. (17)
Answer No. 1
120
Note of Taxation:
Rs. In millions
Current tax (W-1) (26.60)
Deferred tax (w-2) 2.28
(24.32)
Prior period tax (W-3) [6 × 32%] (1.92)
(26.60)
Reconciliation of Accounting Profits with tax expense:
Rs. In millions
Tax rate 32%
Expected tax 25.60
Effect of Permanent differences:
Penalty (1 × 32%) 0.32
Exempt Income (5 × 32%) (1.60)
Actual tax expense 24.32
Workings:
(W-1) Current Tax:
Depreciation on leased Asset (120 ÷ 5) 24
Tax gain 10.7
Finance charge on lease 11.33
Bad debts 10
Gratuity expense 12
Penalty paid 1
Less: Taxation depreciation (29.92)
Accounting gain (8.5)
Gratuity paid (10)
Lease revtal paid (30)
Capital gain (5)
Taxable profits 83.11 × 32% = 26.60
Further Detail Working:
Provision for Bad Debts
b/d 2
Expenses 10
c/d 12
121
Cash 10 b/d 13
Expenses 12
c/d 15
Lease:
1-1-2015 120*
1-1-2015 30 30 -- 90
1-1-2016 30 18.669 11.331 --
PV of LP:
1  (1  0.1259 ) 4 
= 30 + 30  
 0.1259 
= 120 M
Depreciation (Accounting)
PPE (Cost)
b/d 350 Disposal 30
Cash 40
c/d 360
Accumulated Depreciation – Accounting
Disposal (1.5 × 2 + 0.5) 3.5 b/d (350 × 5% × 2) 35
Depreciation (W) 17.5
c/d 49
Disposal – Accounting
PPE 30 Cash 35
Gain 8.5
Depreciation for the year:
[350 – 30] × 5% = 16
40 × 5% × 6/12 = 1
30 × 5% × 4/12 = 0.5
Total 17.5
In accounting; as nothing is mentioned therefore time basis of depreciation.
Depreciation (Tax)
PPE (Cost)
122
b/d 350 Disposal 30
Cash 40
c/d 360
Accumulated Depreciation – Tax

Disposal (3 + 2.7) 5.7 b/d (W) 66.5
Depreciation 29.92
c/d 90.72
Disposal – Account - Tax
PPE 30 Cash 35
Gain 10.7
Workings:
350 × 10% = 35
[350 – 35] × 10 = 31.5
66.5
For the year:

[350 – 30] = 320
[66.5 – 5.7] = (60.8)
259.2
× 10% = 25.92
+ 40 × 10% = 4.00
29.92
In tax; as nothing is mentioned therefore we should follow income tax ordinance, i.e full year basis.
(W 2) Deferred tax as on 31.12.2015
PPE 311 269.28 41.72 TTD
[360-49] [360-90.72]
Leased asset 96 - 96 TTD
[120-24] 90 DTD
Lease liability 90 - 11.3 DTD
Provision for Gratuity 15 - 12.0 DTD
Provision for bad debts 12 -
X 32% 3.00 DTL
Deferred tax liability
DTE 2.28 b/d 5.28
123
c/d 3.0
(W3) FTL would have claimed 6 million as entertainment expense during the year ended 31.12.2013. in 2015, that
expense is disallowed. Now FTL has decided not to file the appeal (means FTL has accepted the decision). It means
FTL will have to pay extra tax on 6 million amounting to Rs. 1.92 (6 x 32%). Entry will be
Prior period tax 1.92
Provision for tax 1.92
As the FTL has decided to file appeal against decision regarding repair expenses, therefore that tax is not yet final.
Question 2
Ravi Limited has provided you the following information for determining its tax and deferred tax expense for the
year 2008 and 2009. Ravi limited was incorporated on 01.01.2008.
1. Lease payments made during the year amounted to Rs. 1.3 million which include financial charges of Rs. 0.3
million. As at December 31, 2009, obligations against assets subject to lease stood at Rs. 4 million. The
movement in assets held under lease is as follows:
Rupees in
million
Opening balance – 01/01/2009 0
Asset taken on lease 5
Closing balance – 31/12/2009 3.60
2. During the years ended December 31, 2008 and 2009 financial charges of Rs. 1.2 million and 4.6 million
respectively have been capitalized in capital work in progress in accordance with 1AS-23 "Borrowing Costs".
However, the entire financial charges are admissible, under the Income Tax Ordinance, 2001 in the year in
which they are incurred.
3. Operating expenses of 2008 and 2009 include an amount of Rs. 0.6 million and 1.4 million respectively paid as
penalty to SECP on noncompliance of certain requirements of the Companies Act.
4. The details of owned fixed assets are as follows: Rs in million
2009 2008
Accounting Tax Accounting Tax
Opening balance 25 23.8 - -
Purchased during the year 10.6 6 28.4 28.4
Depreciation for the year (2.2) (3.3) (3.4) (4.6)
Closing balance 33.40 31.1 25 23.8
5. As on 31.12.2009 rent received in advance of Rs. 0.1 million is included in current liabilities (taxable in 2009)
6. Rates prepaid of Rs. 0.2 million is respect of 2010 are included in current assets as on 31.12.2009. (deductible
for tax purposes in 2009).
7. During the year ended 31.12.2009 Rs. 0.9 million were spent on advertisement and treated as expense. As per
tax rules such expense are allowed over 3 years on straight line basis.
8. Profit before tax for the year 2008 and 2009 amounts to Rs. 10 million and Rs13 million respectively. It
includes an income of Rs. 0.2 million and 0.1 million for the year 2008 and 2009 respectively, which is exempt
from tax.
9. The tax rate for 2008, and 2009 was 35% and 30% respectively.
Required:
Prepare a note on taxation for inclusion in Ravi Limited’s financial statements for the year ended 31 December 2009
giving appropriate disclosures relating to current and deferred tax expenses including comparative figures for 2008
and a reconciliation to explain the relationship between tax expense and accounting profit. (18)
Answer 2
Ravi Limited
Note of Taxation
For the year ended 31.12.2009
124
Rs. In Million
2009 2008
Current tax(W-1) (2.85) (2.8)
Deferred Tax(W-2)(1.44-0.12) (1.32) (0.84)
(4.17) (3.64)
Reconciliation between tax expense and accounting
profits:
2009 2008
Expected tax at 30%/35% 3.9 3.5
Effect of permanent differences:
Tax effect of exempt income (0.1 30%):(0.2 35%) (0.03) (0.07)
Penalty (1.4 30%):(0.6 35%) 0.42 0.21
Tax effect of change in tax rate (0.12) -
Actual Tax Expense 4.17 3.64
W-1 Current Tax 2009 2008

Accounting Profit before tax 13 10
Lease Financial charges 0.3 -
Depreciation of right of use 1.4 -
Penalty to SECP 1.4 0.6
Accounting Depreciation 2.2 3.4
Advertisement Expense 0.9 -
Rent received in advance 0.1 -
Prepaid rates (0.2) -
Lease rental paid (1.3) -
Borrowing cost capitalized (4.6) (1.2)
Tax deprecation (3.3) (4.6)
Advertisement expense (0.9/3) (0.3) -
Exempt income (0.1) (0.2)
Taxable profits 9.5 8
Tax Rate 30% 35%
Current Tax Expense 2.85 2.8
Deferred Tax Liability as on 31-12-2008:
C.A T.B Diff
CWIP 1.2 - 1.2 TTD
Fixed Assets 25 23.8 1.2 TTD
Total 2.4 TTD
Deferred tax Liability = 2.4 x 35% = 0.84
D.T.
L
b/d -
D.T.E. 0.84
c/d 0.84
D.T.E 0.84
D.T.L 0.84
125
Deferred Tax Liability as on 31-12-2009:
C.A T.B Diff

Lease liability 4 - 4 DTD
Right of use 3.6 - 3.6 TTD
CWIP 5.8 - 5.8 TTD
Fixed assets 33.40 31.1 2.3 TTD
Rent received in advance 0.1 - 0.1 DTD
Prepaid rates 0.2 - 0.2 TTD
0.6
Prepaid advertisement - (0.9-0.3) 0.6 DTD
Total 7.2 TTD
Deferred tax Liability = 7.12 x 30% = 2.136
D.T.
L
b/d (35%) 0.84
D.T.E. 0.12 D.T.E. 1.44
(rate change)
c/d (30%) 2.16
D.T. L 0.12*
D.T.E. 0.12 [0.84/35% x 5% = 0.12*]
D.T. E 1.44
D.T.L. 1.44
126
Revaluation with Tax Effects
1-1-2018 C.A T.B Difference
Cost 500,000 500,000 -
Acc. Dep (500,000/5) (100,000) (100,000) -
WDV (31-12-2018) 400,000 400,000 - x30%
=0
1-1-2019
Revaluation Surplus 20,000
420,000 400,000 20,000 x30% =
6,000
Depreciation (420,000/4) (105,000) (100,000)
WDV (31-12-2019) 315,000 300,000 15,000 x30% =
4,500
Depreciation (105,000) (100,000)
WDV (31-12-2020) 210,000 200,000 10,000 x30% =
3,000
Depreciation (105,000) (100,000)
WDV (31-12-2021) 105,000 100,000 5,000 x30% =
1,500
Depreciation (105,000) (100,000)
WDV (31-12-2022) - - - x30%
=0
Current tax working

31-12-2018 31-12-2019 31-12-2020 31-12-2021 31-12-2022
Profit before tax (Assumed) 500,000 500,000 500,000 500,000 500,000
Accounting Dep 100,000 105,000 105,000 105,000 105,000
Tax Dep (100,000) (100,000) (100,000) (100,000) (100,000)
Taxable profit 500,000 505,000 505,000 505,000 505,000
Current tax @30% 150,000 151,500 151,500 151,500 151,500
Income statement (extracts)

2018 2019 2020 2021 2022
Profit before tax 500,000 500,000 500,000 500,000 500,000
Current tax (150,000) (151,500) (151,500) (151,500) (151,500)
Deferred tax - 1,500 1,500 1,500 1,500
(150,000) (150,000) (150,000) (150,000) (150,000)
Profit after tax 350,000 350,000 350,000 350,000 350,000
Revaluation surplus - 14,000 - - -
(20,000 – 6,000)
Working:
D.T.L
b/d -
D.T.E 1,500 R.S 6,000
D.T.L c/d 4,500
b/d 4,500
D.T.E 1,500
D.T.L c/d 3,000
b/d 3,000
127
D.T.E 1,500
D.T.L c/d 1,500
b/d 1,500
D.T.E 1,500
D.T.L c/d -
The concept is:
If revaluation surplus would have a part of profit or loss (included within profit before tax) rather than other
comprehensive income, then:
Working of current tax:
2019
R. Surplus (20,000)
Accounting depreciation 105,000
Tax depreciation (100,000)
x 30% 145,500
Tax:
Deferred tax (4,500)
(150,000)
D.T.L
b/d -
c/d 4,500 D.T.E 4,500
In that case no issue; the issue is only because revaluation surplus is part of OCI; therefore, its tax effect
should also be part of OCI.
A change in the carrying amount of an asset or liability might be to a transaction recognized outside the
statement of profit or loss (i.e. directly in other comprehensive income), i.e in case of revaluation as per IAS 16
and IAS 38.
Basic principle:
In this case, instead of recording the deferred tax effect in statement of profit or loss, the deferred tax effect is
also recorded in other comprehensive income.
Point to note:
Whenever there is a debit/credit effect to Rev. surplus other than in the entry of transfer of surplus to retained
earnings, tax effect of that adjustment will also be debited or credited to revaluation surplus.
Same rule is also applicable for IFRS 9 where gains or losses are sometimes recognized in other
comprehensive income.
A machine is purchased for Rs. 100,000 on 1 January 2011.
 Depreciation is provided on the machine at 25% per annum straight -line to a nil residual value.
 Machines are revalued to fair value using the net replacement value method. The fair values were: 1
January 2012: Rs. 120,000
1 January 2013: Rs. 60,000
 The revaluation surplus is transferred to retained earnings over the life of the asset.
 The tax authorities allow the cost to be deducted at 20% per annum and levy tax at 30%.
Required:
Calculate the deferred tax adjustments and balances, provide all journal entries from the year ended 31- 12-
2011 to 31-12-2015.
128
Solution:
W-1: Deferred tax: Machines
Carrying Tax Temporary
Deferred amount base
difference taxation
Balance: 1/1/2011 - - - - -
Purchase 100,000 100,000 - - -
Depreciation (25,000) (20,000)
[100,000/4 years: 100,000x20%]
Balances: 31/12/2011 75,000 80,000 5,000 1,500 Asset
Revaluation surplus (increase) 45,000 -
120,000 80,000
Depreciation
[120,000/3years: 100,000x20%] (40,000) (20,000)
Balance: 31/12/2012 80,000 60,000 20,000 6,000 Liability

Revaluation surplus (decrease)
(20,000) -
60,000 60,000 - -
Depreciation
[60,000/2 years: 100,000x20%] (30,000) (20,000)
Balance: 31/12/2013 30,000 40,000 10,000 3,000 Asset

Depreciation
60,000/2 years: 100,000x20% (30,000) (20,000)
Balance: 31/12/2014 - 20,000 20,000 6,000 Asset -
Depreciation
N/A: 100,000x20% (-) (20,000)
Balance: 31/12/2015 - - - - Asset
D.T.A / D.T.L
D.T.E (bal) 1,500
c/d 1,500
b/d 1,500 R. S (45,000 x 30%) 13,500
D.T.E (bal) 6,000
c/d 6,000
b/d 6,000
R. S 6,000
(20,000 x 30%)
D.T.E (bal) 3,000
c/d 3,000
b/d 3,000
D.T.E (bal) 3,000
129
c/d 6,000
b/d 6,000
D.T.E (bal) 6,000
c/d -
Revaluation surplus
c/d -
b/d -
D.T.L 13,500 machine 45,000
R.E (31,500/3) 10,500
c/d 21,000
b/d 21,000
Machine 20,000 D.T.A 6,000
R.E (7,000/2) 3,500
c/d 3,500
b/d 3,500
R.E 3,500
c/d -
2011 journals: Debit Credit

1 January 2011:
Machine: cost 100,000
Bank 100,000
Purchase of machine
31 December 2011:
Depreciation – machine 25,000

Machine: accumulated depreciation 25,000
Depreciation on machine: (100,000 – 0)/4 years’ x 12/12
D.T. A (25,000 – 20,000) x 30% 1,500

D.T. E 1,500
Deferred tax on depreciation versus wear and tear
2012 Journals:
1 January 2012:
accumulated depreciation 25,000

Accumulated depreciation set-off against cost
Machine: cost 120,000 – (100,000 – 25,000) 45,000

Revaluation surplus (OCI) 45,000
Revaluation of machine (increase in value)
Revaluation surplus (OCI) 45,000 x 30% 13,500

Deferred tax on revaluation surplus
130
31 December 2012:
Depreciation – machine (120,000 – 0) / 3 years 40,000

Depreciation on machine
Revaluation surplus (45,000 – 13,500) / 3 years 10,500

Retained earnings 10,500
A portion of revaluation surplus transferred to retained earnings
[Transfer will be net of tax]
D.T.A (40,000 – 20,000) / 30% 6,000

D.T.E 6,000
2013 Journals:
1 January 2013:
accumulated depreciation 40,000

accumulated depreciation set-off against cost
Revaluation surplus (OCI) FV: 60,000 – CA: (120,000 – 40,000) 20,000

Revaluation of machine (decrease in value)
D.T.A 20,000 x 30% 6,000

R. S (OCI) 6,000
Deferred tax on revaluation surplus
31 December 2013:
Depreciation – machine (60,000 – 0) / 2 years 30,000

Revaluation surplus (45,000 – 13,500 – 10,500 – 3,500

20,000 + 6,000) / 2 years
[Transfer will be net of tax]
D.T. A (30,000 – 20,000) x 30% 3,000

D.T. E 3,000
2014 Journals:
31 December 2014:
Depreciation – machine (30,000 – 0)/ 1 years 30,000
131
Revaluation surplus (45,000 – 13,500 – 10,000 – 3,500

20,000 + 6,000 – 3,500)/ 1 years
D.T. A (30,000 – 20,000) x 30% 3,000

D.T. E 3,000
2015 Journals:
31 December 2015:
DTE (0 – 20,000) x 30% 6,000

DTA 6,000
132
Question: [Past paper]
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 from the year ended 30-6-2007 to 30-6-2011. (14)
b) Prepare a note on taxation for the year ended 30 June 2011 in accordance with International Financial
Reporting Standards. (07)
(Comparative figures are required. Accounting policies are not required)
Extra question 2:
Avi Limited operates in the food industry. It commenced operations on 1 January 2016. The following
information is available for its year ended 31 December 2018:
 Profit before tax for the year ended 31 December 2018 is Rs. 650,000. This is arrived at after correctly
taking into account all the information below.
 The tax assessment for 2017 arrived during 2018 and indicated taxable profits of Rs. 650,000. Current
normal tax of Rs. 195,000 was processed in 2017.
 A building was sold for Rs. 100,000. It was purchased for Rs. 220,000. On the date of sale, 1 January
2018, the building had a carrying amount of Rs. 120,000 and a tax base of Rs. 130,000.
 Plant was revalued to a fair value of Rs. 60,000 on 1 January 2018. This is the first revaluation of any
item of property, plant and equipment to date. The plant originally cost Rs. 100,000 and had a carrying
amount on 1 January 2018 of Rs. 50,000.
 No transfers of the realized portion of the revaluation surplus to retained earnings are made.
 No other items of property, plant and equipment were revalued.
 Depreciation is provided on the revalued property, plant and equipment. It had a remaining useful life of 5
years on 1 January 2018 (consistent with previous estimates of useful life).
 The tax authorities allow a tax depreciation on the item of plant (revalued above) at 25% p.a. on cost, but
the item of plant already had a tax base of zero on 1 January 2018.
 Accounting Depreciation and tax depreciation on all items of property, plant and equipment (other than the
revalued plant) were Rs. 50,000 and Rs. 35,000 respectively.
 Dividend income of Rs. 20,000 was earned in the current year.
 The following items appeared in the draft 31 December 2018 statement of financial position:
 Accrued income (taxed when earned) Rs. 10,000
 Expenses prepaid (deductible when paid) Rs. 30,000
 The following items appeared on the 31 December 2017 statement of financial position:
 Accrued income (taxed when earned) Rs. 20,000
 Expenses prepaid (deductible when paid) Rs. 0
 Property, plant and equipment (including plant and buildings) Rs. 700,000
 Property, plant and equipment (including plant and buildings) had a tax base of at 31 December 2017 of
Rs. 680,000.
 The current normal tax rate is 30% (2017: 29%) whereas dividend income is taxable at 10%.
133
Required:
a) Calculate the deferred tax balance at 31 December 2018 using the balance sheet approach.
b) Calculate the current tax expense for the year ended 31 December 2018.
c) Prepare a note of tax expense for the year ended 31 December 2018.
d) Prepare a reconciliation of accounting profit with tax expense for the year ended 31 December 2018.
Answer 1-: 000

a) Accounting entries:
Debit Credit
1-7-2006:
Plant 90,000
Cash 90,000
30-6-2007:
Depreciation 9,000
Acc. Dep 9,000
30-6-2007:
D.T.E 3,600
D.T.L 3,600
30-6-2008:
Depreciation 9,000
Acc. Dep 9,000
30-6-2008:
Acc. Dep 18,000
Plant 18,000
30-6-2008:
R. loss 8,000
Plant 8,000
30-6-2008:
D.T.L 1,040
D.T.E 1,040
30-6-2009:
Depreciation 8,000
Acc. Dep 8,000
30-6-2009:
D.T.E 1,408
D.T.L 1,408
30-6-2010:
Depreciation 8,000
Acc. Dep 8,000
30-6-2010:
Acc. Dep 16,000
Plant 16,000
134
30-6-2010:
Plant 12,000
R. S (OCI) 6,000
R. L (P.L) 6,000
30-6-2010:
R. S (OCI) 2,400
D.T.L 2,400
30-6-2010:
D.T.E 2,886.4
D.T.L 2,886.4
30-6-2010:
Current tax 21,113.6
Provision for tax 21,113.6
30-6-2011:
Depreciation 10,000
Acc. Dep 10,000
30-6-2011:
R. S 600
R. E 600
(6,000 – 2,400) / 6
30-6-2011:
D.T.L 1,050.88
D.T.E 1,050.88
30-6-2011:
Current tax 33,050.88
Provision for tax 33,050.88
Date Description Actual Tax Temporar Deferred

carrying Base y tax @ 40%
amount Difference
1-Jul-06 Cost 90,000,000 90,000,000
30-Jun-07 Depreciation (9,000,000) (18,000,000)
30-Jun-07 81,000,000 72,000,000 9,000,000 3,600,000 DTL
30-Jun-08 Loss (8,000,000)
30-Jun-08 F.V 64,000,000 57,600,000 6,400,000 2,560,000 DTL
(64/8)
30-Jun-09 56,000,000 46,080,000 9,920,000 3,968,000 DTL
(64/8)
30-Jun-10 Reversal of 6,000,000
loss
30-Jun-10 Revaluation 6,000,000
surplus
30-Jun-10 FV 60,000,000 36,864,000 23,136,000 9,254,400 DTL
(60/6)
30-Jun-11 50,000,000 29,491,200 20,508,800 8,203,520 DTL
135
D.T.L / D.T.A
b/d -
D.T.E 3,600
c/d 3,600
b/d 3,600
D.T.E 1,040
c/d 2,560
b/d 2,560
D.T.E 1,408
c/d 3,968
b/d 3,968
R. S 2,400
D.T.E 2,886.4
c/d 9,254.4
b/d 9,254.4
D.T.E 1,050.88
c/d 8,203.52
c/d -
b/d -
D.T.L 2,400 plant 6,000
c/d 3,600
b/d 3,600
R.E (3,600/6) 600
c/d 3,000
b) Note of Taxation:
2011 2010
Current (Working below) (33,050,880) (21,113,600)
Deferred 1,050,880 (2,886,400)
(32,000,000) (24,000,000)
Reconciliation of accounting profit with tax expense
Profit before taxation 80,000,000 60,000,000
Tax at the applicable rate of 40% 32,000,000 24,000,000
Workings: Current tax computation

Profit before taxation 80,000,000 60,000,000
Add: Accounting depreciation 10,000,000 8,000,000
Less: Tax depreciation (7,372,800) (9,216,000)
Less: Loss reversed (6,000,000)
Taxable profits 82,627,200 52,784,000
Tax at 40% 33,050,880 21,113,600
Revaluation surplus
WDV =48,000,000
136
FV =60,000,000
R. Surplus =12,000,000
Reversal of loss 8,000,000 Cr R. Surplus 6,000,000
Extra depreciation to be charged (9-8)x2 2,000,000 Dr
Net reversal of loss 6,000,000 Cr
Answer 2:
a) Deferred tax: (Balance sheet approach)
Opening differed tax liability (01-01-20x8)
Effective rate (5800/29) x1%
Revaluation Surplus (10,000x30%)
Other Temporary difference (bal)
Closing balance
D.T.L
b/d 5,800
Rate 200
6,000
D.T.E 3,900
c/d 12,900
Workings:
W-1: PPE:
C.A T.B T.D D.Tax
Opening 1-1-20X8 (29%) 700,000 680,000 20,000 5,800 DL
Rate Change 200
6,000
Building sold (120,000) (130,000)
Revaluation – Plant 10,000
Plant dep: 60,000/5 (12,000)
Other depreciation (50,000) (35,000)
Balance 31-12-20x8 528,000 515,000 13,000 3,900 D.T.L
W-2: Expense Prepaid:

C.A T.B T.D D.Tax
Opening Balance - - - -
Balance 31-12-20x8 30,000 - 30,000 9,000 D.T.L
W-3: Accrued Expense:

C.A T.B T.D D.Tax
Opening Balance - - - -
Balance 31-12-20x8 10,000 10,000 - -
137
b) Current tax: c) Tax Expenses:
Profit before tax 650,000 Deferred tax (4,100)
Dividend income (20,000) (3,900+200)
Prior period tax 6,500*
Depreciation – Accounting 62,000 184,700

(50,000+12,000) d) Reconciliation:
Tax depreciation (35,000) Accounting Profit x Rate
Loss on sale 20,000 650,000 x 30% = 195,000
Tax loss on sale (30,000)
Prepaid expenses (30,000) Tax effect of dividend = (4,000)
Taxable profit 617,000 20% x 20,000
x 30% 185,100 Effect of Rate change 200
Dividend income tax expense 191,200
(20,000 x 10%) 2,000
187,100
*recorded = 195,000
Assessed = 188,500 (650,000 x 29%)
Overprovision = 6,500
Income statement approach: (not required for extra information)

Less: Dividend (20,000)
630,000
difference 13,000
X 30% 3,900 D.T.E
138
ICAP Study Text
Items recognised outside profit or loss
A change in the carrying amount of an asset or liability might be due to a transaction recognised outside the
statement of profit or loss (i-e. in other comprehensive income directly as per IFRS).
For example, IAS 16: Property, plant and equipment, allows for the revaluation of assets. The revaluation of
an asset without a corresponding change to its tax base (which is usually the case) will change the temporary
difference in respect of that asset. An increase in the carrying amount of an asset due to an upward revaluation
is recognised in other comprehensive income in accordance with IAS 16.
IFRS requires or permits various items to be recognised in other comprehensive income. Examples of such
items include:
 a change in carrying amount arising from the revaluation of property, plant and equipment (IAS 16);
 a change in carrying amount arising from the revaluation of intangible assets (IAS 38: Intangible
assets) though this is not the case in Pakistan;
IFRS requires or permits various items to be recognised directly in equity. Examples of such items
include:
 adjustment to the opening balance of retained earnings resulting from either a change in accounting
policy that is applied retrospectively or the correction of an error (see IAS 8: Accounting policies,
changes in accounting estimates and errors); and
Investment in Associate (IAS 28 with IAS 12)
Example: Investment in Associate
Company A has acquired 20% shareholding in Company B for Rs. 250 million. Thereby as per IFRS, it shall be
treated as an Associate of Company A. Company A intends to apply equity method of accounting for
Company B.
Company B Financial highlights:
Profit after tax 75,000,000
Dividend Paid during the year 40,000,000
As per tax law, tax is collected on the dividend received and no tax implication is on the recording of profit
from associate. Rate of corporate tax rate is 29%, however, rate of dividend and capital gain tax is 15% and
20% respectively.
Answer:
Carryin Tax rate*
Description Working g Tax Base TTD DTL
Amount
Investment in
associate W1 257,000,000 250,000,000 7,000,000 15% 1,050,000
*assuming as if intention of the management is to take benefit from investment in the form of dividends
only therefore, relevant rate of tax would be the tax rate on dividend. However, if the intention of the
management is to benefit in the form of capital gain, the relevant rate would be 20%
W1 Rs.
Cost 250,000,000
Share of Profit 15,000,000
Dividend received (8,000,000)
257,000,000
DTE Dr 1,050,000
DTL Cr 1,050,000
139
Question 1: On 30 June 2014 F Company had a credit balance on its deferred tax account of Rs. 1,340,600 all
in respect of the difference between depreciation and capital allowances (means tax depreciation).
During the year ended 30 June 2015 the following transactions took place.
(1) Rs. 45 million was charged against profit in respect of depreciation. The tax computation showed capital
allowances of Rs. 50 million.
(2) Interest income of Rs. 50,000 was reflected in profit for the period. However, only Rs. 45,000of interest was
actually received during the year. Interest is not taxed until it is received.
(3) Interest expense of Rs. 32,000 was treated as an expense for the period. However, only Rs. 28,000 of
interest was actually paid during the year. Interest is not an allowable expense for tax purposes until it is
paid.
(4) During the year F incurred development costs of Rs. 500,600, which it has capitalised. Development costs
are an allowable expense for tax purposes in the period in which they are incurred.
(5) Land and buildings with a net book value of Rs. 4,900,500 were revalued to Rs. 6 million.
The tax rate is 30%. Francesca has a right of offset between its deferred tax liabilities and its deferred tax
assets.
Required:
Calculate the deferred tax liability on 30 June 2015. Show where the increase or decrease in the liability in
the year would be charged or credited.
Solution:
Answer 1:
PPE (W.1) 59,468,667 50,000,000 9,468,667 TTD

Interest receivable 5,000 - 5,000 TTD
Interest payable 4,000 - 4,000 DTD
Development cost 500,600 - 500,600 TTD
Land and building 6,000,000 4,900,500 1,099,500 TTD
Total 11,069,767 TTD
X30% 3,320,930 DTL
DTL/DTA
b/d 1,340,600
R.S (1,099,500 x 329,850
30%)
c/d 3,320,930 DTE 1,650,480
PPE-WDV PPE-T.B
b/d 104,468,667 Dep 45,000,000 b/d 100,000,000 Dep 50,000,000
c/d 59,468,667 c/d 50,000,000

PPE (reverse working) 104,468,667 100,000,000 4,468,667 X30%
1,340,600 TTD
140
Alternate method to calculate Deferred tax expense and closing balance of Deferred tax liability :
Profit before tax -

Accounting Depreciation 45,000,000
Capital allowance (tax depreciation) (50,000,000)

Interest Income (50,000)
Interest Received 45,000

Interest expense 32,000
Interest Paid (28,000)
Development Expenses (500,600)

Net Increase / (Decrease) in taxable Profits (add (5,501,600)
backs are less)
Tax rate @ 30 % 1,650,480 D.T.E.

D.T.E. 1,650480
D.T.L. 1,650,480
Deferred tax on Revaluation Surplus:
C.A T.B Difference

Land & Building 6,000,000 4,900,500 1,099,500 TTD
x 30% 329,850 D.T.L

D.T.L 329,850
D.T.L
b/d 1,340,600
D.T.E. 1,650,480
R.S 329,850
c/d 3,320,930
141
Intangible Assets (IAS-38)
An identifiable non-current asset without physical substance. For example
 Software
 Manufacturing Licenses
 Import License
 Export License/ Export quota
 Airline routes
 Broadcasting Licenses
 Formulas/ Recipes (of medicines)
Asset is a resource controlled by the company as a result of past events and from which future benefits
are expected.
Recognition Criteria: [Para 21]
An intangible asset shall be recognized if and if only:
a) It is probable that future economic benefits will flow to the entity; and
b) Cost of an asset can be measured
reliably. An intangible asset is measured
initially at cost. Elements of cost: [Para 27 to
29] (as in IAS 16)
Goodwill:
Internally Generated Goodwill: [Para 48]
It is not recognized as an intangible asset because it is not a separable resource of the business that
can be measured reliably.
Purchased Goodwill: if cost of investment is more than the parents’ share in FV of net assets of
subsidiary at the date of acquisition. It is recognized in consolidated statement of financial position as a
non-current asset. It is not amortized; instead it is tested for impairment annually.
The following internally generated items must not be capitalized: [Para 63]
 Good will
 Brands (particular make of product e.g. Bata, Service)
 Mast heads (display title of newspaper e.g. DAWN NEWS etc)
 Publishing titles (profession of publishing books e.g. PBP)
 Customer lists (customer relationships)
If however these items are purchased then these are capitalized.
Internally generated intangible items Other than Goodwill: {Research & Development}
A company may have an intangible item that has been internally generated. There are three distinct phases:
1) Research
2) Development
3) Commercial Production.
Once the research phase is successfully completed, the development phase may begin, the successful
completion of which then leads to the start of the Commercial production phase.
The Research Phase:

It is defined as
 Original and planned investigation
 Undertaken with the prospect of gaining
 New scientific or technical knowledge
Accounting treatment of costs in research phase: [Para 54]
There is no guarantee at this stage that the future economic benefits can be obtained or are probable
(economic benefits are only possible).
Therefore, research costs are always expensed out.
Normally they are written as a separate line item after selling & admin expenses in income
statement (if material).
Examples of research activities: [Para 56]
142
The Development Phase:
Development is defined as:
 The application
 Of research finding
 To a plan or design for the production
 Of new or substantially improved products or services
 Prior to the commencement of commercial production or use.
Since development phase is after research phase therefore more advanced stage of creation, it may be
possible that item (formula) is expected to generate future economic benefits and therefore amount can be
capitalized,
if all the following criteria are fulfilled: [Para 57]

a) Technical feasibility of completing the asset;
b) The intention to complete the asset and to either use or sell it;
c) The ability to use or sell the asset;
d) How the asset will generate the future economic benefits;
e) The adequate availability of necessary resources to complete the development and to sell or use the asset
f) The ability to reliably measure the cost of the development of the asset.
If just one of these above mentioned criteria is not met even then the related development costs must be
expensed out.
Examples of development phase [Para 59]

Components of cost of an internally generated asset [Para 66 & 67]
Past Expense not to be capitalized: [Para 71]

Expenditures on an intangible item that are initially recognized as an expense shall not recognize as an
asset at a later date.
The commercial Production in which inventories are produced for sale.

Once development phase is successfully completed, the economic benefits from the use of the
development asset can start to flow into the entity. In order to achieve a better reflection of the
diminishing value of the asset as a result of usage, the development asset should be amortized.
The amortization of the development asset must begin as soon as asset is available for use. It therefore
does not matter when we actually start production.
However, research and development project must be continuously tested during the course of completion
for impairment and whenever carrying amount exceeds its recoverable amount an impairment loss should
be recognized immediately.
143
Question 1
A company entered into a research and development project, the costs of which are as follows (all
costs are incurred evenly over the year):
20X1: 120,000
20X2: 100,000
20X3: 100,000
On 1 September 20X1, the recognition criteria for capitalization of development costs are
met. The recoverable amounts are as follows:
31 December 20X1 90,000
31 December 20X2 110,000
31 December 20X3 200,000
Required:
A. Show all journals related to the costs incurred for each of the years ended 31 December.
B. Disclose the development asset in the statement of financial position for 20X1 to 20X3.
Question 2
Zouq Inc. is a multinational company. As part of its vision to expand its business in South Asia, it
purchased a 90% share of a locally incorporated company, Momin Limited. Following are the brief
details of the acquisition:
Date of acquisition January 1, 2014
Total paid up capital of Momin Limited (Rs. 10 each) 500,000,000
Purchase price per share Rs. 30
Net assets of Momin Limited (as per 2013 audited financial statements) 650,000,000
Fair value of net assets (other than intangible assets) of Momin Limited 1,100,000,000
Momin Limited has an established line of products under the brand name of “Badar”. On behalf of Zouq
Inc., a firm of specialists has valued the brand name at Rs. 100 million with an estimated useful life of
10 years at January 1, 2014. It is expected that the benefits will be spread equally over the brand’s useful
life.
An impairment test of goodwill and brand was carried out on December 31, 2014 which indicated an
impairment of Rs. 50 million in the value of goodwill.
An impairment test carried out on December 31, 2015 indicated a decrease of Rs. 13.5 million in the
carrying value of the brand.
Required:
 What are the requirements of International Accounting Standards relating to amortization of
intangible assets having finite life?
 Prepare the ledger accounts for goodwill and the brand, showing initial recognition and all
subsequent adjustments.
Important Definitions:
Amortization:
 Is the systematic allocation of the depreciable amount of an intangible asset
 Over its useful life
Useful Life:
 Is the period of time over which an asset is expected to be available for use by the entity; or
 The number of production or similar units the entity expects to obtain from the asset.
Impairment Loss:
 It is the amount by which
 the carrying amount of an asset
 exceeds its recoverable amount
Carrying Amount:
 is the amount at which an asset is recognized in the statement of financial position
 After deducting any accumulated amortization and accumulated impairment losses thereon.
Recoverable Amount:
144
 of an asset is the Higher of:
 its fair value less costs to sell and
 its value in use
Fair Value:
Fair value is the price that would be received from selling an asset in an orderly transaction.
Recognition of an Intangible Asset:

Before an intangible item may be recognized as an intangible asset, it must meet the:
 definition of an intangible asset; and
 recognition criteria
The most important aspects to meet regarding the definition of an intangible asset are generally the
following:
 the asset must not have a physical form
 the asset must be ‘identifiable’; and
 the asset must be controlled by the entity
A) The item must be without physical substance:

Expenditure is frequently incurred on items that have both tangible and intangible elements. This requires
assessing which elements is more significant: the physical (Tangible) or the non-physical (Intangible)
element. Depending on which element is more significant will determine which standard should be
applied to the asset:
 the standard on Intangible Asset (IAS-38); or
 the standard on Property, Plant & Equipment (IAS-16).
Example: Recognition of a fishing license

A company has acquired a fishing license. The directors insist that it is a physical asset since it is written
on a piece of paper. State and briefly explain whether or not you would recognize a fishing license as an
intangible asset.
Solution:
Although the fishing license has a physical form, (the related legal documentation), the license is
considered intangible rather than tangible since the most significant aspect is the licensed ‘ability’ to fish.
Such a right (whether documented or not) is always considered to be intangible.
Example: Recognition of Software

State and briefly explain whether or not you would recognize software as an intangible asset if it is
incorporated into a machine that is dependent on the software for its operation.
Solution:
The most significant element would be considered to be tangible machine, since the software is
considered integral to the machine, and thereof the cost of the software would be recognized as part of the
cost of the machine and therefore classified as tangible. If the software was ‘*stand-alone’ software
rather than ‘in the machine’, it would have been classified as an intangible asset (IAS-38).
*Standalone software means which is not necessary for the machine to operate e.g. MS office or adobe
reader. Operating system is not stand alone software.
B) The item must be identifiable:

Another important aspect of definition of ‘intangible assets’ as per IAS-38 is that asset must be
identifiable. An asset is considered to be identifiable if it
 Is ‘separable’, i.e. is capable of being separated or divided from the entity and sold or exchanged.
C) The item must be controllable:

Control over an intangible asset can be achieved if the entity has
 The ability to restrict access to the asset and its related future economic benefits; and
 The power to obtain future economic benefits
Example: Recognition of Training Costs

State and briefly explain whether or not you would recognize training costs as an intangible asset.
145
Solution:
Although training may be considered to be expenditure on an identifiable, non-monetary item that is
without physical substance, the definition of an asset is not met in terms of the Framework since the
trained staff members may not necessarily be under sufficient control of the entity to be considered to be
an asset, unless it is protected by legal rights to use it and to obtain the future economic benefits from it
[Para 15].
Note: if question is silent regarding the protection of benefits by legal rights, then assume that they are not
protected by any future legal rights.
Question 3
FAZAL
The following information relates to the financial statements of Fazal for the year to 31 March 2015.
The IT division has begun a training course for all managers in a new programming language at a cost of
Rs. 200,000. The consultants running the training course have quantified the present value of the training
benefits over the next two years to be Rs. 400,000. The project cost has been included in the statement of
financial position as a non-current asset. The accounting policy note identifies that the costs will be
written off over the next two years to match the benefits.
Required
Explain the correct accounting treatment for the above (with calculations if appropriate).
Amortization and Impairment Testing:

An intangible asset may either be assessed as having:
a) A finite useful life
b) An indefinite useful life (This could be when there is no foreseeable limit to the period over which the
asset is expected to generate cash flows)
Assets that have finite useful life is amortized whereas those that have indefinite useful life are
not amortized.
Impairment Testing:
Intangible assets that have finite useful lives are tested in the same way as Property, Plant &
equipment are tested for impairment:
Impairment test is first performed to identify whether there is any indication of impairment;
Then, if there appears to be material impairment, the recoverable amount is calculated and compared
to the carrying amount.
The following intangible assets are not amortized:
Purchased Goodwill
Intangible assets not yet available for use; and
Intangible assets with indefinite useful lives;
Instead, the recoverable amount must be estimated every year irrespective of whether there is any
indication that suggests a possible impairment.
Amortization:
Only intangible assets with finites lives are amortized. There are three variables to calculate the
amortization
Residual Value
Period of amortization
Method of amortization
Depreciable amount
The depreciable amount is:
The cost of the asset
Less its residual value.
Residual value [Para 100]

In the case of intangible assets, the residual value is assumed to be zero unless:
A 3rd party has committed to purchase the asset at the end of its useful life; or
There is an active market for that asset and
it is possible to determine the residual value using such market and
It is expected that such a market will still exist at the end of useful life.
146
Trademarks (Registered design to identify the manufacture’s Goods)
Patents (official document giving the holder the right to make, use or sell an asset. E.g. new
medicine or software)
In process research & development

Whereas many companies do their own research and development, it is possible for a company to buy
another company’s research and development. If a company buys (either separately or as part of a business
combination) another company’s ‘in-process research and development’ project, the fair value of the
initial acquisition costs will be capitalised.
The entire purchase price is capitalised regardless of the portion of the fair value that relates to purchased
research.
Any subsequent expenditure on this purchased ‘in-process research and development’ project will,
however,
be analyzed and recognized in the normal way:
costs that relate to research must be expensed;
costs that relate to development:
- must be expensed if all recognition criteria are not met; and
- Capitalised if all recognition criteria are met.
Example: in-process research and development acquired

A company bought an incomplete research and development project from another company for Rs 400 000 on 1
January 20X1. The purchase price has been analyzed as follows:
Research 100 000

Development 300 000
Subsequent expenditure has been incurred on this project as follows:
Research: Further research into possible markets was considered necessary 200 000
Development: Incurred evenly throughout the year. All recognition criteria for 480 000
capitalization as a development asset were met on 1 June 20X1.
Required:
Show all journals related to the in-process research and development for 20X1
Solution
1-1-20X1 Debit Credit
Intangible Asset-Development cost 400 000
Bank/ liability 400 000
In-process research and development purchased (no differentiation between research and
development is made) when the project was acquired as ‘in-process R&D’
31-12-20X1
Research expense 200 000
Development expense [480 000 x 5/12] 200 000
Intangible Asset-Development cost [480 000 x 7/12] 280 000
Subsequent expenditure on an in-process research and development project recognized as usually
done: research is expensed and development costs capitalised only if all criteria for capitalization of
development costs are met
147
Self-test question 1
INTANGIBLE ASSETS ACQUIRED IN A BUSINESS COMBINATION
Recognition guidance
Any intangible asset identified in a business combination will be recognised as both recognition criteria
are deemed to be recognised.
The probability recognition criterion always considered to be satisfied for intangible assets acquired in
business combinations. This is because the fair value of an intangible asset reflects expectations about
the probability that the expected future economic benefits embodied in the asset will flow to the
company. In other words, the entity expects there to be an inflow of economic benefits.
The reliable measurement criterion is always considered to be satisfied for intangible assets acquired in
business combinations. If an asset acquired in a business combination is separable or arises from
contractual or other legal rights, sufficient information exists to measure reliably the fair value of the
asset.
Commentary
This means that an intangible asset that was not recognised in the financial statements of the new
subsidiary might be recognised in the consolidated financial statements.
Examples of intangible assets

The following are all items that would meet the definition of an intangible asset if acquired in a business
combination.
 Market related intangibles
 Trademarks, trade names, service marks, collective marks and certification
marks;
 Internet domain names;
 Newspaper mastheads; and
 Customer related intangibles
 Customer lists;
 Customer contracts and the related customer relationships; and
 Artistic related intangibles
 Books, magazines, newspapers and other literary works;
 Video and audio-visual material:
 Television programs
 Contract based intangibles
 Licensing and royalty agreements;
 Construction permits;
 Franchise agreements
 Operating and broadcasting rights;
 Technology based intangibles

 Computer software and databases; and
 Trade secrets (secret formulas, processes, recipes)
Cost guidance
If an intangible asset is acquired in a business combination, its cost is the fair value at the acquisition
date.
If cost cannot be measured reliably then the asset will be included within goodwill.
In-process research and development

Another similar example involves in-process research and development
The acquiree might have a research and development project in process. Furthermore, it might not
recognise an asset for the project because the recognition criteria for internally generated intangible
assets have not been met.
Illustration:
Company X buys 100% of Company Y.
Company Y has spent Rs. 600,000 on a research and development project. This amount has all been
expensed as the IAS 38 criteria for capitalizing costs incurred in the development phase of a project
have not been met. Company Y has knowhow as the result of the project.
148
Company X estimates the fair value of Company Y’s knowhow which has arisen as a result of this
project to be Rs. 500,000.
Analysis
The in-process research and development is not recognised in Company Y’s financial statements. From
the Company X group viewpoint, the in-process research and development is a purchased asset. Part of
the consideration paid by Company X to buy Company Y was to buy the knowhow resulting from
the project and it should be recognised in the consolidated financial statements at its fair value of Rs.
500,000.
Subsequent expenditure on an acquired in-process research and development project

Expenditure incurred on an in-process research or development project acquired separately or in a
business combination and recognised as an intangible asset is accounted for in the usual way by
applying the IAS 38 recognition criteria.
This means that further expenditure on such a project would not be capitalised unless the criteria for the
recognition of internally generated intangible assets were met.
Illustration:
Continuing the previous example. Company X owns 100% of Company Y and has recognised an
intangible asset of Rs. 500,000 as a result of the acquisition of the company.
Company Y has spent a further Rs. 150,000 on the research and development project since the date of
acquisition. This amount has all been expensed as the IAS 38 criteria for capitalizing costs incurred in
the development phase of a project have not been met.
Analysis
The Rs. 150,000 expenditures is not recognised as an intangible asset in Company Y’s financial
statements.
From the Company X group viewpoint, further work on the in-process research and development project
is research and the expenditure of Rs. 150,000 must be expensed.
Illustration: internally generated brand

Company X buys 100% of Company Y.
Company Y owns a famous brand that it launched several years ago.
Analysis
The brand is not recognized in Company Y’s financial statements (IAS 38 prohibits the recognition of
internally generated brands).
From the Company X group view point the brand is a purchased asset. Part of the consideration paid by
Company X to buy Company Y was to buy the brand and it should be recognized in the consolidated
financial statements at its fair value.
Measurement Model
As with tangible assets covered in property, plant and equipment (IAS 16), there are two measurement
models for intangible assets:
The cost model; and
The revaluation model.
Cost Model
The intangible asset is shown at its cost less any accumulated amortization and any accumulated
impairment losses.
Revaluation model
If the intangible asset is measured under the revaluation model it is shown at its:
fair value at date of revaluation
Less any subsequent accumulated amortization and any accumulated impairment losses.
The revaluation must be performed with sufficient regularity that the intangible asset’s carrying amount
does
not differ significantly from its fair value.
In revaluation model if an asset is to be revalued, all assets in that same class must be revalued at the
same time.
149
The mechanisms used in applying the revaluation model to intangible assets are just the same as those
used to apply the revaluation model to property, plant and equipment, with the one exception being that
the fair value of an intangible asset must be determined with reference to an active market ((there was
no such limitation in IAS 16: Property, plant and equipment). There is often no active market for the
intangible asset due to its uniqueness and therefore, although the revaluation model is allowed, it is often
not possible to apply in practice.
If, within a class of assets measured at fair value, there is an intangible asset that does not have a reliably
measurable fair value, then that asset will continue to be carried at cost less accumulated depreciation and
impairment losses (means not revalued).
If the revaluation model is used but at a later stage the fair value is no longer reliably determined (i.e.
there is no longer an active market), the asset should continue to be carried at the amount determined at
the date of the last revaluation less any subsequent accumulated amortization and impairment losses.
Accounting for a revaluation
The revaluation of an intangible asset is accounted for in the same way as that of a tangible asset
(covered by the standard on property, plant and equipment).
Definition: Active market

An active market is a market in which all the following conditions exist:
 the items traded in the market are homogeneous;
 willing buyers and sellers can normally be found at any time; and
 prices are available to the public.
Period of amortization
Amortization of the intangible asset should begin from the date on which it becomes available for use
(i.e. not from when the entity actually starts to use the asset).
Amortization should cease when the asset is derecognized.
The amortization period should be the shorter of:
The asset’s expected economic useful life; and
Its legal life.
Where the asset has a limited legal life (i.e. where related future economic benefits are controlled via
legal rights granted for a finite period), the expected economic useful life will be limited to the period of
the legal rights, if this is shorter, unless:
the legal rights are renewable by the entity; and
there is evidence to suggest that the rights will be renewed; and
The costs of renewal are not significant.
Example: Renewable rights
Ace Ltd purchased a 5 year fishing licence for Rs 100 000. The company expects to renew the licence at
the end of the 5-year period for a further 5 years. The government has indicated that they will re-grant
the licence to Ace Ltd.
Required:
Discuss the number of years over which the licence should be amortized, assuming that the costs
associated with the renewal is:
(i) 100; or
(ii) 99 000.
Solution
i) Renewable rights - insignificant cost
As the costs associated with the renewal are insignificant, the asset must be amortized over the 10 years
useful life. The entity intends to renew the licence and the government intends to re-issue the licence to
Ace Ltd, and therefore it must be treated as an asset with a 10-year useful life.
ii) Renewable rights - significant cost
As the costs associated with the renewal are significant, and almost equaling the initial cost of the
licence, the asset must be amortized over the 5-year useful life. Although the entity intends to renew the
licence, the renewed licence, when it is acquired, must be treated a separate asset and amortized over a
150
useful life of 5 years.
Method of amortization
The method used should be a systematic one that reflects the pattern in which the entity expects to use the
asset. The methods possible include:
straight-line
reducing balance
Unit of production method or any other method reflecting the pattern of benefits
Annual review
At the end of each financial period, the following should be reviewed in respect of intangible assets with
finite useful lives:
amortization period;
amortization method;
residual value; and
If there is any change in estimate, the change shall be treated as a change in accounting estimate as per
IAS-8 (means apply prospectively)
Intangible assets with indefinite useful life:
An intangible asset with an indefinite useful life is:
Not amortized but
Entity is requiring to test such an asset for impairment by comparing its recoverable amount
with its carrying amount annually.
Intangible assets not yet available for use:
An intangible asset that is still not available for use is:
Not amortized, but it is
Tested every year for impairment even if there is no indication of impairment.
Review of useful Life Assessment:
The useful life of an intangible asset that is not being amortized shall be reviewed each period to
determine whether events or circumstances continue to support an indefinite useful life assessment for
that and if they do not, the change in useful life assessment from indefinite to finite shall be accounted
for as a change in accounting estimate as per IAS-8.
Disclosures
Present carrying amount of intangible asset in Non-Current Assets in statement of financial
position.
Schedule in Notes to Financial Statements (just like tangible assets). If an intangible asset is
revalued, then same disclosures as in IAS-16
Class of assets
The same model should be applied to all assets in the same class. A class of intangible assets is a
grouping of assets of a similar nature and use in an entity’s operations. Examples of separate classes
may include:
 brand names;
 mastheads and publishing titles;
 computer software;
 licenses and franchises;
 copyrights, patents and other industrial property rights, service and
operating rights;
 recipes, formulae, models, designs and prototypes; and
 Intangible assets under development.
Comprehensive Example: Zebra Limited
During the year ended 31 December 2017, following transactions were made by Zebra Limited (ZL):
On 1 April 2017 ZL acquired a licence for operating a TV channel for Rs. 86.3 million out of which Rs.
151
50 million was paid immediately. The balance amount is payable on 1 April 2019. A mega social media
and print media campaign was launched to promote the channel at a cost of Rs. 10 million. The
transmission of the channel started on 1 August 2017.
The license is valid for 5 years but is renewable every five years at a cost of Rs. 35 million. Since the
renewal cost is significant, the management intends to renew the license only once and sell it at the end
of 8 years.
In the absence of any active market, the management has estimated that residual value of the license
would be Rs. 15 million and Rs. 20 million at the end of 5 years and 8 years respectively.
Applicable discount rate is 10% p.a.
These transactions should be recorded in ZL’s books of accounts for the year ended 31 December
2017 as follows:
Since a part of the payment for the license has been deferred beyond normal credit terms so the license
will be initially recognised at cash price equivalent of Rs. 80 million i.e. Rs. 50 million plus Rs. 30
million (i.e. present value of Rs. 36.3 million discounted at 10% for 2 years.)
The advertisement cost of Rs. 10 million incurred on launching of the channel cannot be included in the
cost of the license and will be charged to Profit and loss account.
Since the renewal cost is significant so the useful life of the license will be restricted to the original 5
years only.
The residual value of the license will be assumed to be zero since there is no active market for the
license and there is no commitment by 3rd party to purchase the license at the end of useful life.
The amortization for the year will be Rs. 12 million [(80 – 0) /5 ×9/12] calculated from 1 April 2017
when the license was available for use.
Unwinding of interest expense of Rs. 2.25 million (30 × 10% × 9/12) shall be recorded with increasing
the liability of payable for license with same amount.
152
Self-Test Questions
Question 1
On 01 January 2012, Matchless Enterprises Limited (MEL) acquired research data along with partially
developed product design from a company for Rs. 2 million (Research costs - Rs. 0.5 million,
development costs - Rs. 1.5 million).
The product design was handed over to the production department on 01 November 2012. Subsequent
to acquisition, MEL incurred Rs. 0.7 million on research and Rs. 2.5 million on the
development/finalization of the product design. It is expected that this product design would provide
economic benefits to the company for next five years.
Required:
Prepare journal entries to record the above transactions for the year ended 31.12.2012.
Question 2
Star-Bright Pharmaceutical Limited (SPL), a listed company, purchased a brand on January 1, 2005 at a
cost of Rs. 382 Million which has an expected useful life of 10 years. It has incurred a substantial amount
on further development of the brand, in subsequent years,
It is the policy of SPL to amortize the development expenditures which meet the recognition criteria as
given in IAS-38 ‘Intangible Assets ', over a period of 10 years. The amortization commences when the
development expenditures first meet the recognition criteria. However, it was discovered during the 'year
2010 that the development expenditure incurred after acquisition had erroneously been written-off to the
profit and loss account. Details of which are as follows:
Year ended Rs. in million
December 31,2007 24
December 31,2008 54
December 31,2009 38
December 31,2010 43
The draft financial statements (before correction of errors) show that retained earnings as at December 31,
2010 was Rs. 1,950 million (2009: Rs. 1,785 million).
Required:
In accordance with the requirements of IFRS, prepare relevant extracts of the Statement of Financial
Position along with the note on intangible assets after incorporating the required corrections. (Ignore tax)
(QB#8.6)
Question 3
Raisin International
a) Discuss the criteria that should be used while recognizing intangible assets arising from research
and development work. [Para 57]
b) Raisin International (RI) is planning to expand its line of products. The related information for the
year ended 31 December 2015 is as follows:
(i) Research and development of a new product commenced on 1 January 2015. On 1 October
2015, the project becomes available for use. It is estimated that the product would have a
useful life of 7 years. Details of expenditures incurred are as follows:
Rs. m
Research work 4.50
Development work 9.00
Training of production staff 0.50
Cost of trial run (testing cost) 0.80
Total costs 14.80
(ii) The right to manufacture a well-established product under a patent for a period of five years
was purchased on 1 March 2015 for Rs. 17 million. The patent has an expected remaining
useful life of 10 years. RI has the option to renew the patent for a further period of five years
for a sum of Rs. 12 million.
(iii) RI has acquired a brand at a cost of Rs. 2 million. The cost was incurred in the month of June
2015. The life of the brand is expected to be 10 years. Currently, there is no active market for
this brand. However, RI is planning to launch an aggressive marketing campaign in February
2016.
(iv) In September 2014, RI developed a new production process and capitalised it as an intangible
153
asset at Rs. 7 million. The new process is expected to have an indefinite useful life. During
2015, incurred further development expenditure of Rs. 3 million on the new process which
meets the recognition criteria for capitalization of an intangible asset.
Required
In the light of International Financial Reporting Standards, explain how each of the above transaction
should be accounted for in the financial statements of Raisin International for the year ended 31 December
2015.
Question 4
Opal Limited (OL) commenced research work on a new product on 1 July 2013 and entered the
development phase on 1 July 2014. In this respect, the following expenses were incurred and debited to
capital work in progress.
For the year ended
30 June 2015 30 June 2014
----------- Rs. In million -----------
Research and development cost 12.00 8.00
Training of technical staff 0.90 -
Cost of laboratory equipment* - 4.00
Cost of trial run 0.60 -
13.50 12.00
*Purchased on 1 January 2014, having estimated useful life of five years.
Criteria for recognition of the internally generated intangible asset have been met. The commercial
production was started from 1 January 2015. It is estimated that the related product would have a shelf
life of 10 years.
Required:
Explain accounting treatment of the above in the financial statements for the year ended 30 June 2015 in
the light of International Financial Reporting Standards. (07)
154
Solutions
Answer 1
a) Journal Entries
Actual development costs 20X1 (C120 000 x 4/12) 40 000
20X2 (given) 100 000
20X3 (given) 100 000
240 000
20X1 Debit Credit
Research (E) 120 000 x 8/12 80 000
Development: cost (A) 120 000 x 4/12 40 000
Research and development costs incurred (capitalization began from 1 September 20X1, being the
date on which all six criteria were met (costs expensed before this date)
20X2
Development: cost (A) 100 000
Development costs incurred
Impairment loss: CA: 140 000 - RA: 110 000 30 000

accumulated impairment loss: 30 000
Impairment loss recognized
20X3
Development (A) 100 000
Development costs incurred
Impairment loss 10 000

Acc impairment loss 10 000
C.A=40,000 + 100,000 – 30,000 + 100,000 = 210,000
Recoverable Amount =200,000
Solution to example 5B: research and development
b) ABC Ltd
Statement of financial position
at 31 December 20X3 (extracts)
ASSETS 20X3 20X2 20X1
Non-current Assets
Intangible Asset-Development cost 200 000 110 000 40 000
155
Answer 2
(a)
i. The depreciable amount of an intangible asset with a finite useful life shall be allocated on a
systematic basis over its useful life.
ii. Amortization shall begin when the asset is available for use
iii. Amortization shall cease on the date the asset is derecognized.
iv. The amortization method used shall reflect the pattern in which the asset's future economic benefits
are expected to be consumed by the entity.
v. The amortization charge for each period shall be recognized in statement of profit or loss.
(b)
Goodwill Account
01.01.2014 Cost of Investment 270,000,000 31.12.2014 Impairment of 50,000,000
(W1) goodwill
Balance b/d 220,000,000
270,000,000 270,000,000
01.01.2015 Balance b/d 220,000,000
31.12.2015 Balance b/d 220,000,000
220,000,000 220,000,000
Brand Account
01-01-2014 Revaluation Surplus 100,000,000 31.12.2014 Amortization 10,000,000
31.12.2014 Balance c/d 90,000,000
100,000,000 100,000,000
01.01.2015 Balance b/d 90,000,000 31.12.2015 Amortization 10,000,000

31.12.2015 Impairment of brand 13,500,000
31.12.2015 Balance c/d 66,500,000
90,000,000 90,000,000
W-1 Calculation of Goodwill:
Rs in millions
P (90%) NCI (10%)
At acquisition on 1-1-2014
Fair value 1,100
Brand 100
1,200 1,080 120
Cost of investment (50 x 90% x 30) 1350
Goodwill 270
Answer 3
In accordance with IAS 38, expenditure on intangible assets must be expensed unless it meets the
recognition criteria for capitalization. These criteria require the demonstration that future benefits will
arise from the incurred costs. It would be difficult to prove that this is the case in relation to training costs
and IAS 38 specifically states that training costs should always be expensed as they are incurred and not
treated as an intangible asset.
Hence the treatment adopted by Fazal is not correct and the costs being carried forward must be expensed
to the year’s profits.
156
Solutions
Self-Test Questions
Answer 1
Description Debit Credit
Intangible asset 2,000,000
Bank 2,000,000
(Record the purchase of in-process research and development)
Intangible asset 2,500,000

Profit and loss account / Research expense 700,000
Bank 3,200,000
(Record the subsequent expenditure on an in process research and development)
Amortization 150,000
Acc amortization [2,000,000 +2,500,000] ÷ 5 x 2/12 150,000
Answer 2
a) Star-Bright Pharmaceutical Limited
Statement of Financial Position Extracts
As on 31-12-2010
Restated
Non-Current Assets 2010 2009
Intangible Assets (b) 274 285
Equity & Liabilities

Retained Earnings 2071 1879
b) Star-Bright Pharmaceutical Limited

Notes to Financial Statements Intangible Assets
2010 2009
Cost
Opening 498 460
Capitalized 43 38
Closing 541 498
Acc Amortization
Opening 213 163 (382x40%)+2.4+7.8
(382x50%)+(2.4+7.8+11.6
During the 54 50 (11.6+38.2)
year
(15.9+38.2) 267 213
Carrying Amount 274 285
Workings W-1
Amortization
Development Cost 2007 2008 2009 2010
2007 24 2.4 2.4 2.4 2.4
2008 54 5.4 5.4 5.4
2009 38 3.8 3.8
2010 43 4.3
2.4 7.8 11.6 15.9
W-2
Development Cost
Cash 382
C/D 382 (2005)
B/D 382
C/D 382 (2006)
157
B/D 382
Cash 24
C/D 406 (2007)
B/D 406
Cash 54 C/D 460 (2008)
B/D 460
38
C/D 498 (2009)
B/D 498
Cash 43
C/D 541 (2010)
W-3
Movement in Retained Earnings
2010 2009
Retained Earnings-Given 1,950 1,785
Amount Expensed out wrongly 159 116 (24+54+38) expensed out
(24+54+38+43) wrongly upto 2009
Upto 2010
Amortization upto 2010 (37.7) (21.8) 204+7.8+11.6)
(2.4+7.8+11.6+15.9)
2,071 1,879
We can calculate 2010 closing balance by starting from 2009 corrected closing balance as find out above.
If B/D 1879
Profit (1785-1950) 165
Add: Amount expensed out 43
Less: Amortization upto 2010 (15.9)
2071
158
Answer 3
Raisin International
a) Following are the criteria that should be used while recognizing intangible assets from research and
development work.
i. No intangible asset arising from research shall be recognized.
ii. An intangible arising from development shall be recognized if, and only if , an entity can
demonstrate all of the following:
The technical feasibility of completing the intangible asset so that it will be available for use or
sale.
Its intention to complete the intangible asset and use or sell it.
Its ability to use or sell the intangible asset.
How the intangible asset will generate probable future economic benefits. Among other things,
the entity can demonstrate the existence of a market for the output of the intangible asset or the
intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
The availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
Its ability to measure reliably the expenditure attributable to the intangible asset during its
development.
b)
1. Since the product met all the criteria for the development of the product, it should be recognized as
an intangible in the statement of financial position (SOFP) of the company. However, RI should
capitalize only the development work as well as trial run (i.e. Rs. 9 plus 0.8 = 9.8 million) as
intangible asset. IAS-38 does not allow capitalization of cost relating to the research work, training
of staff.
Since the product has a useful life of 7 years, the amortization expense amounting to Rs. 0.35
million (Rs.9.8 million / 7 x 3/12) should be recorded in the statement of profit or loss.
2. This purchasing of right to manufacture should be recognized as an intangible in the SOFP
because:
 It is for an established product which would generate future economic benefits.
 Cost of the patent can be measured reliably.
Since there is a finite life, the patent must be amortized over its useful life. The useful life will be
shorter of its actual life (i.e. 10 years) and its legal life (i.e. 5 years. The amortization to be recorded
in SOCI is Rs. 2.83 million (Rs. 17 million / 5 x 10/12).
3. The acquired brand should be recognized as an intangible in the SOFP because acquisition price is
a reliable measure of its value. The amortization to be recorded in SOCI is Rs. 0.12 million (Rs. 2
million + 10 years’ x 7/12).
4. The carrying value of the intangible asset should be increased to Rs. 10 million in the SOFP. Since
there is an indefinite useful life of the intangible assets, it should not be amortized. Instead, RI
should test the intangible asset for impairment by comparing its recoverable amount with its
carrying amount.
Answer 4
Opal Limited
Accounting treatment for research and development expenses
Development cost recognition as intangible asset:
Since the new product met all the criteria for the development of a product, an intangible set should be
recognized at Rs. 13 million (12 + 0.4 + 0.6) as detailed under:
 Cost of Rs. 12 million incurred during the development phase that is 1 July 2014 to 31 December
2014.
 Depreciation of Rs. 0.4 million (4.0 ÷ 5 × 6/12) on laboratory equipment for the development
phaseof six months from 1 July 2014 to 31 December 2014.
 Cost of trial run amounted to Rs. 0.6 million.
Amortization of Intangible Asset:
Since the product has a shelf life of 10 years, the amortization expense amounting to Rs. 0.65 million
(13 ÷ 10 × 6/12) should be charged to profit and loss account for the period of six months i.e. 1 January to
159
30 June 2015.
Laboratory equipment Cost Recognition as Tangible Asset:
Laboratory equipment cost should be capitalized as a tangible asset as it is having useful life of more
than one year and to be depreciated over its useful life of five years.
Research and Other Costs:
(i) IAS-38 does not allow capitalization of costs pertaining to research work. Therefore, these costs
should be charged to profit and loss account in the period in which they incurred.
However, research cost of Rs. 8 million and depreciation for the research phase of Rs. 0.4 million
(4 ÷ 5 × 0.5) pertained to last year, therefore, comparative figures for the year ended 30 June 2014
should be restated and retained earnings be adjusted for these amounts (as per IAS 8).
(ii) Cost for training of staff is also not allowed for capitalization and should be charged to profit
andloss account for the year ended 30 June, 2015.
(iii) Depreciation of Rs. 0.4 million on laboratory Equipments for the period from the commencement of
the commercial production i.e. 1 January to 30 June 2015 should be charged to profit and loss
account for the year ended 30 June, 2015.
160
ICAP study text
IAS 38: INTANGIBLE ASSETS - INTRODUCTION
Definition of an intangible asset
An asset: A resource controlled by the company as a result of past events and from which future
economic benefits are expected to flow.
Intangible asset: An identifiable, non-monetary asset without physical substance’
Expenditure on an intangible item must satisfy both definitions before it can be considered to be an
asset.
Commentary on the definitions Control
The existence of control is useful in deciding whether an intangible item meets the criteria for treatment
as an asset.
Control means that a company has the power to obtain the future economic benefits flowing from the
underlying resource and also can restrict the access of others to those benefits.
Control would usually arise where there are legal rights, for example legal rights over the use of patents
or copyrights. Ownership of legal rights would indicate control over them. However, legal enforceability
is not a necessary condition for control.
For tangible assets such as property, plant and equipment, the asset physically exists and the company
controls it. However, in the case of an intangible asset, control may be harder to achieve or prove.
In the absence of legal rights to protect, an entity usually has insufficient control over the expected
future economic benefits, for example, a team of skilled staff, or customer relationships and loyalty.
Some companies have tried to capitalise intangibles such as the costs of staff training or customer lists
on the basis that they provide access to future economic benefits. However, these would not be assets as
they are not controlled.
Staff training: Staff training creates skills that could be seen as an asset for the employer. However,
staff could leave their employment at any time, taking with them the skills they have acquired through
training.
Customer lists: Similarly, control is not achieved by the acquisition of a customer list, since most
customers have no obligation to make future purchases. They could take their business elsewhere.
Illustration: Team of skilled staff

A company might have a team of skilled staff and may be able to identify incremental staff skills
leading to future economic benefits from training and expect that the staff will continue to make their
skills available to the company.
However, staff could leave their employment at any time, taking with them the skills they have acquired
through training. Therefore, a company usually has insufficient control over the expected future
economic benefits for these items to meet the definition of an intangible asset.
Illustration: Customer lists

A company may have a portfolio of customers which it expects to continue to trade with the company.
In the absence of legal rights to protect the relationship, the company usually has insufficient control
over the expected economic benefits to meet the definition of an intangible asset.
However, exchange transactions for the same or similar non-contractual customer relationships provide
evidence that the company is able to control those benefits in the absence of such legal rights.
Such exchange transactions also provide evidence that the customer relationship is separable
so, thus meeting the intangible asset definition.
This means that a purchased customer list would usually be capitalised.
Future economic benefits

These may include revenues and/or cost savings.
Evidence of the probability that economic benefits will flow to the company may come from:
 market research;
 feasibility studies; and,
 a business plan showing the technical, financial and other resources needed
and how the company will obtain them.
Need to be identifiable
An intangible asset must also be ‘identifiable’. Intangibles, by their very nature, do not physically exist.
161
It is therefore important that this ‘identifiability test’ is satisfied.
IAS 38 states that to be identifiable an intangible asset:
 must be separable; or
 must arise from contractual or other legal rights.
To be separable, the intangible must be capable of being separated or divided from the company, and
sold, transferred, licensed, rented or exchanged.
Many typical intangibles such as patent rights, copyrights and purchased brands would meet this test,
(although they might fail other recognition criteria for an intangible asset).
Without physical substance
Non-physical form increases the difficulty of identifying the asset.
Certain intangible assets may be contained in or upon an article which has physical substance (e.g.
disc). Whether such assets are treated as tangible or intangible requires. This judgement is based on
which element is the most significant.
Computer software for a computer controlled machine tool that cannot operate without that specific
software is an integral part of the related hardware and it is treated as property, plant and equipment. The
same applies to the operating system of a computer.
Computer software, other than the operating system, is an intangible asset. The same applies to licenses,
patents or motion picture films acquired or internally generated by the reporting company.
Identifiable assets that result from research and development activities are intangible assets because any
physical element of those assets (for example, a prototype) is secondary to the knowledge that is the
primary outcome of those activities.
Example:
Ateeq Ltd acquires new technology that will significantly reduce its energy costs for manufacturing.
Costs incurred include:
Rs
Cost of new technology 1,500,000
Trade discount provided 200,000
Training course for staff in new technology 70,000
Initial testing of new technology 20,000
Losses incurred while other parts of plant shutdown
during testing and training. 30,000
The cost that can be capitalised is:
Cost of a new technology 1,500,000
Less discount (200,000)
Plus initial testing 20,000
1,320,000
The prominent types of intangibles are described below:
Patent
Patent rights entitle their owners, for limited period of time, the monopoly to manufacture or use a certain
product or process.
Trademark
Trademarks are the exclusive rights to proprietary symbols, names, and other unique properties of a
product, such as packaging, style, and even color in some instances.
Copyright
Copyrights represent the legal right on both published and unpublished work of an author to sell, copy,
or perform a piece of literary, musical, or art work. Copyrights protect the works from reproduction or
derivative use without the consent from the copyright owner (usually the author or publisher).
License
Licenses are the contractual rights to use another's property, whether it be a patent, trademark,
copyright, lease or exploration for natural resources.
Franchise
Franchises provide their holders with the right to practice a certain kind of business in a certain
162
geographical location as sanctioned by the franchiser. Fast-food restaurants, for example, often expand
by selling franchise rights.
Goodwill
Goodwill refers to the price or value above the market value of the tangible assets of a company. When a
company is bought, the price paid will often be higher than the market value of its facilities, equipment,
inventory etc. A company develops this intangible asset by establishing a strong business track record,
credit rating, reputation and name.
Recognition criteria for intangible assets
Recognition
An intangible asset is recognised when it:
 complies with the definition of an intangible asset; and,
 meets the recognition criteria set out below.
Recognition criteria
An intangible asset must be recognised if (and only if):

it is probable that future economic benefits specifically attributable to the asset will
flow to the company; and,

the cost of the asset can be measured reliably.
The probability of future economic benefits must be assessed using reasonable and supportable
assumptions that represent management’s best estimate of the set of economic conditions that will exist
over the useful life of the asset.
These recognition criteria are broadly the same as those specified in IAS 16 for tangible non-current
assets.
Measurement
An intangible asset must be measure at cost when first recognised.
Means of acquiring intangible assets
A company might obtain control over an intangible resource in a number of ways. Intangible assets
might be:
purchased separately;
acquired in exchange for another asset;
given to a company by way of a government grant.
internally generated; or
acquired in a business combination;
IAS 38 provides extra guidance on how the recognition criteria are to be applied and/or how the asset is
to be measured in each circumstance.
Separate acquisition Recognition guidance

The probability recognition criterion is always satisfied for separately acquired intangible assets.
The price paid to acquire separately an intangible asset normally reflects expectations about the
probability that the future economic benefits embodied in the asset will flow to the company. The effect
of the probability is reflected in the cost of the asset.
Also the cost of a separately acquired intangible asset can usually be measured reliably especially when
the purchase consideration is in the form of cash or other monetary assets.
Granted by government
A government transfers or allocates intangible assets such as airport landing rights, licenses to operate
radio or television stations, import licenses or quotas or rights to access other restricted resources.
An intangible asset may be acquired free of charge, or for nominal consideration, by way of a
government grant.
IAS 20: Accounting for Government Grants and Disclosure of Government Assistance, allows the
intangible asset and the grant to be recorded at fair value initially or at a nominal amount plus any
expenditure that is directly attributable to preparing the asset for its intended use.
Subsequent expenditure on intangible assets

Subsequent expenditure is only capitalised if it can be measured and attributed to an asset and
enhances the value of the asset. This would rarely be the case:
The nature of intangible assets is such that, in many cases, there are no
163
additions to such an asset or replacements of part of it.
Most subsequent expenditure is likely to maintain the expected future
economic benefits embodied in an existing intangible asset rather than meet the
definition of an intangible asset and the recognition criteria.
Also it is often difficult to attribute subsequent expenditure directly to a
particular intangible asset rather than to the business as a whole.
Maintenance expenditure is expensed out in profit or loss account
DISCLOSURE REQUIREMENTS
Disclosure requirements
In the financial statements, disclosures should be made separately for each class of intangible asset.
(Within each class, disclosures must also be made by internally-generated intangibles and other
intangibles, where both are recognised.)
Most of the disclosure requirements are the same as for tangible non-current assets in IAS 16. The only
additional disclosure requirements are set out below.
Whether the useful lives of the assets are finite or indefinite.
If the useful lives are finite, the useful lives or amortization rates used.
If the useful lives are indefinite, the carrying amount of the asset and the
reasons supporting the assessment that the asset has an indefinite useful life.
Example:
An example is shown below of a note to the financial statement with disclosures about intangible assets
Internally- generated Software Goodwill Total
development costs Licenses
Rs. m Rs. m Rs. m Rs. m
Cost (At the start of the year) 290 64 900 1,254
Additions 60 14 - 74
Additions through business - - 20 20
combinations
Disposals (30) (4) - (34)
At the end of the year 320 74 920 1,314
Accumulated amortization
and impairment losses
At the start of the year 140 31 120 291
Amortization expense 25 10 - 35
Impairment losses - - 15 15
Accumulated amortization on 10 2 - 12
disposals
At the end of the year 175 43 135 353
Net carrying amount

At the start of the year 150 33 780 963
At the end of the year 145 31 785 961
The total amount of research and development expenditure written off (as an expense) during the
period must also be disclosed.
Accounting policies
IAS 1 requires the disclosure of accounting policies used that are relevant to an understanding of the
financial statements. Intangible assets might be among the largest numbers in the statement of financial
position and result in significant expense in the statement of profit or loss.
One of the learning outcomes in this area is that you be able to formulate accounting policies for
intangible assets.
There are several areas that are important to explain to users of financial statements.
Amortization policy
The depreciable amount of an intangible asset must be written off over its useful life. Formulating a
policy in this area involves estimating the useful lives of different categories of intangible assets.
Under the guidance in IAS 38 the estimated residual values of an asset would usually be zero and the
164
straight line method would usually be used.
Other explanations:
This is not so much about choosing a policy as explaining situations to users:
Development expenditure: Does the company have any?
Intangible assets acquired in business combinations in the period.
Whether the company has intangible assets assessed as having an indefinite
useful life.
Below is a typical note which covers many of the possible areas of accounting policy for
intangible assets.
Illustration: Accounting policy – Intangible assets
The intangible assets of the group comprise patents, licenses and computer software.
The group accounts for all intangible assets at historical cost less accumulated amortization and
accumulated impairment losses.
Computer software
Development costs that are directly attributable to the design and testing of identifiable and unique
software products controlled by the group are recognised as intangible assets when the following criteria
are met:
it is technically feasible to complete the software product so that it will be
available for use;
management intends to complete the software product and use or sell it;
there is an ability to use or sell the software product;
it can be demonstrated how the software product will generate probable future
economic benefits;
adequate technical, financial and other resources to complete the development
and to use or sell the software product are available; and
the expenditure attributable to the software product during its development
can be reliably measured.
Directly attributable costs that are capitalised as part of the software product include the software
development employee costs and an appropriate portion of relevant overheads.
Development expenditures that do not meet these criteria are recognised as an expense as incurred.
Costs associated with maintaining computer software programs are recognised as an expense as
incurred.
Useful lives
Amortization is calculated using the straight-line method to allocate their cost or revalued amounts to
their residual values over their estimated useful lives, as follows:
Patents: 25 to 30 years
Licenses 5 to15 years
Computer software 3 years
All intangible assets are estimated as having a zero residual value.
165
Question 1
Following information pertains to International Associates Limited (IAL):
(i) Intangible assets as at 30 June 2015 were as follows:
Brands Software License
Useful life (years) 10 5 Indefinite
------- Rs. in ---------
-- million
Cost 200 80 15
Accumulated amortization / impairment 40 48 -
(ii) Details of expenses incurred on a project to improve IAL’s existing production process are as
under:
Period Rs. in million
Up to June 2015 20
July 2015 – March 2016 45
Expenses were incurred evenly during the above period. On 30 September 2015, it was established that
the project is commercially viable. The new process became operational with effect from 1 April 2016
and it is anticipated that it will generate cost savings of Rs. 10 million per annum for a period of 10
years.
(iii) On 1 August 2015, IAL entered into an agreement to acquire an ERP software which would
replace its existing accounting software. The new software became operational on 1 April 2016.
IAL incurred following expenditure in respect of the ERP software:
Description Rs. in
million
Purchase price (including 15% sales tax) 115
Training of staff 2
Consultancy charges for implementation of ERP 5
ERP software has an estimated useful life of 15 years. However, IAL expects to use it for a period of 10
years. The existing accounting software has become redundant and is of no use for the company.
(iv) During the year ended 30 June 2016, IAL spent Rs. 10 million on development of a new brand.
Useful life of the brand is estimated as ten years.
(v) The license appearing in IAL’s books was issued by the government for an indefinite period.
However, on 1 January 2016 the Government introduced a legislation under which the existing
license would have to be renewed after ten years.
(vi) IAL uses cost model to value its intangible assets and amortises them on straight-line basis.
Required:
Prepare a note on ‘intangible assets’ for inclusion in IAL’s financial statements for the year ended 30
June 2016 in accordance with International Financial Reporting Standards. (16)
Question 2
Apple Limited (AL) is in the process of finalizing its consolidated financial statements for the
year ended 30 June 2018. Following information pertains to the Group's intangible assets:
(i) As on 30 June 2017, revalued amount of AL’s license and related revaluation surplus were Rs.
450 million and Rs. 30 million respectively.
(ii) On 1 July 2017 AL acquired entire shareholding of Mango Limited (ML) for Rs. 1,950 million.
Fair values of net assets appearing in ML’s books on acquisition date are given below:
Rs. in million
Software (Rs. 100 million each) 200
Other net assets 1,545
In respect of acquisition of ML, following information is also available:
 Till acquisition date, ML had incurred research & development cost of Rs. 80 million on
product 'ABC'. ML had not recognised this as an asset because criteria for recognition of
the internally generated intangible asset was met on.1 July 2017. On this date, AL
166
estimated that the fair value of research and development work on ABC was Rs. 95
million.
 On acquisition date, fair value of ML's customer list was assessed at Rs. 20 million.
(iii) ML incurred following expenditures on this project from 1 July 2017 till ABC’s launching date
i.e. 1 May 2018.
Rs. in million
Market research 5
Product design 12
Cost of pilot plant (not for commercial production) 48
Refinement of product before commercial production 6
Training of production staff 8
Testing of pre-production 4
Production and launching of product 105
188
(iv) As on 1 July 2017, the fair value of AL's own customer list was assessed at Rs. 35 million.
(v) As on 1 July 2017, remaining useful life of all intangible assets except goodwill was 10 years.
(vi) On 31 March 2018, ML sold one of its software for Rs. 110 million.
(vii) Group follows the revaluation model for license whereas cost model is used for other intangible
assets.
(viii) As on 30 June 2018:
 fair value of licence was assessed at Rs. 350 million.
 goodwill of ML has been impaired by 20%.
Required:
Prepare a note on intangible assets, for inclusion in AL's consolidated financial statements for the year
ended 30 June 2018 in accordance with the requirements of IFRSs.
(‘Total’ column is not required) (14)

Draft financial statements of Tulip Limited (TL) for the year ended 31 December 2017 show the
following amounts:
Rs. in million
Total Assets 2,700
Total Liabilities 1,620
Net profit for the year 398
While reviewing the draft financial statements, following matters have been noted:
(i) TL commenced development of a new product on 1 January 2017. Following directly
attributable costs have been incurred upto the launching date of 1 October 2017 and have
been capitalized as intangible asset:
Rs. in million
Staff salary 2,700
Equipment (having useful life of 5 years) 1,620
Consumables 398
Consultant fee 90
Total 212
The recognition criteria for capitalization of internally generated intangible assets was met on 1
March 2017. All costs have been incurred evenly during the period except equipment which was
purchased specifically for this product on 1 January 2017.
TL estimated that useful life of this new product will be 10 years. However, TL had not charged any
amortization in 2017. (06)
(ii) After preparation of draft financial statements, a claim of Rs. 20 million was lodged by a customer
for supplying defective units of a product in 2017. According to TL's lawyers, the chance that claim
would succeed is 80%.
At year-end, 800 units of this product were included in TL’s inventory at a cost of Rs. 150,000 per
unit. All these units have the same defects. Normal selling price of each unit is Rs. 200,000. TL has
167
already committed to sell 300 units to Jamal Enterprises at a price of Rs. 220,000 per unit.
TL has estimated that Rs. 80,000 per unit would be incurred to remove the above defect. Further,
each defective unit can be sold for Rs. 130,000 in current condition. (04)
Required:
Determine the revised amounts of total assets, total liabilities and net profit, after incorporating the
impact of above adjustment(s), if any.
Question 4 (Autumn 2019)

Zinc Limited (ZL), a broadcasting company, uses revaluation model for subsequent measurement of its
intangible assets, wherever possible. Following information pertains to ZL’s intangible assets:
(i) On 1 January 2018, ZL bought an incomplete research and development project fromBee Tech at
its fair value of Rs. 90 million. The purchase price was analyzed as follows:
Rs. in million
Research 30
Development 60
Subsequent expenditures incurred on this project are as follows:
Rs. in million
Further research to identify possible markets 10
Development 48
Recognition criteria for capitalization of development was met on 1 March 2018. All costs are
incurred evenly from 1 January 2018 till project completion date i.e. 31 August 2018. It is
expected that newly developed technology will provide economic benefits to ZL for the next 10
years.
On 31 December 2018, ZL received an offer of Rs. 170 million for its developed
technology.
(ii) On 31 December 2018, ZL launched its new website for online streaming of TV shows, movies
and web series. The website’s content is also used to advertise and promote ZL’s products. The
website was developed internally and met the criteria for recognition as an intangible asset.
Directly attributable costs incurred for the websiteare as follows:
Rs. In million
Undertaking feasibility studies 3
Evaluating alternative products 1
Acquisition of web servers 16
Acquisition cost of operating system of web servers 7
Registration of domain names 2
Stress testing to ensure that website operates in the intended manner 3
Designing the appearance of web pages 5
Development cost of new content related to:
 online streaming 11
 advertising and promoting ZL’s products 8
Advertising of the website 6
(iii) During 2018, the licensing authority intimated that broadcasting license of one of ZL’s channels
will not be further renewed.
ZL had obtained this license for indefinite period on 1 January 2012 by paying Rs. 150
million, subject to renewal fee of Rs. 0.3 million at every five years. Upto last year, this license
was expected to contribute to ZL’s cash inflows for indefinite period. As on 31 December 2018,
the recoverable amount of this license was assessed asRs. 105 million.
Required:
In accordance with the requirements of IFRSs, prepare a note on intangible assets, forinclusion in ZL’s
financial statements for the year ended 31 December 2018 in respect of the above intangible assets. (‘Total’
column is not required) (15)
168
Qabil Limited (QL) is in process of finalizing its financial statements for the year ended 31 December
2019. Following information pertains to QL’s intangible assets:
(i) Intangible assets as at 31 December 2018 were as follows:

Product ERP
design software
Cost 750 200
Accumulated amortization / impairment 75 80
------- Years -------
Useful life 10 8
(ii) Cost incurred on development of product design was capitalised in 2018. The competition for
the product is increasing. QL has estimated the following net cash inflows from the product:
Year 2020 2021 2022 2023 2024 2025 & onwards
Net cash inflows
190 170 140 100 80 Nil
(Rs. in million)
Pre-tax and post-tax discount rates are 12% and 10% respectively.
(iii) On 1 January 2019, QL entered into an agreement to replace existing ERP software with a new
ERP software at a cost of Rs. 360 million. According to the agreement, 40% payment was made on
signing of the contract while the remaining amount was paid evenly over customization and
installation period which completed on31 October 2019.
The entire cost of project was financed through a running finance from Hone haar Bank at mark- up
of 15% per annum. The software became operational on 1 November 2019. QL expects to use it
for a period of 9 years.
The existing ERP software will be continued till 31 December 2020.
(iv) On 1 January 2019, QL acquired a licence for Rs. 600 million for a period of 5 years. QL made
an initial payment of Rs. 100 million and the remaining amount will be paid in two equal
instalments on 1 January 2020 and 2021. Cash price equivalent of the license is Rs. 520
million.
On expiry of 5 years, the license is renewable for further five years at an insignificant cost of Rs.
15 million. QL intends to renew the license and sell it at the end of 8th year.
In the absence of any active market, QL has estimated that residual value of the license would be
Rs. 80 million and Rs. 60 million at the end of 8th year and 10th year respectively.
Required:
Prepare a note on ‘Intangible assets’ for inclusion in QL’s financial statements for the year ended 31
December 2019 in accordance with the requirements of IFRSs. (15)

Ajwa Limited (AL) is engaged in the business of manufacturing and trading of consumer goods. On 1
July 2021, AL launched its own website for online sale of its products. The website was developed
internally which met the criteria for recognition as an intangible asset on 1 May 2021. Directly attributable
costs incurred for the website are as follows:
*Incurred in 2021 Rs. in million
Defining hardware and software specifications January to March 0.5
Salaries and general overheads January to June 6.0
Development of the content May to June 7.0
Registering website with search engines June 1.0
Annual fees for website hosting June 0.6
Employees training costs June to July 1.5
Discount offers for logging on the website July to August 2.0
*All costs were incurred evenly throughout the mentioned period.
Required:
Compute the cost of the website for initial measurement. Also discuss the reason(s) for not inclusion of any
169
of the above costs in the computation. (07)

Dove Limited (DL) commenced development of a new product on 1 January 2020. In thisregard,
following expenditures have been incurred:
Description Incurred in Rs. in million
Evaluation of possible alternatives January 2020 2
Pre-production prototypes February and March 2020 17
Pilot plant April to July 2020 40
Fee to register legal rights August 2020 15
Cost of manufacturing samples August to October 2020 *32
Brand building cost October to December 2020 16
*NRV of Rs. 20 million
DL has also incurred directly attributable salaries and overheads of Rs. 5 million andRs. 1.5 million
respectively in each month over the development period of new product
The recognition criteria for capitalization of internally generated intangible asset was met on
1 April 2020 and commercial production of the product was commenced from1 November
2020.
Required:
Compute the cost of the new product for initial measurement. Also discuss the reason(s) forignoring any of
the above expenditures in the computation. (08)

The following transactions pertain to Amused Limited (AL):
In 2020, AL started development of a new product. The recognition criteria for capitalization of
internally generated intangible asset was met on 1 January 2021. On this date, AL started development of a
plant which completed in 3 months. It is pilot plant for testing the new product and is not of a scale
economically feasible for commercial production. AL incurred cost of Rs. 3 million and Rs. 7 million on
design and construction of plant respectively. AL expects to operate the plant for two years till end of
development phase. During 2021, AL incurred Rs. 5 million in operating the pilot plant.
On 1 March 2021, AL acquired a patent with indefinite life in exchange of its old equipment and cash
consideration of Rs. 25 million. The fair values of the patent and equipment were assessed at Rs. 57 million
and Rs. 35 million respectively. On the date of exchange, the equipment had a carrying value of Rs. 30
million. AL believes that its future cash flows will change as a result of this exchange. AL incurred
cost ofRs. 2 million for transferring the title of the patent to its name.
On 1 June 2021, the government granted a license to AL free of cost to import raw material upto 10 tons
from international market for its intended use. The license is non-transferable. There are no further
conditions attached by the government. The fair value of the license is Rs. 50 million.
Required:
Explain how each of the above transactions should be accounted for in the financial statements of
AL for the year ended 31 December 2021, in accordance with the requirements of IFRSs. (09)

The following transactions pertain to Sphere Limited (SL) for the year ended 30 June 2022:
(i) On 1 July 2021, SL acquired a license against cash consideration of Rs. 50 million. SL incurred cost
of Rs. 3 million which includes refundable taxes of Rs. 1 million for transferring the title to its
name.
The license is valid for five years but is renewable every five years at a significant cost of Rs. 40
million. SL intends to renew the license only once and then sell the license at the end of ten years.
SL estimates that residual value of the license would be Rs. 12 million and Rs. 9 million at the end of
five years and ten years respectively.
(ii) On 1 July 2021, SL decided to develop a website for advertising and promotion of its products. SL
believes that website would enhance the brand value of the products and would also be used for
providing general information about SL to the public.
On 1 September 2021, SL internally initiated development of the website which was completed on
31 January 2022. Directly attributable costs incurred by SL for developing website were as
follows:
 Rs. 2 million for planning the website in September 2021.
170
 Rs. 7 million for acquisition of the web servers in October 2021.
 Rs. 3 million for content development equally in November and December 2021.
Rs. 1 million for annual website hosting fees (valid till 31 January 2023) paid inJanuary 2022
Required:
Discuss how the above transactions should be dealt with in the SL’s books for the year ended 30 June 2022,
in accordance with the IFRSs. (08)

The following information pertains to the intangible assets of Hadero Limited (HL):
I. On 1 May 2022, HL acquired an eight-year license at a cost of Rs. 174 million. HL plans to use the
license for six years. Licenses are traded in an active market. As on 31 December 2022, the fair
value of a new license valid for eight years is Rs. 192 million, while older licenses sell at a fair
value of new license value less Rs. 2 million for each month the license has already been used.
II. On 1 July 2022, HL acquired operation management software at a cost of Rs. 410 million.
HL also incurred a cost of Rs. 20 million for consulting charges to select and evaluate the
appropriate software in alignment with HL’s needs.
HL expects that indefinite life can be achieved if HL incurs future expenditures to enhance its
performance standards by integrating ‘artificial intelligence’ into this software. Without such
expenditures, the software is projected to become technologically obsolete in five years.
After the acquisition of the new software, the existing software would henceforth serve limited purposes.
The existing software was acquired for Rs. 240 million, and as on 31 December 2021, Rs. 126
million had been amortized, based on a useful life of ten years.
On 31 December 2022, HL has estimated the value in use of the existing software tobe Rs. 58 million.
This valuation has been computed using cash flows projected over the revised remaining useful life of
two years.
III. During the year 2022, it was discovered that the entire cost of Rs. 1,050 million incurred on product
development’ has been recorded as intangible asset without considering the following pertinent
facts:
The product development was commenced on 1 August 2021. Up till the launch date of 1 October
2022, the following directly attributable costs were incurred:
Rs. in million
Staff salary 150
Equipment (having useful life of five years) 420
Consumables 160
Consultant fee 320
Total 1,050
The recognition criteria for capitalization of internally generated intangible assets was met on 1 February
2022. All costs have been incurred evenly during the period except the equipment which was purchased
specifically for this product development on 1 September 2021. The useful life of the developed product is
estimated at eight years.
HL uses the revaluation model for the subsequent measurement of its intangible assets, wherever possible,
and accounts for revaluation using the net replacement value method. Depreciation and amortization are
charged using the straight line basis.
Required:
Prepare the notes on ‘Intangible assets’ and ‘Correction of error’ for inclusion in HL’s financial statements for
the year ended 31 December 2022, in accordance with the requirements of IFRSs

The following information pertains to the intangible assets of Irresistible Limited (IL):
(i) IL started a research and development project for a new product Alpha, on 1 February 2023. Up
till the launch date of 1 December 2023, the following directlyattributable costs were incurred on Alpha:
Date(s) of incurrence Rs. in million
Staff salary February to November 2023 60
Equipment (useful life of five years) 1 April 2023 120
Consumables February to November 2023 70
Consultant fee May to November 2023 28
Total 278
Though the development activities started on 1 May 2023, the recognition criteria for the capitalization of
internally generated intangible assets were met on 1 June 2023. All costs have been incurred evenly during
the period mentioned against each cost.The useful life of Alpha is estimated to be six years.
171
(ii) On 1 July 2023, IL launched its new web site for online sale of its products. The web site was developed
internally and met the criteria for recognition as an intangible asset.Directly attributable costs incurred for the
web site are as follows:
Rs. in million
Acquiring of web servers and its operating system 22
Capturing digital photographs of the products 6
Conducting feasibility studies and selecting preferences 2
Creating and uploading new content on the web site 13
Developing code and installing developed applications
on the web server 8
Providing additional discount to customers for ordering
through web site 9
Registering of domain names 3
It is estimated that the web site would be technologically obsolete in 4 years; however, IL plans to incur
additional expenditures on the web site to incorporate new technologies, which will enable IL to use the
web site for 8 years.
Required:
Prepare a note on ‘Intangible assets’ for inclusion in IL’s financial statements for the year ended 31 December
2023, in accordance with the requirements of IFRSs.
(‘Total’ column is not required) (09)
172
Answer 1
International Associates Limited
Intangible Assets: “Rs. in Millions”
Brand Software Licence Development Total
Cost/Revalued Amount
Opening balance 200 80 15 - 295
Addition - 120* - 30* 150
Disposal - (80) - - (80)
Closing Balance 200 120 15 30 365
Accumulated Amortization
Opening balance 40 48 - - 88
For the year 20 15* 0.75 0.75 36.5
(200/10) (15×10×6/12) (30/10×3/12)
Adjustment for Disposal - (60)* - - (60)
Closing Balance 60 3 0.75 0.75 64.5
Carrying Amount – 2016 140 117 14.25 29.25 300.5
Carrying amount – 2015 160 31 15 - 207
Useful life 10 10 10 10 -
Addition in software = 115+5 = 120 [Sales tax is assumed as non-refundable]
Addition in development expenditure = 45/9 × 6 = 30
Amortization of software = [80 ÷ 5 × 9/12] + [120 ÷ 10 × 3/12] = 15
Disposal of existing software = 48 + 12 = 60
Answer 2
Apple Limited
Notes to the consolidated financial statement for the year ended 30-06-2018
License Software Goodwill Research and Customer
Development list
Cost: - - - - -
Opening 450 - - - -
Elimination of Amortization (45) - - - -
Additions:
Acquisition - 200 90(W-9) 95 20
Development - - - 70(W-1) -
Disposals - (100) - - -
Revaluation Surplus (55) (W-8) - - - -
Closing balance 350 100 90 165 20
Accumulated Amortization:
Opening - - - - -
For the year 45 (W-2) 17.5 (W-3) - 2.75 (W-4) 2.00 (W-5)
Elimination of Amortization (45) 7.5(W-6) - - -
Closing - 10 2.75 2.00
Accumulated impairment loss:

Opening - - - - -
For the year - - 18.00 (W-7) - -
Closing - - 18.00 - -
Carrying Amount
At 30 June 2018 350 90 72 162.25 18
173
W-1) (12+48+6+4) = 70
W-2) (450/10) = 45
W-3) [(100/10)+(100/10 x 9/12)] = 17.5
W-4) [(95+70)/10 x 2/12] = 2.75
W-5) (20/10) = 2
W-6) (100/10 X 9/12) = 7.5
W-7) (90 x 20%) = 18
W-8) License:
WDV = (450 – 45) = 405
FV = 350_ 28 Transfer
Loss = _55_
27 ( 30 – 30/10 )
W-9) Computation of goodwill

Rs. in
Millions
Consideration 1,950
Fair value of net assets
Software 200
Other net assets 1,545
Research and development 95
Customer List 20
1,860
Goodwill on acquisition 90
Answer 3
Revised amounts of total assets, total liabilities and net profit
“Rs. In million “
Net Profit Total Assets Total Liabilities
Given in question 398 2,700 1620
Effect of entries
(Workings) (i) (73.78) (73.78)
360
(360)
(30) 42
(72)
(7.51) (7.51)
Effect of entries:
(workings) (ii) (20)
(13) (13) 20
Revised Amounts : 253.71 2,575.71 1,640
Workings:
W-1
Development expenses 73.78
Intangible Asset[692-360] / 9 x 2 73.78
Equipment 360
Intangible asset 360
Remaining intangible asset is [692- 73.78- 360] = 258.22
Depreciation [72 x 5/12] 30
Intangible asset [72 x 7/12] 42
Acc. Depreciation – Equipment [360/05] 72
174
Total Intangible Assets = 258.22+42=300.22
Amortization 7.51
Accumulated Amortization 7.51
[300.22+10 x 3/12]
W-2
Expense for Claim 20
Provision for claim 20
As it is highly probable the claim is required to be settled
Cost of sale 13
Inventory 13
Working below: Adjustment of NRV:

Committed Not Committed
Selling price/unit 220,000 200,000
Cost to sell/unit 80,000 80,000
(a) NRV if defects are removed 140,000 120,000
(b) Selling price in existing conditions 130,000 130,000
Higher of (a) and (b) above 140,000 130,000
Cost/unit 150,000 150,000
Adjustment of NRV/ Unit 10,000 20,000
NO. of Units 300 500
Total Adjustments (RS. In million) 3 10
Answer 4
Zinc Limited
Intangible assets: Research &

Website License
development
----------------- Rs. in million -----------------
Opening:
Cost - - 150.00
Accumulated amortization/ Impairment - - -
- - 150.00
Additions:
- separate acquisition 90.00 21.00 -
(2+3+5+11)
- development 36.00 - -
48×(6÷8)
Amortization (4.20) - (37.50)
(90+36)÷10×4÷12 150÷4
Impairment - - (7.50)
105–112.5(150÷4×3)
Closing 121.80 21.00 105.00
Cost/Revalued amount 126.00 21.00 150.00

Accumulated amortization/ Impairment (4.20) - (45.00)
Net book value 121.80 21.00 105.00
Useful life 10 NA 4
Amortized method Straight line NA Straight line
Answer 5
Qabil Limited
175
Intangible assets: Product design ERP software License

----------------- Rs. in million -----------------
Opening:
1 January 2019 750.00 200 -
Acc. amortization/impairment (75.00) (80) -
675.00 120 -
Separate acquisition - (W-1) 391.50 520.00
Amortization (112.5) (67.25) (65.00)
(675÷6) 60(120 ÷ 2) +7.25 (520–0)/8
(391.5÷9×2/12)
Impairment (bal. fig) (49.5) - -
Closing (W-2)513.00 444.25 455.00
Cost 750.00 591.50 520.00

Acc. amortization/impairment (237.00) (147.25) (65.00)
513.00 444.25 455.00
Measurement basis Cost model Cost model Cost model

Useful life (in years) 6 2–9 8
Amortization method Straight line Straight line Straight line
W-1: Cost of software Rs. in million

Purchase price 360.00
Borrowing cost: On advance (360×40%×15%)×(10÷12) 18.00
[(360×60%×15%)×10÷12]
On remaining payments ÷2 13.50
391.50
W-2: Value-in-use of product
Cash flow Discount factor @ Amount
Years
Rs. in million 12% Rs. in million
2020 190 0.89 169
2021 170 0.80 136
2022 140 0.71 99
2023 100 0.64 64
2024 80 0.57 45
513
Answer 6
Cost of website: Rs. in million
Salaries and general overheads 6/6×2 2.0
Development of the content 7.0
Registering website with search engines 1.0
10.0
Defining hardware and software This activity relates to planning phase (which is similar in
specifications nature to research phase) so should be expensed out.
Salaries and general overheads Salaries and general overheads of Rs. 4 million from
January 2021 to April 2021 should be expensed out as
incurred before meeting recognition criteria.
Annual fees for hosting website This is operating expense which is of recurring nature so
should be expensed out.
176
Employees training costs This is not eligible cost for capitalization so should be
expensed out.
Discount offers for logging on the This is promotional activity and relates to post
website development so should be expensed out or adjusted from
transaction price.
Answer 7
Cost of product: Rs. in million
Pilot plant 40.0
Fee to register patent 15.0
Cost of manufacturing the samples 32–20 12.0
Salaries and administrative overheads 6.5(5+1.5)×7 45.5
112.5
Reasons for ignoring cost:
Description Rs. in million Reasons
This is part of research and therefore should
Evaluation of possible alternatives 2
not be capitalized.
Since this cost was incurred before meeting
Pre-production prototypes 17 of recognition criteria, this should be
charged to P & L.
This is selling cost and therefore should not
Brand building 16
be capitalized.
Since salaries and overheads from January
2020 to March 2020 were incurred before
Salaries and overheads 19.5 meeting of recognition criteria, this should
[6.5(5+1.5)×3]
be charged to P & L.
Answer 8
(i) Cost incurred on pilot plant should be recorded as intangible as it falls under development activities. As
criteria for capitalizing development cost has been met, all cost (i.e. designing, constructing and operating)
incurred on pilot plant should be capitalized as an intangible. Amortization will begin once development
activity endsand commercial production starts over the life of product.
(ii) This exchange has a commercial substance and future cash flows are expected to change as a result of this
exchange. Therefore, the exchange should be recognized at fair value. As fair value of both assets exchanged
is given, the exchange should be recorded at the fair value of equipment given. So, the patent should be
recorded at Rs. 60 million i.e. sum of fair value of equipment given up (Rs. 35 million) and cash
consideration (Rs. 25 million). Further, cost of transferring title of Rs. 2 million should be added to cost
of patent. No amortization will be charged on patent due to indefinite life. However, the patent will be
tested for impairment annually.
(iii) Grant of license by government should be treated as government grant. The license can be recorded as
intangible asset at its fair value of Rs. 50 million. Government grant so recognized should be amortized to
P&L over the life of license. Alternatively, intangible asset can be recorded at a nominal amount. AL
should select an accounting policy inthis regard and apply it consistently.
Answer 9
(i) The license should be recognised as intangible asset at initial cost of Rs. 52 million (50+2). The transfer fee
being directly attributable cost should be included while refundable tax of Rs. 1 million should not be
included in cost.
The useful life of license will be restricted to the original five years as the renewal cost of Rs. 40 million is
significant which should be considered separate intangible at the time of renewal. The residual value of
license at the end of five years as zero because there is no commitment by 3rd party to purchase the
license and there is no active market for the license. The amortization for the year should be Rs. 10.4
million (52/5).
(ii) As per IAS 38, Rs. 5 million (2+3) for planning and content development should be expensed out.
Website is developed primarily for promoting and advertising SL’s products and services. So, SL will
177
not be able to demonstrate how it will generate probablefuture economic benefits.
Rs. 7 million incurred for acquisition of the web servers should be capitalized under property, plant
and equipment and depreciated over useful life.
Since webhosting fees is paid for one year, Rs. 0.42 (1/12×5) million will be expensed out while Rs.
0.58 million will be recorded as prepayment
Answer 10 Autumn 2023
178
Practice questions:
Question 1
Habib Limited
On 30 June 2004, Habib Limited (HL) discovered that it had been manufacturing a product illegally since this product
happened to be a patented product for which it did not have the necessary rights. HL immediately shut down its factory and
hired a firm of lawyers to act on its behalf in the acquisition of the necessary rights to manufacture this patented product.
Legal fees of Rs. 50,000 were incurred during July 2004.
The legal process was finalized on 31 July 2004, HL was then required to pay Rs.800 000 to purchase the rights,
including Rs. 80,000 in refundable Taxes.
During the July factory shut-down:
• Overhead costs of Rs. 40,000 were incurred;
• Significant market share was lost with the result that HL’s total sales over August and September was
Rs. 20,000 but its expenses were Rs. 50,000, resulting in a loss of Rs. 30,000.
• To increase market share, HL spent an extra Rs. 25,000 aggressively marketing their product. This
marketing campaign was successful, resulting in sales returning to profitable levels in October.
The accountant wishes to capitalize the cost of the patent at:
Purchase price: Rs.800 000 + Legal fees: Rs. 50,000 + Overheads during the forced shut-down in July: Rs. 40,000 +
Operating loss in Aug & Sept: Rs. 30,000 + Extra marketing required: Rs. 25,000 = Rs. 945,000
Required:
Comment whether or not each of the cost identified can be capitalized.
Answer:
Rs.
Purchase price: The purchase price should be capitalized, but this must exclude refundable 720,000
taxes
(800,000-80,000)
Legal costs: This is a directly attributable cost. Directly attributable costs must be 50,000
capitalized
Overhead costs: This is an incidental cost not necessary to the acquisition of the rights (the -
shut-down was only necessary because HL had been operating illegally)
Operating loss: The operating loss incurred while demand for the product increased to its -
normal level is an example of a cost that was incurred after the rights. were acquired.
(Costs incurred after the Intangible Asset is available for use will not be capitalized)
Advertising campaign: The extra advertising incurred inorder to recover market share is an -
example of a cost that was incurred after the rights were acquired. Furthermore, advertising
costs are listed in IAS 38 as one of the costs that may never be capitalized as an
intangible asset
Total cost 770,000
Question: Saqib Limited began researching and developing an intangible asset. The following is asummary of
the costs that the R&D Department incurred each year:
2011: Rs. 180,000
2012: Rs. 100,000
2013: Rs. 80,000
Additional information:
The costs listed above were incurred evenly throughout each year.
Included in the costs incurred in 2011 are administrative costs of Rs. 60,000 that are not considered tobe directly
attributed to the research and development process. The first two months of the year were dedicated to research.
Then development began from 1 March 2011 but all 6 recognition criteria for capitalization of development
costs were only met on 1 April 2011.
Included in the costs incurred in 2012 are administrative costs of Rs. 20,000 that are considered to be directly
attributed to the research and development process.
179
Included in the costs incurred in 2013 are training costs of Rs. 30,000 that are considered to be directly attributed
to the research and development process: in preparation for the completion of the development process, certain
employees were trained on how to operate the asset.
Required:
Prepare journal entries related to the costs incurred for each of the years ended 31 December 2011 to 2013and briefly
comment on accounting treatment.
Answer:
2011 Debit Credit
Administration Exp.-Not directly attributable 60,000
Research Expense (180,000-60,000)*2/12 20,000
Development Expense (180,000-60,000)*1/12 10,000
Development cost (Asset) (180,000-60,000)*9/12 90,000
Bank 180,000
2012
Development cost (Asset) 100,000
Bank 100,000
2013
Training Expense 30,000
Development cost (Asset) [80,000-30,000] 50,000
Bank 80,000
Comment
Administration costs are capitalized if they are considered directly attributable (see 2012), otherwise
they are expensed (see 2011)
Training costs are always expensed even if they are considered to be directly attributable (see2013).
Research costs are always expensed
Development costs that are expensed due to being incurred before the recognition criteria were met may not be
subsequently capitalized, even if the recognition criteria are subsequently met. They remain expensed.
Question 3
Brooklyn
Brooklyn is a bio-technology company performing research for pharmaceutical companies. The finance director
has contacted Ahmed’s financial consulting company to arrange a meeting to discuss issues relevant to the
preparation of the financial statements for the year to 30th June 2015. Ahmed’s initial telephone conversation has
provided the necessary background information:
On 1st August 2014 Brooklyn began investigating a new bio-process. On 1st September 2015, the new process was
widely supported by the scientific community and the feasibility project was approved. A grant was then obtained
relating to future work. Several pharmaceutical companies have expressed an interest in buying the ‘know how’
when the project completes in June 2016. The nominal ledger account set up for the project shows that the
expenditure incurred between 1st August 2014 and 30th June 2015 was Rs.300,000 per month.
Required: prepare for the meeting with the finance director which explain and justify the accounting treatment of
these issues, with appropriate calculations and identification of matters on which further information is required are as
follows:
Answer:
IAS 38 on intangibles requires that research and development be considered separately:
 research – which must be expensed as incurred (related to August 2014)
 development – which must be capitalised where certain criteria are met.
It must first be clarified how much of the Rs.3 million incurred to date (10 months (from 01.09.2014 to
30.06.2015) at Rs. 300,000) is simply research and how much is development. The development element will only
be capitalised where the IAS 38 criteria are met. The criteria are listed below together with the extent to which they
180
appear to be met:
 The project must be believed to be technically feasible. This appears to be so as the feasibility has been
acknowledged.
 There must be an intention to complete and use/sell the intangible. Completion is scheduled for June 2016
 The entity must be able to use or sell the intangible. Interest has been expressed in purchasing the knowhow
on completion
 It must be considered that the asset will generate probable future benefits. Confirmation is required from
Brooklyn as to the extent of interest shown by the pharmaceutical companies and whether thisis of a sufficient
level to generate orders and to cover the deferred costs.
 Availability of adequate financial and technical resources must exist to complete the project. The financial
position of Brooklyn must be investigated. A grant is being obtained to fund further work and the terms of
the grant, together with any conditions, must be discussed further.
 Able to identify and measure the expenditure incurred. A separate nominal ledger account has been set up to
track the expenditure.
If all of the above criteria are met, then the development element of the Rs.3m incurred to date must becapitalised
as an intangible asset. Amortization will not begin until commercial production commences.
181
SIC 32
Intangible Assets- Website Costs ISSUE
An entity may incur internal expenditure on the development and operation of its own website for internalor
external access.
(a) A web site designed for external access may be used for various purposes such as to promote and
advertise an entity’s own products and services provide electronic services; and sell products and services.
(b) A website designed for internal access may be used to store company policies and customer details.
Stages of website’s development:
a. Planning
b. Application and Infrastructure Development
c. Graphical Design Development
d. Content Development
[All these stages will be discussed on the next pages]

Once development of a web site has been completed, the Operating stage begins. During this stage,an
entity maintains and enhances the applications, infrastructure, graphical design and content of the web site.
Issues are:
a. whether the web site is an internally generated intangible asset that is subject to the
requirements of IAS 38; and
b. The appropriate accounting treatment of such expenditure.
Exclusion from scope of SIC 32 [para 5 and 6]
SIC 32 does not apply to expenditure on purchasing, developing, and operating hardware (e.g. web
servers, staging servers, production servers and Internet connections) of a web site. Such expenditure is
accounted for under IAS 16.
Additionally, when an entity incurs expenditure on an Internet service provider hosting the entity’s web
site, the expenditure is recognized as an expense.
IAS 38 does not apply to intangible assets held by an entity for sale in the ordinary course of business
(see IAS 2 and IFRS-15) or leases of intangible assets that fall within the scope of IFRS-16.
Consensus [Accounting Treatment] [para 7 and 8]

A web site arising from development shall be recognized as an intangible asset if and only if, in
addition to complying with the general requirements described in IAS 38.21 for recognition and
initial measurement, an entity can satisfy the requirements in IAS 38.57 related to capitalization of
development expenditures. In particular, an entity may be able to satisfy the requirement to demonstrate
how its web site will generate probable future economic benefits in accordance with IAS 38.57(d) when,
for example, the web site is capable of generating revenues, including direct revenues from enabling
orders to be placed. An entity is not able to demonstrate how a web site developed solely or primarily
for promoting and advertising its own products and services will generate probable future economic
Page 1 of 6
182
benefits, and consequently all expenditure on developing such a web site shall be recognized as an expense
when incurred.
Summary: If Website is capable of earning direct revenues from orders to be placed; then recognize as an
intangible asset; however, if website is developed solely for the purpose of advertisement and promotion
of products; all expenditure, items must be recognized as an expense.
Stages in Website Development:[para 9]

a) Planning stage:
The Planning stage is similar in nature to the research phase in IAS 38. Expenditure incurred in this
stage shall be recognized as an expense when it is incurred.
b) Application and Infrastructure development stage, Graphical Design stage and content
development stage:
The Application and Infrastructure Development stage, the Graphical Design stage and the Content
Development stage, to the extent that content is developed for purposes other than to advertise and promote
an entity’s own products and services, are similar in nature to the development phase in IAS 38.
Expenditure incurred in these stages shall be included in the cost of a web site recognized as an
intangible asset. For example, expenditure on purchasing or creating content (other than content that
advertises and promotes an entity’s own products and services) specifically for a web site, or expenditure
to enable use of the content (e.g. a fee for acquiring a license to reproduce) on the web site, shall be included
in the cost of development when this condition is met. However, in accordance with IAS 38, past expenses
are recognized as an expense shall not be recognized as part of cost of an intangible asset at a later date.
c) Content development stage:

Expenditure incurred in the Content Development stage, to the extent that content is developed to
advertise and promote an entity’s own products and services (e.g. digital photographs ofproducts), shall
be recognized as an expense when incurred. For example, when accounting for expenditure on
professional services for taking digital photographs of an entity’s own products and for enhancing their
display, expenditure shall be recognized as an expense as the professional services are received during the
process, not when the digital photographs are displayed on the web site.
d) Operating stage:
The Operating stage begins once development of a web site is complete. Expenditure incurred in thisstage
shall be recognized as an expense when it is incurred
A web site that is recognized as an intangible asset shall be measured after initial recognition by
applying the requirements of IAS 38.72–.87(means either at cost or revaluation model)
The best estimate of a web site’s useful life should be short.
Example of application of SIC -32

Stage/nature of expenditure Accounting treatment
Page 2 of 6
183
Planning
 Undertaking feasibility studies Recognize as an expense when incurred
 Defining hardware and software
specifications
 Evaluating alternative products and
suppliers
 Selecting preferences
Application and infrastructure development
 Purchasing and developing hardware Apply the requirement of IAS 16
 Obtaining a domain name Recognize as an expense when incurred, unless the

 developing operating software (e.g. expenditure can be directly attributed to preparing
operating system and server software) the web site to operate in the manner intended by
 developing code for the application management, and the website meets the recognition
 installing developed applications on the criteria in IAS 38.21 and IAS 38.57
web server
 stress testing
Graphical design development
 designing the appearance (e.g. layout and Recognize as an expense when incurred, unless
colour) of web pages the expenditure can be directly attributed to
preparing the web site to operate in the manner
intended by management, and the web site meets
the recognition criteria in. IAS 3S.21 and IAS
38.57
Content development
 Creating, purchasing, preparing (e.g. Recognize as an expense when incurred in
creating links and identifying tags) and accordance with IAS 38.69(c) to the extent that
uploading information either textual or content is developed to advertise and promotes an
graphical in nature, on the web site before entity’s own products and services (eg digital
the completion of the web site’s photographs of products). Otherwise recognize as
development. Examples of content include an expense when incurred, unless the expenditure
information about an entity , products or can be directly attributed to preparing the web site
services offer for sale, and topics that to operate in the manner intended by management,
subscriber access and the web site meets the recognition criteria in
IAS 38.21 and IAS 38.57
Operating (the web site)

 updating graphics and revising content Assess whether it meets the definition of an
 adding new functions, features and content intangible asset and the recognition criteria set
 registering the website with search
out in IAS 38.18, in which case the expenditure
engines is recognized in the carrying amount of the web
 backing up data site asset, otherwise expense. Subsequent
 reviewing security access expenditure can only be capitalized, if they meet
 analyzing usage of the web site the relevant recognition criteria.
Page 3 of 6
184
Other
 selling, administrative and other
general overhead expenditure unless it
can be directly attributed to preparing
the web site for use to operate in the
manner intended D)management Recognize as an expense when incurred
 clearly identified inefficiencies and
initial operating losses incurred before
the web site achieves planned
performance (e.g. false start testing]
 training employees to operate the website
Point to remember: All expenditure on developing a website solely or primarily for promoting and
advertising an entity’s own products and services is recognized as an expense when incurred.
Page 4 of 6
185
Extra Practice Questions:
Q.1
Zinc Limited (ZL), a broadcasting company. Following information pertains to ZL’s intangible assets:
(i) On 1 January 2018, ZL bought an incomplete research and development project from Bee Tech at its
fair value of Rs. 90 million. The purchase price was analysed as follows:
Rs. in million
Research 30
Development
60
Subsequent expenditures incurred on this project are as follows:
Rs. in million
Further research to identify possible markets 10
Development 48
Recognition criteria for capitalization of development was met on 1 March 2018. All costs are incurred
evenly from 1 January 2018 till project completion date i.e. 31 August 2018. It is expected that newly
developed technology will provide economic benefits to ZL for the next 10 years.
(ii) On 31 December 2018, ZL launched its new website for online streaming of TV shows, movies and web
series. The website’s content is also used to advertise and promote ZL’s products. The website was
developed internally and met the criteria for recognition as an intangible asset. Directly attributable costs
incurred for the website are as follows:
Rs. in
million
Undertaking feasibility studies 3
Evaluating alternative products 1
Acquisition of web servers 16
Registration of domain names 2
Stress testing to ensure that website operates in the intendedmanner 3
Designing the appearance of web pages 5
Development cost of new content related to:
 online streaming 11
 advertising and promoting ZL’s products 8
Advertising of the website 6
(iii) During 2018, the licensing authority intimated that broadcasting license of one of ZL’s channels willnot
be further renewed. The license is renewed after every five years.
ZL had obtained this license for indefinite period on 1 January 2012 by paying Rs. 150 million. Upto
last year, this license was expected to contribute to ZL’s cash inflows for indefiniteperiod.
As on 31 December 2018, the recoverable amount of this license was assessed as Rs. 105million.
Required:
In accordance with the requirements of IFRSs, prepare a note on intangible assets, for inclusion in ZL’s
financial statements for the year ended 31 December 2018 in respect of the above intangible assets. (‘Total’
column is not required)
(15)
Page 5 of 6
186
A. Zinc Limited
Intangible assets:
Research & Website License
Development
-------- Rs. In million ---------
Gross carrying amount
Opening - - 150.00
Additions 126 21.00 -
(90+48 × 6/8) (2+3+5+11)
Disposal - - -
Closing Balance 126 21 150
Acc. Amortization/Impairment -
Opening Balance - - -
Amortization 4.20 - 37.50
[126/10 × 4/12] (150/4)
Impairment - - 7.50
[105-112.5(150 –
37.5)]
Closing Balance 4.2 - 45
Carrying Amount 121.80 21.00 105.00
Useful life 10 NA 4
Amortized method Straight line NA Straight line
Page 6 of 6
187
CONSOLIDATION
Company “A” purchased more than 50% shares of company “B”
Company “A” is parent/holding Company of company “B”
Company “B” is the subsidiary of company “A”
In this case parent has control over subsidiary’s decision making.
According to IFRS-3 following set of financial statements are to be prepared in this case:
1. Separate financial statements of parent company;
2. Separate financial statements of subsidiary; and
3. Consolidated financial statements by parent assuming as if parent and subsidiary are a
combined entity (means the financial statements of a group presented as if they are single
economic entity).
Illustration: Single economic entity
A Limited (a car manufacturer) buys 100% of B Limited (an automotive part manufacturer).
The 100% ownership gives A Limited complete control over B Limited.
A Limited’s business has changed as a result of buying B Limited.
It was a car manufacturer. Now it is a car manufacturer and a manufacturer of automotive parts.
The two parts of the business are operated by two separate legal entities (A Limited and B Limited).
However, the two parts of the business are controlled by the management of A Limited.
In substance, the two separate legal entities are a single economic entity.
Definitions:
Group: A parent and its subsidiaries
Parent: An entity that controls one or more entities.
Subsidiary: An entity that is controlled by another entity.
In the vast majority of cases obtaining a controlling interest means buying shares which give the
holder more than 50% of the voting rights in the other company.
Illustration: Wholly owned subsidiary
A owns 100% of B’s voting share capital. This 100% holding is described as a controlling interest and
gives A complete control of B. B would be described as a wholly owned subsidiary.
A company does not have to own all of the shares in another company in order to control it.
Illustration: Partly owned subsidiary

A owns 80% of B’s voting share capital. This 80% holding is described as a controlling interest and
gives a complete control of B. B would be described as a partly owned subsidiary. Other parties own
the remaining 20% of the shares. They have an ownership interest in B but do not have control.
This is described as a non-controlling interest.
Non-controlling interest (NCI) is defined by IFRS 10 as: “the equity in a subsidiary not attributable…
to a parent.”
188
Company A Company B Consolidation A+B
1. Goods sold by Company A to Company B for Rs. 100,000
Entry:
Co. B 100,000 Purchases 100,000 If the businesses are combined, it is neither a
Sales 100,000 Co. A 100,000 purchase nor a sale. Similarly, it is neither
receivable nor payable. So entry will be
(Co.B is debtor) (Co. A is creditor) cancelled out.
2. Co. A has given a loan of Rs. 600,000 to Co. B

Loan receivable - Co B 600,000 Cash 600,000 If the businesses are combined
Cash 600,000 Loan payable - Co A 600,000 then it is an Internal receivable
and payable therefore
cancelled out
3. Company A purchased shares of company B for Rs. 700,000

Investment 700,000 Cash 700,000 In combined SOFP it is an internal investment
Cash 700,000 Share Capital 500,000 and issue of shares. So cash will be cancelled
Share Premium 200,000 and remaining entry will be reversed
Suppose shares were issued at Share Capital 500,000
premium Share Premium 200,000
Investment 700,000
4. Company B declared dividend and suppose share of dividend payable to Company A is Rs.
200,000
Dividend receivable 200,000(From B) Dividend 200,000 If we combine the business, then
Dividend income 200,000 Dividend payable 200,000 receivables and payables will be
(to Co. A) cancelled out. So entries will be
cancelled out
Equity = Total Assets – Total Liabilities or

Equity = Net Assets or
Equity = Share capital + Reserves
(Reserve includes Share premium, retained earnings, general reserves and capital reserves etc.)
189
Example (When 100% acquisition by parent company and the date of acquisition of shares and
the date of consolidation are same.)
 P acquired 100% of the equity shares of S on incorporation of S

 The date of acquisition of shares was 31-12-2001
 The cost of investment was Rs. 120,000
 S had net assets of Rs. 120,000 at the date of acquisition.
The Statement of financial position of P and S at 31-12-2001 were as follows:
P S
Rs. Rs.
Non-Current Assets:
Property, Plant and Equipment 640,000 125,000
Investment in S at cost 120,000 -
Current Assets: 140,000 20,000
900,000 145,000
Equity:
Share Capital 200,000 80,000
Share Premium 250,000 40,000
Retained Earnings 350,000
800,000 120,000
Current Liabilities: 100,000 25,000
900,000 145,000
Required: Consolidated statement of financial position at 31-12-2001
Note:
1. The date at which shares are purchased by parent is called as acquisition date.
2. The date at which consolidated statement of financial position is prepared is called as
consolidation date.
3. It is always assumed that before consolidation all accounting adjustments in the separate
financial statements of parent and subsidiary should have been correctly made and recorded
unless otherwise mentioned.
Important points to remember:
Parent purchased shares in subsidiary means parent has purchased net assets of subsidiary upto its
shareholding.
Therefore, we compare net assets of subsidiary at the date of acquisition with cost of investment and
then cancel them. E.g in the above question
Net asset of S at the date of acquisition (Share capital + Share premium) = 120,000
Cost of investment of shares of parent in S is = 120,000
It means parent has paid exactly the amount equal to its share in the net asset of S. Finally, the
consolidation entry becomes
Share premium 40,000
Investment in S 120,000
190
Solution
P Group
Consolidated statement of financial position at 31-12-2001
Non-Current Assets: Rs.
Property, Plant and equipment (640+125) 765,000
Current Assets (140+20) 160,000
925,000
Equity:
Share Capital (Parent Co. only) 200,000
Share Premium (Parent Co. only) 250,000
Consolidated Retained Earnings 350,000
800,000
Current Liabilities (100+25) 125,000
925,000
Note: Consider that share capital and share premium in the statement of financial position of S and
investment in S appearing in statement of financial position of P are not shown in consolidated
statement of financial position (because of cancellation).
Example (When there is 100% acquisition of subsidiary and the dates of acquisition and
consolidation are different.)
 P acquired 100% of the share capital of S on 1-1-2001 for Rs. 200,000 (cost of investment)
 The balance of retained earnings of S was Rs. 80,000 at this date.
The Statement of financial position of P and S at 31-12-2001 were as follows:
P S
Rs. Rs.
Non-Current Assets:
Property, Plant and equipment 680,000 245,000
Investment in S at cost 200,000
Current Assets: 175,000 90,000
1,055,000 335,000
Equity:
Retained Earnings 470,000 140,000
900,000 260,000
Current Liabilities 155,000 75,000
1,055,000 335,000
Required:
Consolidated Statement of financial position as at 31-12-2001
 Retained earnings can be categorized as pre-acquisition retained earnings and post-acquisition
retained earnings.
Pre-acquisition retained earnings: Which are at the date of acquisition. Profits which are earned
before acquisition (i.e. Rs 80,000)
Post-acquisition retained earnings: Which are earned after the date of acquisition till the statement
of financial position date (i.e Rs 140,000 – Rs 80,000 = Rs 60,000)
191
 If question is silent then assume no change in the share capital and share premium since
acquisition till consolidation date (means statement of financial position date).
 While consolidation we calculate Net Assets (Share Capital + Reserves) of subsidiary at the date
of acquisition and compare it with cost of investment of parent company (and then cancel them).
Net Assets of S at date of acquisition = Share Capital + Share Premium + Retained Earnings
200,000 = 30,000 + 90,000 + 80,000
Consolidation Entry:
Share Capital of S 30,000
Share Premium (S) 90,000
*Retained earnings (S) 80,000
Investment in S 200,000
*(It should be pre-acquisition retained earnings.)

Solution
P Group
Consolidated Statement of financial position
As at 31-12-2001 Rs.
Non-Current Assets:
Property, Plant and equipment (680 + 245) 925,000
Current Assets (175 + 90) 265,000
1,190,000
Equity:
Share Capital (Parent only) 150,000
Share Premium (Parent only) 280,000
Consolidated Retained earnings* (470,000+60,000) 530,000
960,000
Current Liabilities: (155 + 75 ) 230,000
1,190,000
*Parent’s retained earnings + parents share in post-acquisition retained earnings of S
= 470,000 + 60,000(140,000 – 80,000)
= 530,000
192
Partial Acquisition of Subsidiary by the Parent
Suppose
In Subsidiary
Parent has Others has
80% Shares 20% Shares

(These others are called as non-controlling interest (NCI))
In that case, net assets of subsidiary are distributed between parent’s share and NCI’s share according
to their respective ratio of shareholding.
Before going further, remember that we compare net assets of subsidiary at the date of acquisition
with the cost of investment of the parent in subsidiary (and cancel them).
If the cost of investment is more than the parent’s share in *the fair value of subsidiary’s net assets
at the date of acquisition, then the balance will be Goodwill. It will be shown as non-current asset
in consolidated Statement of financial position.
*If the question is silent then carrying amounts are equal to fair value.
Example
P acquired 80% of S on 1-1-2001 for Rs. 230,000 (cost of investment)
The retained earnings of S were Rs. 100,000 at that date.
It is policy of P to recognize NCI at the date of acquisition at a proportionate share of net assets.
The statement of financial position of P and S as at 31-12-2001 were as follows:
P S
Rs. Rs.
Assets:
Other assets 570,000 240,000
800,000 240,000
Equity:
Share premium 100,000 20,000
Retained earnings 440,000 125,000
740,000 195,000
Current Liabilities 60,000 45,000
800,000 240,000
Required: Prepare consolidated statement of financial position as at 31-12-2001
193
Solution
P Group
Consolidated Statement of Financial Position
As at 31-12-2001 Rs.
Assets:
Goodwill 94,000
Other Assets [570+240] 810,000
904,000
Equity:
Share Capital 200,000
Share Premium 100,000
Consolidated retained earnings [440,000 + 20,000 (w-1)] 460,000
Share of parent (in total equity of combined business) 760,000
Share of NCI (34,000 + 5,000) (w-1) 39,000
Total equity (of combined business) 799,000
Current Liabilities (60,000+45,000) 105,000
904,000
(W-1) Analysis of equity of S:

P (80%) NCI (20%)
At acquisition (1-1-2001)
Net assets at the date of acquisition 170,000 136,000 34,000
Paid by parent (cost of investment) 230,000
Goodwill (balancing figure) 94,000
Change in equity after acquisition till the SOFP date:
Retained earnings (125,000 - 100,000) 25,000 20,000 5,000
(W-2) Consolidation Entry on 1-1-2001

1. Share Capital (80%) 40,000
Share premium (80%) 16,000
Retained earnings (80%) 80,000 (80% of pre-acquisition retained
earnings)
Investment 230,000
2. Transfer of net assets to NCI on 1-1-2001
Share capital (20%) 10,000
Share premium (20%) 4.000
Retained earnings (20%) 20.000
NCI (W-1) 34,000
A compound entry can be made from the above two entries as follows
Investment 230,000
194
Non-controlling interest 34,000

 By investing in subsidiary, Parent effectively purchased net assets of subsidiary up to its
shareholding.
 Therefore first step is to identify whether purchase consideration (cost of investment) is more
or less than parent’s share of F.V of net assets of subsidiary at the date of acquisition
 If question is silent then assume that carrying amount of net assets is equal to FV.
If cost of investment is more than parent’s share If cost of investment is less than parent’s share of
of F.V of Net assets of S, then difference is F.V of net Assets of S, then the difference is gain
Goodwill. on bargain purchase.
It is not amortized but tested for impairment It is recognized in consolidated SOCI as another
annually income.
In only consolidated SOFP is prepared, then
added to consolidated retained earnings.
(Question 3 on page No. 17)
 While consolidation, it is important to identify equity at the date of acquisition which will be
used to calculate Goodwill or gain on bargain purchase.
 If parent acquires subsidiary when it is incorporated, then its equity (net assets) will comprise
of share capital (and share premium, if any) at the date of acquisition. There will be no
balance of retained earnings.
 If parent acquires subsidiary after it is incorporated, then its equity will comprise of share
capital, share premium, retained earnings and other reserves (if any) at the date of acquisition.
 If consolidation date is after some time from acquisition date, then pre-acquisition and post-
acquisition equity needs to be separated.
 Equity of subsidiary at acquisition date (Pre-acquisition equity) should be used to calculate
Goodwill or gain on bargain purchase.
 Only post-acquisition changes in equity of subsidiary are included in consolidated retained
earning up to parent’s share in subsidiary
Non-Controlling Interest (NCI):
When a parent acquires less than 100% shares in a subsidiary, the remainder of shares in subsidiary
are held by other shareholders. These are called Non-Controlling Interest (NCI). Figure of NCI is
recognized in the equity of consolidated statement of financial position to show their ownership
interest in net assets of subsidiary.
195
Acquisition of subsidiary during the period:
Example
P bought 70% of S on 31-3-2001
S’s profit for the year was Rs. 12,000
The statement of financial position of P and S at 31-12-2001 is as:
P S
Rs. Rs.
Property, plant & equipment 100,000 20,000
Investment in S 50,000 -
Other assets 30,000 12,000
180,000 32,000
Liabilities 10,000 1,000
180,000 32,000
Required: Consolidated statement of financial position as at 31-12-2001
Solution:
P Group
Consolidated statement of financial position as at 31-12-2001
Non-current assets: Rs.
Property, plant & equipment (100+20) 120,000
Goodwill 34,600
Other assets (30+12) 42,000
196,600
Equity:
Consolidated retained earnings (160,000+6300) 166.300
176.300
Non-controlling Interest (6,600+2,700) 9,300
Total equity 185,600
Current liabilities (10+1) 11,000
196,600
W-1 Analysis of equity of S Parent (70%) NCI (30%)

At acquisition 31-3-2001
Share Capital 1,000
Retained earnings (w-2) 21,000
22,000 15,400 6,600
Cost of investment 50,000
Goodwill 34,600
Change since acquisition till SOFP date:
Retained earnings 9,000 6,300 2,700
W-2 Pre-acquisition retained earning
196
If question is silent, then assume that profit is evenly earned during the year. In this question, means
Rs. 1,000 (12,000/12) is earned every month.
The amount of retained earnings of S given In question includes profit for the whole year. If we
deduct this profit then we will get the figure of retained earnings at the start of the year. Therefore we
will calculate pre-acquisition retained earnings at 31-3-2001 as follows:
Retained earnings on 1-1-2001 Rs.
(30,000-12,000) 18,000
Add: Profit upto 31-3-2001
(12,000/12) x 3 3,000
Retained earnings as on 31-3-2001 21,000
Journal entries
Consolidation entry:
Share Capital 1,000
Goodwill (Balancing Figure) 34,600
Investment 50,000
NCI 6,600
Q.1 HALL
Statements of financial position at 31 December 2015
Hall Stand
Assets Rs. 000 Rs. 000
Non-current assets
Property, plant and equipment 35,000 20,000
Investment in Stand 12,000 —
Current assets 16,000 14,000
63,000 34,000
Equity and liabilities
Capital and reserves
Share capital 10,000 4,000
Non-current liabilities 23,000 16,000
8% Debenture loans 20,000 9,000
Current liabilities 20,000 9,000
63,000 34,000
On 1 January 2013 Hall acquired 75% of Stand for Rs. 12,000,000. At that date the balance on
Stand’s retained earnings was Rs. 8,000,000.
Required
Prepare the consolidated statement of financial position of Hall as at 31 December 2015. [QB#4.1]
197
Q.2 HYMN
The following are the summarized statements of financial position of a group of companies as at 31
December 2015.
Hymn Psalm
Assets Rs. Rs.
Non-current assets
Investment 85,000
410,000 120,000
Equity
255,000 99,000
410,000 120,000
Hymn purchased 80% of Psalm’s shares on 1 January 2015 when there was a credit balance on that
company’s retained earnings of Rs. 20,000.
Required
Prepare the Hymn group consolidated statement of financial position as at 31 December 2015.
[QB#4.3]
Fair value Adjustments
Goodwill is the excess of cost of investment over parents share in FV of net assets of subsidiary at the
date of acquisition. The balance sheet of a subsidiary at the date it was acquired may not be a guide to
the FV of net assets. E.g. the market value of a building may be different but it may appear in the
balance sheet at historical cost less accumulated depreciation. Therefore’ before calculating goodwill
carrying amount must be same as their FV.
(a) If FV adjustment has not been made in the books of the subsidiary at the date of acquisition, the
following entries should be made at that date:
If revaluation surplus If revaluation loss

Asset xxx Revaluation Loss xxx
Revaluation surplus xxx Asset xxx
Depreciation adjustment: If fair value is more than carrying amount then extra depreciation has to
be charged in the books of S on the amount of difference from the date of acquisition till the date of
consolidated statement of financial position.
Depreciation xxxx
Accumulated depreciation xxxx
If only statement of financial position is to be prepared, then the effect of depreciation has to be
incorporated in retained earnings of subsidiary:
Retained earnings of S xxxx
Accumulated depreciation xxxx
198
Now consider that any change in retained earnings of subsidiary will affect both the consolidated
retained earnings and Non-Controlling Interest;
Therefore, finally the consolidation entry should be made as follows:
Consolidated retained XX
earnings
Non-controlling Interest XX
Accumulated depreciation / Asset X
X
This entry will be made with the amount of incremental depreciation because this amount would not
been charged after the date of acquisition till the reporting date (statement of financial position date).
Reversal entries will be made if there is a revaluation loss (means value of asset has decreased)
Example
P bought 80% of S 2 years ago on 1.1.2000.
At the date of acquisition S’s retained earnings stood at Rs. 600,000 and the fair value of its net assets
were Rs. 1,000,000. This was Rs. 300,000 above the carrying amount of the net assets at this date.
The revaluation was due to an asset that has remaining useful life of 10 years as at the date of
acquisition.
Statement of financial position of P and S as at 31-12-2001 as follows:
P S
Property, Plant and equipment 1,800,000 1,000,000
Investment in S at Cost 1,000,000 -
Other Assets 400,000 300,000
3,200,000 1,300,000
Retained earnings 2,900,000 1,000,000
3,200,000 1,300,000
Requirement:
Consolidated Statement of Financial Position as at 31-12-2001
Note: If the question is silent regarding revaluation entries, then assume that revaluation entries have
not been made.
199
Solution
P Group
Consolidated Statement of financial position As at 31-12-2001
Assets Rs.
PPE(1800+1000+300-60) 3,040,000
Goodwill 200,000
Other Assets 700,000
3,940,000
Equity and Liabilities:
Consolidated retained earnings (2900+320-48) 3,172,000
3,272,000
Non-controlling Interest (200+80-12) 268,000
3,540,000
3,940,000
(W-1) Analysis of Equity: P (80%) NCI (20%)
At acquisition:
700,000
Revaluation surplus 300,000
1,000,000 800,000 200,000
Payment by P 1,000,000
Goodwill 200,000
Change since acquisition:
(W-2) Entries:
a) Asset 300,000
b) Share Capital 100,000

Rev. Surplus 300,000
Goodwill (bal) 200,000
Investment 1,000,000
Non-controlling Interest 200,000
After these two entries, pre-acquisition surplus will cancel out just like pre-acquisition retained
earnings. Therefore, there is no question of transfer of surplus to retained earnings in subsequent
years.
c) Incremental depreciation because of revaluation
Consolidated retained earnings 48,000
NCI 2,000
Accumulated depreciation/Asset 60,000
200
(300,000/10 x 2)
(b) If fair value adjustment has already been incorporated in the subsidiary’s books at the date of
acquisition, then pre-acquisition surplus should be taken in the calculation of goodwill or gain on
bargain purchase. Any post acquisition surplus will be distributed just like post acquisition
retained earnings between the parent and non-controlling Interest (Q. 21).
Adjustment of un-realized profits:
Example
First year of operation
P S Combined
Sales 150 220 220
Purchases 100 150 100
Closing Stock - - -
Cost of Sales (100) (150) (100)
Gross Profit 50 70 120
Explanation of the example:
We have to understand two terms:
Unrealized Profits:
A profit which is intergroup/inter company (earned by parent from subsidiary or vice versa).
Realized Profits:
A profit which has been earned from a third party (earned from a party outside the group).
Now explanation of the above example.
 Parent sold goods to its subsidiary for Rs. 150.
 These goods cost parent Rs. 100.
 All goods purchased by subsidiary from parent are sold to third parties for Rs. 220.
 While consolidation, we will take that sale price on which goods are sold to third parties.
Similarly purchase price will be that price on which group purchased from an outsider.
 So, Rs. 120 is the realized profit for the group (which includes profit earned by parent Rs 50
as well as profit earned by subsidiary Rs 70)
 Rs. 50 was unrealized profit when earned by P from S but when the S sold the goods to an
outsider this 50 has also been realized by the group. It means that if all the stock is sold to a
third party then unrealized profit is also converted into a realized profit and therefore there is
no need of any adjustment.
If however suppose S has not yet sold the goods to an outsider then profit of parent amounting to Rs
50 is unrealized with respect of group as a whole. Similarly stock in S’s statement of financial
position is overstated by Rs 50, with respect to group as a whole.
Conclusion:
Group as a whole should not make profit while transacting with each other. It is quite possible that the
parent makes a sale of inventories or other assets to subsidiary or vice versa (at a profit in the separate
financial statements). Therefore, while consolidating, this profit has to be eliminated and realized
profit for the group is only that which is made from third parties (because for consolidation purposes
group companies are treated as a single entity.)
Sale of Goods:
201
The problem of unrealized profit will not arise if whole of stock is sold to outside parties. This
problem arises where some of the stock is still in statement of financial position of either the parent or
the subsidiary.
Sale by parent to subsidiary:
In this case, profit is in the parent’s books and stock is in the subsidiary’s books. So, we need to adjust
consolidated retained earnings and stock of the subsidiary.
Consolidated retained earnings X X
Stock XX
(With the amount of unrealized profit within stock)
[Non-controlling Interest will not be affected by this entry as it has no share in profits of parent].
Sale by subsidiary to parent:
In this case, profit is in subsidiary’s books and stock is in the parent’s books.
Non-controlling Interest XX
Stock XX
(Non-controlling Interest will be affected by this entry as it has share in profits of subsidiary)
Example
P bought 80% of S 2 years ago. At the date of acquisition, retained earnings of S stood at Rs. 16,000.
During the year, S sold goods to P for Rs. 20,000 which gave S a profit of Rs. 8,000.
P still held 40% of these goods at the year end.
Statement of financial position of P and S as at 31-12-2001 is as follows:
P S
Property, plant & equipment 100,000 41,000
Other Assets 110,000 50,000
260,000 91,000
260,000 91,000
Requirement: Consolidated Statement of financial position as at 31-12-2001
Solution
As at 31-12-2001
Rs.
Property, plant & equipment 141,000
Goodwill 13,200
Other Assets (110+50-3.2) 156,800
311,000
Consolidated retained earnings (200+32 -2.56) 229,440
202
279,440
Non-controlling Interest (9200+8000-640) 16,560
296,000
Current Liabilities 15,000
311,000
(W-1) Analysis of equity:

At acquisition: P (80%) NCI (20%)

46,000 36,800 9,200
Goodwill 13,200
Change Since acquisition:
(W-2) Elimination of unrealized Profit

Consolidated retained earnings – 80% 2,560
Non-controlling Interest 20% 640
Stock 3200
(20,000 X 40%) X 40/100 = 3200
Calculation of margin on sales: 8,000/20,000 x 100 = 40% of sale
Cash in transit / cheque in transit
Suppose S paid cash to H, then S will pass the following entry:
Receivable from H XX
Cash XX
On receipt of cash from S then H will pass the following entry:
Cash XX
Payable to S XX
Scenario-1
Keeping in mind the above two entries, assume if cash is sent by S but not received by H then:
S should have already made the entry i.e:
Cash XX
So, reconciling entry will be made by H at the end of the accounting period as follows:
Cash in transit X X
Payable to S XX
Scenario-2
If cash is returned by H to S, then entry would have been made by H as follows:
203
Payable to S XX
Cash XX
Assuming that cash is not yet received by S then in this case, reconciling entry will be made by S as
follows:
Cash in transit X X
Q.3 HAIRY
The summarized statements of financial position of Hairy and Spider as at 31 December 2015 were as
follows.
Hairy Spider
Rs. 000 Rs. 000
Assets
Non-current assets
Investments 55,000 -
Current assets
Cash 11,000 4,000
Investments - 3,000
Trade receivables 72,600 19,100
Current account – Hairy - 3,200
Inventory 17,000 11,000
275,600 100,300
Share premium 20,000 -
Capital reserve 23,000 16,000
Trade payables 38,000 17,000
Current account — Spider 2,700 -
275,600 100,300
The following information is relevant.
(1) On 31 December 2012, Hairy acquired 48,000 shares in Spider for Rs. 55,000,000 cash.
Spider has 60,000 shares in total.
(2) The inventory of Hairy includes Rs. 4,000,000 goods from Spider invoiced to Hairy at cost
plus 25%.
(3) The difference on the current account balances is due to cash in transit.
(4) The balance on Spider’s retained earnings was Rs. 2,300,000 at the date of acquisition. There
has been no movement in the balance on Spider’s capital reserve since the date of acquisition.
Required
Prepare the consolidated statement of financial position of Hairy and its subsidiary Spider as at 31
December 2015. [QB#5.2]
204
Q.4 HANG
On 31 December 2012, Hang acquired 60% of Swing for Rs. 140,000. At that date Swing had a
retained earnings balance of Rs. 50,000 and a share premium account balance of Rs. 49,000.
The following statements of financial position have been prepared as at 31 December 2015.
Hang Swing
Assets Rs. Rs.
Non-current assets
Investment in Swing 140,000
630,000 376,000
Equity
Share premium 25,000 49,000
405,000 219,000
630,000 376,000
Required
Prepare the consolidated statement of financial position of Hang and its subsidiary as at 31 December
2015. [QB#4.4]
Q.5 HASH
Hash Stash
Rs. 000 Rs. 000
Investment in Stash (80%) 100,000 -
Sundry assets 207,500 226,600
307,500 226,600
307,500 226,600
Hash purchased the shares in Stash on 30th September 2015.

Stash’s retained profit for the year ended 31st December 2015 was Rs. 24,000,000.
Required
Prepare the consolidated statement of financial position at 31 December 2015. [QB#4.5]
Q.6 HASSLE
Hassle Strife
Rs. Rs.
Investment in Strife 60,000 —
Sundry assets 247,500 226,600
307,500 226,600
307,500 226,600
Hassle bought 80% of Strife when the balance on Strife’s retained profit was Rs. 50,000.
Required
205
Prepare the consolidated statement of financial position at 31 December 2015. [QB#4.2]
Dividend adjustments
(a) If dividend are not recorded then:
Suppose
H books S Books
Dividend (CRE) 3,000 Dividend CRE-90% 1,800
Dividend payable 3,000 NCI-10% 200
(H declared dividend) Dividend payable 2,000
(S declared dividend)
Dividend receivable 1,800
Dividend Income (CRE) 1,800
X
(Dividend income from S to be recorded by H)
Dividend receivable by H and dividend payable by subsidiary of Rs. 1,800 will be cancelled out and
any amount payable to outsiders of group (NCI) should be disclosed as current liability.
(b) If dividends are already recorded, then no further adjustment is required. Only cancel out the
related dividend payable and receivable appearing in separate financial statements of parent
and subsidiary.
Q.7 HAIL
The following are the draft statements of financial position of Hail and its subsidiary Snow as at 31
December 2015.
Hail Snow
Rs. 000 Rs. 000
Assets
Non-current assets
Investments 68,000
Current assets
Cash 7,700 25,200
Snow current account 15,000 -
Inventory 56,200 36,200
400,400 192,200
Shareholders’ equity
Share premium - 5,000
Capital reserve - 20,000
285,400 116,200
Hail current account - 8,000
400,400 192,200
206
Notes
(1) Snow has 50,000 shares in issues. Hail acquired 45,000 of these on 1 January 2012 for a cost of
Rs. 65,000,000 when the balances on Snow’s reserves were
Rs. 000
Share premium account 5,000
Capital reserve -
(2) Hail declared a dividend of Rs. 3,000,000 before the year end and Snow declared one of Rs.
2,000,000. These transactions have not been accounted for.
(3) The current account difference is due to cash in transit.
Required
Prepare the consolidated statement of financial position as at 31 December 2015 of Hail. [QB#5.1]
Q.8 HALE
On 1 July 2012 Hale acquired 128,000 of Sowen’s 160,000 shares. The following statements of
financial position have been prepared as at 31 December 2015.
Hale Sowen
Rs. 000 Rs. 000
Investment in Sowen 203,000 —
Inventory at cost 112,000 74,400
Receivables 104,000 84,000
Bank balance 41,000 8,000
612,000 296,000
Payables 52,000 24,000
612,000 296,000
The following information is available.
(1) At 1 July 2012 Sowen had a debit balance of Rs. 11 million on retained earnings.
(2) Property, plant and equipment of Sowen included land at a cost of Rs. 72 million. This land had a
fair value of Rs. 100,000,000 at the date of acquisition.
(3) The inventory of Sowen includes goods purchased from Hale for Rs. 16 million. Hale invoiced
those goods at cost plus 25%.
Required
Prepare the consolidated statement of financial position of Hale as at 31 December 2015. [QB#5.4]
207
Q.9 HELLO
On 1 January 2014, Hello acquired 60% of the ordinary share capital of Solong for Rs. 110,000. At
that date Solong had a retained earnings balance of Rs. 60,000. The following statements of financial
position have been prepared as at 31 December 2015.
Hello Solong
Assets Rs. Rs.
Non-current assets
Investments in Solong 110,000
606,000 332,000

Capital and reserves
375,000 190,000
606,000 332,000
The fair value of Solong’s net assets at the date of acquisition was determined to be Rs. 170,000.
The difference between the book value and the fair value of the net assets at the date of acquisition
was due to an item of plant which had a useful life of 10 years from the date of acquisition.
Required
Prepare the consolidated statement of financial position of Hello and its subsidiary as at 31 December
2015. [QB#5.5]
208
Consolidated Income Statement
Example
Entity P bought 80% of S several years ago.
The income statement for the year ended 31-12-2001 is as follows:
P S
Rs. Rs.
Revenue 500,000 250,000
Cost of sales (200,000) (80,000)
Gross Profit 300,000 170,000
Other Income 25,000 6,000
Distribution Cost (70,000) (60,000)
Administration expense (90,000) (50,000)
Other expenses (30,000) (18,000)
Finance Costs (15,000) (8,000)
Profit before Tax 120,000 40,000
Income tax expense (45,000) (16,000)
Profit for the period 75,000 24,000
Requirement: Prepare consolidated income statement for the year ended 31-12-2001.
Solution:
P Group
Rs.
Revenue (500+250) 750,000
Cost of sales (200+80) (280,000)
Gross Profit 470,000
Other Income (25+6) 31,000
Distribution Cost (70+60) (130,000)
Admin expenses (90+50) (140,000)
Other expenses (30+18) (48,000)
Finance Cost (15+8) (23,000)
Income tax expense (45+16) (61,000)
Profit for the period 99,000
Attributed to:
Owners of the Parent 94,200
Non-controlling Interest (20% of Rs. 24,000) 4,800
99,000
209
Acquisition of subsidiary during an accounting period
Only post acquisition profits are consolidated when a parent acquires a subsidiary during a financial
year, the profits of the subsidiary have to be divided into pre-acquisition and post-acquisition profits.
Example:
Entity P acquired 80% of S on 1-10-2001. Year end is 31 December. It means 3/12 of the subsidiary’s
profit for the year is post-acquisition profits.
Income statement for 31-12-2001 is as follows:
P S
Revenue 400,000 260,000
Cost of sales (200,000) (60,000)
Gross profit 200,000 200,000
Other income 20,000 -
Distribution cost (50,000) (30,000)
Administration expense (90,000) (95,000)
Profit before tax 80,000 75,000
Requirement: Consolidated income statement for 31-12-2001

Solution
Consolidated Income Statement:
Working
P S (3/12) Consolidated
Revenue 400,000 65,000 465,000
Cost of sales (200,000) (15,000) (215,000)
Gross Profit 200,000 50,000 250,000
Other Income 20,000 - 20,000
Distribution cost (50,000) (7,500) (57,500)
Administration expenses (90,000) (23,750) (113,750)
Profit before tax 80,000 18,750 98,750
Tax expense (30,000) (3,750) (33,750)
Profit for the period 50,000 15,000 65,000
Attributed to:
Owner of Parent 62,000
Non-controlling Interest (15,000 x 20%) (3,000)
65,000
210
Before any further discussion PLEASE recall (from page no. 14 & 15):
Group as a whole should not make profit while transacting with each other. It is quite possible that the
parent makes a sale of inventories or other assets to subsidiary or vice versa (at a profit in the separate
financial statements). Therefore, while consolidating, this profit has to be eliminated and realized
profit for the group is only that which is made from third parties (because for consolidation purposes
group companies are treated as a single entity.)
Sale of Goods:
The problem of unrealized profit will not arise if whole of stock is sold to outside parties. This
problem arises where some of the stock is still in statement of financial position of either the parent or
the subsidiary.
In this case, profit is in the parent’s books and stock is in the subsidiary’s books. So, we need to adjust
consolidated retained earnings and stock of the subsidiary.
Stock XX
[NCI will not be affected by this entry as it has no share in profits of parent].
In this case, profit is in subsidiary’s books and stock is in the parent’s books.
NCI XX
Stock XX
If income statement is also prepared, then instead of the above, profit is reduced by increasing cost
of sales.
Cost of sales XX
Stock XX
(No adjustment is required in S’s profit while calculating profit attributable to NCI)
Cost of sales X X
Stock XX
(Adjust the profits of S while calculating profit attributable to NCI)
211
Example:
P acquired 80% of S 3 years ago.
During the year S sold goods to P for Rs. 50,000 at a mark-up of 25% on cost. At year end, P still had
15,000 of the goods in inventory.
Extracts of income statement for 31-12-2001 are as follows:
P S
Rs. Rs.
Revenue 800,000 420,000
Cost of sales (300,000) (220,000)
Gross Profit 500,000 200,000
Expenses (173,000) (123,000)
Required:
Consolidated income statement for 31-12-2001 and journal entries regarding intergroup sale and
elimination of unrealized profit.
Solution
Rs.
Revenue(800+420-50) 1,170,000
Cost of sales (300+220-50+3) (473,000)
Expenses (173+123) (296,000)
Attributable to:
Owners of Parent (bal) 386,200
Non-controlling Interest (77,000-3,000) x 20% 14,800
401,000
Journal Entries:
Cancellation of intergroup Sale/Purchase
Sales 50,000
Purchases 50,000
Elimination of unrealized profits
Cost of sales 3,000
Stock 3,000
(15,000 x 25/125)
212
Example: Fair Value and Depreciation Adjustment
P acquired 80% of S 3 years ago from the reporting date.
At the date of acquisition S had a depreciable asset with a fair value of Rs. 120,000 in excess of its
book value. This revaluation adjustment has not been made by the S in its books.
This asset had a useful life of 10 years at the date of acquisition.
Extracts of the income statement for the year to 31-12-2001 are as follows:
P S
Rs. Rs.
Revenue 800,000 420,000
Cost of sales (300,000) (220,000)
Gross Profit 500,000 200,000
Expenses (173,000) (163,000)
Requirement: Consolidated income statement

Analysis of example:
After acquisition 3 years ago, group has to recognize extra depreciation of Rs. 12,000 per year.
Therefore a total depreciation of 12000 x 3 = 36,000 should be recognized.
However, remember that only one year’s depreciation will be shown in income statement because
income statement is for the year. Remaining two years depreciation should be adjusted against
retained earnings in statement of changes in equity (to be discussed later on)
Solution
For the year to 31-12-2001 Rs.
Revenue (800,000+420,000) 1,220,000
Cost of sales (300,000+220,000+12,000) (532,000)
Expenses (173,000 + 163,000) (336,000)
Profit 352,000
Attributable to:
Owners of the Parent 347,000
Non-controlling Interest (37,000-12,000) x 20% 5,000
352,000
Entry:
Asset 120,000
Depreciation (Cost of sales) 12,000
Accumulated depreciation/Asset 12,000
213
Accounting For Goodwill:
Goodwill is carried as non-current asset in consolidated statement of financial position.
It is not depreciated or amortized because generally it has an indefinite useful life. Instead it is
subjected to an annual impairment review. If there is an impairment loss, then following entry is
required if only statement of financial position is prepared:
Consolidated retained earnings XXX
Goodwill XXX
(No effect on NCI if it is not measured at F.V)
If income statement also is prepared, then entry is:
Administrative expenses XXX
Goodwill XXX
(No effect on NCI if it is not measured at F.V)
Summary of discussion
When purchased Goodwill is impaired, the impairment does not affect the individual financial
statements of the parent or the subsidiary. Instead, it will affect only consolidated statement of
financial position and consolidated statement of comprehensive income.
If goodwill is impaired:
1. It is written down in value in the consolidated statement of financial position; and
2. The amount of write-down is charged as an expense in the consolidated statement of
comprehensive income normally in administrative expenses.
Example:Impairment of Goodwill
P acquired 80% of S 3 years ago.
Goodwill on acquisition was Rs. 200,000
The annual impairment test on G/W has shown it to have recoverable amount of only Rs. 175,000
Extracts of the income statement for the year 31-12-2001 are as follows:
P S
Rs. Rs
Revenue 800,000 420,000
Cost of sales (300,000) (220,000)
Gross Profit 500,000 200,000
Expenses (173,000) (163,000)
Requirement Consolidated Statement of Comprehensive Income as at 31-12-2001.
214
Solution
Sales (800+420) 1,220,000
Cost of sales (300+220) (520,000)
Expenses (173,000+163,000+25,000) (361,000)
Attributed to
Owners of Parent 331,600
Non-controlling Interest (37,000 x 20%) 7,400
339,000
Journal Entry:
Admin expenses 25,000
Goodwill 25,000
Comprehensive Example: Dividend + Goodwill + Sale of Goods + Depreciation Adjustment
P acquired 80% of S 3 years ago. Good will on acquisition was Rs. 80,000. The recoverable amount
of Good will at the year-end was estimated to be Rs. 65,000. This was the first time that the
recoverable amount of Good will had fallen below the amount of initial recognition.
S sells goods to P. The total sales in the year were 100,000. At year end P retains inventory from S
which had cost to S Rs. 30,000 but was in P’s books at Rs. 35,000.
The distribution cost of S includes depreciation of an asset which had been subjected to a fair value
increase of Rs. 100,000 on acquisition. This asset is being written off on a straight line basis over 10
years. Assume that revaluation adjustment has not been made in the books of S.
Statement of comprehensive income for 31-12-2001 is as follows:
P S
Rs’000’ Rs’000’
Revenue 1,000 800
Cost of sales (400)_ (250)_
Gross Profit 600 550
Distribution cost (120) (75)
Admin expenses (80)_ (20)_
400_ 455_
Dividend from S 80 -
Finance Cost (25)_ (15)_
Tax (45)_ (40)_
215
Profit after tax 410_ 400_
Consolidated Statement of Comprehensive Income:
Rs. 000
Revenue (1,000+800-100) 1,700
Cost of sales (400+250-100+5) (555)
1,145
Distribution Cost (120+75+10) (205)
Admin Expenses (80+20+15) (115)
Finance Cost (25+15) (40)
Tax (45+40) (85)
Profit after tax 700
Attributed to:
Owners of Parent (balancing figure) 623
Non-controlling Interest (400-5-10) x 20% (77)
700
Entries:
Cancellation of intergroup sales
Sales to P 100,000
Purchases from S 100,000
Elimination of unearned profit
Cost of sales 5,000
Stock 5,000
(As sale is made by S therefore NCI will be affected)
Extra depreciation:
Depreciation 10,000
Accumulated Depreciation/Asset 10,000
(100,000/10)
(As asset of S is revalued therefore NCI will be affected)
Dividend: It will be cancelled out in the following entries
P S
Dividend receivable 80,000 Dividend CRE 80,000
Dividend income 80,000 NCI 20,000
216
(Total dividend declared = 80 x 100/80 = 100)
Impairment loss
Impairment loss (admin expenses) 15,000
Goodwill 15,000
(as nothing is mentioned therefore NCI should not be at fair value, means impairment loss will not
effect NCI)
Q.10 HARRY
The following are the statements of profit or loss for the year ended 31 December 2015 of Harry and
its subsidiary Sally.
Harry Sally
Rs. 000 Rs. 000
Revenue 1,120 390
Cost of sales (610) (220)
Gross profit 510 170
Distribution costs (50) (40)
Administration costs (55) (45)
Operating profit 405 85
Investment income 20 4
Finance costs (18) (4)
Income tax expense (140) (25)
Profit for the year 267 60
Movement of retained earnings:

Rs. 000 Rs. 000
Retained profit brought forward 100 45
Profit for year 267 60
Dividends paid and proposed (50) (20)
Retained profit carried forward 317 85
The following information is relevant.

(1) Harry acquired 75% of Sally six years ago when Sally’s retained earnings were Rs. 9,000.
(2) Harry made sales to Sally totaling Rs. 100,000 in the year. At the year end the statement of
financial position of Sally included inventory purchased from Harry. Harry had taken a profit of
Rs. 3,000 on this inventory.
(3) Harry’s investment income includes Rs. 15,000 being its share of Sally’s dividends.
Required
Prepare a consolidated statement of profit or loss and a working showing the movement on
consolidated retained profit for the year ended 31 December 2015. [QB#6.1]
217
Q.10A HORN
Statements of profit or loss for the year ended 31 December 2015.
Horn Smooth
Rs. 000 Rs. 000
Revenue 304,900 195,300
Cost of sales (144,200) (98,550)
Gross profit 160,700 96,750
Operating costs (76,450) (52,100)
Operating profit 84,250 44,650
Investment income 10,500 2,600
Profit for the year 51,850 30,750
Statement of changes in equity (extracts) for the year ended 31 December 2015
Horn Smooth
Rs. 000 Rs. 000
Retained earnings brought forward 80,200 31,000
Proposed ordinary dividend (20,000) -
112,050 61,750
The following information is also available.
(1) Horn acquired 75% of the share capital of Smooth on 31 August 2015.
(2) *Negative goodwill of Rs. 3.8 million arose on the acquisition.
(3) Profits of both companies are deemed to accrue evenly over the year except for the investment
income of Smooth all of which was accrued and received in November 2015.
(4) Horn has bought goods from Smooth throughout the year at Rs. 2 million per month. At the
year-end Horn does not hold any inventory purchased from Smooth.
Required
Prepare the consolidated statement of profit or loss and a working showing the movement on
consolidated retained profit for the year ended 31 December 2015. [QB#6.2]
*Negative goodwill is another name of gain on bargain purchase.
Sale of Non-Current Asset between the group companies:
Sale by Parent:
Suppose a machine is sold by the parent to subsidiary. It had a WDV of 100and was sold for 150
resulting in gain of RS. 50 to parent. This gain is intergroup which needs to be eliminated.
In this case, profit is in the books of parent and asset is in the books of subsidiary. The adjusting entry
of gain (net of any depreciation effect) if only consolidated statement of financial position is prepared
should be recorded as follows:
CRE xxx
Non Current Asset xxx
If consolidated statement of comprehensive income is also prepared, then entry will be:
Gain on disposal xxx
(This entry will not affect Non-controlling Interest)
218
Reversal entries will be passed if there is a loss on disposal.
Sale by subsidiary:
Suppose a machine is sold by the subsidiary to parent. It had a WDV of 100and was sold for 150
resulting in gain of 50 to subsidiary. This gain is intergroup which needs to be eliminated.
In this case, profit is in the books of subsidiary and asset is in the books of parent. The adjusting entry
of gain (net of any depreciation effect) if only consolidated statement of financial position is prepared
should be recorded as follows:
CRE xxx
NCI xxx
If SOCI is also prepared, then entry will be:
Gain on disposal xxx
(With the amount of profit. This entry will affect NCI as well)
Reversal entries will be passed if there is a loss on disposal.
Example 1:
H owns 80% of S.
There was a transfer of an asset within the group for Rs. 15,000 on 1 January
20X3.
The original cost to H was Rs. 20,000 and the accumulated depreciation at the
date of transfer was Rs. 8,000.
Assets had a remaining useful life of 3 year on the date of transfer.
The effect of the above transfer in Consolidated Financial statements

for the year ended 31 December 20X3 would be:
Solution:
The amount of the adjustment would be:
Gain on disposal (carrying amount – sale proceeds )

(15,000 – 12,000) 3,000
Additional depreciation till reporting date (Gain
/remaining life) (3,000 / 3) (1000)
Net Un realized gain 2000
If the transfer was from H to S Dr Cr
219
Non-current asset 2,000
If the transfer was from S to H Dr Cr

NCI in the statement of financial position 400
Example 2:
H owns 80% of S.
There was a transfer of an asset within the group for Rs. 15,000 on 1 January 20X3.
The original cost to H was Rs. 30,000 and the accumulated depreciation at the date of transfer was Rs.
12,000.
Assets had a remaining useful life of 3 years on the date of transfer.
The effect of the above transfer in Consolidated Financial statements for the year ended 31
December 20X4 would be:
Solution:
The amount of the adjustment would be:
Loss on disposal (carrying amount – sale

proceeds ) (15,000 – 18,000) 3,000
Additional depreciation till reporting date (Loss
/remaining life) (3,000 x 2/3) (2,000)
Net Un realised loss 1,000
If the transfer was from H to S – Full journal

Consolidated financial statements Dr Cr
If the transfer was from S to H – Full journal

Consolidated financial statements Dr Cr
consolidated retained earnings 800
NCI in the statement of financial position 200
220
Q.11 Sale of good, sale of fixed assets and post-acquisition losses
As on 31-12-2008
H Ltd S Ltd
Non-current assets
Fixed assets 150,000 80,000
Cost of investment (60%) 100,000 ----
Current assets
Stocks 30,000 20,000
Other current assets 70,000 30,000
350,000 130,000
Equity
Share Capital (Rs.1 per share) 200,000 100,000
Reserves 150,000 30,000
350,000 130,000
The following additional information is also available:

1. H invested when reserves were Rs.50000. Acquisition date is 1-1-05.
2. During the year, “S” sold goods for Rs. 50,000 to “H” at profit of 25% on cost. Stock include
25,000 of goods purchased from “S”.
3. “H” sold a fixed asset to “S” for Rs 40,000 at a profit of 25% on sale price on 1-1-07.
4. Group charges depreciation on reducing balance method @20%.
Required: Prepare a Consolidated Statement of financial position as on 31.12.2008
Q.12 Question with statement of changes in equity
P acquired 85% of ‘S’ for Rs 150,000 on 1-1-08 when equity of S included:
I. Share Capital Rs 10,000
II. Retained Earrings Rs 100,000
On the date of acquisition, P believed that the plant owned by ‘S’ was undervalued by Rs 2,000. This
revaluation adjustment has not been incorporated by S. The trial balances of P and S for the year
ended 31.12.2009 are as follows:
Trail Balance
P S
Rs
R.E on 1-1-09 1,050,000 107,000
Account Payable 180,000 5,000
Plant 672,000 69,000
Intangible Asset 523,000 -
Account Receivable 45,000 60,000
Investment in ‘S’ 150,000 -
Assume Depreciation rate is 10% straight line.
Required: Prepare:
 Consolidated statement of financial position as on 31-12-09
221
 Consolidated statement of comprehensive income for the year ended 31-12-09
 Consolidated statement of changes in equity for the year ended 31-12-09
Q.13 On 1-10-2000, ‘H’ acquired 80% of ‘S’ for Rs 900,000. Summarized financial statements of both are
as follows:
Statement of profit or loss H S
Rs 000
Sales 1,200 1,000
Cost of Sales (650) (660)
Gross Profit 550 340
Operating Expenses (120) (88)
Finance Cost - (12)
Profit before Tax 430 240
Tax (100) (40)
Profit after Tax 330 200
Statement of financial position Rs 000

As on 31-03-2001
H S
PPE 620 660
Investment 920 10
Inventory 240 280
Accounts Receivable 170 210
Bank 20 40
1,070 1,200
Share Capital-Rs 1 each 700 150
Share Premium 600 -
1,750 850
8% debentures - 150
Trade Payable 170 155
Current Tax Payable 50 45
1,070 1,200
The following information is relevant:
i. The FV of S’s assets were equal to their BV with the exception of its land which had a FV of
Rs 125,000 in excess of its BV at date of acquisition.
ii. In post-acquisition period, ‘H’ sold goods to ‘S’ for RS 100,000 at 25% markup. ‘S’ had half
of these goods in inventory at year end.
iii. At 31-03-2001, impairment loss of goodwill was Rs 20,000.
iv. The current A/c’s of the two Co’s disagreed due to a cash remittance of Rs 20,000 to ‘H’ on
26-3-2001 not being received until after the year end. Before adjusting for this, ‘S’ debit
balance in H’s books was Rs 56,000.
v. It is the group’s policy to value Non-controlling interest at acquisition at its proportionate
share of the FV of the subsidiary’s identifiable net assets.
Required
1. Prepare consolidated statement of comprehensive income, consolidated statement of financial
position and consolidated statement of changes in equity for the year ended 31.03.2001 if
i. Acquisition date is 1-10-2000 (as in question)
ii. Acquisition date is 01-01-2001
iii. Acquisition date is 01-04-2000
222
2. Solve the same question by assuming as if only consolidated statement of financial position is
required (on the basis of acquisition date as per original question).
Important Points to Remember:

(1) If only consolidated SOFP is required then prepare working of analysis of equity upto the end
of the SOFP date; pass necessary accounting entries related to SOFP and then prepare the
consolidated SOFP.
(2) If consolidated SOFP and consolidated SOCI both are is required, then prepare working of
analysis of equity upto the end of the previous period, pass necessary accounting entries related
to income statement and SOFP then prepare income statement and then statement of charges in
equity. After all the working prepare consolidated SOFP.
(3) If only consolidated SOCI is required then prepare working of Analysis of equity upto the
calculation of goodwill or gain if information is available. The purpose is only to identify gain
on bargain purchase which is to be included in consolidated SOCI as an other income. Pass
necessary accounting entries related to income statement, and then prepare the consolidated
income statement.
(4) If consolidated SOCI and consolidated SOCE both are required; then prepare working of
analysis of equity upto the end of the previous period pass necessary accounting entries related
to consolidated SOCI and consolidated SOCE.
Measurement of NCI:
There are two methods of measurement of NCI:
1- Measure NCI at proportionate share of F.V of net assets attributable to NCI at the date of
acquisition. This method is called as Partial Goodwill Method as goodwill is recognized
only of parent.
2- Measure NCI at F.V of NCI at the date of acquisition. It is called as Full Goodwill Method,
as the goodwill of NCI is also recognized.
IFRS gives the entity an option of valuing NCI at its F.V. The concept behind this is that the NCI
in purchasing the shares would also have purchased goodwill in the subsidiary, but the traditional
method which is Partial Goodwill Method does not show goodwill of NCI.
The FV of NCI at the acquisition date:
 Can be given in question; or

 Needs to be calculated from given share price of the subsidiary just before the acquisition
If nothing is mentioned then use partial goodwill method.
Impairment of Goodwill if NCI is at F.V:
If only SOFP is prepared:
CRE
NCI
Goodwill
If income statement is prepared
Admin Expenses
Goodwill
223
(NCI will also be affected by this entry)
Q.14 You are provided with the following statement of financial position for SHARK and MINNOW:
Statement of financial position as on 31.10.2000
Assets: Rupees in “000”
Shark Minnow
Plant 325 70
Fixtures 200 50
Investment in Minnow 200 ---
Inventory 220 70
Receivables 145 105
Bank 100 ---
Total Assets 1190 295
Ordinary Shares (Rs. 1 per share) 700 170
915 220
Payables 275 55
Bank Overdraft --- 20
1190 295
The following additional information is available:
1- Shark purchased 70% of Minnow 4 years ago when retained earnings of Minnow were Rs
20,000.
2- Plant of Minnow having book value of Rs 50,000 was revalued to its Fair value of Rs 60,000.
The revaluation was not recorded in the accounts of Minnow. Depreciation is charged at 20%
using straight line method.
3- At 31-10-2000, the inventories of Minnow included Rs 45,000 of goods purchased from
Shark at the rate of 25% mark up.
4- Minnow owes Shark Rs 35,000 for goods purchased (means subsidiary’s payable to parent)
and Shark owes Minnow Rs 15,000(means parent’s payable to subsidiary).
5- It is the group’s policy to value the non-controlling interest at fair value. The market price of
shares of non-controlling shareholders just before the acquisition was Rs.1.5 per share.
Required: Consolidated Statement of financial position as at 31-10-2000.
Acquisition related costs: These are those costs that the parent incurs for the business combination.
For example, legal, accounting, valuation and other financial or consultancy fees.
These costs are not capitalized as part of cost of investment but expensed in the income statement of
the periods in which they are incurred.
A question may incorrectly capitalize the costs. You would have to correct this before consolidation.
Goods in transit:
Suppose parent sold goods to subsidiary for Rs. 100,000
Parent books Subsidiary books
Receivable from S 100, Purchases 100,000
000
Sales 100,000 Payable to P 100,000
If suppose parent sold goods to S but not yet received by S then S will make an entry of goods in
transit as follows:
224
Parent books Subsidiary books
Receivable from S 100, Goods in transit
000 100,000
Sales 100,000 Payable to P 100,000
However, goods are at sale price therefore profit is to be eliminated from the goods in transit. The
entry of profit elimination will only effect the parent’s share in profits. If however goods were sold by
subsidiary then parent as well as NCI’s share of profit will be affected.
Q.15 The following summarized Statement of financial position pertains to Alpha Limited (AL) and its
subsidiary Delta Limited (DL) as at 30-06-2014:
Rupees in millions
AL DL
Property, plant & equipment 460 200
Investment (2m shares of DL) 340 ---
Long term loan granted to DL 30 ---
Current Assets 595 400
1425 600
Share Capital (Rs.100 each) 600 250
Long Term borrowings 200 72
Current Liabilities 300 78
1425 600
Following additional information is available:
1- AL acquired investments in DL on 01-07-2013 when retained earnings of DL were Rs.140m
and the F.V of DL’s net assets was equal to their carrying amount.
2- Both Companies depreciate equipment at 10% on straight line Method. On 30-06-2014, Al
sold certain equipment to DL as detailed below:
Rupees in millions
Cost 40
Acc. Depreciation 30
Sale proceeds 25
3- Inter-company sale of goods are involved at a markup of 20%. The relevant details are as
under
Rupees in millions
AL’s inventory includes goods purchased from DL 27
DL’s inventory includes goods purchased from AL 24
Receivable from DL on 30-06-2014 19
Payable to AL on 30-06-2014 19
4- Long term loan was granted to DL on 01-07-2013. It is repayable after 5 years and carries
interest at 12% per annum payable on 30Th June and 31St December each year.
5- AL values Non-Controlling Interest at the acquisition date at its fair value which was Rs.80
million.
Required: Prepare a Consolidated Statement of financial position as at 30-06-2014.
Q.16 B acquired 60% of M’s ordinary share capital on 01-10-2002 at a price of 5.3 per share, when
the retained earnings of M were Rs.104m and general reserves were Rs.11m. Their statements of
financial positions as at 30.09.2006 are:
225
B M
Millions Millions
Non-current assets
Property, plant & equipment 2,848 354
Patents 45 ---
Investment in M 159 ---
Current assets
Inventories 895 225
Trade Debtors 1,348 251
Cash & Cash Equivalents 212 34
5,507 864
Share Capital (Rs.1 per share) 920 50
Retained Earnings 2,086 394
General Reserves 775 46
3,781 490
Non-current liabilities:
Long Term Borrowings 558 168
Current liabilities:
Trade & Other Payables 1,168 183
Current portion of long term loan --- 23
5,507 864
1- At the date of acquisition, M’s inventory had Fair value of Rs.8m above its Carrying amount.
This inventory had all been sold by 30-09-2006.
2- M’s Land & building had Fair value of Rs.26m above their carrying amount. Rs.20m is
attributable to building which had a remaining useful life of 10 years at the date of
acquisition.
3- It is the group’s policy to value NCI at full (fair) value. The F.V of NCI at acquisition was
Rs.86m.
4- Annual impairment tests have revealed cumulative Impairment losses relating to recognized
goodwill is Rs.20m to date.
Required: Prepare consolidated statement of financial position as at 30-09-2006
Q.17 Two Subsidiaries:
“H” has held shares in two companies “S” and “A” for a number of years. At 31-12-2004, they have
the following statement of financial position
Rupees in “000”
H S A
Non-current assets
PPE 370 190 260
Investments 218 --- ---
Current assets
Inventories 160 100 180
Trade Receivables 170 90 100
Cash 50 40 10
968 420 550
Share Capital (Rs. 1/ share) 200 80 50
Share Premium 100 80 30
Retained Earnings 568 200 400
868 360 480
Current liabilities
226
Trade Payables 100 60 70
968 420 550
Following is additional information:
1. “H” made investment in “S” and “A” Rs 128,000 and Rs 90,000 respectively.
2. The 48000 shares in “S” were acquired when “S’s” retained earnings were Rs 20,000.
3. The 35,000 shares in “A” were acquired when that company had retained earnings of Rs
150,000.
4. When “H” acquired its shares in “S”, the F.V of “S’s” net assets equaled their book values
with following exceptions:
PPE 50 Higher
Inventories 20 Lower (sold during 2004)
Depreciation arising on the fair value adjustment to non-current asset since this date is Rs 5,000.
5. During the year, “H” sold inventories to “S” for Rs 16,000 which originally cost “H” Rs
10,000. Three-quarter of these inventories have subsequently been sold by “S”.
6. No impairment losses on goodwill had been necessary by 31-12-2004.
7. It is group’s policy to value NCI at F.V. The F.V of NCI at acquisition was Rs 90,000 in S
and Rs 80,000 in A.
Required: Prepare Consolidated statement of financial position as at 31-12-2004.
Q.18 ‘F’ acquired 60% holding in ‘R’ 3 years ago when ‘R’s’ retained earnings balance stood at Rs.
16,000. Both companies’ statement of profit or loss for the year ended 30-06-2008 are as follows:
Amount in Rupees
F R
Revenue 403,400 193,000
COS (201,400) (92,600)
Gross Profit 202,000 100,400
Distribution Cost (16,000) (14,600)
Admin expenses (24,250) (17,800)
Dividend from R 15,000 ---
Income tax (61,750) (22,000)
Profit after tax 115,000 46,000
Statement of Changes in Equity (Extracts):

F R
Retained earnings Retained earnings
Balance at 01-07-2007 163,000 61,000
Dividends (40,000) (25,000)
Balance at 30-06-2008 238,000 82,000
Additional Information are:
During the year, ‘R’ sold some goods to ‘F’ for Rs.40000 at 25% markup. Half of these items were
still in inventories at year end.
Required: Consolidated Statement of comprehensive income of F and its subsidiary and an extract
from statement of change in equity, showing retained earnings, for the year ended 30-06-2008.
227
Q.19 ‘R’ purchased 75% of ‘E’ for Rs.2m 10 years ago when the balance of its retained earnings
were Rs.1, 044,000. The SOFP of two companies as at 31-03-2004 are as follows:
(‘Rs.000’)
R E
Non-current assets
Land and Building 3350 -
Plant and Equipment 1010 2210
Motor Vehicles 510 345
Investment in E 2000 -
Current assets
Inventories 890 352
Trade receivables 1372 514
Cash and Cash Equivalents 89 51
9221 3472
Share Capital (Rs.1 per share) 1000 500
Rev. surplus 2500 -
10% Debentures 500 -
Current liabilities
Trade payables 996 362
9221 3472
Additional Information are:

1- Receivables of ‘R’ includes amount owned by ‘E’ of Rs 75,000. Rs 39,000 were in transit at
the year end from ‘E’ due to which current accounts are not reconciled.
2- Included in inventories of ‘E’ are items purchased from ‘R’ during the year for Rs.31200 at
30% markup on cost.
3- Rs 180,000 is impairment loss of goodwill at the reporting date.
4- Shares of ‘E’ were traded at Rs4.40 per share just prior to acquisition by ‘R’.
Required: Prepare Consolidated statement of financial position of R group of companies as at 31-03-

04. It is the group’s policy to value the non-controlling interest at fair value.
Note: fair value of NCI can also be calculated by a reverse working if goodwill of NCI is available.
Acquired intangible assets
A question might provide information about an unrecognized asset of the subsidiary.
When a company acquires a subsidiary, it may identify intangible assets of the acquired subsidiary,
which are not included in the subsidiary’s statement of financial position as per IAS-38 because they
may be internally generated. If these assets are separately identifiable and can be measured reliably
then should be included in the consolidated statement of financial position as intangible assets, and
accounted for as such.
This can result in the recognition of assets and liabilities in consolidated financial statements which
are not previously recognized by the subsidiary. This adjustment should be treated as just like
revaluation adjustment.
228
Q.20 If a company bought 100% of the Coca-Cola Corporation they would be buying a lot of assets but part
(perhaps the largest part) of the purchase consideration would be to buy the Coca Cola brand.
Coca Cola does not recognize its own brand in its own financial statements because companies are not
allowed to recognize internally generated brands as per IAS-38.
However, as far as the company buying the Coca-Cola Corporation is concerned the brand is a
purchased asset. It would be recognized in the consolidated financial statements and would be taken
into account in the goodwill calculation
Example:
P bought 80% of S 2 years ago.
At the date of acquisition S’s retained earnings stood at Rs. 600,000. The fair value of its net assets
was not materially different from the book value except for the fact that it had a brand which was not
recognized in S’s accounts. This had a fair value of 100,000 at this date and an estimated useful life of
20 years.
The statements of financial position P and S as at 31 December 20X1 were as follows:
P S
Rs Rs
PP and E 1,800,000 1,000,000
Investment in S 1,000,000
Other assets 400,000 300,000
3,200,000 1,300,000
Retained earnings 2,900,000 1,000,000
3,200,000 1,300,000
Required: prepare consolidated statement of financial position as on 31.12.2001.
Q.21 Following are the Balance Sheet as at 30-06-2014:

(Rupees in ‘000’)
M N
Non-current assets
PPE 75,000 70,000
Investments 42,000 7,000
Current assets
Inventories 15,000 8,000
Debtors 11,000 12,000
Cash & Bank 9,000 5,000
152,000 102,000
Share Capital (Rs.10 per share) 30,000 20,000
Retained Earnings 88,000 45,000
Rev. Surplus 8,000 5,000
132,000 74,000
Debentures - 12,000
Current liabilities
Creditors 16,000 10,000
Other Liabilities 4,000 6,000
152,000 102,000
229
1. On 01-01-2012, ‘M’ acquired 1.6 million shares of ‘N’ at a price of Rs 23 per share. One year
later it also purchased one-fourth of the debentures of ‘N’ at face value.
2. At acquisition date, retained earnings and revaluation surplus of ‘N’ were Rs.15m and Rs.1m
respectively. At that date, its internally generated brand had a fair value of Rs.7m and an
indefinite useful life.
3. At acquisition date, a plant of ‘N’ was overvalued by Rs.2m. Its remaining useful life was 5
years. This revaluation adjustment has not been incorporated by N in its books.
4. During the year, ‘N’ sold goods to ‘M’ for Rs 240,000 @ 20% markup. Only 25% of these
goods were sold by ‘M’ till year end.
5. At the year end, ‘M’ and ‘N’ declared dividend of 20% and 10% respectively but neither
company had accounted for the dividend.
Required: Prepare Consolidated Statement of financial Position as at 30-06-2014.

Q.22 In recent years Hillusion has acquired a reputation for buying modestly performing businesses and
selling them at a substantial profit within a period of two to three years of their acquisition. On 1 July
20X2 Hillusion acquired 80% of the ordinary share capital of Skeptik at a cost of Rs 10,280,000. On
the same date it also acquired 50% of Skeptik’s 10% loan notes at par. The summarized draft financial
statements of both companies are:
STATEMENTS OF PROFIT OR LOSS: YEAR TO 31 MARCH 20X3
Hillusion Skeptik
Rs 000 Rs 000
Sales revenue 60,000 24,000
Cost of sales (42,000) (20,000)
Operating expenses (6,000) (200)
Loan interest received (paid) 75 (200)
Income tax expense (3,000) (600)
STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH 20X3
Assets
Tangible non-current Assets 19,320 8,000
Investments 11,280 Nil
30,000 8,000
Total assets 45,600 16,000
Equity and liabilities Equity
Ordinary shares of Rs 1 each 10,000 2,000
35,600 10,400
10% loan notes Nil 2,000
Total equity and liabilities 45,600 16,000
(1) The fair values of Skeptik's assets were equal to their book values with the exception of its
plant, which had a fair value of Rs 3.2 million in excess of its book value at the date of
acquisition. The remaining life of all of Skeptik's plant at the date of its acquisition was four
years and this period has not changed as a result of the acquisition. Depreciation of plant is on
a straight-line basis and charged to cost of sales. Skeptik has not adjusted the value of its plant
as a result of the fair value exercise.
230
(2) In the post-acquisition period Hillusion sold goods to Skeptik at a price of Rs 12 million.
These goods had cost Hillusion Rs 9 million. During the year Skeptik had sold Rs 10 million
(at cost to 'Skeptik) of these goods for Rs 15 million.
(3) Hillusion bears almost all of the administration costs incurred on behalf of the group
(invoicing, credit control etc). It does not charge Skeptik for this service as to do so would not
have a material effect on the group profit.
(4) Revenues and profits should be deemed to accrue evenly throughout the year.
(5) The current accounts of the two companies were reconciled at the year-end with Skeptik
owing Hillusion Rs 750,000.
(6) The goodwill was reviewed for impairment at the end of the reporting period and had suffered
an impairment loss of Rs 300,000, which is to be treated as an operating expense.
(7) Hillusion's opening retained earnings were Rs 16,525,000 and Skeptik's were Rs 5,400,000.
No dividends were paid or declared by either entity during the year.
(8) It is the group policy to value the non-controlling interest at acquisition at fair value. The
directors valued the non-controlling interest at Rs 2,500,000 at the date of acquisition.
Required
1.
(a) Prepare a consolidated statement of profit or loss and statement of financial position for
Hillusion for the year to 31 March 20X3.
(b)Also prepare statement of changes in equity for the year to 31 March 20X3.
2. Solve the same question by assuming as if only statement of financial position is required to be
prepared.
Q. 23 The following summarized Trial Balances pertain to Rivera Limited (RL) and its subsidiary Chenab
Limited (CL) for the year ended 31 December 2014:
RL CL
Debit Credit Debit Credit
Rs. in million
Sales - 285 - 320
Cost of sales 186 - 240 -
Selling and distribution expenses 27 - 25 -
Administration expenses 17 - 15 -
Finance charges 8 - 10 -
Tax expense 19 - 12 -
Share capital (Rs. 100 each) - 350 - 200
Retained earnings - 1 January 2014 - 50 - 36
Property, plant and equipment 190 - 263 -
Current assets 23 - 35 -
Investment in CL (1.6 million shares) 250 - - -
Current liabilities 35 - 44
720 720 600 600
Other relevant information is as under:

(i) RL acquired the controlling interest in CL on 1 January 2014. On the acquisition date, fair value
of CL's net assets was equal to its book value except for an office building whose fair value
exceeded its carrying value by Rs. 18 million. The remaining useful life of the office building on
the acquisition date was 15 years.
(ii) Inter-company sales are invoiced at cost plus 20%. Details of inter-company transactions for the
year ended 31 December 2014 are as follows:
■ RL sold goods amounting to Rs. 60 million to CL. At year-end, inventory of CL included Rs.
9.60 million in respect of such goods.
■ CL sold goods amounting to Rs. 48 million to RL. At year-end, inventory of RL included Rs.
16.80 million in respect of such goods.
(iii) There were no inter-company balances outstanding at the year-end.
231
(iv) RL values the non-controlling interest at its proportionate share of CL's identifiable net assets.
(v) As at 31 December 2014, goodwill of CL was impaired by 10%.
Required:
1.In accordance with the requirements of International Financial Reporting Standards, prepare:
(a) Consolidated Statement of Comprehensive Income for the year ended 31 December 2014.
(b) Consolidated Statement of Financial Position as at 31 December 2014.
2. Solve the same question by assuming as if only statement of financial position is required to be
prepared.
Q.24
HANKS
Statements of financial position as at 31 December 2015
Hanks Streep Scott
Rs. 000 Rs. 000 Rs. 000
Assets
Non-current assets Property, plant and equipment 32,000 25,000 20,000
Investments 33,500 - -
65,500 25,000 20,000
Current assets
Cash at bank and in hand 9,500 2,000 4,000
Trade receivables 20,000 8,000 17,000
Inventory 30,000 18,000 18,000
125,000 53,000 59,000
Share capital 40,000 10,000 15,000
Share premium account 6,500 - -
101,500 47,000 42,000
Current liabilities 23,500 6,000 17,000
125,000 53,000 59,000
Statements of profit or loss for the year ended 31 December 2015

Hanks Streep Scott
Rs. 000 Rs. 000 Rs. 000
Revenue 125,000 117,000 82,000
Cost of sales (65,000) (64,000) (42,000)
Gross profit 60,000 53,000 40,000
Distribution costs (21,000) (14,000) (16,000)
Administrative expenses (14,000) (8,000) (7,000)
Profit before taxation 25,000 31,000 17,000
Income tax expense (10,000) (9,000) (5,000)
Profit after tax 15,000 22,000 12,000
Statement of changes in equity (extract) for the year ending 31 December 2015
Hanks Streep Scott
Rs. 000 Rs. 000 Rs. 000
232
Retained earnings brought forward 40,000 15,000 15,000
Retained profit for the financial year 15,000 22,000 12,000
Dividends - - -
Retained earnings carried forward 55,000 37,000 27,000
You are given the following additional information

(i) Hanks owns 80% of Streep’s shares. These were purchased in 2012 for Rs. 20.5 million cash,
when the balance on Streep’s retained earnings stood at Rs. 7.5 million.
(ii) In 2010 Hanks purchased 60% of the shares of Scott for Rs. 13 million. At that date the
retained earnings of Scott stood at Rs. 3 million and the fair value of the net assets of Scott
was Rs. 24 million. It was agreed that any undervaluation of the net assets should be
attributed to land. This land was still held at 31 December 2015.
(iii) Included in the inventory of Scott and Streep at 31 December 2015 are goods purchased from
Hanks for Rs. 5.2 million and Rs. 3.9 million respectively. Hanks aims to earn a profit of 30%
on cost. Total sales from Hanks to Scott and to Streep were Rs. 8 million and Rs. 6 million
respectively.
(iv) Hanks and Streep each proposed a dividend before the year end of Rs. 2 million and Rs. 2.5
million respectively. No accounting entries have yet been made for these.
(v) Hanks has carried out annual impairment tests on goodwill in accordance with IFRS 3 and
IAS 36. The estimated recoverable amount of goodwill at 31 December 2012 was Rs. 5
million and at 31 December 2015 was Rs. 4.5 million.
Required
Prepare the consolidated statement of profit or loss and consolidated statement of changes in equity
for the year ended 31 December 2015 and the consolidated statement of financial position at that date.
[QB#6.4]
233
Other consolidated related issues:
The requirement to prepare consolidated accounts

IFRS 10 states that, with certain exceptions, a parent must present consolidated financial statements in
which it consolidates its investments in subsidiaries. In other words, a parent must prepare
consolidated financial statements for the group as a whole.
Exception to this rule [IFRS-10: Para 4]

There is an exception to this rule. This allows a parent that is itself a subsidiary not to prepare
consolidated financial statements.
A parent need not present consolidated financial statements if (and only if) all the following
conditions apply:
 The parent itself (X) is a wholly-owned subsidiary, with its own parent (Y).
Alternatively, the parent (X) is a partially-owned subsidiary, with its own parent (Y), and the
other owners of X are prepared to allow it to avoid preparing consolidated financial statements.
 The parent’s debt or equity instruments are not traded in a public market.
 The parent does not file its financial statements with a securities commission for the purpose of
issuing financial instruments in a public market.
 The parent’s own parent, or the ultimate parent company (for example, the parent of the parent’s
parent), does produce consolidated financial statements for public use that comply with IFRS.
All subsidiaries
Consolidated financial statements must include all the subsidiaries of the parent
(IFRS 10). There are no grounds for excluding a subsidiary from consolidation.
Sundry accounting issues

Common reporting date [IFRS-10 Para B92, 93]
IFRS 10 requires that the financial statements of the parent and its subsidiaries that are used to prepare
the consolidated financial statements should all be prepared with the same reporting date (the same
financial year-end date), unless it is impracticable to do so.
If it is impracticable for a subsidiary to prepare its financial statements with the same reporting date as
its parent, adjustments must be made for the effects of significant transactions or events that occur
between the dates of the subsidiary's and the parent's financial statements. In addition, the reporting
date of the parent and the subsidiary must not differ by more than three months.
Uniform accounting policies [IFRS-10 Para B 87]

Since the consolidated accounts combine the assets, liabilities, income and expenses of all the entities
in the group, it is important that the methods used for recognition and measurement of all these items
should be the same for all the entities in the group.
IFRS 10 therefore states that consolidated financial statements must be prepared using uniform
accounting policies. The policies used to prepare the financial statements in all the entities in the
group must be the same
234
SOLUTION
A.1
Hall
As at 31-12-2013
Assets: Rs. ‘000'
Goodwill 3,000
Current Assets 30,000
88,000
Equity and Liabilities
Consolidated retained earnings (13,000+3,000) 16,000
26,000
30,000
8% debentures 29,000
88,000
W-1 Analysis of Equity: H (75%) NCI (25%)

At acquisition:
Share capital 4,000
12,000 9,000 3,000
Payment by Parent 12,000
Goodwill 3,000
Change in equity since acquisition till balance sheet date:
W-2 Entries
Share capital 4,000
Investment 12,000
NCI 3,000
A.2
Hymn
As at 31-12-2013
Assets:
Goodwill 29,000
474,000
235
278,200
Non-controlling Interest (14,000 + 5,800) 19,800
298,000
474,000
W-1 Analysis of Equity:

H (80%) NCI (20%)
At acquisition:
70,000 56,000 14,000
Payment by Parent 85,000
Goodwill 29,000
Change in equity since acquisition till balance sheet date:
W-2 Entries
Investment 85,000
A.3 Hairy
As at 31-12-2015
Rs
Non-Current Assets:
PPE (120+60) 180,000
Current Assets:
Cash (11+4) 15,000
Investment 3,000
Trade receivable (72.6+19.1) 91,700
Cash in transit 500
Inventory (17,000+11,000-800) 27,200
317,400
Equity:
Capital Reserves 23,000
Consolidated Retained earnings (91,900 +4,000+7,640-640) 102,900
245,900
236
Non-controlling Interest (15,660+1,000-160) 16,500
Payables (38+17) 55,000
317,400
Workings:
(W-1) % of holding
= number of shares acquired by Hairy X 100
Total number of shares of spider
= 48,000/60,000 X 100 = 80%
(W-2) Analysis of Equity of S:
P(80%) S(20%)
At acquisition:
Capital Reserves 16,000
78,300 62,640 15,660
Paid by P 55,000
Gain on bargain purchase (Add in CRE) 7,640
Change since acquisition
Retained earnings (7,300-2,300) 5,000 4,000 1,000
(W-2) Accounting Entries:

Consolidated retained earnings – 80% 640
NCI – 20% 160
Stock 800
(4,000 x 25/125)
(W-3) Cash in transit
H S 2,700
Receivable by S from H - 3,200
500
Payable by H to S 2,700
Payable and receivable amounting to Rs. 2,700 will be cancelled out and remaining Rs. 500 is Cash in
transit.
A.4
Hang Rs.
As at 31-12-2015
237
Goodwill 26,600
892,000
Equity
Retained earnings (180,000+30,000 x 60%) 198,000
423,000
510,600
892,600
W-1 Analysis of Equity of S:

At acquisition: Hang (60%) NCI (40%)
189,000 113,400 75,600
Paid by Hang 140,000
Goodwill 26,600
Change in equity since acquisition
A.5
Hash Rs.
Sundry Assets 434,100
Goodwill 8,800
442,900
Share Capital 1,200
Consolidated retained earnings (87,500+4,800) 92,300
212,300
NCI (22,800+1,200) 24,000
236,300
Liabilities (100+106.6) 206,600
Total equity and Liabilities 442,900
W-1 Analysis of equity of S Hash (80%) Stash (20%)

At acquisition:
Retained earnings [(70-24) + (24/12 x 9)] 64,000
114,000 91,200 22,800
Goodwill 8,800
Change in equity since acquisition:
Retained earnings - 24/12 x 3 6,000 4,800 1,200
A.6
Hassle
Assets Rs.
238
Sundry Assets 474,100
Total Assets 474,100
Equity:
Consolidated Retained earnings (87,500+20,000+16,000) 123,500
243,500
Total equity and Liabilities 474,100
W-1 Analysis of equity of S H(80%) NCI(20%)

At acquisition:
100,000 80,000 20,000
Gain on bargain purchase 20,000
A.7 Hail
Non-current Assets Rs.'000'
Property, plant & equipment (161+85) 246,000
Investment (68-65) 3,000
Goodwill 6,500
Current Assets
Cash (7,700+25,200) 32,900
Trade receivable (92,500+45,800) 138,300
Cash in transit (15,000-8,000) 7,000
Inventory (56,200+36,200) 92,400
526,100
Consolidated retained earnings (185,400+46,080-3,000) 228,480
328,480
Non-controlling Interest (6,500+5,120-200) 11,420
339,900
Dividend payable by H 3,000
Dividend payable by S to NCI 200
526,100
Workings
(W-1) % of holding = 45,000/50,000 x 100 = 90%
(W-2) Analysis of equity of S
Hail (90%) NCI(10%)
At acquisition:
239
Share Premium 5,000
Capital Reserves -
65,000 58,500 6,500
Paid by H 65,000
Goodwill 6,500
Capital Reserves 20,000 18,000 2,000
(W-3) Entries:
Dividend declared:
By Hail By Snow
Dividend (CRE) 3,000 Dividend CRE-90% 1,800
Dividend payable 3,000 NCI-10% 200

Dividend Income (CRE) 1,800
A.8
Consolidated Statement Of Financial Position
Non-current Assets Rs.
Goodwill 61,400
Current Assets
Inventory (112,000+74,400-3,200) 183,200
Receivables (104,000+84,000) 188,000
Bank 49,000
791,200
655,200
NCI (35,400+24,600) 60,000
715,200
791,200
Workings Hail (80%) NCI (20%)

At acquisition:
Retained Earnings (11,000)
Revaluation Surplus 28.000
177,000 141,600 35,400
Paid by Hail 203,000
Goodwill 61,400
Retained earnings (W-2) 123,000 98,400 24,600
240
(W-2) Retained Earnings
b/d 11,000 Profit after tax (B.F) 123,000
c/d 112,000 post acquisition profits
W-3 Journal Entries:

Asset 28,000
Rev. Surplus 28,000
Stock 3,200
(16,000 x 25/125)
(No effect on Non-Controlling Interest as parent sold goods to subsidiary)
A.9 Hello
As at 31-12-2013
Asset: Rs.
PPE (225,000+175,000+10,000-2,000) 408,000
Goodwill 8,000
Current Assets (271,000+157,000) 428,000
844,000
Equity:
391,800
NCI (68,000+12,000-800) 79,200
471,000
844,000
(W-1) Analysis of equity of S:

H-60% NCI-40%
At acquisition:
160,000
Revaluation Surplus (170,000-160,000) 10,000
170,000 102,000 68,000
Paid by H 110,000
Goodwill 8,000
241
W-2 Entries:
Plant 10,000
Rev. surplus 10,000
Extra Depreciation:
CRE 1,200
NCI 800
Acc. Dep/Asset 2,000
(10,000/10 x 2)
A.10 Consolidated Statement of Comprehensive Income
Rs. '000'
Revenue (1,120+390-100) 1,410
Cost of sales (610+220-100+3) (733)
Gross profit 677
Distribution Cost (50+40) (90)
Admin Cost (55+45) (100)
Operating Profit 487
Investment income [(20-15)+ 4] 9
Finance Cost (18+4) (22)
Tax (140+25) 165
Attributed to:
Owners of the Parent (balancing figure) 294
Non-controlling Interest (60 x 25%) 15
309
Movement in consolidated retained earnings

Rs.000
Opening balance as on 1-1-13* 127
Share in consolidated profit for the year 294
Dividend paid by H (50)
Closing balance as on 31-12-13* 371
*Opening balance of consolidated retained earnings will consist of:
Rs. 000
Opening balance of consolidated R.E 100
+ Parent’s share in post-acquisition retained earnings of subsidiary 27
(45-9) x 75% 127
242
A.10A
Consolidated Statement of Comprehensive Income
Amount in rupees
Sales (304900+195300*4/12-8000) 362,000
Cost of Sales (144200+98550*4/12-8000) (169,050)
Other Income – gain on bargain purchase 3,800
Investment Income (10500+2600) 13,100
Operating Expenses (76450+52100*4/12) (93,817)
Tax (42900+16500*4/12) (48,400)
Attributable to
Owners of Parent (bal) 64,638
Non-controlling Interest [(30750-2600)*4/12*25%+2600*25%] 2,995
67,633
Movement in Consolidated Retained Earnings:

Amount in Rupees
Balance as on 1-1-2015 80,200
Profit for the year 64,638
Dividend (20,000)
Balance as on 31-12-2015 124,838
A.11 Consolidation Statement of financial position

As at 31-12-08.
Non-current Assets
Fixed assets (150000+80000-6400) 223,600
Goodwill 10,000
Current assets
Stock (30000+20000-5000) 45,000
Other current assets (70000+30000) 100,000
378,600
Equity
Consolidated retained earnings (150000-300-12000-6400) 128,600
328,600
Non-controlling Interest (60000-8000-2000) 50,000
Workings
(W-1)
Analysis of equity
At acquisition H 60% NCI 40%
150,000 90,000 60,000
Paid by “H” 100,000
243
Goodwill 10,000
Change in equity since acquisition
Retained Loss (50000-30000)=(20000) (12,000) (8,000)
Entries:
Fixed asset sold by H to S:
Gain on disposal [40,000/100 x 25] 10,000
Extra depreciation [working below] (3,600)
Net un realized gain to be reversed 6,400
CRE 6,400
Asset 6,400
(Asset sold by Parent)
Working of extra depreciation:

Date of Disposal 1-1-2007
Depreciation on gain that should be reversed:
10,000 x 20% 2,000

8,000 x 20% 1,600
3,600
Elimination of Un-Realized Profit:

CRE-60% 3,000
NCI-40% 2,000
Stock 5,000
(25,000 x _25_ )
125
A.12 Consolidated statement of financial position

As on 31-12-09
Assets:
Plant (672,000 + 69,000 + 2,000 – 200-200) 742,600
Intangibles 523,000
Goodwill 54,800
Accounts Receivable (45,000 + 60,000) 105,000
1,425,400
Equity & Liabilities:
CRE 1,121,560
1,221,560
NCI 18,840
1,240,400
Accounts payable (180,000 + 5,000) 185,000
1,425,400
Consolidated statement of comprehensive income
Profit for the year (60,000+7,000-200) 66,800
Attributable to:
Owners of the parent (balancing figure) 65,780
NCI (7,000-200) x 15% 1,020
244
66,800
Consolidated statement of changes in equity

Share CRE NCI Total

Capital
Balance as on 01-01-09 (W) 100,000 1,055,780 17,820 1,173,600
Profit ---- 65,780 1,020 66,800
Balance as on 01-01-09
100,000 1,121,560 18,840 1,240,400
Working
Calculation of the opening balances:
For the purpose of calculating opening balances, we have to calculate the closing balances of the last
year, i.e. 31.12.08 which will be the opening balances as on 01.01.09.
Analysis of Equity of S
At Acquisition 1-1-08 P-85% NCI-15%
110,000
112,000 95,200 16,800
Paid by P 150,000
Good will 54,800
Change since acquisition till 31.12.08

Retained Earnings (107,000-100,000) 7000 5,950 1,050
Entries
Asset 2000
Rev Surplus 2000
Depreciation for the year ended 31.12.08:
CRE-85% 170
NCI-15% 30
Asset 200
(2,000 x 10% )
So as on 31.12.08
CRE 1,050,000 + 5,950 -170 =1,055,780
NCI 16,800 +1,050 -30 = 17,820
Therefore, after the above discussion remember:

The opening balance of the CRE comprises of 100% b/d of the parent; plus
Parent’s share in in post-acquisition reserves of S upto the beginning of the period after adjustments
(if any)
The opening balance of NCI comprises of
NCI at acquisition; plus
245
NCI’s share in in post-acquisition reserves of S upto the beginning of the period after adjustments (if
any)
A.13 1. Scenario i: If acquisition date is 01-10-2000

a) H Group
Consolidated statement of financial position
As on 31-03-01
Assets: Rupees in (000)
PPE (620+660+125) 1405
Investment (20+10) 30
Goodwill (200-20) 180
Stock (240+280-10) 510
Receivable (170+210-20-36) 324
Cash in Transit 20
Bank (20+40) 60
Total Assets: 2529

Share Capital 700
Share Premium 600
CRE (450+80-10-20) 500
1800
NCI (175+20) 195
Total Equity 1995
Debentures 150
Payables (170+155-36) 289
Current tax payables (50+45) 95
Total Equity and Liabilities: 2529
b) H Group
Rupees in (000)
Sales (1200+1000*6/12-100) 1600
Cost of Sales (650+660*6/12-100+10) (890)
Gross Profit 710
Operating Expenses (120+88*6/12+20) (184)
Finance Cost (12*6/12) (6)
Tax (100+40*6/12) (120)
Attributable to:
Owners of the parent 380
NCI (200*6/12*20%) (20)
400
c) H group
Share Share Premium CRE NCI Total

Capital
Balance as on 01-04-2000 700 600 *120 ----- 1420
246
(450-330)
NCI at acquisition __ __ __ 175 175
Profit ---- --- 380 20 400
Balance as on 31-03-2001 700 600 500 195 1995
*Only brought down balance of parent because acquisition of subsidiary is during the period.
(W-1) Analysis of Equity:
At Acquisition:
H 80% NCI 20%
Share Capital 150
Share Premium ---
Retained Earnings (w-2) 600
750
Rev. Surplus 125
875 700 175
Payment by H 900
Goodwill 200
Change since Acquisition:
Retained Earnings: 200 x 6 / 12 = 100 80 20
(W-2) Calculation of retained earnings at acquisition:

Amount
01-04-2000 (700-200) 500
01-10-2000 (200 x 6/12) 100
600
(W-3) Entries:
1- Asset 125
Rev. surplus 125
2- Sale of Goods: (goods sold by H)
Cost of sale 10
Stock 10 (100*50% * 25/125)
3- Impairment of Goodwill:
Admin Exp. 20
Goodwill 20
4- Cash in Transit:
“H” “S”
Receivable from “S” 56000
Payable to “H” 36000
Cash in transit 20000

Payable to “H” 36000

Scenario ii: If acquisition date is 01-01-2001
a) H Group
As on 31-03-01
Rupees
Assets:
247
Non-current assets:
PPE (620+660+125) 1,405
Goodwill (160-20) 140
Current assets:
Inventory (240+280-10) 510
Receivable (170+210-20-36) 324
Cash in transit 20
Bank 60
Total Assets 2,489
Share Capital 700

Share Premium 600
CRE (450+40-10-20) 460
1,760
NCI (185+10) 195
1,955
Liabilities:
Debentures 150
Current liabilities
Payables (170+155-36) 289
Current tax payables 95
Total Equity & Liabilities 2,489
b) H Group
Sales (1,200+1,000*3/12-100) 1,350
COS (650+660*3/12-100+10) (725)
Gross Profit 625
Operating Expenses (120+88*3/12)+20 (162)
Finance Cost (12+3/12) (3)
Tax (100+40*3/12) (110)
Attributable to
Non-controlling Interest (200*3/12)*20% 10
350
c) H Group
Share capital Share premium CRE NCI Total

Balance as on 01-04- 700 600 120 ---- 1420
2000
NCI at acquisition --- --- --- 185 185
Profit --- --- 340 10 350
Balance as on 31-03- 700 600 460 195 1955
2001
248
Workings
(W-1)
Analysis of Equity
P-80% NCI-20%
At Acquisition:
Share Capital 150
Retained Earnings 650
(500+200 x 9/12)
Revaluation Surplus 125
925 740 185
Paid 900
Goodwill 160

Retained Earnings (200*3/12) =50 40 10
Scenario iii: If Acquisition date is 01-04-2000

a) H Group
As on 31-03-01
Assets: Amount in
rupees
Non-current assets
PPE (620+660+125) 1,405
Goodwill (280-20) 260
Current assets
Inventory (240+280-10) 510
Receivable (170+120-20-36) 324
Cash in transit 20
Bank 60
Total Assets 2,609

Share Capital 700
Share Premium 600
CRE (450+160-10-20) 580
1,880
NCI (155+40) 195
2,075
Liabilities:
Debentures 150
Current liabilities
Payables (170+155-36) 289
Current tax payable 95
Equity & Liabilities 2,609
b) H Group
Consolidated statement of comprehensive income Amount in
For the year ended 31-03-01 rupees
249
Sales (1200+1000-100) 2,100
Cost of Sales (650+660-100+10) (1,220)
Gross Profit 880
Operating Expenses (120+88+20) (228)
Finance Cost (12)
Tax (100+40) (140)
Attributable to
Non-controlling Interest (200*20%) 40
500
c) H Group
Share capital Share premium CRE NCI Total

Balance as on 01-04-2000 700 600 120 ---- 1420
NCI at acquisition --- --- --- 155 185
Profit --- --- 460 40 350
Balance as on 31-03-2001 700 600 580 195 1955
(W-1)
Analysis of Equity
P-80% NCI-20%
At Acquisition:
Share Capital 150
650
775 620 155
Paid 900
Goodwill 280
2. Same previous question assuming as if acquisition date is 1-10-2000: however only statement
of financial position is required to be prepared:
H Group
STATEMENTS OF FINANCIAL POSITION
AS AT 31 MARCH 20X3
Non-current Assets
Property, Plant and Equipment (620+660+125) 1,405
Goodwill (200-20) 180
Inventory (240+280-10) 510
Account receivable (170+210-36-20) 324
Bank (20+40+20) 80
2,529
Equity
250
Share capital 700
Share Premium 600
Consolidated Retained earnings (450+80-10-20) 500
1,800
NCI (175+20) 195
1,995
8% debentures 150
Current liabilities
Account Payable (170+155-36) 289
Taxation Payable(50+45) 95
2,529
Workings
W-1 Analysis of Equity S:
At Acquisition:
H 80% NCI 20%
Share Capital 150
Retained earnings-Openings (700-200) 500
Pre-Acquisition Profit for the period (200x6/12) 100
875 700 175
Paid 900
Goodwill 200
Change since Acquisition
200 x 6/12 100 80 20
W-2 Accounting Entries

a) CRE 10
Stock 10
(50,000/125 x 25)
(H sold goods to S, so no effect on NCI)
b) Cash in transit 20
Receivable from S 20
c) CRE 20
Goodwill 20
A.14 Consolidated Statement of Financial Position

As on 31-10-2000
Assets:
Non-current assets:
Plant (325+70+10-8) 397
Fixtures (200+50) 250
Goodwill (60+16.5) 76.5
Current assets:
Inventory (220+70-9) 281
Receivable (145+105-35-15) 200
Bank 100
1304.5
251
Share Capital 700
CRE (215+21-5.6-9) 221.4
921.4
NCI (76.5+9-2.4) 83.10
1004.5
Payables (275+55-35-15) 280

Bank Overdraft 20
1304.5
W-1 Analysis of equity:
At Acquisition:
Shark 70% NCI 30%
Share Capital 170
R.E 20
Rev. Surplus 10
200 140 60
Payment by Shark 200
F.V of NCI (170*30%*1.5) 76.5

Goodwill 60 16.5
Total Goodwill 76.5 (60 + 16.5)
Change since acquisition 30 21 9
Accounting entries
a) CRE 5,600
NCI 2,400
Asset 8,000
(10,000/5 = 2,000x4 = 8,000)
b) CRE 9,000
Stock 9,000
(45,000 x 25/125)
A15 Alpha Limited
As on 30-06-2014
Assets: Rupees in millions
PPE (460+200-15) 645
Goodwill 30
Current Assets (595+400- 4.5 – 4 – 19) 967.5
Total Assets 1642.5
Share Capital 600

Consolidated retained earnings (325+48-15-3.6-4) 350.4
950.4
Non-controlling Interest (80+12-0.9) 91.1
1041.5
Long term loan (200+72-30) 242
Current liabilities (300+78-19) 359

Total 1642.5
Workings
252
At Acquisition:
AL 80% NCI 20%
Share Capital 250
Retained earnings 140
390 312 78
Paid 340
Goodwill
F.V of NCI 80
Goodwill 28 2
Total goodwill 30
(W-1.1) % of holding:
200/250*100=80%
(W-2) Entries:
1- Inter-company gain on sale of fixed asset:
CRE 15
Equipment 15
(Sale proceed = 25 – WDV = 10)
No depreciation adjustment is required because asset is sold on the last day of the accounting period.
2- Sales of goods:
(a) Sale by subsidiary:
CRE 3.6
NCI 0.9
Stock 4.5 (27*20/120)
(b) Sale by parent:
CRE 4
Stock 4 (24*20/120)
A.16 B Group
As on 30-09-2006
Assets: Rupees in
millions
Non-current assets
Property, plant & equipment (2,848+354+26-8) 3,220
Patents 45
Goodwill (46-20) 26
Current assets
Inventories (895+225+8-8) 1,120
Receivables (1,348+251) 1,599
Cash & Bank (212+34) 246
6,256
Equity and liabilities:
Share Capital 920
253
Consolidated retained earnings 2,086+174-4.8-4.8-12) 2,238.4
General Reserves (775+21) 796
3,954.4
Non-controlling Interest (86+116+14-3.2-3.2-8) 201.6
4,156.0
Long term loans (558+168) 726
Payables (1,168+183) 1,351
Current portion of Loans 23
6256

At Acquisition:
P 60% S 40%
Share Capital 50
R.E 104
General Reserves 11
Rev. Surplus 34 (8+26)
199 119.4 79.6
Payment by parent (50*60%*5.3) 159
F.V of NCI 86
Goodwill 39.6 6.4
Total Goodwill is 39.6+6.4 = 46

Retained Earnings (394-104)290 174 116
General Reserves (46-11)35 21 14
(W-2) Entries:
1. Inventory Revaluation: Consolidation is requirement of IFRS-3 & 10 which requires that all
the assets and liabilities of subsidiary should be revalued at the date of acquisition.
Inventory 8
Rev. Surplus 8
Inventory was undervalued at the date of acquisition. If it was not mentioned in the question that
inventory has been sold, then we would prepare the above entry only. As the inventory is sold,
further adjustment is required.
When the inventory was sold, this entry would have been passed as follows:
Cost of Sales xxx
Inventory xxx
(At carrying amount)
But remember if inventory was undervalued then the above entry was also undervalued by the same
amount. So to correct the above entry, we will have to prepare an additional entry:
Cost of Sales 8
Inventory 8
254
However as we are only preparing SOFP and cost of sale of subsidiary is to be increased, therefore
the above entry will be passed as follows:
CRE 60% 4.8
NCI 40% 3.2
Inventory 8
Reversal entry will be made if inventory is overvalued at the date of acquisition.
2. Revaluation of land and buildings:
PPE 26
Rev. Surplus 26
Effect of depreciation of building:
CRE 4.8
NCI 3.2
PPE 8
(20/10*4)
3. Impairment of Goodwill:
CRE 12
NCI 8
Goodwill 20
A.17 H Group
As on 31-12-2004:
Rupees in ‘000’
Non-current assets
PPE (370+190+260+50-5) 865
Goodwill (2+6+11) 19
Current assets:
Inventories (160+100+180-20+20-1.5) 438.5
Receivables (170+90+100) 360
Cash (50+40+10) 100
1782.5
Share Capital 200
Share premium 100
Consolidated retained earnings (568+108+175+12-3-1.5+71) 929.5
1229.5
Non-controlling Interest (90+72-2+8+80+75) 323
1552.5
Current liabilities
Payables (100+60+70) 230
1782.5
(W-1) Analysis of Equity of “S”:

At Acquisition:
H 60% NCI 40%
255
Share Capital 80
Share Premium 80
Revaluation Surplus (50-20) 30
210 126 84
Payment by “H” 128
F.V of NCI 90
Goodwill 2 6
Total Goodwill is 2+6 = 8
Retained Earnings (200-20) 180 108 72
(W-1) Analysis of Equity of “A”:
At Acquisition:
H 70% NCI 30%
Share Capital 50
Share Premium 30
R.E 150
230 161 69
Paid by H 90
F.V of NCI 80
Gain on bargain purchase /Goodwill 71 11
(in CRE) (in SOFP)
Retained Earnings (400-150) 250 175 75
(W-3) Entries:
1. Plant Revaluation:
PPE 50
Rev. Surplus 50
Depreciation adjustment:
CRE 3
NCI 2
PPE 5
(50/10)
2. Sale of Goods:
Rev. Loss 20
Inventory 20
Inventory 20
CRE 12
NCI 8
3. Unrealized profit in stock:
Value of stock = 16-(16*3/4) =4
256
Unrealized gain (4*37.5/100) =1.5
CRE 1.5
Stock 1.5
A.18 F Group
Consolidated Statement of comprehensive income
Amount in
Rupees
Sales (403400+193000-40000) 556,400
COS (201400+92600-40000+4000) (258,000)
Distribution Cost (16000+14600) (30,600)
Admin Expenses (24250+17800) (42,050)
Tax (61750+22000) (83,750)
Attributable to
Owners of Parent 125,200
NCI (46000-4000)*40% 16,800
142,000
Statement of change in equity (Consolidated Retained Earnings Column)

For the year ended 30.06.2008
Balance as on 01-07-2007 (163,000+ (61,000-16,000)*60%) 190,000
Dividend (40,000)
Balance as on 30-06-2008 275,200
W-1 Unrealized profit in stock:

Unrealized gain 20,000 x 25/125 = 4,000
Cost of sale 4,000

Stock 4,000
(Stock is sold by subsidiary therefore NCI will be affected.)
A.19 P Group
As on 31-03-2004:
Amount in Rupees
Non-current assets
Land & Building 3,350
Plant and Machinery (1010+2210) 3,220
Vehicles (510+345) 855
Goodwill (1006-180) 826
Current assets
Inventories (890+352-7.2) 1,234.8
Trade receivables (1372+514-36-39) 1,811
Cash in transit 39
Cash (89+51) 140
257
11,475.8
Share Capital 1,000
CRE (4,225+1,174.5-7.2-135) 5,257.3
6,257.3
NCI (550+391.5-45) 896.5
7,153.8
Rev. Surplus 2,500
10% Debentures 500
Current liabilities
Trade payables (996+362-36) 1,322
11,475.8

At Acquisition:
R 75% NCI 25%
Share Capital 500
1,544 1,158 386
Paid 2,000
F.V of NCI (500*25%)*4.4 550
Goodwill 842 164
Total Goodwill 842 + 164 = 1,006
Retained Earnings (2,610-1,044) 1,566 1,174.5 391.5
(W-2) Entries:
1. Cash in transit 39
Receivable from ‘E’ 39
Payable to ‘R’ 36
Receivable from ‘E’ 36
2. CRE 7.2
Stock 7.2
31,200 x 25/125 = 7,200
3. CRE 135
NCI 45
Goodwill 180
(Impairment of Goodwill as NCI is at Fair value)
A.20 P Group: Consolidated statement of financial position at 31 December 20X1
Rs.
Assets
Brand (100,000 – 10,000) 90,000
Goodwill 360,000
Property, plant and equipment (1,800 + 1000) 2,800,000
Other assets (400 + 300) 700,000
Total assets 3,950,000
Equity
Share capital (P only) 100,000
Consolidated retained earnings (2,900,000+320,000-8,000) 3,212,000
3,312,000
258
Non-controlling interest (160,000+80,000-2,000) 238,000
3,550,000
Current liabilities (200 + 200) 400,000

At Acquisition:
P 80% NCI 20%
800,000 640,000 160,000
Cost of Investment 1,000,000
Goodwill 360,000
Retained Earnings (1,000,000 – 600,000) 400,000 320,000 80,000
W-2
Amortization of brand:
CRE 8,000
NCI 2,000
Brand 10,000
(100,000 / 20 x 2 = 10,000)
A.21 M Group
As on 30-6-2014
Amount in 000
Non-current Assets:
Property, plant & equipment (75000+70000-2000+1000) 144,000
Investment (42000+7000-36800-3,000) 9,200
Goodwill 800
Brand 7,000
Current assets
Inventories (15000+8000-30) 22,970
Debtors (11000+12000) 23,000
Cash & Bank (9000+5000) 14,000
220,970

Share Premium 6,000
Consolidated retained earnings (88000+24000-24+800-6000) 106,776
142,776
Non-controlling interest (9000+6000+800+200-6-400) 15,594
158,370
Revaluation Surplus (8000+3200) 11,200
Debentures (12,000-3,000) 9,000
Current liabilities
Creditors (10000+6000) 26,000
Dividend (6000+400) 6,400
259
Other Liabilities 10,000
220,970
At Acquisition:
M 80% NCI 20%
Share Capital 20000
Share Premium 4000
40000
Revaluation Surplus – Brand 7000
Revaluation Loss – Plant (2000)
45000 36000 9000
Paid by ‘M’ 1600 x 23 36800
Goodwill 800

Retained earnings (45000 -15000) 30,000 24,000 6,000
Revaluation Surplus (5,000-1,000) 4,000 3,200 800
(W-2) Entries:
1. Depreciation of Plant to be reversed:
Plant 1000
CRE 800
NCI 200 (2000/5*2.5)
(Extra depreciation charged by N as plant was overvalued)

2. Adjustment of unrealized profit (subsidiary sold goods to parent)
CRE 24
NCI 6
Stock 30 (240*75%*20/120)
(W 3) Adjustment of Dividend
Dividend by ‘P’: Dividend by ‘S’:
Dividend 6000 Dividend 2000
Dividend Payable 6000 Dividend Payable

(30000*20%) 2000
(20000*10%)
Dividend receivable 1600

Dividend income 1600
(30000*20%)
A.22 HILLUSION GROUP

a) STATEMENTS OF PROFIT OR LOSS
FOR YEAR TO 31 MARCH 20X3
Hillusion
Rs 000
Sales revenue (60,000+24,000x9/12)-12,000) 66,000
260
Cost of sales (42,000+20,000x9/12-12,000+500+600) (46,100)
Gross profit 19,900
Operating expenses(6,000+200x9/12)+300 (6,450)
Finance Income (1,000 x 10% x 9/12) 75
Finance Charge (200 x 9/12) (150) (75)
Income tax expense (3,000 + 600 x 9/12) (3,450)
Profit attributable to
Owners of the Parent (bal) *9,655
Non-controlling interest [(3,000x9/12-600-300)x20%] 270
9,925
*Not required to be calculated; just for additional information
[9,075 + (3,000 x 9/12-600-300) x 80% - 500] = 9,655
A. b) HILLUSION GROUP
STATEMENTS OF FINANCIAL POSITION
AS AT 31 MARCH 20X3
Non-current Assets
Property, Plant and Equipment (19,320+8,000+3,200-600) 29,920
Goodwill (1,430 - 300) 1,130
Investment (11,280-10,280-1,000) -
Current assets (15,000+8,000-500-750) 21,750
52,800
Equity
Consolidated Retained earnings 26,180
36,180
Non-controlling interest 2,770
38,950
Non-current liabilities (0+2,000-1,000) 1,000
Current liabilities (10,000+3,600-750) 12,850
52,800
c) HILLUSION GROUP
Statement of Change in Equity
For the year ended 31 March 20X3
Share capital Consolidated NCI Total
Retained
Earnings
Balance as on 1-4-20X2 10,000 *16,525 - 26,525
NCI at acquisition 2,500 2,500
Profit for the year 9,655 270 9,925
Balance as on 31-3-20X3 10,000 26,180 2,770 38,950
*Only brought forward balance of parent because acquisition of subsidiary is during the period.
Workings
1) Analysis of equity of S:
At acquisition (1-7-20X2) H (80%) NCI (20%)
Share capital 2,000
261
(5,400+3,000 x 3/12)
8,150
11,350 9,080 2,270
Paid by H 10,280
Fair value of non-controlling interest 2,500
Goodwill 1,200 230
Total Goodwill 1,430
W-2 Accounting Entries:

a) Plant 3,200
b) Cost of sales 600
Plant 600
(3,200 ÷ 4 x 9/12)
(Non-controlling interest will be affected because asset is of subsidiary)
c) Cost of sales 500
Stock 500
(2,000 x 25% = 500)
(3/12 x 100 = 25% of sales)
(Parent sold to subsidiary therefore no effect on non-controlling interest)
d) Operating Expenses 300
Goodwill 300
(As non-controlling interest is at Fair value therefore non-controlling interest will be affected by
impairment of goodwill)
If only consolidated statement of financial position is in this question required to be prepared:

HILLUSION GROUP
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH
20X3
Assets
Property plant and equipment (19,320 + 8,000 + 3,200 - 600) 29,920
Investments (11,280 – 10,280 - 1000) -
Goodwill (1,430 – 300) 1,130
Current assets (15,000+8,000-750-500) 21,750
Total assets 52,800
Ordinary shares capital 10,000
Consolidated Retained Earnings (25,600+1,800-,480-500-
240) 26,180
36,180
Non-controlling Interest (2,500+450-120-60) 2,770
Non-current liabilities 38,950
10% loan notes (2,000-1,000) 1,000

Current liabilities (10,000+3,600-750)) 12,850
Workings
Analysis of Equity S:
262
W-1 At Acquisition:
H 80% NCI 20%
Share Capital 2,000
Rev. Surplus 3,200
(8,400-3000+3000x3/12)
11,350 9,080 2,270
Paid 10,280
NCI at FV 2,500
1,200 230
Total Good will 1,430
Change since Acquisition:
3,000 x 9/12 = 2,250 1,800 450
W-2 Accounting Entries:

a) Plant 3,200
b) CRE (80%) 480
NCI (20%) 120
Plant 600
(3,200÷4 x 9/12 = 600)
c) CRE 500
Stock 500
(2,000 x 25/100 = 500)
(3/12 x 100=25% of sale price)
(H to S so no effect on non-controlling interest)
d) CRE (80%) 240
NCI (20%) 60
Goodwill 300
(Non-controlling interest at fair value therefore non-controlling interest will be affected by
impairment of goodwill)
A.23
(a) Rivera Limited
Consolidated Statement of Comprehensive Income for the year ended 31 December
2014
Rs. in
million
Sales - net (285+320-60-48) 497.00

Cost of sales (186+240-60-48+1.6+2.8) (322.40)
Gross profit 174.60
Selling and distribution expenses (27+25) (52.00)
Administration and other expenses (17+15+1.2+4.68) (37.88)
Operating profit 84.72
Finance charges (8+10) (18.00)
Taxation (19+12) (31.00)
Net profit for the year 35.72
Attributable to:
263
- Owners of the parent Balancing 32.92
- Non-controlling interest (18(W3)-2.8-1.2) x 20% 2.80
35.72
(b) Rivera Limited

Consolidated Statement of Financial Position as at 31 December 2014
Rs. in
million
ASSETS
Non-current assets:
Property, plant and equipment (190+263+18-1.2) 469.80
Goodwill (46.8 – 4.68) 42.12
511.92
Current assets (23+35-2.8-1.6) 53.60
565.52
EQUITY AND LIBILITIES
Equity
Share capital 350.00
Retained earnings (50+32.92) 82.92
432.68
Non-controlling interest (50.8+2.8) 53.60
486.52
Current liabilities (35+44) 79.00
565.52
Workings
W-1 Analysis of Equity S:
At Acquisition:1-1-2014
RL 80% NCI 20%
Share Capital 200
Rev. Surplus 18
254 203.2 50.8
Paid 250
Goodwill 46.8

a) Office Building 18
b) Depreciation 1.2
(18/15)
(As the asset is of S; so it will affect non-controlling interest as well)
c) Intra company sale
 Sale by parent
Cost of sale 1.6
Inventory 1.6
(9.6 x 20/120 = 1.6)
(As the sale is by parent, therefore no effect on non-controlling interest)
 Sale by subsidiary
264
Cost of sale 2.8
Inventory 2.8
(16.8/120 x 20 = 2.8)
(As the sale is by subsidiary therefore non-controlling interest will be affected)
d) Impairment Loss
Admin expenses 4.68
Good will 4.68
(46.8 / 10)
(As non-controlling interest is not at fair value therefore no effect on non-controlling interest)
W-3
Income Statement of Subsidiary (CL) to calculate its Net profit
Sales 320
Cost of sales 240
Gross profit 80
Selling and distribution expenses 25
Administration and other expenses 15
Operating profit 40
Finance charges 10
Taxation 12
Net profit for the year 18
If a statement of changes in equity is also required in the exam then:

Rivera Limited
Statement of Change in Equity
Share capital Consolidated NCI Total
Retained
Earnings
Balance as on 1-1-2014 350 *50 - 400
NCI at acquisition 50.8 50.8
Profit for the period 32.92 2.8 35.72
Balance as on 31-12-2014 350 82.92 53.6 486.52
*Only brought forward balance of parent because acquisition of subsidiary during the period.
If only statement of financial position is required in exam question then:
Rivera Limited
Consolidated Statement of Financial Position as at 31 December 2014
Rs. in
million
ASSETS
Non-current assets:
Property, plant and equipment (190+263+18-1.2) 469.80
Goodwill (46.8 – 4.68) 42.12
511.92
Current assets (23+35-2.8-1.6) 53.60
565.52
EQUITY AND LIBILITIES
Equity
Share capital 350.00
265
Retained earnings (50+28+14.4-0.96-1.6-2.24-4.68) 82.92
432.68
Non-controlling interest (50.8+3.6-0.24-0.56) 53.60
486.52
Current liabilities (35+44) 79.00
565.52
Workings
W-1 Analysis of Equity of Subsidiary:
At Acquisition:
RL 80% NCI 20%
Share Capital 200
254 203.2 50.8
Paid by RL 250
Goodwill 46.8
Change since Acquisition
Retained Earnings 18 14.4 3.6

a) Office Building 18
b) CRE 0.96
NCI 0.24
Acc Depreciation 1.2
c) Intra company sale

 Sale by parent
CRE 1.6
Inventory 1.6
 Sale by subsidiary
CRE 2.24
NCI 0.56
Inventory 2.8
d) Impairment Loss
CRE 4.68
Good will 4.68
A.24
HANKS
Consolidated statement of financial position as at 31 December 2015
Assets Rs.000
Non-current assets
83,000
Property, plant and equipment (32,000 + 25,000 + 20,000 + 6,000) 4,500
Goodwill (6,500-1,500-500)
87,500
Current assets
Cash at bank and in hand (9,500 + 2,000 + 4,000) 15,500
Receivables (20,000 + 8,000 + 17,000) 45,000
266
Inventory (30,000 + 18,000 + 18,000 - 2,100) 63,900
Total assets 211,900
Share premium account 6,500
Retained earnings (W5) 88,300
134,800
Non-controlling interest (W4) 28,100
162,900
Current liabilities
Trade payables (23,500 + 6,000 + 17,000) 46,500
Dividend payable - to NCI (2,500 - 2,000) 500
- to Hanks’s shareholders 2,000
Hanks
Consolidated statement of profit or loss for the year ended 31 December 2015
Rs.000
Revenue (125,000+117,000+82,000-8,000-6,000) 310,000
Cost of sales (65,000+64,000+42,000-8,000-6,000+2,100) (159,100)
Distribution costs (21,000+14,000+16,000) (51,000)
Administrative expenses (14,000+8,000+7,000+500) (29,500)
Profit before taxation 70,400
Tax (10,000+9,000+5,000) (24,000)
Profit after taxation 46,400
Attributable to:
Owners of Parent (15,000-2,100-500+ (22,000 x 80%) + (12,000 x 60%) (bal) 37,200
Non-controlling interest (22,000 x 20%) + (12,000 x 40%) 9,200
46,400
Hanks
Statement of Change in Equity for the year ended 31-12-2015
Share Share Consolidated NCI Total
capital Premium Retained
Earnings
Balance as on 1-1-2015 40,000 6,500 53,100(A) 19,400(B) 119,000
Profit for the period 37,200 9,200 46,400
Dividend (2,000) (500) (2,500)
Balance as on 31-12-2015 40,000 6,500 88,300 28,100 162,900
A= (55,000-15,000+6,000+7,200+1,400-1,500) = 53,100
B= (3,500+1,500+9,600+4,800) = 19,400
Workings
W-1 Analysis of Equity of Streep:
At Acquisition:
H 80% NCI 20%
Share Premium -
17,500 14,000 3,500
Paid 20,500
Goodwill in 2012 6,500
267
Change since Acquisition till the beginning of current period (means at the end of the last
period) to calculate the opening balances:
(37,000-22,000-7500) or (15,000-7,500) 7,500 6,000 1,500
W-2 Analysis of Equity of Scott:
At Acquisition:
H 60% NCI 40%
18,000
Land Revaluation surplus (bal) 6,000
24,000 14,400 9,600
Paid 13,000
Gain on bargain purchase (in 2010 so in opening balance of CRE) 1,400
Change since Acquisition till the beginning of current period (means at the end of the last
period)
(27,000 – 12,000 – 3,000) or (15,000-3,000) 12,000 7,200 4,800
268
iii) H sold to S
Cost of sale 2,100
Inventory 2,100
[(5.2+3.9) = 9.1x 30/130 = 2,100]
(No effect on NCI)
iv) Adjustments of Dividend
Hanks Streep
Dividend (CRE) 2M Dividend CRE(80%) 2M
Dividend payable 2M NCI (20%) 0.5M
Dividend Payable 2.5M
Dividend receivable 2M
Dividend income (CRE) 2M
v) Impairment loss of goodwill
CRE-Opening 1,500
Admin 500
Goodwill 2,000
(As NCI is not at FV so no effect on NCI)
269
Question No. 1
Following information has been extracted from the financial statements of Yasir Limited (YL) and
Bilal Limited (BL) for the year ended 30 June 2016.
YL BL YL BL
Assets Equity & Liabilities
Rs. In million Rs. In million
Fixed assets 250 540 Share capital (Rs. 10 each) 750 500
Accumulated depreciation (70) (70) Retained earnings 340 258
180 470 1,090 758
Investment in BL – at cost 675 - Loan from YL - 12
Loan to BL 16 - Creditors & other liabilities 75 51
Stock in trade 160 150
Other current assets 71 50
Cash and bank 63 151
1,165 821 1,165 821
(i) On 1 July 2014, YL acquired 75% shares of BL at Rs. 18 per share. On the acquisition date, fair
value of BL’s net assets was equal to its book value except for an officer building whose fair
value exceeded its carrying value by Rs. 12 million. Both companies provide depreciation on
building at 5% on straight line basis.
(ii) Year wise net profit of both companies are given below:
2016 2015
------- Rs. In million --------
YL 219 105
BL 11 168
(iii) The following inter-company sales were made during the year ended 30 June 2016:
Included in buyer’s closing stock
Sales
in trade Profit %
------------- Rs. In million --------------
YL to BL 120 20 30% on cost
BL to YL 80 32 15% on sale
(iv) BL declared interim dividend of 12% in the year 2015 and final dividend of 20% for the year
2016.
(v) The loan was granted by YL to BL on 1 July 2014 and carries interest rate of 12% payable
annually. The principal is repayable in five equal annual instalments of Rs. 4 million each. On
30 June 2016. BL issued a cheque of Rs. 5.92 million which was received by YL on 2 July
2016. No interest has been accrued by YL.
(vi) YL values non-controlling interest on the date of acquisition at its fair value. BL’s share price
was Rs. 15 on acquisition date.
270
(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 International Financial Reporting Standards. (18)
Answer No. 1
YL Group
As on 30-6-2016
Rs. Rs.
Non-Current Assets:
Fixed Assets (180 + 470 + 12 – 1.2) 660.8
Goodwill (211.5 – 21.15) 190.35
Current Assets:
Stock (160 + 150 – 4.62 – 4.8) 300.58
Other Current Assets (71 + 50) 121.00
Cash and bank (63 + 151 + 5.92) 219.92
Total Assets 1,492.65
Equity:
Share Capital 750
Consolidated Retained Earning (340 + 89.25 – 0.9 – 4.62 – 3.6 + 1.92 – 406.19 1,156.19
15.86)
Non-Controlling Interest (187.5 + 29.75 – 0.3 – 1.2 – 5.29) 210.46
1,366.65
Creditors and other liabilities (75 + 51) 126.00
Total Equity & Liabilities 1,492.65
Workings:
Analysis of Equity of BL:
P (75%) NCI
(25%)
At Acquisition 1-7-2014
S.C 500
R.E (Working ii) 139*
639
Revaluation surplus 12
651 488.25 162.75
COI (500/10 × 75% × 18) 675.00
Fv of NCI (v) 187.50
Goodwill 186.75 24.75
271
Total goodwill 211.5
Change in equity since the date of acquisition till the SOFP 119 89.25 29.75
date [258 – 139]
Workings:
(i) Office building 12
CRE (75%) 0.9

NCI (25%) 0.3
Office building (12 × 5% × 2) 1.2
(ii) Pre – Acquisition profit of BL on 1-7-2014 is
BL – RE
b/d (bal) 139
Dividend (500 × 12%) 60 PAT 168
c/d 247
b/d 247
PAT 11
c/d 258
(iii) P→S
20
 30 = 4.62
130
CRE 4.62
Stock 4.62
S→P
32
 15 = 4.8
100
CRE 3.6
NCI 1.2
Stock 4.8
(iv) Entry in the books of YL:
Cheque in transit 5.92
Interest income (CRE) 1.92
Loan – BL 4
Working:
Loan given on 1-7-2014 20
Repayment (annual) (4)
Loan as on 30-6-2015 16
Interest × 12% 1.92
(v) FV of NCI: 500/10 = 50 × 25% = 12.5 × 15 = 187.5 M
272
(vi) Impairment Loss = 211.5 × 10% = 21.15
CRE 15.86
NCI 5.29
Goodwill 21.15
Question No. 2
On 1 July 2014, Galaxy Limited (GL) acquired controlling interest in Beta Limited (BL). The
following information has been extracted from the financial statements of GL and BL for the yeare
ended 30 June 2015.
GL BL
Rs. In million
Share capital (Rs. 100 each) 100 50
Retained earnings – 1 July 2014 40 18
Profit for the year ended 30 June 2015 20 6
Shareholders equity / Net assets 160 74
Investment in BL (300,000 shares) 50 -

Inter-company sales (at invoice value) 25 30
Inter-company purchases remained unsold at year end 9 5
Inter-company current account balances 7 (4)
(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.
Answer No. 2
Analysis of Equity of BL:
P (60%) NCI
(40%)
At Acquisition
S.C 50
273
R.E 18
68
Impairment loss (10)
78 46.8 31.2
Cost of investment 50
FV of NCI 35
Goodwill 3.2 3.8
Total goodwill (3.2 + 3.8 = 7)
Since Acquisition till the SOFP date (6+10) 16 9.6 6.4
Working notes:
(i) As land so no depreciation impact.
(ii) As impairment loss is subsequently also charged by BL so depreciation would have been
properly charged on recoverable amount, during the year by BL.
(iii) Unsold Stock
P→S=5 S→P=9
5 9
× 20 = 0.83 × 20 = 1.5
120 120
CRE 0.83 CRE 0.9
Stock 0.83 NCI 0.6
Stock 1.5
(iv) Goods in transit
P → S = 3 (7 – 4)
3
× 20 = 0.5
120
CRE 0.5
Stock 0.5
(v) Goodwill Impairment: 7 × 10% = 0.7
CRE 0.42
NCI 0.28
Goodwill 0.7
(NCI is at Fair value)
Calculation of goodwill = 7 – 0.7 = 0.63

CRE = 40+20 = 60
+ post acquisition profits of S 9.6
- unsold stock of P 0.83
- unsold stock of S 0.9
- Goods in transit 0.5
- impairment of goodwill 0.42
274
66.95
NCI = 35 + 6.4 – 0.6 – 0.28 = 40.52
Question No. 3
The summarized trial balances of Oscar Limited (OL) and United Limited (UL) as at 31 December
2015 are as follows:
Oscar Limited (OL) United Limited
(UL)
Debit Credit Debit Credit
----------- Rs. In million --------------
Sales 835 645
Cost of sales 525 396
Operating expense 115 102
Tax expense 65 48
Share premium 150 60
Retained earnings as at 1 January 2015 265 179
Current liabilities 115 105
Cost of investment 500 -
Stock-in-trade 125 115
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 recognised the value of brand in
its books of account. At the date of acquisition, the fair value of brand was assessed at Rs. 45
million. The remaining useful life of the brand was estimated as 15 years.
(ii) OL charged Rs. 2.5 million monthly to UL for management services provided from the date of
acquisition and has credited it to operating expenses.
(iii) On 1 October 2015, UL sold a machine to OL for Rs. 24 million. The machine had been
purchased on 1 October 2013 for Rs. 26 million. On the date of acquisition the machine was
assessed as having a useful life of ten years and that estimate has not changed. Gain on disposal
was erroneously credited to sales account.
(iv) Other inter-company transactions during the year 2015 were as follows:
Included in buyer’s
Sales
closing stock-in-trade Profit %
------------ Rs. In million -------------
OL to UL (P – S) 60 20 25% of cost
UL to OL (S – P) 30 5 20% of sales
UL settled the inter-company balance as on 31 December 2015 by issuing a cheque of Rs. 30
million. However, the cheque was received by OL on 1 January 2016.
(v) The non-controlling interest is measured at the proportionate share of UL’s identifiable net
assets.
It may be assumed that profits of both companies had accrued evenly during the year.
Required:
275
Prepare consolidated statement of comprehensive income for the year ended 31 December 2015 and
consolidated statement of financial position as at 31 December 2015. (18)
Answer No. 3
Oscar Limited
Consolidated Statement of Comprehensive Income
Rs. In
million
Sales [835 + 645 × 8/12 – 60 × 8/12 – 30 × 8/12] – 3.2 1,201.8
Cost of sale [525 + 396 × 8/12 – 60 × 8/12 – 30 × 8/12] + 4 + 1- 0.1 (733.9)
Gross profit 467.9
Operating expenses [115 + 102 × 8/12] + 2 (185)
Tax expense [65 + 48 × 8/12] (97.00)
Profit after tax 185.9
Attributable to:
Owners of Parent (bal.) 173.92
Non-controlling Interest (99 × 8/12 – 3.2 + 0.1 – 1 – 2) × 20% 11.98
185.90
Statement of changes in equity

S.L S.P CRE NCI Total
Balance as on 1-1-2015 600 150 265 -- 1,015
NCI at Acquisition 113.4 113.4
Profit for the year 173.94 11.96 185.9
600 150 438.94 125.36 1,314.30
Oscar Limited
As on 31-12-2015
Rs. In Rs. In
million million
Non-Current Assets:
Property, plant & equipment (390 + 350 – 3.2 + 0.1) 736.9
Brand (45 – 2) 43.0
Goodwill 46.4
Current Assets:
Stock (125 + 115 – 4 – 1) 235.0
Trade receivables (140 + 125 – 30) 235.0
Cash and bank (105 + 103 + 30) 238.0
1,534.3
276
Share capital 600
Share premium 150
Con. Retained Earnings 438.92 1,188.92
Non-Controlling Interest 125.38
1,314.30
Current Liabilities (115 + 105) 220.00
1,534.3
Analysis of Equity of S:
P (80%) NCI
(20%)
Acquisition (1-5-2015)
Share capital 250
Share premium 60
Brand – FV 45 567 453.6 113.4
Cost of Investment 500.0
Goodwill 46.4
Profit for the year of UL = (645 – 396 – 102 – 48) = 99
Accounting Entries:
Brand 45
Amortization (45 ÷ 15 × 8/12) 2
Brand 2
(NCI will be affected)
Disposal of machine [by subsidiary to parent]:

01.01.2013
UL (Subsidiary)
Entry that would have been made:
Cash 24
*Accumulated Depreciation 5.2
Machine 26
Gain (sales) 3.2
*26 ÷ 10 × 2 = 5.2
Consolidation Adjustment
Sales 3.2
Machine 3.2
277
Reversal of extra depreciation:
3.2/8 x 3/12 = 0.1
Machine 0.1
Depreciation (cost of sales) 0.1
[NCI will also be affected by net gain of 3.1 (3.2 – 0.1) as machine is sold by subsidiary]
(iii) UL would have charged management fee as an expense in operating expenses. OL has recorded
the income by crediting the operating expenses therefore net affect is already cancelled. If we
make an entry it will be:
Operating expenses OL 20
Operating expenses UL 20
(2.5 × 8 = 20)
Therefore no need of any adjustment.
(iv) (a) OL to UL (P – S)
20
× 25 = 4
125
COS 4
Stock 4
(No effect on NCI)
(b) UL to OL (S – P)
5
× 20 = 1
100
COS 1
Stock 1
In addition UL would have made entry as follows:

Payable to OL 30
Bank 30
Therefore at the year end, OL will make a reconciling entry as follows:
Cash in transit 30
UL (Receivable from UL) 30
Entries that have already been made:
OL UL
(UL) Debtor 60 Purchases 60
Sale 60 (OL) Payable 60
Purchases 30 Debtor (OL) 30
278
(UL) payable 30 Sales 30
Q. 4 The draft summarized statements of financial position of Golden Limited (GL) and its
subsidiary Silver Limited (SL) as at 31 December 2016 are as follows:
GL SL
---------- Rs. in million ----------
Building 1,600 500
Plant & machinery 1,465 690
Investment in SL 327 -
Current assets 2,068 780
5,460 1,970

Retained earnings 3,150 210
4,860 810
Liabilities 600 1,160
5,460 1,970
GL acquired 60% of the shares of SL on 1 April 2016 at following consideration:

 Issuance of 20 million ordinary shares at premium of Rs. 2 each;
 Cash amounting to Rs. 87 million, which includes consultancy charges of Rs. 10

million and legal expenses of Rs. 5 million.
The market value of each share of GL and SL on acquisition date was Rs. 25 and Rs. 11
respectively. At acquisition date, retained earnings of SL were Rs. 100 million.
The following table sets out those items whose fair value on the acquisition date was different
from their book value. These values have not been incorporated in SL’s books of account.
Book value Fair value

---------Rs. in million---------
Building 250 170
Inventory 112 62
Provision for bad debts (15) (24)
Buildings are depreciated at the rate of 20%

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.
279
SL paid an interim cash dividend of 10% on 31 July 2016.
GL values non-controlling interest at the acquisition date at its fair value.
Required:
Prepare a consolidated statement of financial position as at 31 December 2016 in
accordance with the requirements of International Financial Reporting Standards.
A.4
Golden Limited
As on 31-12-2016
Millions
Non-Current Assets:
Building [1,600 + 500 – 80 + 3] 2,023
Plant & Machinery [1,465 + 690] 2,155
Current Assets:
Current Assets [2,068 + 780 – 50 – 9 – 12.5] 2,776.5
6,954.5
Share Capital 980.0
Share premium 730.0
Consolidated Retained Earnings [3,150 + 24.6 + 66 – 15 + 1.8] 3,227.4
4,937.4
Non-Controlling Interest [198 + 26.4 + 44 + 1.2 + 0.6 – 4] 269.6
5,207
Liabilities [600 + 1,160 – 12.5] 1,747.5
6,954.5
Workings:
Analysis of Equity of SL
GL (60%) NCI (40%)
At Acquisition:
Share capital 450
Share premium 150
700
Revaluation Loss (80 + 50 + 9) (139)
561 336.6 224.4
Cost of Investment (20 × 12 + 72) [327 -15] 312.00
FV of NCI [450 ÷ 10 × 40% × 11] 198.00
Gain on bargain purchase 24.6 26.4
280
Since Acquisition till the SOFP date:
Retained earnings (210 – 100) 110 66 44
Entries:
(i) CRE (10 + 5) 15
Investment 15
(ii) R. Loss 80
Building 80
(iii) 80 × 5% × 9/12 = 3
Building 3
CRE 1.8
NCI 1.2
(iii) R. Loss 50
Inventory 50
(iv) Revaluation Loss 9

Provision 9
(v) Payable – S.L 12.5
Receivable – G.L 12.5
50/2 = 25 × 3/6 = 12.5
Note: No effect of interim dividend declared during the year, it should have been recorded by SL.
281
Consolidation Test:
Question No. 1
Emerald plc has investments in Amethyst Ltd several years ago. Emerald plc acquired 70% of the
ordinary shares of Amethyst Ltd when the retained earnings of Amethyst Ltd were Rs. 232,000.
Emerald plc made a long-term loan to Amethyst Ltd. of Rs. 100,000 when it acquired its shares in
amethyst Ltd. That loan is not expected to be repaid in the foreseeable future.
The draft summarised statements of financial position of the two companies at 30 September 2011 are
shown below:
Emerald plc Amethyst Ltd.

Rs. Rs.
Assets
Non-current assets
Investment in Amethyst Ltd 700,000 --
Loan to Amethyst Ltd 100,000 --
1,600,700 815,500
Current Assets
Trade and other receivables 345,200 362,800
Cash and cash equivalents 11,500 5,700
924,100 714,000
Total Assets 2,524,800 1,529,500
Equity:
Ordinary share capital (Rs. 1 shares) 800,000 400,000
Retained earnings 1,327,700 611,000
2,127,700 1,011,000
Non-current Liabilities
Loan from Emerald plc -- 100,000
Current Liabilities
Trade and other payables 257,100 298,500
Taxation 140,000 120,000
397,100 518,500
Total equity and liabilities 2,524,800 1,529,500
(1) The fair values of the assets and liabilities of Amethyst Ltd at the date of their acquisitions by
Emerald plc were equal to their carrying amounts with the exception of land held by Amethyst
Ltd. It had a carrying amount at acquisition of Rs. 52,000, but a fair value of Rs. 65,000.
282
(2) On 1 October 2010, Amethyst Ltd sold a machine to Emerald plc for Rs. 40,000. The machine
had been purchased by Amethyst Ltd on 1 October 2008 for Rs. 35,000. The total useful life of
the machine was originally assessed as four years and that estimate has never changed.
(3) Included in Emerald plc’s inventories at 30 September 2011 were goods which had been
purchased from Amethyst Ltd for Rs. 46,000. These goods have been sold at a mark-up of
25%. Half of these goods are still in inventory.
(4) At 30 September 2011 Emerald plc’s trade receivables included Rs. 85,000 due from Amethyst
Ltd. However, Amethyst Ltd’s trade payables included only Rs. 60,000 due to Emerald plc.
The difference was due to cash-in-transit.
(5) At 30 September 2010, cumulative impairment losses in respect of goodwill arising on the
acquisition of Amethyst Ltd of Rs. 50,000 had been recognised. A further impairment loss of
Rs. 15,000 in respect of goodwill arising on the acquisition of Amethyst Ltd needs to be
recognised in the current year.
Required:
(a) Prepare the consolidated statement of financial position of Emerald plc as at 30 September
2011. (18)
Answer No. 1
Emerald
As on September 30, 2011
Rupees
Assets
Non-Current Assets:
Property, Plant & Equipment (800,700 + 815,500 + 13,000 – 11,250) 1,617,950
Goodwill (248,500 – 50,000 – 15,000) 183,500
1,801,450
Current Assets:
Inventory (567,400 + 345,500 – 4,600) 908,300
Trade and other receivables (345,200 + 362,800 – 25,000 – 60,000) 623,000
Cash and cash equivalent (11,500 + 5,700 + 25,000) 42,200
3,374,950
Equity:
Retained earnings (W-1.1) 1,516,905
Non-controlling interest (W-1.2) 2,316,905
302,445
2,619,350
Trade and other payables (257,100 + 298,500 – 60,000) 495,600
Taxation (140,000 + 120,000) 260,000
3,374,950
(W-1) Analysis of equity
283
At the date of acquisition Total Parent NCI
70% 30%
Revaluation surplus (W-2) 13,000
645,000 451,500 193,500
Goodwill 248,500
Change since acquisition till balance sheet date
Retained earnings (611,000 – 232,000) 379,000 265,300 113,700
(W-1.1) Consolidated retained earning

Balance as at 30/9/11 1,327,700
Balance of subsidiary as at 30/9/11 265,300
Elimination of unrealised gain on sale of machine (net) (7,875)
Elimination of excess depreciation charged 11,250
Elimination of unrealised gain on sale of stock (3,220)
Impairment loss on goodwill 2010 (W-5) (50,000)
Impairment loss on goodwill 2011 (W-5) (15,000)
1,516,905
(W-1.2) Non-controlling interest

NCI at acquisition 193,500
Balance of subsidiary as at 30/9/11 113,700
Elimination of unrealised gain on sale of machine (3,375)
Elimination of unrealised gain on sale of stock (1,380)
302,445
(W-2) Entry for adjustment (i)

Particulars Dr. Cr.
Land (65,000 – 52,000) 13,000
(Revaluation surplus on land at the date of acquisition)
(W-3) Entry for adjustment (ii)
Particulars Dr. Cr.
CRE (22,500 × 70%) 7,875
NCI (22,500 × 30%) 3,375
PPE 11,250
Machine sold by parent to subsidiary
Gain on disposal
284
[35,000 /4 x 2] =17,500
WDV = 17,500 [35,000 – 17,500]
Cash = 40,000
Gain = 22,500 (to be reversed)
Depreciation adjustment: [22,500/2 = 11250 (to be reversed)]
Remaining life is 2 years on the date of sale.
Net gain to be reversed [22,500 – 11,250 = 11,250] (to be reversed)
(W-4) Entry for adjustment (iii)

Particulars Dr. Cr.
CRE (4,600 × 70%) 3,220
NCI (4,600 × 30%) 1,380
Stock 4,600
(Elimination of unrealised gain on sale of stock)
Sale price of stock (46,000/2) 23,000

Unrealised gain (23,000/125 × 25) 4,600
(W-5) Entry for adjustment (v)
Particulars Dr. Cr.
CRE 50,000
Goodwill 50,000
(Recording of impairment loss on goodwill of 2010)
CRE 15,000
Goodwill 15,000
(Recording of impairment loss on goodwill of 2011)
Q.2 Following are the financial statements for the year ending June 30, 2015:
P Ltd. S Ltd.
Income statement Rs. In million
Sales 210,000 180,000
Cost of sales (140,000) (108,000)
Distribution cost (12,000) (10,800)
Admin expenses (10,000) (7,200)
Finance cost (6,500) (4,800)
Other income 4,800 100
Tax (19,000) (21,000)
285
Statement of retained earnings:

Opening retained earnings 105,000 75,000
Closing retained earnings 132,300 103,300

(i) P Ltd. (PL) acquired 70% shares of S Ltd. (SL) on November 1, 2014 for Rs. 82 million. Fair
value of identifiable net assets of S Ltd. at that date was Rs. 110 million.
(ii) Above net assets included an item of equipment which had a net book value higher than fair
value by Rs. 3 million. It’s remaining useful life at that date was 5 years.
(iii) Consolidated goodwill is impaired by 20% at year end.
(iv) On January 1, 2015 PL gave a loan of Rs. 30 million to SL at an annual interest of 12%. Both
companies have properly accounted for interest for the year.
(v) Both companies have been selling goods to each other throughout the year. PL always earned a
profit margin of 25% on all inter-company sales. SL used to earn margin of 30% which was
reduced to 20% after acquisition. Inter-company sales throughout the year are as follows:
Rs. ‘000’
Sales by PL to SL 24,000
Sales by SL to PL 18,000
Out of post-acquisition sales, goods worth Rs. 3 million are held with PL and Rs. 4.5 million
are held with SL in stock at year end.
(vi) On June 30, 2015 SL also sold some old vehicles having carrying amount of Rs. 400,000 for
Rs. 500,000 to PL. SL has been depreciating the vehicles using straight line method over a life
of 5 years. However, PL has decided to depreciate these vehicles using 30% on reducing
balance basis.
Required:
(a) Prepare consolidated income statement and statement of retained earnings.
(b) Assuming that fair value of NCI at acquisition date was Rs. 34 million and that impairment loss
at year end is 20% of full goodwill, how would profit attributable to shareholders of PL and
NCI change? (18)
A.2
(a) Consolidated Income Statement
For the year ended June 30, 2015
‘000’
Sales (210 + 180 × 8/12 – [24 + 18] × 8/12) 302,000
Cost of sales (140 + 108 × 8/12 – [24 + 18] × 8/12 + 0.6 + 1.125 – 0.4) (185,325)
Distribution cost (12 + 10.8 × 8/12) (19,200)
Admin Expenses (10 + 7.2 × 8/12 + 1) (15,800)
Financial charges (6.5 + [4.8 – 1.8] × 8/12 + 1.8 – 1.8] (8,500)
286
Other income [4.8 + 0.1 – 0.1 – 1.8] 3,000
Tax (19 + 21 × 8/12) (33,000)
Profit Attributable to:
Owners of the Parent (bal.) 37,775
[(28.3 – 0.1 + 1.8) × 8/12 + 0.1 – 1.8] – 0.6 + 0.4 – 0.1] × 30% 43,175
Calculation of goodwill (for impairment loss)

Cost of Investment 82,000
Net Assets Acquisition (110,000 × 10%) 77,000
Goodwill 5,000
× 20% 1,000
(b)
Revised PAT (43,175 + 1,000 – 1,200) 42,975
Profit Attributable:
Owners of Parent (bal.) 37,935
NCI (5,400 – 1,200 × 30%) 5,040
42,975
Calculation of Goodwill (if NCI is at FV)
P (70%) NCI (30%)
FV of net Assets 77,000 33,000
Cost of Invest 82,000
FV of NCI 34,000
Total Goodwill 5,000 1,000 6,000 × 20% = 12
Accounting Entries:
(i) Asset 0.4
Depreciation 0.4
[3 ÷ 5 × 8/12 = 0.4]
(Net book value higher than FV so reversal of
dep.)
(Asset of S effect on NCI)
Impairment loss 1
Goodwill 1
(Goodwill of parent so no effect on NCI)
(a) COS 0.6
Stock 0.6
287
3
(SL → PL) × 20 = 0.6
100
(Effect on NCI)
(b) COS 1.125
Stock 1.125
4 .5
(PL → SL) × 25 = 1.125
100
(No Effect on NCI)
Other Income 0.1
PPE 0.1
(SL → PL)
(Effect on NCI)
[No depreciation adjustment as asset is sold on the last day of the year].
Interest income / other income 1.8
Interest expenses / Financial charges 1.8
[30 × 12% × 6/12] = 1.8
If NCI is at FV then; Entry of Impairment loss is:
Impairment loss 1.2
Acc. Impairment loss 1.2
(6,000 × 205)
(it will now effect NCI)
288
Test cash flow and IAS 16:
Question 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
Rs. In million Rs. In million
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 31 st July
each year. Interest payable for 5 months has been accrued.
(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 the indirect method. (15)
Question No. 2
Abid Limited (AL) uses the revaluation model for subsequent measurement of its property, plant and
equipment and has a policy of revaluing its assets on an annual basis using the net replacement value
method.
289
The following information pertains to AL’s buildings:
(i) Four buildings were acquired in same vicinity on 1 January 2012 at a cost of Rs. 300 million.
The useful life of the buildings on the date of acquisition was 20 years.
(ii) AL depreciates buildings on the straight line basis over their useful life.
(iii) The results of revaluations carried out during the last three years by premier Valuation Service,
an independent firm of valuers, are as follows:
Fair value
Revaluation date
Rs. In million
1 January 2013 323
1 January 2014 252
1 January 2015 272
(iv) On 30 June 2015, one of the buildings was sold for Rs. 80 million.
Required:
Prepare a note on “property, plant and equipment” (including comparative figures) for inclusion in
AL’s financial statements for the year ended 31 December 2015 in accordance with International
Financial Reporting Standards. (Ignore taxation) (13)
Answer 1
Alpha Limited
Statement of Cash Flow
Cash Flow From Operating Activities:
Profit before tax (61 + 17) 78
Interest expense 2.17
Depreciation 17.00
Gain on disposal (2.00)
Bad debts 5.63
Gratuity expense 9.5
Profit before working capital charges 110.3
Working Capital Charges:
Trade debtors (17.63)
Inventories (60 – 46) (14.00)
Advances and Prepayments (12.00)
Trade payables (42 – 56) (14.00)
Accrued expense (12.17)
Cash for generated from operations 40.5
Tax paid (25)
Gratuity paid (6.5)
Net cash from operating Activities 9.00
Cash flow From Investing Activities:
290
Purchase of machinery (65)
Receipt from disposal 20
Acquisition of intangibles (45)
Purchase of investments (12 – 9) (3)
Net Cash From Investing Activities (93)
Cash Flow From Financing Activities:

Proceeds from issue of right shares (150/10 = 15 × 1/5 × 15) 45
Proceeds from long term loan 40
85
Net Cash Flow 1
Cash and cash equivalents at the beginning of the period 7
Cash and cash equivalents at the end of the period 8
Workings:
PPE – WDV
b/d 193 Disposal (20 – 2) 18
Cash 65 Depreciation (bal.) 17
c/d 223
20 ÷ 20 × 6/12 = [0.5 + 1 + 0.5] = 2
Intangibles
b/d 23
45
c/d 68
Receivables
b/d 34.74 Provision 5
17.63
c/d 47.37
33/95% = 34.74
45/95% = 47.37
Provision
Debtors 5 b/d 1.74
5.63
c/d 2.37
Advances
b/d (70 – 6) 64
12
291
c/d (84 – 8) 76
Advances tax + tax Payable
b/d 6 b/d 42
Cash 25 Expenditure (17 – 2) 15
c/d 34 c/d 8
Share Capital
b/d 150
30
c/d 180
Share Premium
b/d --
15
c/d 15
Retained Earnings
b/d 53
PAT 61
c/d 114
Loan
b/d --
40
c/d 40
D.T.L
b/d 7
2
c/d 9
Cash 6.5 b/d 3
Expense 9.5
c/d 6
Accrued Expenses
12.17 b/d 70
c/d (60 – 2.17*) 57.83

*(40 × 13% × 5/12 = 2.17)
Interest Payable
292
b/d --
2.17
c/d 2.17
Disposal A/c
PPE 18 Cash 20
Gain 2
Answer No. 2
Abid Limited
Note of Property, Plant & Equipment :
Rs. In Millions
2015 2014
Cost/Revalued Account:
Preparing balance 252 323
Addition/Disposal (68) --
Elimination (14) (17)
Revaluation 34 (54)
Closing balance 204 252
Accumulated Depreciation
Opening balance 14 17
Elimination (14) (17)
For the year 14 14
Disposal (2) --
Closing balance 12 14
Carrying amount 192 238
Useful life 20 years 20 years
Disclosures of Revaluation:
The revaluation was performed on 1-1-2015 by M/s Premies Valuatin Services, an independent firm
of valuers. Revaluations are performed annually. The carrying amount of buildings had they were
carried at cost model would have been:
31-12-2014 = 300 – (15 × 3) = 255
31-12-2015 = 225* - 45** = 180
* [300 – 75] = 225
** [225 ÷ 20 × 4] = 45
Detail of Disposal of building:

Cost / Revalued Amount = (272 ÷ 4) = 68
Accumulated Depreciation (68 ÷ 17 × 6/12) = 2
Carrying Amount 66
Sale proceeds 80
Mode of Disposal Not Available
Particulars of buyer Not Available
Workings: (Ledgers; not required in exam but for calculation of figures)
Building A/c
293
2012
Cash 300
c/d 300
b/d 300 Accumulated depreciation 15
Revaluation surplus (285 – 323) 38
c/d 323
R. Loss 18
c/d 252
Reversal of loss 17 Disposal (W-2) 68
Revaluation surplus (W-1) 17
c/d 204
Accumulated Depreciation
Depreciation (300 ÷ 20) 15
c/d 15
Building 15 b/d 15
c/d 17
Building 17 b/d 17
c/d 14
Building 14 b/d 14
Disposal 2 Depreciation (W-3) 14
c/d 12
Revaluation Surplus
Retained earnings (38 ÷ 19) 2 b/d --

Building 38
c/d 36
Building 36 b/d 36
c/d --
Retained earnings (W-4) 0.875 b/d --
Retained earnings (4.25 – 0.125) 4.125 Building 17
c/d (4 × 3) 12
Workings:
1) 01.01.2015
WDV = 238 17
HCA = 255 (300 – 15 × 3)
FV = 272 17
(2) FV of Building Disposed:
272/4 = 68
294
(3) Depreciation for the year:
[232 – 68] ÷ 17 = 12
[68 ÷ 17 × 6/12] = 2
(4) Transfer of Surplus:
17/4 = 4.25 per building; 17 - 4.25 = 12.75 ÷ 17 = 0.75; 4.25/17 x 6/12 = 0.125; total 0.75 +
0.125 =0.875
295
Introduction to IFRS 3
Definitions [Appendix A- Defined terms.]
A business combination is a transaction or other event in which an acquirer obtains control of one or more
businesses.
A business is an integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to
investors or other owners, members or participants.
Objective of IFRS 3 [Para 1]

The objective of IFRS 3 is to improve the relevance, reliability and comparability of information reported about
business combinations and their effects.
It establishes principles and requirements for:
 the recognition and measurement of identifiable assets acquired, liabilities assumed and non- controlling
interest in the acquiree;
 the recognition and measurement of goodwill (or a gain from a bargain purchase); and
 disclosures that enable users to evaluate the nature and financial effects of a business combination.
Acquisition method [IFRS 3 Para 5]

 All business combinations are accounted for by the acquisition method which involves: identifying the
acquirer;
 determining the acquisition date;
 recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non- controlling
interest in the acquiree; and
 recognizing and measuring goodwill or a gain from a bargain purchase
Identifying the acquirer [IFRS 3 Para 6 and 7] and [B 15]

 The acquirer is usually the combining entity whose relative size is significantly greater than that of the
other(s).
 In a business combination affected by transferring cash (other assets) or by incurring liabilities the acquirer
is usually the entity that makes the transfer or incurs the liabilities.
 In a business combinations affected by exchange of equity interests the acquirer is usually the entity that
issues equity.
Also note that the acquirer is usually the entity:
 whose owners have the largest portion of the voting rights in the combined entity;
 whose owners have the ability to determine the composition of the governing body of the combined entity;
 whose (former) management dominates the management of the combined entity;
 that pays a premium (extra over fair value) over the pre-combination fair value of the equity interests of the
others
Determining the acquisition date [IFRS 3 Para 8]

Acquisition date is the date on which the acquirer effectively obtains control of the acquiree.
This generally is the date of transfer of consideration and when net assets are acquired but might be before or
after this date depending on circumstances.
296
Cost [means purchase consideration is the sum of]
IFRS 3 states that the purchase consideration for an acquisition (business combination) is the sum of:

the fair values, at the acquisition date, of the assets transferred by the acquirer, such as cash

the liabilities incurred by the acquirer to the former owners of the acquire (e.g payable)

equity instruments issued by the acquirer in exchange for control of the acquire (shares)
The purchase consideration may include some deferred consideration (discussed next)
Parent issues shares as part of the purchase consideration:

When the acquirer issues shares as part of the purchase consideration and the shares are quoted equity
instruments (means listed shares), they are normally valued at their market price at the acquisition date for
the purpose of measuring the consideration/acquisition cost.
Costs of acquisition: transaction costs

Transaction costs incurred in making an acquisition, such as the cost of the fees of advisers and lawyers, must
not be included in the cost of the acquisition. These costs must be treated as an expense as incurred and
written off to profit or loss.
The amount of transaction costs associated with an acquisition and written off during the period to profit or loss
must be disclosed in a note to the financial statements.
Example:
Company P acquired 80% of the shares of Company S when the fair value of the net assets of S was Rs.
800,000. Date of acquisition of shares is 01.01.2019.
The purchase price was Rs. 300,000 in cash plus 10,000 new shares in Company P. The new shares were to be
issued 1 month after the date of acquisition.
The market value of P’s shares at the date of acquisition was Rs.40 each. One month later the market value had
increased to Rs.45. The nominal value of P’s shares is Rs.10 each
The transaction costs of making the acquisition comprising of fees of advisors and lawyers were Rs.80,000.
Required: Discuss the relevant accounting treatment.
Answer:
The cost of the investment in the shares of S = Rs. 300,000 + (10,000 × Rs.40) = Rs. 700,000. The share
price at the date of acquisition is used not that at the date of issue.
Investment 700,000
Share capital (10,000 x 10) 100,000
Share premium (10,000 x 30) 300,000
Cash 300,000
The costs of making the acquisition i.e 80,000 should be written off to profit or loss.
The parent company’s share of the net assets of S at the acquisition date was Rs. 640,000 (80% Rs. 800,000).
Purchased goodwill attributable to owners of the parent company is therefore Rs. 60,000 (Rs. 700,000 - Rs.
640,000).
Example: Share exchange
The parent has acquired 12,000 shares in the subsidiary by issuing 5 of its own Rs.1 shares for every 4 shares in
the subsidiary. The market value of the parent company’s shares on the date of acquisitionwas 6.
Cost of the combination:
12,000 x 5/4 = 15,000 shares x 6 90,000
297
Debit Credit
Investment in subsidiary 90,000
Share capital (15,000 x 1) 15,000
Share premium (15,000 x 5) 75,000
If an entity borrows money to finance an acquisition, the costs associated with arranging the borrowing are
treated in accordance with the rules of IFRS 9. These costs are deducted from the value of the debt and
amortized over the term of the debt using the effective rate of interest (i.e. the amortized costmethod).
Before next discussion:
Seller
01.01.2018 31.12.2018 31.12.2019
Sale Receipt
100,000
Buyer
01.01.2018 31.12.2018 31.12.2019
Purchase Payment
100,000
Deferred consideration
Sometimes all or part of the cost of an acquisition is deferred and does not become payable until a later date (e.g
one or two years)
The amount of any deferred consideration (the amount not payable immediately) is discounted to its
present value at the acquisition date.
Example
The parent acquired 75% of the subsidiary’s 80m Rs.1 shares on 1 January 2016. It paid 3.50 pershare and
agreed to pay a further 108m on 1 January 2017.The parent company’s cost of capital is 8%.
In the financial statements for the year to 31 December 2016 the cost of the combination will be:
Rs. m
80m shares x 75% x 3.50 210
Deferred consideration: 108m x (1 + 0.08)-1 100
Total consideration 310
01.01.2016
Investment 310
Cash 210
Payable 100
At 31 December 2016
8m will be charged to finance cost as per IAS 37, being the unwinding of the discount (means time value of
money) on the deferred consideration.
Finance Cost (CRE) 8
Payable 8
Point to remember:
If the consideration includes assets or liabilities of the acquirer carried at amounts different from their
fair values at the acquisition date, these are revalued and any gain or loss is recorded in profit or loss. It
is sort of a disposal of assets against shares so a realized gain or loss.
298
Question:
The draft statements of financial position of Ping Co and Pong Co on 30 June 2018 were as follows.
STATEMENT OF FINANCIAL POSITIONAS AT 30 JUNE 2O18
Ping Co Pong Co
Assets
Non-current assets
20,000 ordinary shares in Pong Co at cost 30,000
80,000
Current assets
Owed by Ping Co 10,000
Cash and cash equivalents 2,000 -
21,000 25,000
Total assets 101,000 65,000
Equity
Ordinary shares of 1 each 45,000 25,000
Revaluation surplus 12,000 5,000
83,000 58,000
Current liabilities
Owed to Pong Co 8,000 -
Trade and other payables 10,000 7,000
18,000 7,000
Total equity and liabilities 101,000 65,000
Ping Co acquired its investment in Pong Co on 1 July 2017 when the retained earnings of Pong Co stood
at 6,000. The agreed consideration was 30,000 cash and a further 10,000 on 1 July 2019, whichis not yet
recorded by Ping Co. Ping Co.’s cost of capital is 7%. Pong Co.’s has an internally-developedbrand name
– ‘Pongo’ – which was valued at 5,000 at the date of acquisition. It has an indefinite useful life. There
have been no changes in the share capital or revaluation surplus of Pong Co since that date.The difference
between the current A/C was due to cash in transit.
There is no impairment of goodwill. It is group policy to value NCI at full fair value. At the acquisition date
the NCI was valued at 9,000.
Required:
Prepare the consolidated statement of financial position of Ping Co as at 30 June 2018.
Solution:
PING CO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2018
Assets
Non-current assets 90,000
Property, plant and equipment (50,000 + 40,000) 6,734
Intangible assets: Goodwill 5,000
Brand name
Current assets
Inventories ( 3,000 + 8,000) 11,000
Trade receivables (16,000 + 7,000) 23,000
Cash in transit 2,000
Cash and cash equivalents 2,000
38,000
299
Equity
Ordinary shares of 1 each 45,000
Retained earnings [26,000 + 17,600 - 612] 42,988
99,988
NCI [9,000 + 4,400] 13,400
113,388
9,346
Deferred consideration [8,734+612]
Current liabilities
Trade and other payables (10,000 + 7,000) 17,000
139,734
Total equity and liabilities
Workings:
Example: Analysis of equity of Pong Co:
P (80%) NCI (20%)
At Acquisition: 1-7-20x7
Rev surplus(Because 100% Pre; because no change
after acquisition) 5,000
Rev surplus (Brand) 5,000
41,000 32,800 8,200 41,000
Investment (30,000 + 8,734) 38,734 38,734
FV of NCI (given) 9,000 9,000
5,934 800 6,734
Change Since Acquisition till SOFP date
Retained earnings (28,000 – 6,000) 22,000 17,600 4,400
Deferred consideration:
10,000 (1.07)-2 = 8,734
Investment 8,734
Payable 8,734
30.06.2018
Finance cost 612
(CRE)
Payable 612
8,734 x 7% = 612
Brand 5,000
R.S 5,000
Contingent consideration (conditional consideration)
Sometimes the final cost of the combination is contingent on (depends on) a future event. For example, an
acquirer could agree to pay an additional amount if the acquired subsidiary’s profits exceed a certain level within
three years of the acquisition.
In a situation such as this, the contingent payment should be included in the cost of the combination (discounted
to present value if the payment will occur up to or more than 12 months in the future).
Accounting treatment:
Under the rules of IFRS 3, contingent consideration must be recognised at fair value at acquisition, even
if it is not probable that the consideration will actually have to be paid.
300
Example: Contingent consideration
Company X purchased 100% of the issued capital of Company S on 1 January 2014.
The purchase agreement required Company X to pay Rs. 300,000 in cash immediately and an additional sum of
Rs. 100,000 on 31 December 2016 if the earnings of Company S increase at an annual rate of 25% per year in
each of the three years following the acquisition. Cost of capital is 10%. How should the contingent payment be
recognised in calculating the goodwill arising at the date of acquisition?
Answer
The contingent consideration should be included in the cost of investment (the purchase consideration) whether
or not it is probable that it will have to be paid. The contingent consideration of Rs. 100,000 should be
measured at fair value.
An appropriate measure of fair value will be the present value of the future payment, discounted at an
appropriate cost of capital. The purchase consideration is therefore:
300,000 + 100,000 (1+.01)-3 = 375,131
If there is still contingent consideration at the end of an accounting period, it might be necessary to remeasure
it (just like deferred consideration)
Example:
Hamid Limited (HL) bought 60% ordinary shares of Rashid Limited (RL) on 1st January 2022.
 HL’s total share capital (before this acquisition) is Rs. 300 million consisted of 30 million shares of Rs. 10
each.
 RL’s total share capital is Rs. 100 million consisted of 10 million shares of Rs. 10 each.
 On 1st January 2022, market value of one share of HL and RL was Rs. 29 and Rs. 21 respectively.
 Appropriate discount rate is 10%
Amounts paid or commitments made for the acquisition:
i) One share in HL was given for every two shares in RL.
ii) Rs. 4 per share was paid immediately to previous owners of RL. Further Rs. 3 per share shall be paid
three years later. Furthermore, Rs. 2 per share shall be paid two year later provided that profits of RL
exceed a certain benchmark. The fair value of this conditional payment has been estimated at Rs. 5.48
million.
iii) Legal advisor was paid Rs. 0.5 million and a consultancy fee of Rs. 1.5 million was paid to financial
consultant.
Required:
a) Calculate Investment in RL at cost in the above business combination.
b) Calculate fair value of NCI at the date of acquisition.
Answer:
Part (a) Investment in RL Rs. million
Share consideration [10m shares x 60% ÷2 x 1 x Rs. 29] 87
Cash consideration [10m shares x 60% x Rs. 4] 24
Deferred consideration [10m shares x 60% x Rs. 3 x 1.10-3] 13.52
Contingent consideration [at fair value] 5.48
130
301
Note 1: For share consideration Rs. 30 million (i.e. 6m shares x ½ x Rs. 10) shall be added to share
capital and Rs. 57 million (i.e. 6m shares x ½ x Rs. 19) shall be added to share premium.
Note 2: Transaction costs (legal and consultancy fee) of Rs. 2 million (0.5 + 1.5) shall be charged to
PL.
Part (b) Fair value of NCI at the date of acquisition Rs. million
[10m shares x 40% x Rs. 21] 84
Some exam questions give aggregate “investment” figure which includes investment in subsidiary andother
investments and need to be separated as only investment in equity of subsidiary is used for goodwill calculation.
Example
M Limited (ML) acquired 90% ordinary shares of S Limited (SL) on 1 July 2021. The statements of financial
position of both companies as at 30 June 2022 are as under:
ML SL
Rs. m Rs. m
Non-current assets
Investments (see note (i)) 430
Current assets 280 410
1,210 1,010
Equity
Ordinary Share capital (Rs. 10 each) 800 500
Retained earnings 260 280
1,060 780
Liabilities 150 230
1,210 1,010
The statements of comprehensive income of both companies for the year ended 30 June 2022 are asunder:
ML SL
Rs. m Rs. m
Revenue 1,478 1,230
Administrative expenses (120) (65)
Finance costs (10) -
Taxation (98) (45)
Profit after tax 180 110
Notes:
(i) The break-up of investment figure is as follows:
Rs. million
Investment in SL (paid in cash) 135
Acquisition costs related to SL (paid in cash) 5*
Other investments measured at FVTPL 290
430
*legal and consultancy fee
(ii) The arrangement for acquisition of SL also included following which have not been accounted for
yet:
Share exchange: One share in ML for every two shares acquired in SL. At the date of acquisition market value
of one share of ML and SL was Rs. 28 and Rs. 21 respectively.
302
Future cash payment: (deferred consideration) Additional Rs. 4 per share shall be paid on 30 June 2024.
Conditional cash payment: (contingent consideration) Another additional Rs. 2 per share shall be paid on 30
June 2023 provided that SL continues to earn profit of Rs. 100 million or above till then. The fair value of this
conditional payment was estimated to be Rs. 50 million on 1 July 2021.
However, on 30th June 2022 the fair value has been estimated at Rs. 48 million only. The appropriate discount
rate is 9%.
(iii) ML measures non-controlling interest at fair value on the date of acquisition.
Required: Prepare for ML, consolidated statement of financial position as at June 30, 2022 and consolidated
statement of comprehensive income for the year then ended
Answer:
M Limited’s Consolidated statement of financial position as at 30 June 2022
Non-current assets Rs. million
PPE 500 + 600 1,100
Investments 430 – 135 – 5 290
Goodwill 389
Current assets 280 + 410 690

2,469
Equity
Share capital 800 + 225 1,025
Share premium 0 + 405 405
Retained earnings 343.49
Non-controlling interest 116
Liabilities 150 + 230 + [139 + 12.51] + [50 – 2]

579.51
2,469
M Limited’s Consolidated statement of comprehensive income for the year ended 30 June 2022
Rs. Million
Revenue 1,478 + 1,230 2,708
Cost of sales 990 + 970 (1,960)
Gross profit 748
Distribution costs 80 + 40 (120)
Administrative expenses 120 + 65 + 5-2 (188)
Finance cost 10 + 0 + 12.51 (22.51)
Taxation 98 + 45 (143)
Profit attributable to:

Parent (balancing) 263.49
Non-controlling interest 110 x 10% 11
274.49

Share capital Share premium C.R.E N.C.I
b/d 800 - 80 (260-180) -
NCI at Acq. 105
303
Issue of share 225 405
Profit of year 263.49 11
c/d 1,025 405 343.49 116
Analysis of Equity of S:
P(90%) NCI(10%)
At acquisition
Share capital 500
Retained earnings 170(280-110)
670 603 67 670
Cost of investment (430-290-5-630+139+50) 954 954
FV of NCI (500/10=50x10%x21) 105 105
Good will 351 +38 =389
At acquisition
Expense 5
investment 5
At acquisition
Investment 630
Share-capital 225
Share-premium 405
[500/10 x 90% = 45/2 x 1 = 22.5 million shares x28 = 630]
Investment 139
payable 139
[45M x 4 = 180(1 + 0.09)-3 = 139
31-06-2022
Finance cost 12.51

payable 12.51
139 x 9% = 12.51
At acquisition
investment 50
payable 50
30-06-2022
Payables 2
expense 2
Example
Statements of comprehensive income for the year ended 31 December 2015.
Bumpy Smooth
Rs. 000 Rs. 000
Revenue 304,900 195,300
Cost of sales (144,200) (98,550)
Operating costs (76,450) (52,100)
Operating profit 84,250 44,650
Investment income 10,500 2,600
304
Bumpy Smooth
Gain on revaluation 5,000 2,500
Total comprehensive income 56,850 33,250
The following information is also available.
(i) Bumpy acquired 75% of the share capital of Smooth on 31 August 2015.
(ii) Negative goodwill of Rs. 3.8 million arose on the acquisition.
(iii) Profits of both companies are deemed to accrue evenly over the year except for the investment income of
Smooth all of which was received in November 2015.
(iv) The revaluation of asset was carried on by both companies on 1 July 2015.
(v) Bumpy has bought goods from Smooth throughout the year at Rs. 2 million per month. At the year -end
Bumpy does not hold any inventory purchased from Smooth.
Required: Prepare the consolidated statement of comprehensive income for the year ended 31December 2015.
Answer: Consolidated statement of comprehensive income

Rs. 000
Revenue 304,900 + 195,300 x 4/12 – (2,000 x 4 months) 362,000
Cost of sales 144,200 + 98,550 x 4/12 – (2,000 x 4 months) (169,050)
Operating costs 76,450 + 52,100 x 4/12 (93,817)
Investment income 10,500 + 2,600* 13,100
Gain on bargain purchase 3,800
Tax 42,900 + 16,500 x 4/12 (48,400)
Gain on revaluation 5,000 + 0** 5,000
Total comprehensive income 72,633
Parent (balancing) 64,637
Non-controlling interest(30750-2600) x 4/12 x 25% + 2600x 25%) 2,996
67,633
Total comprehensive income attributable to:
Parent (balancing)[64,637+5,000] 69,637
Non-controlling interest(2996 + 0) 2,996
72,633
*all relates to post-acquisition period
**all relates to pre-acquisition period
Example
T Limited (TL) acquired 80% ordinary shares of M Limited (ML) on 1 July 2021. The statements offinancial
position of both companies as at 30 June 2022 are as under:
TL ML
Rs. m Rs. M
305
Non-current assets
Investment in ML 530
Current assets 280 410
1,310 1,010
Equity
Ordinary Share capital (Rs. 10 each) 800 500
1,060 780
Liabilities 250 230
1,310 1,010
The statements of comprehensive income of both companies for the year ended 30 June 2022 are asunder:
TL ML
Rs. m Rs. M
Revenue 1,478 1,230
Other income 45 40
Administrative expenses (175) (105)
Taxation (98) (45)
Profit after tax 180 110
 During the year ML sold goods to TL for Rs. 75 million. These goods were priced at cost plus25% mark-up.
TL has sold 80% of these goods at further mark-up of 15% to entities outside group. By the year-end, TL
has paid (and ML has received) 50% of the amount due.
 On 1st January 2022, TL transferred one of its plant to ML for Rs. 140 million. The book value of this plant
on the date of transfer was Rs. 100 million and it had remaining useful life of 8 years at this date. ML had
immediately paid this amount to TL.
 TL measures non-controlling interest at fair value as at the date of acquisition that was measured at Rs. 225
million.
Required: Prepare for TL, consolidated statement of financial position as at June 30, 2022 and consolidated
statement of comprehensive income for the year then ended
Answer:
Consolidated statement of financial position as at 30 June 2022
Non-current assets Rs. million
Property, plant & equipment 500 + 600 – 37.5 1,062.5
Goodwill 85
Current assets 280 + 410 – 37.5 – 3 649.5
1,797
Equity
Share capital 800 800
Non-controlling interest 246.4
Liabilities 250 + 230 – 37.5 442.5
306
1,797
Consolidated statement of comprehensive income for the year ended 30 June 2022
Rs. million
Revenue 1,478 + 1,230 – 75 2,633
Cost of sales 990 + 970 – 75 + 3 (1,888)
Gross profit 745
Other income 45 + 40 – 37.5 47.5
Distribution costs 80 + 40 (120)
Administrative expenses 175 + 105 (280)
Taxation 98 + 45 (143)

Parent (balancing) 228.1
Non-controlling interest [ 110 – 3 ] x 20% 21.4
249.5
Share capital Retained earnings N.C.I Total

b/d 800 80(260-180) - 1060
NCI at Acq. 225 225
Profit 228.1 21.4 249.5
c/d 800 308.1 246.4
Analysis of Equity of ML
P (80%) NCI (20%) Total
At Acquisition:
Share capital500
Retained Earnings
170[280 – 110]
670 536 134 670
Cost Of Investment 530 530
FV of NCI 225 225
755
(6) 91 85
Workings:
S P
75 x 20% = 15/125 x 25 = 3
Cost of Sale 3
Stock 3
(NCI will be
affected)Payable37.5
Receivable 37.5
[75 x50%]
P S
Gain to be Reversed 40.0 Dr.
Extra Dep to be reversed 2.5 Cr.
(40/8 x 6/12) 37.5 Dr.
307
Gain 37.5
PPE 37.5
(NCI will not be affected).
Re measurement of contingent consideration:

1. If the contingent consideration will be payable in cash, it should be re-measured to fair value atthe end of
the reporting period. Any gain or loss on re-measurement should be taken to profit or loss.
2. If the contingent consideration will take the form of debt instrument (e.g. parent will issue debentures),
the amount of the debt is re-measured at fair value at the end of the reporting period and the change in value
is recognised in profit or loss in the period.
3. If the contingent consideration will take the form of equity instrument, it is not re-measured at the end
of the reporting period (shares issued by company are not re measured by the company that has issued
shares).
A reason for re-measuring the contingent consideration is that the amount payable might depend on the
performance of the subsidiary after its acquisition.
If the profits are higher than expected, the contingent consideration might be re-measured to a higher value,
increasing the liability (the contingent payment) and reducing the reported profit for the period.
Similarly, if the profits are lower than expected, the contingent consideration might be re-measured to a lower
value, reducing the liability (the contingent payment) and increasing the reported profit for the period (Note:
under previous accounting rules before IFRS 3, any increase in the value of contingent consideration was
charged to Goodwill).
A right to return the previous transferred consideration is classified as a receivable if specified conditions are
met.
Acquisition date amounts of assets acquired and liabilities assumed

Core principle
An acquirer of a business must recognise assets acquired and liabilities assumed at theiracquisition
date fair values.
The acquiree’s identifiable assets and liabilities might include assets and liabilities not previously recognized
in the acquiree’s financial statements. For example, internally generated brands or customer lists and
contingent liabilities under IAS 37.
Contingent liabilities
Many acquired businesses will contain contingent liabilities such as contingent liabilities for the settlement of
legal disputes or for warranty liabilities. IFRS 3 states that contingent liabilities should be recognised at
acquisition ‘even if it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.’
This is a departure from the normal rules in IAS 37; i.e. they are not recognized but only disclosed.
The contingent liabilities should be measured at fair value at the acquisition date.
Contingent assets are not recognised.

Restructuring costs and future losses:
An acquirer should not recognise a liability for the cost of restructuring a subsidiary or for any
other costs expected to be incurred as a result of the acquisition (including future losses).
This is because a plan to restructure a subsidiary after an acquisition cannot be a liability at the acquisition date.
For there to be a liability (and for a provision to be recognised) there must have been a past obligating event.
This can only be the case if the subsidiary was already committed to the restructuring before the acquisition.
308
This means that the acquirer cannot recognize a provision for restructuring at the acquisition and then
release (reverse) it to profit or loss in order to increase profits or reduce losses after acquisition.
Issue costs of shares (e.g. prospectus charges)
However, IFRS 3 requires that the cost of issuing equity is treated as a deduction from the proceeds of the equity
issue (IFRS 3: para. 53). Share issue costs will therefore be debited to the share premium account (rather
than to profit or loss).
Definition: Fair value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transactionbetween
market participants at the measurement date.
How to measure Fair values of different assets and liabilities:

The net assets of a newly acquired business are subject to a fair valuation exercise as follows:The table below
shows how different types of asset and liability should be valued.
Item Fair value

Marketable investments Current market value
Non-marketable Estimated values that take into consideration features such as:
Investments
(a) price earnings ratios
(b) dividend yield
(c) expected growth rates of comparable investments
Trade and other Present values of the amounts to be received. This is normally
Receivables the same as the book value. Discounting is not usually required
because amounts are expected to be received within a few
months.
Inventories: finished Selling price less the sum of:

Goods
(a) the costs of disposal, and
(b) a reasonable profit allowance for the selling effort of the
acquirer based on profit for similar finished goods.
Inventories: work in Selling price of finished goods less the sum of:
Progress
(a) costs to complete,
(b) costs of disposal, and
(c) a reasonable profit for the completing and selling effort
based on profit for similar finished goods.
Inventories: raw materials Current replacement costs (means current purchase price)
Land and buildings Market value
Normally market value. Use depreciated replacement cost calledas net

replacement cost (means cost of new asset then
depreciate) if
309
Plant and equipment market value is not available (e.g., because of the specialized
nature of the plant and equipment or because the items are rarelysold)
Intangible assets Same as plant and equipment
Trade and other payables; Present values of amounts to be disbursed in meeting the liability
long-term debt and other determined at appropriate current interest rates. For current
liabilities. liabilities this is normally the same as book value.
Exceptions to the above principles and guidance.

Topic Recognition Principle Measurement at Measurement at
Acquisition laterDates
Contingent liability Defined by IAS 37 Fair value At the higher of the
original amount and
and not recognised. the amount that would
be reported under IAS
37.
Income taxes Apply IAS 12 Apply IAS 12 Apply IAS 12
Deferred tax assets and liabilities are measured in accordance with IAS 12 rather than at acquisitiondate fair
values.
Question:
Goodwill on consolidation
On 1 September 2017 Tyzo Co acquired 6 million Rs.1 shares in K Co at 4.00 per share. At that dateK
Co produced the following financial statements.
M m
Property, plant and equipment Trade payables 3.2
[note (i)] 16.0 Taxation 0.6
Inventories [note (ii)] 4.0 Bank overdraft 3.9
Receivables 2.9 Long-term loans 4.0
Cash in hand 1.2 Share capital (1 shares) 8.0
24.1 24.1
Notes
1. The following information relates to the property, plant and equipment of K Co at 1 September 2017.
M
Gross replacement cost (means cost of similar new asset) 28.4
Net replacement cost (gross replacement cost less Acc. depreciation) 16.6
2. The inventories of K Co which were shown in the financial statements are raw materials at cost to K Co of
4m. They would have cost 4.2m to replace at 1 September 2017.
3. On 1 September 2017 Tyzo Co took a decision to rationalize the group so as to integrate K Co. The costs of
the rationalization (means restructuring) were estimated to total 3.0m and the process was due to start on 1
March 2018. No provision for these costs has been made in the financial statements given above.
Required:
Compute the goodwill on consolidation of K Co explaining your treatment of the items mentionedabove. You
should refer to the provision of relevant accounting standards
Solution:
Analysis of Equity M:
310
P NCI(25%)
(75%)
Acquisition (1-9-2017)
Share capital 8
Share premium 0
Retained Earnings 4.4
RS (PPE) [16.6-16] 0.6
RS (inventory) [4.2- 4.0] 0.2 13.2 9.90 3.30
Cost of Investment (6 x 4) 24.0
Goodwill 14.1
Notes on treatment
1. Share capital and pre-acquisition profits represent the book value of the net assets of K Co at the date of
acquisition. Adjustments are then required to this book value in order to convert it into fair value of the
net assets at the date of acquisition. For short-term monetary items (means receivables of payables), fair
value is their carrying value on acquisition.
2. IFRS 3 states that the fair value of property, plant and equipment should be determined by market value
or, if information on a market price is not available (as is the case here), then by reference to depreciated
replacement cost. The net replacement cost (i.e. 16.6m) represents the gross replacement cost less
depreciation based on that amount.
3. IFRS 3 also states that raw materials should be valued at replacement cost. In this case that amount is 4.2m.
4. The rationalization costs cannot be reported in pre-acquisition results under IFRS 3 as they are not a
liability of K Co at the acquisition date.
Measurement period [Para 45 of IFRS 3]

Initial accounting for goodwill may be determined on a provisional basis and must be finalized by the end of a
measurement period.
This ends as soon as the acquirer receives the information it was seeking about facts and circumstances
that existed at the acquisition date but must not exceed one year from the acquisition date.
During the measurement period new information obtained about facts and circumstances that existed at the
acquisition date might lead to the adjustment of provisional amounts or recognition of additional assets or
liabilities with a corresponding change to goodwill.
Any adjustment restates the figures as if the accounting for business combination had been completed at
acquisition date.
Goodwill
It is initially measured as a difference between:
 Cost of acquisition plus NCI; and
 FV of net assets of subsidiary at the date of acquisition>
Group as a single economic entity
IFRS contains rules that require the preparation of a special form of financial statements (consolidated financial
statements also known as group accounts) in a parent subsidiary relationship.
The consolidation rules are specified in the following standards:
 IFRS 10: Consolidated financial statements
 IFRS 3: Business combinations.
311
A group of companies: parent and subsidiaries
Definitions: Group, parent and subsidiary [IFRS 10 Appendix A]Group: A parent and its subsidiaries
Parent: An entity that controls one or more entities.
Subsidiary: An entity that is controlled by another entity.
Control
An entity is a subsidiary of another entity if it is controlled by that other entity.
Definition: Control of an investee [IFRS 10 Para 7]

An investor controls an investee if and only if, it has all the followings:
 Power over investee;
 it is exposed, or has rights, to variable returns from its involvement with the investee; and
 it has the ability to affect those returns through its power over the investee.
Situations where control exists

In practice, the vast majority of cases involve a company achieving control of another through buying a
controlling interest in its shares.
Furthermore, in the vast majority of cases obtaining a controlling interest means buying shares which give the
Controlling Interest can be obtained either directly and/or indirectly. It is better illustrated with
Example:
Company A purchased 35% shares in Company B on January 01, 20X1. Company A purchased 45% of shares
in Company C on March 01, 20X1. Company C purchased 40% shares in Company B. How much is the holding
of Company A in Company B, combined directly and indirectly?
1. Company A has a direct shareholding of 35% in Company B, which doesn’t make it parent of
Company B.
2. Company A has a direct shareholding of 45% in Company C, which doesn’t make it Parent of
Company C.
3. Company C has a direct shareholding of 40% in Company B, which doesn’t make it Parent of
Company B.
However, Since Company A has direct shareholding of 45% in Company C, which mean, anything owned by
Company C to the extent of 45% is also owned by Company A. Therefore, Company A will have indirect
shareholding of 18% (45% * 40%) in Company B. Cumulative shareholding of Company A in Company B will
be 53% (35% + 18%), after which Parent Subsidiary relationship will be established and Company A will
consolidate Company B in its Consolidated Financial Statements.
Power [IFRS 10 Para 10 to 14]
Power arises from rights. To have power over an investee, an investor must have existing rights that give the
investor the current ability to direct the relevant activities. The rights that may give an investor power can differ
between investees.
Examples of rights that, either individually or in combination, can give an investor power include but are not
limited to: [B 15 of IFRS 10]
 rights in the form of voting rights (or potential voting rights) of an investee;
 rights to appoint, reassign or remove members of an investee’s key management personnel who have the
ability to direct the relevant activities;
312
 rights to appoint or remove another entity that directs the relevant activities;
 rights to direct the investee to enter into, or veto any changes to, transactions for the benefit of the
investor; and
 other rights (such as decision-making rights specified in a management contract) that give the holder
the ability to direct the relevant activities.
Relevant activities [IFRS 10 B 11]
These are activities of the investee that significantly affect the investee’s returns (means e.g. Profits) For many
investees, a range of operating and financing activities significantly affect their returns.
Examples of activities that, depending on the circumstances, can be relevant activities include, but are not
limited to:
 selling and purchasing of goods or services;
 managing financial assets during their life (including upon default);
 selecting, acquiring or disposing of assets;
 researching and developing new products or processes; and
 determining a funding structure or obtaining funding
Returns [IFRS 10 Para 15 to 16]
Variable returns are returns that are not fixed and have the potential to vary as a result of theperformance
of an investee.
313
CONSOLIDATION
Definitions: the concept of group [IFRS 10: Appendix A and IAS 27.4] “Group” means a parent and its
subsidiaries.
“Parent” is an entity that controls one or more entities.
“Subsidiary” is an entity that is controlled by another entity (i.e. parent).
“Consolidated financial statements” are the financial statements of a group in which the assets, liabilities,
equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single
economic entity.
“Separate financial statements” are those presented by an entity in which the parent entity presents its
investment in subsidiary at cost or in accordance with IFRS 9 (at fair value) or using the equity method.
The individual/separate financial statement of parent and subsidiary are not affected by consolidation specific
adjustments. Consolidation specific adjustments are not part of individual entity double-entry accounting
system. In practice, consolidation is one-time year-end procedure, often performed usingspecialized software.
Requirement [IFRS 10: 4 & 4B and Companies Act, 2017: Section 228]
Companies Act, 2017 requires that there shall be attached to the financial statements of a holding company
having a subsidiary or subsidiaries, at the end of the financial year at which the holding company‘s financial
statements are made out, consolidated financial statements of the group presented as those of a single
enterprise and such consolidated financial statements shall comply with the disclosure requirements of the
relevant Schedule and financial reporting standards notified bythe Commission.
IFRS 10 also requires that an entity that is a parent shall present consolidated financial statements and must
include all the subsidiaries of the parent. However, a parent need not present consolidatedfinancial statements
if it meets all the following conditions:
(a) it is a wholly‑ owned subsidiary or is a partially‑ owned subsidiary of another entity and all its other
owners, including those not otherwise entitled to vote, have been informed about, and do not object to,
the parent not presenting consolidated financial statements;
(b) its debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or
an over‑ the‑ counter market, including local and regional markets);
(c) it did not file, nor is it in the process of filing, its financial statements with a securities commission or
other regulatory organisation for the purpose of issuing any class of instruments in apublic market; and
(d) its ultimate or any intermediate parent produces financial statements that are available for public use and
comply with IFRSs, in which subsidiaries are consolidated or are measured at fair value through profit or
loss in accordance with this IFRS.
A parent that is an investment entity shall not present consolidated financial statements if it is required to
measure all of its subsidiaries at fair value through profit or loss.
Whether an investor is parent? [IFRS 10: 5 to 7, 10, B15, B56 to B58]

An investor, regardless of the nature of its involvement with an entity (the investee), shall determine whether
it is a parent by assessing whether it controls the investee.
An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its power over theinvestee.
An investor controls an investee if and only if the investor has all the following:
(a) Power over the investee: this is when the investor has existing rights that give it the currentability to
direct the relevant activities, i.e. the activities that significantly affect the investee’s returns.
(b) Exposure, or rights, to variable returns from its involvement with the investee: variable returns
are returns that are not fixed and have the potential to vary as a result of the performance of an investee.
Variable returns can be positive and/or negative. Examples of returns include dividends, capital gain from
investment in investee, remuneration from providing services to investee, residual interest in the assets of
investee on liquidation, tax benefits, economies of scale, cost savings and gaining access to proprietary
knowledge, etc.
(c) The ability to use its power to affect the amount of returns: it shall determine whether it is a
314
principal or an agent.
In practice, the vast majority of cases involve a company achieving control of another through buying a
controlling interest in its shares.
Furthermore, in the vast majority of cases obtaining a controlling interest means buying shares which give the
► Example
A owns 100% of B’s voting share capital.
A
This 100% holding is described as a controlling interest and gives
100% A complete control of B.
B would be described as a wholly owned subsidiary.

B
A company does not have to own all of the shares in another company in order to control it.
► Example
A This 80% holding is described as a controlling interest and gives
80% A complete control of B.
B B would be described as a partly owned subsidiary.

Other parties own the remaining 20% of the shares. They have an
ownership interest in B but do not have control. This is described
as a non-controlling interest.
Non-controlling interest (NCI) is defined by IFRS 10 as: “the
equity in a subsidiary not attributable, directly or indirectly, to a
parent.”
Control is assumed to exist when the parent owns directly, or indirectly through other subsidiaries,
more than half of the voting power of the entity, unless in exceptional circumstances it can be clearly
demonstrated that such control does not exist.
► Example
A
60% A owns a controlling interest in B. B owns a controlling interest

in C.
B
Therefore, A controls C indirectly through its ownership of B. C
70% is described as being a sub-subsidiary of A.
Consolidation of sub-subsidiaries is not part of this syllabus
C
In certain circumstances, a company might control another company even if it owns shares which give it
less than half of the voting rights. Such a company is said to have de facto control over the other
company. (De facto is a Latin phrase which translates as of fact. It is used to mean in reality or to refer to
a position held in fact if not by legal right
315
► Example
The other shares are held by a large number of unrelated investors none of whom individually own more than
1% of B.
A This 45% holding probably gives A complete control of B.
45% It would be unlikely that a sufficient number of the other

shareholders would vote together to stop A directing the company
B B as it wishes.
A company might control another company even if it owns shares which give it less than half of the voting
rights because it has an agreement with other shareholders which allow it to exercise control.
► Example
A further 10% is held by A’s bank who have agreed to use their vote as directed by A.
A
45% This 45% holding together with its power to use the votes
attached to the bank’s shares gives A complete control of B.
B
It is important to understand that control is different from ownership. A 60% ownership means 60% share in
profit and net assets of investee but control either exists or does not exist, it is not expressedin percentage.
Acquisition method of consolidation [IFRS 3: 4, 5 & Appendix A]
IFRS 3 defines a “business combination” as a transaction or other event in which an acquirer obtainscontrol of
one or more businesses. It also requires that an entity shall account for each business combination by applying
the acquisition method.
Applying the acquisition method requires:
• identifying the acquirer;
• determining the acquisition date (the date on which acquirer obtains the control);
• recognising and measuring the identifiable assets acquired, the liabilities assumed and any
non‑controlling interest in the acquiree; and
• recognising and measuring goodwill or a gain from a bargain purchase.
Uniform accounting policies [IFRS 10: B87]

If a member of the group uses accounting policies other than those adopted in the consolidated financial
statements for like transactions and events in similar circumstances, appropriate adjustments are made to that
group member’s financial statements in preparing the consolidated financial statements to ensure conformity
with the group’s accounting policies.
Common reporting date [IFRS 10: B92 & B93]

The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial
statements shall have the same reporting date (period-end).
When period-end is different, the subsidiary prepares, for consolidation purposes, additional financial
information as of the same date as the financial statements of the parent to enable the consolidation,unless it is
impracticable to do so.
If it is impracticable to do so, subsidiary’s most recent financial statements may be used with adjustments of
significant transactions and events.
In any case, the difference between reporting dates shall be no more than three months, and the length of the
reporting periods and any difference between the dates of the financial statements shall be the same from
period to period.
316
Classification Principle [IFRS 3: 15][add on page 302 of Vol 1]
At the acquisition date, the acquirer shall classify or designate the identifiable assets acquired and liabilities
assumed as necessary to apply other IFRSs subsequently.
► Example
S Limited owns a property that has been rented to its subsidiary M Limited which uses it as its administrative
office.
Required: Briefly discuss how the above property should be classified by S Limited in its separate financial
statements and in its consolidated financial statements.
Answer:
In separate financial statements, the property will be classified as investment property in accordance with IAS
40 as it has been rented to another entity. However, in consolidated financial statements, the property will be
classified as property, plant and equipment in accordance with IAS 16 since group is to be considered as
single economic unit and the property in that context is owner occupied property.
317
Consolidation and IAS 28 Q.B
Question-1:
The statements of financial position of three entities P, S and A are shown below, as at 31 December 2015.
P S A
Non-current assets: Rs. Rs. Rs.
Property, plant and equipment 450,000 240,000 460,000
Investment in S at cost 320,000 - -
Investment in A at cost 140,000 - -
910,000 240,000 460,000
Current assets:
Inventory 70,000 90,000 70,000
Current account with P - 60,000 -
Current account with A 20,000 - -
Other current assets 110,000 130,000 40,000
Total Assets 1,110,000 520,000 570,000
Equity and reserves:

Equity shares of Rs. 1 100,000 200,000 100,000
Share premium 160,000 80,000 120,000
Accumulated profits 650,000 140,000 250,000
910,000 420,000 470,000
Long-term liabilities: 40,000 20,000 30,000
Current account with P - - 20,000
Current account with S 60,000 - -
Other current liabilities 100,000 80,000 50,000
Total equity and liabilities 1,110,000 520,000 570,000
(i) P bought 150,000 shares in S several years ago when the carrying amount of the net assets of S was Rs.
340,000, which was equal to fair value.
(ii) P bought 30,000 shares in A several years ago when A’s accumulated profits were Rs. 150,000. There has
been no change in the issued share capital or share premium of either S or A since P acquired its shares in
them.
(iii) There has been impairment of Rs. 200,000 in the goodwill relating to the investment in S, but no impairment
in the value of the investment in A.
(iv) At 31 December 2015, A holds inventory purchased during the year from P which is valued at Rs. 16,000 and
P holds inventory purchased from S which is valued at Rs. 40,000. Sales from P to A and from S to P, are
priced at a mark-up of one-third on cost.
(v) None of the entities has paid a dividend during the year.
(vi) P uses the partial goodwill method to account for goodwill and no goodwill is attributed to the non-
controlling interest in S.
Required:
Prepare the consolidated statement of financial position of the P group as at 31 December 2015.
Question-2:
Qudsia Limited (QL) has investments in two companies as detailed below:
M Limited (ML)
318
 On 1 January 2010, QL acquired 40 million ordinary shares in ML, when its retained earnings were Rs. 150
million.
 The fair value of ML’s net assets on the acquisition date was equal to their carrying amounts.
H Limited (HL)
 On 30 November 2012, QL acquired 16 million ordinary shares in HL, when its retained earnings stood at
Rs. 224 million.
 The purchase consideration was made of:
- Rs. 290 million in cash, paid on acquisition; and
- 4 million shares in QL. At the date of acquisition, QL’s shares were being traded at Rs. 15 per share but
the price had risen to Rs. 16 per share by the time the shares were issued on 1 January 2013. The share
issuance has not yet been recorded by QL in its books.
 The fair value of the net assets of HL on the date of acquisition by QL was equal to their carrying amounts.
The draft summarized statements of financial position of the three companies on 31 December 2012 are shown
below:
QL ML HL
-------------Rs. in million--------------
Assets
Property, plant and equipment 5,000 550 500
Investment in ML 630 - -
Investment in HL 290 - -
Current assets: 5,380 400 350

11,300 950 850
Ordinary share capital (Rs. 10 each) 6,000 500 400
Retained earnings 2,900 100 240
Current liabilities: 2,400 350 210

11,300 950 850
The following additional information is available:
1. As on 31 December 2012, the recoverable amount of the Goodwill was estimated at Rs. 70 million.
2. QL values the non-controlling interest at its proportionate share of the fair value of the subsidiary’s
net identifiable assets.
3. On 1 October 2012, ML sold a machine to QL for Rs. 24 million. The machine had been purchased
on 1 October 2010 for Rs. 26 million. The machine was originally assessed as having a useful life of
ten years and that estimate has not changed.
4. In December 2012, QL sold goods to HL at cost plus 30%. The amount invoiced was Rs. 52 million.
These goods remained unsold at year end and the invoiced amount was also paid subsequent to the
year end.
Required:
Prepare a consolidated statement of financial position for QL as on 31 December 2012 in accordance
with the requirements of International Financial Reporting Standards.
Question-3: [concept of IFRS 9 included]

Hark acquired the following non-current investments on 1 April 2015:
1) 4 million equity shares in Spark, by means of an exchange of one share in Hark for every one share in Spark,
plus Rs. 6.05 million in cash. The professional fees associate with the acquisition amounted to Rs. 1 million.
The market price of shares in Hark at the date of acquisition was Rs. 9 per share. The market price of Spark
shares just before the acquisition was Rs. 7. The cash part of the consideration is deferred and will not be paid
until two years after the acquisition, i.e 1.4.2017.
2) 25% of the equity shares in Ark, at a cost of Rs. 6 per share. The money to make this payment was obtained
by issuing one million new shares in Hark at Rs. 9 per share.
319
None of these transactions has yet been recorded in the summary statements of financial position that are shown
below.
The summarized draft statement of financial position of the three companies at 31 March 2016 are as follows:
Hark Spark Ark
Assets Rs. in Million Rs. in Million Rs. million
Non-current assets:
Property, plant and equipment 60.0 31.0 16.0
Other equity investments 0.8 - -
Current assets: 18.2 8.0 9.0
Total assets 79.0 39.0 25.0
Equity shares of Rs. 1 each 16.0 5.0 6.0
Share premium 2.0 4.0 4.0
Retained earnings: at 1 April 2015 36.0 16.0 8.0
- For year ended 31 March 2016 8.0 3.0 2.0
62.0 28.0 20.0
6% loan notes 10 - -
7% loan notes - 6.0 3.0
Current liabilities: 7.0 5.0 2.0
Total equity and liabilities 79.0 39.0 25.0
1) Hark has chosen to value the non-controlling interest in Spark using the fair value method permitted by IFRS-3
(revised). The fair value of the non-controlling interests at the acquisition date is estimated to be the market
value of the shares before the acquisition.
2) At the date of acquisition of Spark, the fair values of its assets were equal to their carrying amounts.
3) The cost of capital of Hark is 10% per year.
4) During the year ended 31 March 2016, Spark sold goods to Hark for Rs. 3.6 million, at a mark-up of 50% on
cost. Hark had 75% of these goods in its inventory at 31 March 2016.
5) There were no intra-group receivables and payables at 31 March 2016.
6) On 1 April 2015, Hark sold a group of machines to Spark at their agreed fair value of Rs. 3 million. At the time
of the sale, the carrying amount of the machine was Rs. 2 million. Plant and machinery is depreciated to a
residual value of nil using the straight-line method and at 1 April 2015 the machines had an estimated remaining
life of five years.
7) “Other equity investments” are included in the summary statement of financial position of Hark at their fair
value on 1 April 2015. Their fair value at 31 March 2016 is Rs. 0.65 million. These investments are held for
trading.
8) Impairment tests were carried out on 31 March 2016. These show that there is no impairment in the value of the
investment in Ark or in the consolidated goodwill.
9) No dividends were paid during the year by any of the three companies.
Required:
Prepare the consolidated statement of financial position for Hark as at 31 March 2016.
Question-4: [Concept of Investment property]

Hamachi Ltd acquired 90% of S Ltd.’s Rs. 1 ordinary shares on 1 April 2014 by paying Rs. 3.00 per share. The
balance on S Ltd.’s retained earnings at this date was Rs. 800,000. On 1 October 2015, Hamachi Ltd acquired 30%
of A Ltd.’s Rs. 1 ordinary shares for Rs. 3.50 per share. The statements of financial position of the three companies
at 31 March 2016 are shown below:
Hamachi Ltd S Ltd A Ltd
Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000
Non-current assets:
Property, plant and equipment 8,050 3,600 1,650
Investments 4,000 910 -
320
12,050 4,510 1,650
Current assets:
Inventory 830 340 250
Accounts receivable 520 290 350
Bank 240 - 100
1,590 630 700
Total assets 13,640 5,140 2,350
Hamachi Ltd S Ltd A Ltd

Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000
Equity:
Ordinary shares of Rs. 1 each 5,000 1,200 600
Reserves:
Retained earnings b/f 6,000 1,400 800
Profit year to 31 March 2016 1,500 900 600
7,500 2,300 1,400
12,500 3,500 2,000
10% loan notes 500 240 -
Accounts payable 420 960 200
Taxation 220 250 150
Overdraft - 190 -
640 1,400 350
Total equity and liabilities 13,640 5,140 2,350
1) Fair value adjustments
On 1 April 2014 S Ltd owned an investment property that had a fair value of Rs. 120,000 in excess of its
carrying value (book value). The value of this property has not changed since acquisition. This property is
included within investments in the balance sheet.
Just prior to its acquisition, S Ltd was successful in applying for a six-year license to dispose of hazardous
waste. The license was granted by the government at no cost, however Hamachi Ltd estimated that the license
was worth Rs. 180,000 at the date of acquisition.
2) In January 2016 Hamachi Ltd sold goods to A ltd for Rs. 65,000. These were transferred at a mark-up of 30%
on cost. Two thirds of these goods were still in the inventory of A Ltd at 31 March 2016.
3) To facilitate the consolidation procedures, the group insists that all inter-company current account balances
are settled prior to the year-end. However, a cheque 40,000 from S Ltd to Hamachi Ltd against an amount
receivable from S was not received until early April 2016. Inter-company balances are included in accounts
receivables and payables as appropriate.
4) A Ltd is to be treated as an associated company of Hamachi Ltd.
5) An impairment test at 31 March 2016 on the consolidated goodwill of S Ltd concluded that it should be
written down by Rs. 468,000. No other assets were impaired.
Required:
Prepare the consolidated statement of financial position of Hamachi Ltd as at 31 March 2016.
Question-5: [Comprehensive question including changes in equity and IAS 38]

Bilal limited (BL), acquired a subsidiary, M limited (ML), on July 01, 2014 and associate, Z limited (ZL),
onJanuary 01, 2017. The details of the acquisition at the respective dates are as follows:
Ordinary Reserves Share Fair value of Cost of Ordinary
Investment
share capital Retained Premium net assets at investment Share capital
Rs. 1 each earnings acquisition acquired
---------------------------------Rs. in million------------------------------------
321
ML 400 160 140 800 765 320 (80%)
ZL 220 269 83 572 203 55 (25%)
The draft financial statements for the year ended June 30, 2018 are:
As at June 30, 2018
BL ML ZL
------------------Rs. in million-------------------
Non-current assets:
Property, plant and equipment 1,012 920 442
Intangible assets - 350 27
Investment in ML 765 - -
Investment in ZL 203 - -
1,980 1,270 469
Current assets:
Inventories 620 1,460 214
Trade receivables 950 529 330
Cash and cash equivalents 900 510 45
2,470 2,499 589
4,450 3,769 1,058
Equity:
Share capital 1,000 400 220
Share premium 200 140 83
2,570 1,469 664
Trade and other payables 1,880 2,300 394
4,450 3,769 1,058
Statement of comprehensive income

For the year ended June 30, 2018
BL ML ZL
------------------Rs. in million-------------------
Revenue 4,480 4,200 1,460
Cost of sales (2,690) (2,940) (1,020)
Gross profit 1,790 1,260 440
Distribution and administrative cost (620) (290) (196)
Finance cost (50) (80) (24)
Dividend income 260 - -
Profit before tax 1,380 890 220
Income tax expense (330) (114) (72)
Profit for the year 1,050 776 148
Dividend declared/paid for the year 250 300 80
1) The BL Group has the policy of measuring NCI at fair value at the date of acquisition and Fair Value ofNCI
was Rs. 210 million at the date of acquisition.
2) Neither ML nor ZL had reserves other than retained earnings and share premium at the date of acquisition.
Neither issued new shares since acquisition.
The fair value difference on the subsidiary relates to property, plant and equipment being depreciated through
cost of sales over the remaining useful life of 10 years from the acquisition date.
3) ML’s intangible assets include Rs. 87 million of training and marketing cost incurred during the year ended
June 30, 2018. The directors of ML believe that these should be capitalized as they relate to the startup period
of a new business, and intend to amortize the balance over five years from July 01, 2018.th directors of the
BL decide to write off this amount during the year ended 30.06.2018 in accordance with IAS 38.
322
4) Dividend income of BL relates to dividend income from ML and ZL. (300x80%+80x25%=260)
5) ML and ZL sold goods to BL amounting to Rs. 1,000 and 500 respectively. At the end of the period, BL
inventory include stock purchased from ML and ZL. Unrealized profit within the stock is 42 million and 25
million respectively. In addition, BL sold goods to ML for Rs. 300, which remains in stock of ML till the
end of reporting period. Unrealized profit within the goods is 18 million.
4) Goodwill in ML is impaired by Rs. 100 million by the end of the reporting period.
Required:
Prepare consolidated statement of financial position, consolidated statement of comprehensive income and
consolidated statement of changes in equity for the year ended 30 June 2018.
Question-6:
Following is the summarized trial balance of FL and its subsidiary AL for the year ended December 31, 2018:
FL AL
-----Rs. In million------
Cash and bank balances 4,920 2,700
Accounts receivables 6,240 6,580
Stock in trade – closing 14,460 5,680
Investment in AL 10,500 -
Other investments 20,100 -
Cost of sales 49,200 21,000
Operating expenses 3,600 5,400
Accumulated depreciation (5,760) (1,260)
Ordinary share capital (Rs. 10 each) (30,000) (6,000)
Retained earnings – opening (33,780) (4,800)
Sales (57,600) (33,800)
Accounts payable (2,760) (1,440)
Gain on sale of fixed assets (540) -
Dividend income (1,080) -
Following additional information is also available:
1. On January, 2018, FL acquired 480 million shares of AL from its major shareholders for Rs. 10,500 million.
2. The following inter-company sales were made during the year 2018:
Sales Including in buyer’s Amount receivable/payable Gross profit
closing stocks in trade at year end %
on sales
--------------------------------Rs. In million--------------------------
FL to AL 2,400 900 300 20
AL to FL 3,600 1,200 500 30
3. On July 1, 2018, FL sold certain plants and machines to AL. Details of the transaction are as follows:
Rs. In million
Sales value 144
Less: Cost of plant and machines 150
Accumulated depreciation (60)
Net book value 90
Gain on sale of plant 54
4. The plants and machineries were purchased on January 1, 2016, and were being depreciated on straight line
method over a period of five years. AL computed depreciation thereon using the same method based on the
remaining useful life, using full year policy.
5. FL billed Rs. 100 million to subsidiary for management services provided during the year 2018 and credited
it to operating expenses. The invoices were paid and recorded by subsidiary on December 15, 2018.
6. Details of cash dividends are as follows:
Dividend
Date of declaration Date of payment %
323
FL November 25, 2018 January 5, 2019 20
AL October 15, 2018 November 20, 2018 10
7. These dividends are not yet accounted for by both the companies. However, the share in dividend income of
parent from subsidiary is already accounted for in the books of parent.
Required:
a) Prepare consolidated statement of financial position and statement of comprehensive income of FL for the
year ended December 31, 2018. Ignore tax and corresponding figures.
b) Also prepare a consolidated statement of changes in equity for the year ended 31-12-2018.
Question-7: (Spring 2023)

Following are the summarized statements of financial position of Aluminium Limited (AL) and Silver Limited (SL)
as at 31 December 2022:
----- Rs. In millions-----

Property, plant and equipment 1,160 960
Investment property 440 290
Inventories 365 190
3,260 1,710
Share capital 1400 800
Share premium 550
Liabilities 692 315
3260 1710
(i) On 1 January 2022, AL acquired a 70% shareholding in SL for the following consideration:
 Issuance of 20 million shares of AL after one month of acquisition. The market price of AL’s shares at
the date of acquisition was Rs. 25 each. However, market price increased to Rs. 27 each when shares
were issued. The issuance of shares has been recorded in AL’s books at Rs. 27 per share.
 Cash payment of Rs. 304 million after three years. The amount payable has been recorded in full i.e. at
Rs. 304 million in AL’s books.
(ii) At acquisition date, SL’s retained earnings and revaluation surplus were Rs. 515 million and Rs. 105 million
respectively. Further, carrying values of SL’s net assets were equal to their fair values except an investment
property whose fair value exceeded the carrying value by Rs. 160 million. The property had a remaining
useful life of eight years. Both AL and SL subsequently measure investment properties using the cost model.
(iii) AL follows the cost model whereas SL follows the revaluation model for subsequent measurement of
property, plant and equipment. If SL had adopted the cost model, SL (iv)
(iv) During the year, SL made sales of Rs. 150 million to AL at 20% mark-up. 40% of these goods are included
in AL’s closing inventories.
(v) On 1 July 2022, AL acquired 5 million shares representing 25% shareholdings in Platinum Limited (PL) for
Rs. 91 million. On acquisition date, the fair value of PL’s share was Rs. 17 each. AL has nominated 1 director
out of 5 directors on the board of PL.
(vi) During the six months ended 31 December 2022, PL reported net profit of Rs. 52 million. AL has recorded
its share of dividend from PL amounting to Rs. 5 million as other incomes.
(vii) On 1 September 2022, AL sold a machine having carrying value of Rs. 60 million to PL for Rs. 108 million.
The remaining useful life of the machine at the time of disposal was four years.
(viii) A fair value loss of Rs. 22 million needs to be recorded in respect of AL’s remaining investments.
(ix) Discount rate of 15% per annum may be used wherever required. (x) AL measures non-controlling interest at
the proportionate share of SL’s identifiable net asset would not have recorded revaluation surplus of Rs. 45
million on 31 December 2022
Required
In accordance with IFRSs, prepare AL’s consolidated statement of financial position as at 31 December 2023.
324
Following are the summarized statements of financial position of Heptagon Limited (HL)and Ellipse Limited (EL)
as at 30 June 2022:
HL EL
--- Rs. in million ---
Investment property 650 -
Investment in Octagon Limited – at cost 100 -
Inventories 490 330
3,420 1,430
Share capital (Rs. 10 per share) 1,400 650

Liabilities 450 240
3,420 1,430
(i) On 1 January 2022, HL acquired 60% shareholdings in EL at the following consideration which
has not been recorded in HL’s books:
 One share in HL was given for every three shares in EL. At acquisition date, thefair values of each
share of HL and EL were Rs. 54 and Rs. 17 respectively.
 Cash payment of Rs. 5 per share shall also be paid two years later provided thatprofits of EL exceed
a certain benchmark. The fair value of this conditional payment at acquisition date was estimated at
Rs. 143 million which has increased to Rs. 150 million on 30 June 2022.
(ii) At acquisition date, EL’s retained earnings were Rs. 300 million and carrying valuesof EL’s net assets were
equal to their fair values except land which was carried at Rs. 50 million. The land had a fair value and value
in use estimated at Rs. 80 million and Rs. 70 million respectively. The group follows cost model for
subsequent measurement of all property, plant and equipment.
(iii) On 1 January 2022, HL purchased an investment property with useful life of thirtyyears for Rs. 600 million
and rented out to EL on same date for Rs. 4 million per month till 31 December 2022. The property was
carried in HL’s books at fair value of Rs. 650 million on 30 June 2022. Rent for the month of June 2022 was
unpaid at30 June 2022.
(iv) An impairment test carried out at 30 June 2022 indicated that goodwill of EL has beenimpaired by Rs. 15 million.
The management believes that the impairment arose due to temporary adverse economic conditions.
(v) On 1 July 2021, HL acquired 6 million shares representing 30% shareholdings in Octagon Limited (OL).
On that date, fair value of each share of OL was Rs. 16.
(vi) During the year ended 30 June 2022, OL reported net profit of Rs. 60 million and paidtotal dividend of Rs. 20
million. HL recorded its share of OL’s dividend as other income.
(vii) During the year, OL made sales of Rs. 50 million to HL at 20% above cost. 60% of these goods were sold
by HL during the year. As at 30 June 2022, OL has receivablewith HL of Rs. 25 million.
(viii) HL values non-controlling interest at the acquisition date at its fair value.
Required:
Prepare HL’s consolidated statement of financial position as at 30 June 2022 in accordance with the IFRSs. (18
Question 9 Spring 2022
Following balances are extracted from the records of Happiness Limited (HL), SatisfiedLimited (SL) and Furious
Limited (FL) for the year ended 31 December 2021:
HL SL FL
-------- Rs. in million --------
Sales 4,100 2,250 2,100
Cost of sales 2,880 1,125 1,365
Operating expenses 800 550 303
Other income 414 216 95
325
Gain/(loss) on re-measurement of investmentin
195 (80) 20
listed securities
Finance cost - 50 35
Surplus arising on revaluation of property ,plant
- - *100
and equipment for the year
*The revaluation was performed on 31 December 2021
(i) Details of HL’s investments are as follows:
Share capital Retained

Date of Holding Investee (Rs. 10 each) earnings of
investment % of investee investee
1 July 20 75% SL 1,500 1,200
1 March 21 30% FL 1,000 950
(ii) Following was the consideration for acquisition of SL’s shares:
 Immediate payment of Rs. 1,700 million and another payment of Rs. 843 million after 3 years.
 An amount of Rs. 500 million payables on 1 May 2021 that was contingent upon the post-acquisition
performance of SL. Fair value of this consideration was estimated at Rs. 290 million on
acquisition date as well as on 31 December 2020. However, due to improvement in business
conditions in 2021, the target was achieved and full amount was paid. HL has included the full
payment in cost of investment in SL.
(iii) At the date of acquisition of SL, carrying values of its net assets were equal to fair values except the
following:
 An in-process development project for a software had a fair value of Rs. 180 million. The
cost of Rs. 140 million incurred before acquisition by SL on development had been expensed out in
SL’s books since the project did not meet the criteria for capitalization. After acquisition, SL incurred
further Rs.20 million which resulted in completion of project on 1 January 2021. The software has
a useful life of 4 years.
 Fair value of inventory was higher than its carrying value by Rs. 200 million.50% and 10% of the
inventory were included in the inventory of SL at31 December 2020 and 2021 respectively.
(iv) HL has designated its investment in listed securities as subsequently measured at fair value through profit or loss
whereas SL and FL irrevocably elected their respective investments at initial recognition on 1 June 2021 as
subsequently measured at fair value through other comprehensive income.
(v) SL paid cash dividend of 8% for the half year ended 30 June 2021. HL recorded itsshare as other income.
(vi) On 25 August 2021, FL delivered goods having sale price of Rs. 150 million at a markup of 20% to HL.
40% of these goods are included in the HL’s inventory as at31 December 2021.
(vii) An impairment test has indicated that goodwill of SL was impaired by 15% on31 December 2021.
There was no impairment in the previous year
(viii) The income and expenses of all companies had accrued evenly during the yearexcept stated otherwise
(ix) HL measures non-controlling interest at the proportionate share of acquiree’s identifiable net assets
(x) Discount rate of 12% per annum may be used wherever required
Required:
Prepare HL’s consolidated statement of profit or loss and other comprehensive income forthe year ended 31
December 2021 (18)
Question 10 Autumn 2021
Following are the summarized statements of financial position of Safawi Limited (SL) and Khudri Limited (KL) as
at 30 June 2021:
(i) On 1 October 2020, SL acquired 80% shareholdings in KL through share exchange of one share in SL for every
share in KL. At acquisition date, KL’s retained earnings were Rs. 1,000 million and the fair values of each
share of SL and KL were Rs. 25 and Rs. 23 respectively. Shares issued by SL have not been recorded in
the books.
326
(ii) On acquisition date, carrying values of KL’s net assets were equal to their fair valuesexcept the following:
 Inventories were carried at Rs. 240 million and had a fair value of Rs. 340 million. 60% of
these were sold during the year ended 30 June 2021.
 Land was carried at nil value and had a fair value of Rs. 50 million. The land wasallotted
unconditionally to KL by the government free of cost in 2018 when its fair value was Rs. 40
million.
(iii) On 1 January 2021, SL disposed of a software license to KL for Rs. 120 million. Its carrying value and
remaining useful life at that date was Rs. 90 million and 3 years respectively.
(iv) Due to temporary adverse economic conditions, an impairment test carried out at 30 June 2021 indicated
that goodwill has been impaired by Rs. 60 million.
(v) On 1 July 2020, SL acquired 3 million shares of Anbara Limited (AL) representing 25% shareholdings. On that
date, AL’s retained earnings and fair value of each share were Rs. 2,400 million and Rs. 172 respectively.
(vi) During the year ended 30 June 2021, AL reported net loss of Rs. 280 million and other comprehensive income
of Rs. 60 million.
(vii) On 1 July 2020, SL disposed of machinery to AL for Rs. 200 million at a gain of 100%. The remaining useful
life of the machinery at the time of disposal was 5 years.
(viii) An impairment test carried out at year end has indicated that investment in AL hasbeen impaired by Rs.
130 million.
(ix) SL values non-controlling interest on the acquisition date at its fair value.
Required:
Prepare SL’s consolidated statement of financial position as at 30 June 2021 in accordance with the requirements of
IFRSs. (18)

Following are the summarized statements of financial position of Himaliya Limited (HL)and Method Limited (ML)
as on 31 December 2020:
HL ML
Investments 4,320 -
Inventories 1,050 700
Cash and bank balances 210 175
8,820 3,150
Share capital (Rs. 10 per share) 4,700 1,400

Share premium 720 -
Liabilities 1,190 560
8,820 3,150
(i) On 1 April 2020, HL acquired 90% shareholdings in ML at Rs. 2,220 million which was recorded as cost
of investment by HL. It includes professional fee of Rs. 30 million for advice on acquisition of ML. At
acquisition date, ML’s retained earnings were Rs. 700 million.
(ii) On acquisition date, carrying value of ML’s net assets was equal to fair value except abrand which had not
been recognized by ML. The fair value of the brand was assessedat Rs. 160 million. HL estimated that benefit
would be obtained from the brand for the next 5 years.
(iii) Upon acquisition, HL had a plan to restructure ML at a cost of Rs. 80 million. Up to 31 December 2020,
327
ML has incurred and recorded cost of Rs. 70 million for restructuring as per HL’s plan.
(iv) On 1 January 2020, HL acquired 35% shareholdings in Pears Limited (PL) by investing Rs. 1,500 million.
This investment is carried at cost on 31 December 2020.Details of PL’s net asset on 31 December 2020 are
as follows:
Assets and liabilities Rs. in million

Property, plant and equipment 2,625
Inventories 1,190
Trade receivables 700
Cash and bank balances 595
Liabilities (630)
Net assets 4,480
(v) During the year ended 31 December 2020, PL earned a net profit of Rs. 910 million.
(vi) PL paid dividend of Rs. 490 million for the half year ended 30 June 2020. HL recorded its share as other income.
(vii) Subsequent to investments made by HL in ML and PL, inter-company sales of goodsare invoiced at a mark-
up of 25%. The relevant details are as under:
Rs. in
million
ML’s inventory on 31 December 2020 includes goods
purchased from HL 50
HL’s inventory on 31 December 2020 includes goods
purchased from PL 120
Receivable from ML on 31 December 2020 as per HL’s books 74
Payable to PL on 31 December 2020 as per HL’s books 98
(viii) HL values non-controlling interest at the acquisition date at its fair value which wasRs. 240 million.
Required:
(a) Prepare HL’s consolidated statement of financial position as at 31 December 2020 in
accordance with the requirements of IFRSs. (17)
(b) List down the additional information having no effect in your working in (a) above. (02)
Question 12 Autumn 2020
The following amounts are extracted from the records of Manzil Limited (ML), Himmat Limited (HL) and
Koshish Limited (KL) for the year ended 31 December 2019:
ML HL KL
---------- Rs. in million ----------
Sales 800 315 132
Cost of sales (540) (180) (97)
Operating expenses (114) (60) (6)
Other income 41 - 8
Finance cost (20) (12) (5)
Retained earnings as at 31 December 2019 3,600 322 200
(i) Details of ML’s investments are as follows:
Date of Holding Investee Share capital

investment % (Rs. 10 each) of
Investee
1 Aug 2015 25% KL Rs. 400 million
1 May 2019 60% HL Rs. 600 million
328
(ii) Consideration for acquisition of HL’s shares comprises of:
 transfer of ML’s building having carrying value and fair value of Rs. 150 million and Rs. 226 million
respectively at acquisition date. The disposal of building has been recorded at carrying value.
 issuance of 16 million ordinary shares of ML after one month of acquisition. The market price of ML’s
shares at the date of acquisition was Rs. 30 each. However, the market price increased to Rs. 32 when
shares were issued.
(iii) At the date of acquisition of HL, carrying value of its net assets was equal to fair value except the following:
 A manufacturing plant whose fair value exceeded its carrying value by Rs. 60 million. The
remaining useful life of the plant on the acquisition date was8 years.
 A contingent asset of Rs. 50 million as disclosed in HL's financial statements which had an estimated
fair value of Rs. 15 million. At year-end, this contingent asset is disclosed in HL's financial statements
at Rs. 46 million.
(iv) Impairment test carried out at year-end has indicated that goodwill of HL has beenimpaired by 10%.
(v) On 15 August 2019, HL and KL paid 5% dividend for the half year ended 30 June 2019. ML recorded its share
as other income.
(vi) On 30 June 2019, KL sold a machine having carrying value of Rs. 60 million to ML for Rs. 68 million. The
remaining useful life of the machine at the time of disposal was 5 years.
(vii) On 15 November 2019, HL and KL purchased 600,000 and 400,000 ordinary shares of Jazba Limited (JL)
respectively at price of Rs. 150 each plus 2% transaction cost. HL and KL classified the investment as
financial asset at fair value through other comprehensive income. These investments have not been re-measured
at year-end. Market price of JL’s share was Rs. 138 at year-end. Total share capital of JL consists of 20 million
shares.
(viii) ML measures non-controlling interest at the proportionate share of acquiree’sidentifiable net assets.
Required:
Prepare ML’s consolidated statement of profit or loss and other comprehensive income for the year ended 31 December
2019 (19)
Following balances have been extracted from the records of Baghsar Limited (BL), Rawal Limited (RL), and
Tarbela Limited (TL) for the year ended 30 June 2023:
BL RL TL
-------- Rs. in million --------
Sales 3,900 2,480 1,900
Cost of sales 1,980 1,660 810
Operating expenses 500 620 415
Other income 420 100 90
Finance cost 150 60 95
Revaluation surplus arising during the year 120 300 90
(i) Details of BL’s investments are as follows:
Share Retained
Revaluation
Date of capital (Rs. earnings
Holding Investee 10 each) surplus
investment of
% of investee investee
-------------- Rs. in million --------------
1 Oct 2022 75% RL 6,000 (1,650) 450
1 Jul 2022 30% TL 1,000 1,400 270
(ii) BL acquired the shareholding in RL at the following consideration:
 Immediate cash payment of Rs. 2,600 million. This amount was recorded as investment in BL’s
books, and includes Rs. 120 million incurred as a valuationfee.
 Further cash payments of Rs. 2 per share and Rs. 1.5 per share to be paid on 30 September 2024
329
and 30 September 2025, respectively. This has not been recorded in BL’s books.
(iii) At the date of acquisition, carrying values of RL’s net assets were equal to their fairvalues, with the following
exceptions:
 The brand, an intangible asset, had a carrying value of Rs. 160 million and a fair value of Rs. 256
million. The remaining useful life of the brand on acquisition dateis estimated at four years. The
recoverable amount of the brand as on 30 June 2023 was estimated at Rs. 178 million.
 A building with a carrying value of Rs. 900 million had a fair value of Rs. 1,200 million.
The building is depreciated using a 5% straight-line method. RL revalued the building to its fair value
on 2 October 2022 in its books.
(iv) The fair value of RL’s share was Rs. 8.5 per share on the acquisition date.
(v) Subsequent to the acquisition date, BL sold goods to RL at a sale price of Rs. 500 million, generating a profit of
Rs. 160 million. 80% of these goods were sold by RL to its customers at a profit of Rs. 150 million before 30 June
2023.
(vi) BL acquired the shareholding in TL by transferring BL's land having a carrying value of Rs. 690 million and a fair
value of Rs. 932 million on that date. The investment in TL was recorded at the carrying value of land.
(vii) TL paid a dividend of Rs. 5 per share on 1 June 2023. BL recorded the dividend as other income.
(viii) BL measures non-controlling interest at the acquisition date at its fair value.
(ix) Income and expenses of all companies accrued evenly during the year unless stated otherwise.
(x) A discount rate of 17% per annum may be used wherever required.
Required:
Prepare BL’s consolidated statement of profit or loss and other comprehensive income for the year ended 30 June
2023. (18)
Following are the summarized statements of financial position of Winsome Limited (WL)and Superb Limited (SL)
as on 31 December 2023:
WL SL
----- Rs. in million -----
Investments 2,000 -
Other assets 690 700
4,590 1,600
Share capital (Rs. 10 per share) 2,500 750

Share premium - 120
4,590 1,600
(i) On 1 April 2023, WL acquired a 75% shareholding in SL at the followingconsiderations:
 Immediate cash payment of Rs. 288 million.
 Further amount of Rs. 288 million to be paid on 31 March 2025.
 Transfer of WL's freehold land having a carrying value and fair value ofRs. 710
million and Rs. 660 million respectively.
All considerations have been correctly recorded in WL’s books on acquisition date butno
subsequent adjustment has been made.
(ii) At the dat e of SL’s acquisition, the carrying values of SL’s net assets amounted to Rs. 1,132 million,
which was equal to fair value, except for an equipment with a remaining life of 8 years assessed at Rs. 64
million above its carrying value.
(iii) Goodwi l l on the acquisition of SL amounted to Rs. 320 million.
(iv) On 1 July 2023, SL sold a machine to WL for Rs. 160 million, resulting in a gain of Rs. 20 million. The
machine had a remaining useful life of 5 years. Out of Rs. 160 million, Rs. 35 million remains unpaid
as on 31 December 2023.
(v) WL measures non-controlling interest at the acquisition date at its fair value.
330
(vi) On 1 July 2022, WL acquired 15 million shares of Cute Limited (CL), out of a total of50 million Rs. 10
shares, for Rs. 290 million. This investment in CL is carried at costin WL’s books.
(vii) CL paid a 12% final dividend for the years 2022 and 2023 which WL recorded as other income upon receipt.
The breakup of total comprehensive income of CL for 2023 and 2022 is as follows:
2023 2022
Profit 90 80
Other comprehensive income 40 -
Total comprehensive income 130 80
(viii) An impairment test carried out at year-end has indicated that goodwill of SL has been impaired by 10%, while
the investment in CL has been impaired by Rs. 22 million.
(ix) A fair value gain of Rs. 48 million needs to be recorded in respect of WL’s remaining investments.
(x) A discount rate of 20% per annum may be used wherever required.
Required:
Prepare WL’s consolidated statement of financial position as at 31 December 2023 in accordance with the
requirements of IFRSs. (Show all necessary workings) (18)
331
Solutions:
Answer-1:
P Group
Consolidated statement of financial
position as at 31 December 2015
Assets Rs.
Non-current assets:
Property, plant and equipment (450,000+240,000) 690,000
Goodwill (65,000 – 20,000) 45,000
Investment in associate (140,000+30,000-1,200) 168,800
Current-assets:
150,000
Inventory (70,000+90,000-10,000)
Current A/c with A (as it is not part of group) 20,000
Other current assets (110,000+130,000) 240,000
Total assets 1,313,800

Equity:
100,000
Share capital
Consolidated accumulated profits 711,300
(650,000+60,000+30,000-20,000-1,200-7,500)
971,300
Non-controlling interest in S (85,000+20,000-2,500) 102,500
Total equity 1,073,800
Long-term liabilities:
(40,000+20,000)
60,000
(100,000+80,000)
180,000
Working
P own 75% of the equity of S and 25% of the equity of A. Therefore, S is a subsidiary and A is an associate
At Acquisition: 01-01-2022 P(75%) NCI(25%)

Retained Earning 60,000
340,000 255,000 85,000
Cost of Investment 320,000 -
Goodwill 65,000
Since Acq. till SOFP date:
R.E(140-60) 80,000 60,000 20,000
Analysis of equity of A
At Acq P(30%)
S.C 100,000
332
S. P 120,000
R. E 150,000
370,000 111,000
Difference is G. W which is not to
be disclosed separately
Since acquisition till SOFP date:
R. E (250 – 150) 100,000 30,000
Journal Entries
Impairment loss (CRE) 20,000
G. W 20,000
(no effect on NCI as it is not at FV)
Parent to Associate
CRE 1,200
Investment in A 1,200
(100+33.33 = 133.33)
16,000/133.33x33.33=4,000x30%=1,200
If income statement is also required to be
Prepared, then;
CRE 7,500
NCI 2,500
Stock 10,000
Answers-2:
QL Group
As on 31 December 2012
Assets Rs.in
Non-current assets: million
Property, plant and equipment (5,000+550-3.1) 5,546.90
Goodwill (110-40) 70
Investment in associate [(290+60-4.8)+6.4] 351.60
Current-assets:
(5,380+400 5,780
Total assets 11,748.50

Ordinary share capital 6,000.00
Reserve for issue of shares[4x15] 60.00
Retained earnings(2,900-40-2.48-4.8+6.4-40) 2,819.12
Non-controlling interest 119.38
(130-10-0.62)
(2,400+350) 2,750.00
11,748.50
Workings
Analysis Of Equity of subsidiary

333
Share Capital 500
Retained Earning 150
650 520 130
Cost of Investment 630 -
Goodwill 110
R.E(100-150) (50) (40) (10)
i)
S P:
Date of sale 1-10-2012
Sale proceeds 24
Carrying amount (20.8)
[26 – (26÷10x2)]
Gain (to be reversed) 3.2 Dr.
Extra depreciation 0.1 Cr.
(to be reversed) (3.2/8 x 3/12)
Net gain 3.1 Dr.
CRE (80%) 2.48

NCI (20%) 0.62
PPE 3.1
Impairment loss (CRE) 40
G. W 40
[110-70]
W-2) Analysis of equity of HL (Associate)
At Acq (30-11-2012) P(40%(16/40))
S.C 400
R. E 224
624 249.9
Cost of investment (290+60) 350
Difference is G. W
Since acquisition till SOFP date:
R. E (250 – 150) 16 6.4

i)
30-11-2012:
Investment 6.4
Share of Profit(CRE) 6.4
(Entry is made on the basis of share price on the date of acquisition rather than price on the date of issuance)
Investment (4x15) 60
Reserve for issue of shares 60
(Subsequently on 1-1-2013 on issuance of shares; entry will be)
Reserves 60
S.C (4X10) 40
S.P (4X5) 20
(However, investment in associate can be remeasured according to the requirements of other standards)
ii)
Parent to Associate:
(52/130 x 30 x 40%) = 4.8
CRE 4.8
Investment in associate 4.8
334
Answer-3:
Hark Group
Consolidated statement of financial position as at 31 March 2016
Rs. 000
Non-current assets:
Property, plant and equipment (60+31-0.8) 90,200
Goodwill 23,000
Investment in associate (9+0.5) 9,500
Other investments (0.8-0.15) 650
Current assets:
[18.2+8-0.9-1 (cash paid for professional charges)+9-9] 24,300

Equity shares of Rs. 1 each (16+4+1) 21,000
Share premium (2+32+8) 42,000
[36+8+2.4-1-0.5-0.72-0.8-0.15+0.5 (from associate)] 85,730
106,730
Non-controlling interests (7+0.6-0.18) 7,420
Deferred consideration for Spark shares (5+0.5) 5,500
6% loan notes 10,000
7% loan notes 6,000 21,500
Current liabilities: 12,000
(7+5)
Workings
W-1) Analysis of equity of Spark:
At Acquisition: 01-04-2015 P(75%) NCI (25%) Total

Share Capital 5
Share Premium 4
Retained Earning 16
25 20 5 25
Cost of Investment (36+5) 41 41
FV of NCI (5x20%x7) 7 7
48
Goodwill 21 2 23
R. E 3 2.4 0.6
Journal Entries
Investment (4x9) 36
S.C 4
S.P 32
Investment 5
335
Payable 5
(6.05(1+0.1)-2)=5
Expense (CRE) 1
Cash 1
Finance Cost 0.5
Payable 0.5
(5x10%) =0.5(unwinding of discount)
H sale to S (sale of machine)
Cash = 3
C.A = 2
Gain 1 Dr. (to be reversed)
Extra dep (1/5) 0.2 Cr. (to be reversed)
Net gain 0.8 Dr.

CRE 0.8
Machine 0.8
Investment of Hark:(At FVTPL)
CRE (loss) 0.15
Investment 0.15
(0.85-0.65)
S sale to P
3.6x75% =2.7/150x50=0.9
CRE (80%) 0.72
NCI (20%) 0.18
Stock 0.9
W-2) Analysis of equity of Ark (Associate):

P
(25%)
At Acq: 1-4-2015
S.C 6
S.P 4
R.E 8
18 4.5
Difference is G.W (no separate disclosure required)

R.E (2 x 25%) 0.5
Investment 0.5
Profit from associate(CRE) 0.5
Cash (1x9) 9
S.C 1
S.P 8
Investment in Ark 9
Cash 9
(6 x 25% x 6)
Answer 4
Hamachi Ltd
As at 31 March 2016
336
Rs. 000
Non-current assets:
Property, plant and equipment (8,050-3,600) 11,650
Goodwill (1,170-468) 702
License (180-60) 120
Investments:
Associate (630+90-3) 717
Others (4,000+910-3,240-630+120 FV adjustment of investment property) 1,160
14,349
Current assets:
Inventory (830+340) 1,170
Accounts receivable (520+290-40) 770
Cash in transit 40
Bank 240
2,220
Total assets 16,569

Equity attributable to equity holder of the parent:
Ordinary shares of Rs. 1 each 5,000
(6,000+1,500+1,350-54-468+90-3)
13,415
(230+150-6)
13,789
10% loan notes (500+240) 740
Accounts payable (420+960) 1,380
Taxation (220+250) 470
Overdraft 190
Workings:
W-1) Analysis of equity of S
Share Capital 1,200
2,000
2,300 2070 230
Cost of Investment 3240
(1200x90%x3)
Goodwill 1,170
R. E (1,400-800+900) 1500 1,350 150
337
Investment in property 120
R. S 120
If investment property is at fair value model; then there is no concept of depreciation
License 180
R.S 180
CRE (90%) 54
NCI (10%) 6
License 60
(180/6 x 2)
CIT 40
Receivable from S 40
CRE 468
G.W 468
W-2) Analysis of equity of A:

P (30%)
At Acq: 1-10-2015
S.C 600
R.E (800+600x6/12) 1,100
1,700 510
(600 x 30% x 3.5)
Difference is G.W
(no need of separate disclosure)

R.E (800+600-1,100) 300 90
Investment 90
Profit of associate (CRE) 90
H A:65 x 2/3 =43.333/130x30
=120*30%=3
= 10 x 30% = 3
Profit from associate (CRE) 3
Investment 3
338
Answer-5:
a)
BL Group
Consolidated statement of financial position As on 30-6-2018
Non-current assets: “Rs. in million”
Property, plant and equipment (1,012+920+100-40) 1,992
Goodwill (175-100) 75
Intangible assets (350-87) 263
Investment in ZL (203+6+37(from income statement)-20) 226
Current assets:
Stock (620+1,460-42-18-6.25) 2,013.75
Trade and other receivables (950+529) 1,479
Cash and bank balances (900+510) 1,410
7,458.75
Share Capital 1,000
Share Premium 200
Consolidated retained earnings 1768.75 2,968.75
Non-Controlling Interest 310
3278.75
Current liabilities: (1,880+2,300) 4,180
7,458.75
b)
BL Group
Consolidated statement of profit or
lossFor the year ended 30-6-2018
Sales (4,480+4,200-1,000-300) 7,380
Cost of sales (2,690+2,940-1,000-300+10+42+18) (4,400)
Gross profit 2,980
Distribution and admin expenses (620+290+87+100) (1,097)
Finance cost (50+80) (130)
Dividend income (260-240-20) -
Share of profit of Z [(148 x 25%) =37*-6.25) 30.75
Profit before tax 1,783.75
Taxation (330+114) (444)
Profit after tax 1,339.75
Attributable to:
Owners of parent (bal.) 1,232.35
NCI (776-10-87-42-100) x 20% 107.4
1,339.75
*
Investment 37
Share of profit 37
c)
BL Group
Consolidated statement of changes in
equity For the year ended 30-6-2018
Share Share Consolidated NCI Total

Capital Premium Retained earnings
Balance as on 1-7-2017 1,000 200 786.4* 262.6** 2,249
Profit for the year 1,232.35 107.4 1,339.75
Dividend (250) (60) (310)
(300-240)
Balance as on 30-6-2018 1,000 200 1,768.75 310 3,278.75
339
*(1,370+250-1,050 = 570)570+234.4+6-24 = 786.4
**210+58.6-6 = 262.6
Workings:
W-1) Analysis of equity of ML: (Subsidiary)
At Acquisition: 01-04- P(80%) NCI(20%) Total
2014
Share Capital 400
Share Premium 140
700
(PPE)
800 640 160 800
Fair Value of NCI 210 210
Goodwill 125 50 175
R. E (453-160) 293 234.4 58.6
Retained Earnings Working:

Retained Earnings
b/d 453
Dividend 300
Profit 776
c/d 929

i)
PPE 100
R. S 100
Opening R.E(S) (24 CRE opening,6 NCI opening) 54
Depreciation (COS) 10
PPE 40
(100/40x4=40) (Effect on NCI)
ii)
Selling and Marketings 87
Intangible Asset 87
iii)
Dividend income (P) 240
Dividend declared (S) 240
(300 x 80%)
iv)
ML to BL (S to P)
Cost of sales 42
Stock 42
BL to ML (P to S)
Cost of sales 18
Stock 18
v)
Impairment 100
Good will 100
(NCI will be affected as it is a FV)
340
W-2) Analysis of equity of ZL: (Associate)
At Acq 01-01-2017 P (25%(55/220)
S.C 220
S. P 83
R. E 269
572 143
Difference is G. W which is not
to be disclosed separately
Since acquisition till the
beginning of the period:
R. E (293W – 269) 24 6
Investment 6
CRE (opening 6)
Working of Retained Earnings

Retained earnings
b/d 293
Div. 80 PAT 148
c/d 361
Share of profit for the year:

148 x 25% = 37 Investment 37
Profit from associate 37
i)
Dividend income 20
Investment in associate 20
ii)
ZL to BL: [25x25%] = 6.25
Profit from associate 6.25
Inventory 6.25
Answer-6:
a)
FL Group Statement of financial position
As on 31-12-2018
Non-current assets:
Rs. In million
Property, plant and equipment (22,500-5,760+5,940-1,260-32.40) 21,387.60
Goodwill 1,860
Other investment 20,100
Current assets:
Stock (14,460+5,680-180-360) 19,600
Accounts receivable (6,240+6,580-300-500) 12,020
Cash and bank balances (4,920+2,700-600) 7,020
81,987.60
341
Equity & liabilities: Equity:
Share capital
Consolidated retained earnings 30,000.00
69,139.60 39,139.60
NCI 3,448.00
72,587.60
Accounts payable (2,760+1,440-300-500) 3,400
Dividend payable 6,000
81,987.60
FL Group
Income statement
Rs. In million
Sales (57,600+33,800-2,400-3,600) 85,400.0
Cost of sales (49,200+21,000-2,400-3,600+180+360) 64,740.0
Gross profit 20,660.0
Operating expenses (3,600+5,400) (9,000)
Gain on disposal (540-32.4) 507.6
Dividend income (1,080-480) 600
Profit before tax 12,767.60
Tax -
Profit after tax 12,767.60
Attributable to:
Owners of parent (bal.) 11,359.60
NCI (7,400* - 360) x 1,408
20%
12,767.60
*[33,800-21,000-5,400]
b)
FL Group
Consolidated statement of changes in
equity For the year ended 31-12-2018
Share Consolidated NCI Total
Capital Retained Earnings
Balance as on 1-1-2018 30,000 33,780 - 63,780
NCI at acquisition 2,160 2,160
Profit for the year 11,359.60 1,408 12,767.60
Dividend (6,000) (120) (6,120)
(600x20%)
Balance as on 31-12-2018 30,000 39,139.6 3,448 72,587.60
Workings:
Analysis of equity of S:
P [80%(480/600)] NCI (20%)
At Acq: 1-1-2018
S. C 6,000
R. E (All opening pre) 4,800
10,800 8,640 2,160
G. W 1,860
Since Acq. till the end of previous year (not relevant because acquisition is during the year)
Workings:
342
i) P S
900
100
x20 = 180 COS 180
Stock 180
(No effect on NCI)
S P
1,200
100
x30 = 360 COS 360
Stock 360
(Effect on NCI)
ii) Machine sold by P S

Gain on disposal 54 Dr.
(to be reversed)
Extra depreciation 21.6
Cr. (to be reversed)
[54/2.5]
Net Gain 32.4 Dr.
Gain 32.4
Asset 32.4
(As sold by parent so no effect on NCI)
iii) Services provided by FL (Parent)

Operating exp (P) 100
Gain (P) 100
Gain (P) 100
Operating expenses (S) 100
As the net effect will be zero therefore no need to make any further entry.
iv)
P S
Dividend 6,000 Dividend (S) 600
Dividend payable 6,000 Dividend payable 600
(30,000 x 20%) (6,000 x 10%)
Dividend Payable 600
Cash 600
No effect of dividend of Parent, however dividend declared by subsidiary will be cancelled out up to parent’s share.
Dividend income (P) 480
Dividend declared (S) 480
(600 x 10% x 80%)
As dividend of S is paid before the balance sheet date therefore there is no need for any cancellation of dividend
receivable/payable.
Answer 7
Aluminium Limited
Consolidated statement of financial position as on 31 December 2022
Non-current assets: Rs. in million
Property, plant and equipment 2,075
Investment property 870
Investments 43
Inventories 545
Other current assets 565
4,186
343
Equity & liabilities:
Share capital (Rs. 10 each) 1,400
Share premium 510
Consolidated retained earnings 899
Liabilities 933
4,186
Analysis of Equity of S at Acquisition Date () P(70%) NCI(30%)

Share Capital 800
Ret Earnings 515
F.V Adjustment 160
Fv of Net Assets 1,580 1106 474
Consideration (500+200(300x1.15-3)) (700)
Bargain Purchase Gain 406
Change in Equity since acquizition till SOFP date
Revaluation. Surplus ((150-45)-105) =0
Retained Earnings (445-515) =(70) (49) (21)
W-2 Investment in Associate

P(25%)
Fair Value of net Assets(not given in Q) -
Consideration paid 91
Goodwill (no treatment) -
Change in equity since acquisition (52x25%) 13
Journal entries
Date Transaction Debit Credit
1 Jan Share premium 40
investment 40
1 Jan Payables 104
investment 104
31-Dec C.R.E 30
Payables (200x15%) 30
1 Jan Investment Property 160
31 Dec C.R.E(70%) 14
N.C.I(30%) 6
Investment property 20(160/8)
31-Dec C.R.E(70%) 7
N.C.I(30%) 3
Inventory 10
31-Dec C.R.E 5
Investment in A 5
31-Dec Investment in A 13
C.R.E 13
(52x25%=13)
31-Dec C.R.E 11
Investment in A 11
(48-48/4x4/12=44x25%=11
31-Dec C.R.E 22
Investment 22
31-Dec Revaluation surplus 45
PPE 45
344
Answer 8
Heptagon Limited
Consolidated statement of financial position as on 30 June 2022
Non-current assets: Rs. in million
Property, plant and equipment (1820+840+30)+(650-50-10) 3,280
Goodwill 107–15 92
Investment in associate (100+80-6) 112
Current assets
Inventories 490+330–1(20÷1.2×20%×30%) 819
Other current assets 360+260–4–0 616
4,919
Share capital (Rs. 10 each) 1,400+130(13×10) 1,530
Share premium 750+572 1,322
Consolidated reserves (820+24-7-50-10-9+18-6-1) 779
Non-controlling interest (442+16-6) 452
Liabilities 450+240+123+7-4 836
4,919
*investment property is classified as PPE according to Group as it is use by group and therefore, IAS-16 should
be used instead of IAS-40
W-1: Analysis of equity of S at Acquisition date

Share Capital 650
Share Premium 200
B.V of Net Assets 1,150
Revaluation Surplus(Land) 30
F.V of net Asset 1,180 708 472
Less: Investment (702+143) 845
F.V of NCI (650/10*40*17) 442
Goodwill (137-30)=107 137 (30)
Change in Equity Since Acquisition date
Retained Earnings (340-300)=40 24 16
W-2: No information is available for Associate so no analysis of equity of Associate

Transaction debit credit
1. Investment (13x54) 702
Share Capital(13x10) 130
Share Premium(13x44) 572
(650/10x60%=39/3x1=13M share)
2. Investment 143
Contingent liability 143
3. CRE 7
Contingent Liability 7
4. Land 30
Revaluation Surplus(80-50) 30
5. Rent Payable to HL 4
Rent Receivable from EL 4
6. CRE (F.V gain) 50
PPE 50
7. CRE 10
Accumulated Depreciation 10
(600/30x6/12)
345
8. CRE (60%) 9
NCI (40%) 6
Goodwill 15
9. Investment in Associate 18
CRE (share of profit) 18
(60x30%=18)
10. CRE 6
Investment in Associate 6
(20x30%=6)
11. CRE 1
Stock 1
Answer 9
Happiness Limited
Consolidated statement of profit or loss and other comprehensive income
Rs. in million
Sales 4,100+2,250 6,350.0
Cost of sales 2,880+1,125+80(200×40%) (4,085.0)
Operating expenses 800+550+45+210+42) (1,647.0)
Other income 414+216–90(1,500×8%×75%) 540.0
Gain on re measurement of investments 195.0
Finance cost 50+76.3(600×1.06×12%) (126.3)
Share of associate’s profit (123 W-2 -3) 120.0
Net Profit 1,346.7
Other Comprehensive Income

Loss on re-measurement of investment (80.0)
Share of associate’s OCI (20+100)×30% 36.0
(44.0)
Total comprehensive income 1,302.7
Profit or loss attributable to:

Owner of the parent (Bal.) 1,192.7
Non-controlling interests (741(W-2)-45-80)x25% 154.0
1,346.7
Comprehensive income attributable to:

Owner of the parent (Bal.) 1168.7
Non-controlling interests 154–20(80×25%) 134.0
1,302.7
W-1: Analysis of equity of S at Acquisition date
Share Capital 1,500
B.V of Net Assets 3,080 2,310 770
Investment (W-3) 2,590 -
Goodwill 280
346
W-2: Analysis of equity of S at Associate
At acquisition date 01-03-2021 P(30%)
Share Capital 1,000
1,950 585
Investment -
Share of Profit of Associate =410x30%=123
=(210-1365-303+95-35=492x10/12=410)
W-3
Investment in S =1700+843(1+0.12) ^-3 +290=2590
During the year, there is a change in estimate which should be measured as an expense in 2021.
Profit of SL
(2,250-1,125-550+216-50) =741(investment of (80) measured at FVOCI)
Transaction debit credit
1. Investment in A 123
Share of profit 123
2. Investment 290
Payable (at F.V) 290
3. Operating Expense 210
Payable 290
Investment in SL 500
(no effect in NCI)
4. Software 180
(Additional Cost 20M, have been properly recorded in SL
Books)
5. Amortization expense (180/4*1) 45
Accumulated Amortization 45
(From 01-01-21 as the project is capitalized on this date)
(NCI is effected)
6. Inventory 200
(50% of inventory sold last year 200x50%=100)
At 31-12 -20
7. Opening CRE 75
Opening NCI 25
Stock 100
(10% remains on 31-12-21 and 50% sold before start of
period, mean 40% sold this year)
Cost of Sale 80
Stock 80
(NCI will be effected )(200x40%=80)
8. Other Income(P) 90
Dividend(S) 90
(1500x8%=120x75%=90)
9. Share of profit 3
Stock 3
(150x40% =60/120x20=10x30%=3)
10. Impairment loss 42
Goodwill 42
(280x15%=42, No effect in NCI)
11. Finance Cost 76.32
Payable 76.32
(no effect in NCI)
347
Unwinding of Discount
Last year =843(1.12) ^-3 = 600
From July to Dec 2020
600x12%x6/12 = 36
Carrying Amount at last year end =600+36 = 636
From Jan to Dec 2021
636x12% = 76.2
Answer 10
Safawi Limited
Rs. in million
Assets:
Property, plant and equipment 2,390+1,210+50 3,650
Intangible assets other than goodwill 525+135–25(W-3) 635
Goodwill 310(W-1)–60(iv) 250
Investment in associate – AL (540-70+15-130-20) 335
Current Assets
Inventories (1,200+600+100-60(ii)) 1,840
Other current assets 1,485+445 1,930
8,640
Share capital (Rs. 10 each) 2,500+800(i) 3,300
Share premium 1,040+1200(i) 2,240
Consolidated retained earnings (1280+160-48-25-70-20-130) 1,099
Consolidated Revaluation Surplus (0+15) 15
Non-controlling interest (460+40-12-12) 476
Liabilities 1,320+190 1,510
8,640
W-1: Analysis of Equity of Subsidiary

Share Capital 1,000
Share Premium -
C.V of net Asset 2,000
(Investment)
Revaluation Surplus (land) 50
F.V of net Asset 2,150 1,720 430
Investment (i) 2,000 -
Fair Value of NCI(20x23) 460
Goodwill(280+30) 310 280 30
Change in Equity Since
Acquisition till SOFP date
Retained Earnings(1200-1000) 200 160 140
W-2: Analysis of equity of Associate

At Acq 01-01-2020 P (25%)
S.C 120
S. P 2,000
2,120 530
348
Goodwill(no need to record) xxx
Change Since acquisition till the
SOFP Date
Net loss (280) (70)
OCI(Revaluation Surplus) 60 15
Journal Entries
a.Transaction debit credit
(i) Investment (80x25(F.V)) 2000
Share Capital (80x10) 800
Share Premium 1200
(ii) Inventory 100
CRE (80%) 48
NCI (20%) 12
Investment 60
Land 50
(iii) CRE 25
Int. Asset 25
(30-30/3x6/12=25)
CRE (80%) 48
NCI (20%) 12
Goodwill 60
(iv) CRE 70
Investment in A 70
Investment in A 15
CRE 15
(60x25%=15)
(v) CRE 20
Investment 20
(100-100/5=80x25%=20)
(vi) CRE 130
Investment in A 130
(vii) Fair Value of NCI
1,000/10= 100X20%=20 M Share
20x33=460
Answer 11
Himaliya Group
Consolidated SOFP
As at 31 December 2020
Rs. 000
Non-current assets:
Property, plant and equipment (2400+1750) 4150
Goodwill(W-1) 170 170
Brand (160-24) 136
Investment in A (1500+318.5-171.5) 1647
Investment (4320-2190-30-1500) 600
Current assets:
Inventories (1050+700-10-8.4) 1731.6
Trade Receivables (840+525-74) 1,291
Cash & Bank Balance (210+175) 385
349
Share Capital (Rs. 10 each) 4700
Share premium 720
CRE(W-3) 2,728
NCI (240+49-2.4) 1,676
Other Liabilities (1,190+560-74) 1,676
Total equity and liabilities 10,110.6
W-1: Analysis of Equity of Subsidiary

Share Capital 1,400
Share Premium -
C.V of net Asset 2,100
Revaluation Surplus (land) 160
F.V of net Asset 2,260 1,720 226
Investment (2220-30) 2,190 -
Fair Value of NCI(20x23) - 240
Goodwill(280+30) 310 156 14
Change in Equity Since
Acquisition till SOFP date
Retained Earnings(1190-700) 490 441 49
W-2: Analysis of equity of Associate

At Acq Date P (35%)
F.V of net Asset * 4060 1421
Consideration paid (1500)
Goodwill(no need to record) xxx
Change Since acquisition till the SOFP Date
Net Profit 910 318.5
*Net Assets Of Associate
Opening Net Asset(bal) 4060
PAT +910
Dividend (490)
Closing net Asset 4,480
W-3 Consolidated Retained Earnings

HL’s Retained Earnings (Given) 2210
Professional Fee (30)
Share of profit from Associate 138.6
(318.5-171.5-8.4)
Post-Acq profit of subsidiary 441
URP on Stock (10)
Amortization of brand (21.6)
Total 2728
Transaction Debit Credit

i) CRE 30
Investment 30
ii) Brand 160
CRE (90%) 21.6
NCI (10%) 2.4
Brand 24
350
v) No treatment as actual cost is incurred & already recorded, and no need for future
costs to be provided now
vi) Investment in A 318.5
CRE 318.5
(910x35%)
vi) CRE 171.5
Investment in A 171.5
(490x35%)
vii) CRE 318.5
Inventory 318.5
(P to S) (490x35%)
CRE 8.4
Inventory 8.4
(A to P) (50/125*25=8.4)
Payable 74
Receivable 74
Answer 12
Manzil Limited
Rs. in million
Sales 800+315×8/12 1,010.0
Cost of sales 540+180×8/12+5(60÷8×8÷12) (665.0)
Gross profit 345.0
Operating expenses 114+60×8/12+12.4(124×10%) (166.4)
Other income 41+76(226–150)–18(600×5%×60%)– 94.0
5(400×5%×25%)
Share of associate’s profit (W-2) 6.2
Finance cost 20+12×8÷12 (28.0)
Net Profit 250.8
Other Comprehensive Income

91.8(0.6×150×1.02)–
Loss on re-measurement of investment 82.8(0.6×138) (9.0)
Share of associate’s 6[61.2(0.4×150×1.02)– (1.5)
OCI 55.2(0.4×138)]×25%
(10.5)
Total comprehensive income 240.3

Non-controlling interests ((W-1)42–5)×40% 14.8
250.8

Non-controlling interests 14.8–3.6(9×40%) 11.2
240.3
W-1: Computation of goodwill Rs. in million

Building 226.0
Shares 16×30 480.0
351
706.0
NCI (970×40%) 388.0
Net assets of ML:

Share capital 600.0
Retained earnings 322–42{(315–180–60–12)×8/12}+30(600×5%)] 310.0
Excess fair value – manufacturing plant 60.0
970.0
124.0
W-2: Share of associate’s profit Rs. in million

Profit (132–97–6–5+8)×25% 8.0
Share of unrealized profit on sale of machine (68–60)×4.5/5×25% (1.8)
6.2
Answer 13
Baghsar Limited
Rs. in million
Sales 3,900+1,860(2,480×9÷12)–500 5,260.0
Cost of sales (1,980+1,245(1,660×9÷12)–500+32(160×20%)) (2,757.0)
Operating expenses (500+620x9/12+120+96/4x9/12+30) (1,133.0)
Other income (420+100x9/12+362.1(W-1)+242-150) 949.1
Share of associate’s profit 670(1,900–810–415+90–95)×30% 201.0
Finance cost 150+45(60×9÷12)+137.6(1,078.9(W-1)×17%×9÷12) (332.6)
Net Profit 2,187.5

Revaluation surplus arising during the year 120.0
Share of associates OCI 90×30% 27.0
147.0
Total comprehensive income 2,334.5
Non-controlling interests (W-4) 33.0
2,187.5
Non-controlling interests 33.0
W-1 Analysis of Equity of Subsidiary

At Acquisition: 01-october 2022 P(90%) NCI(10%)
Share Capital 6,000
Retained Earning (1,650)
F.V Adjustment-Brand 96
F.V Adjustment- Building 300
F.V of net Asset 5,196 3,897 1,299
Investment – Cash (2600-120) 2,480 -
Investment – Deferred 1,078.9 3558.9 -
(450x2x1.17-2+450x1.5x1.17-3 )
F.V of NCI (150x8.5) - 1275
Gain on Bargain Purchase 338.1 24
352
Journal Entries
i) Operating Expense 120
Investment 120
(Valuation fees)
ii) Brand 96
iii) Building 300
(1200-900=300)
iv) Operating Expense 18
Brand 18
(96/4x9/12=18)
Impairment loss 30
Brand 30
Working
F. V =256
Depreciation = (48)
C.V =208
R. A =178
Impairment loss =30
(NCI will be effected)
v) Sale 500
Cost of Sale 500
Cost of Sale 32
Inventory 32
(URP=160x20%=32)
vi) Investment in A 242
Gain on Disposal 242
(932-690=242)
Other income 150
Investment in A 150
(30x5=150)
353
IAS-28: [Accounting for Associates]
Associate: An entity over which an investor has a significant influence (rather than control; means not a
subsidiary)
Significant influence: is the power to participate in the financial and operating policy decisions of
investee but not control of those policies.
Point to remember:
If an entity holds 20% to 50% of the equity of another entity (investee), it is presumed that entity has
significant influence over investee (means an associate).
Separate Financial Statements: [ Para 10 of IAS-27]
An investor shall account for the investment in an associate in its separate financial statements
i) At cost (it means record the investment at cost and then only account for the dividend income
from associate in the statement of comprehensive income); or
ii) In accordance with IFRS 9; or
iii) Using equity method as per IAS-28
Consolidated Financial statements: [means investor has investment in one or more subsidiaries and
also investment in associates].
IAS-28 requires investment in associates to be accounted for in consolidated financial statements
using equity method.
Summary of Accounting of associates
In Separate financial statement of investor
Investment
Cash/Payable/Share Capital
Dividend Receivable
Dividend income
Cash
Dividend Receivable
In consolidated financial statement

Investment in associate
Cash /Payable/ Share Capital
Investment in Associate
Share of profit
(Post acquisition changes in equity)
When dividend from associate is declared then record the dividend receivable up to the extent of our
share in associate
Dividend Receivable
Investment
We have already added in investment our share of profits in associate and when associate declared
dividend from it, it will result in increase in short term asset ( i.e Receivable) and decrease in long term
asset (i.e Investment)
Cash
Dividend Receivable
Page 1 of 27
354
Equity Method: It is a method of accounting whereby investment is initially recorded at cost and
adjusted thereafter for post-acquisition changes in the investor’s share of net assets of the investee
(means associate).
The profit or loss of the investor includes the investor’s share of profit or loss of the investee. In
addition, the other comprehensive income of the investor includes the investor’s share of other
comprehensive income of the investee.
Example 1.P acquired 40% of the equity of A on 1 January 2018 for 45,000. At the date of acquisition,
the share capital and retained earnings of A were 1,000 and 99,000 respectively.
The trial balances of P and A as on 31.12.2019 are as follows:
Trial Balance P A
Share capital 1,000,000 1,000
Retained earnings (31 Dec 2018) 9,000,000 120,000
Land and buildings 10,555,000 145,000
Investment in A 45,000 0
Required: Explain the accounting treatment.
Solution to example:
Workings: Analysis of Equity
At Acquisition:1.1.2018 P (40%) No NCI
Share capital 1,000
100,000 40,000 0
Difference is Goodwill XXX
(no separate disclosure required)
Since Acq. Till the end of previous period
R.E. (120,000 -99,000) 21,000 8,400 0
Current period 25,000 10,000 0
(from income statement)
 P’s 40% share of the associate’s net assets on date of acquisition is 40,000 [(1,000+99,000) x 40%]
and therefore an excess of 5,000 was paid.
 This is referred to as goodwill but is not separately disclosed.
 This goodwill would have been included as part of the carrying amount of the investment in the
associate when the full amount paid of 45,000 was debited to the investment asset account.
 Since the goodwill does not require separate disclosure, no further journal entry to account for the
excess of 5,000 is required.
Accounting entries to record the share of profits:
Up to previous period Debit Credit
Investment 8,400
Opening CRE 8,400
Current period
Investment 10,000
Share of profit 10,000
Therefore, the investment in Associate will appear in consolidated statement of financial position at:
355
(45,000 + 8,400 + 10,000) =63,400
Example 2.P acquired 40% of the equity of A on 1 January 2018 for 35,000. At the date of acquisition,
the share capital and retained earnings of A were 1,000 and 99,000 respectively.
The trial balances of P and A as on 31.12.2019 are as follows:
Trial Balance P A
Share capital 1,000,000 1,000
Retained earnings (31 Dec 2018) 9,000,000 120,000
Land and buildings 10,565,000 145,000
Investment in A 35,000 0
Required: Explain the accounting
treatment. Solution to example
At Acquisition:1.1.2018 P (40%) No NCI
Share capital 1,000
100,000 40,000 0
Difference is Gain (to be accounted for) 5,000
Since Acq. Till the end of previous period
R.E. (120,000 -99,000) 21,000 8,400
Current period (from income statement) 25,000 10,000
 In this case, P has debited the investment with the cost of 35,000.
 P’s 40% share of the associate’s net assets on date of acquisition is 40,000 and therefore 5,000 less
was paid, means a gain on acquisition.
 In terms of IAS 28.32, the gain must be accounted for as part of the profit from the associate.
 Since this gain is not recorded in the separate financial statements, so we would need to debit the
investment by 5,000 and credit this gain to the profit from associate account in the equity- accounted
consolidated financial statements (but as this gain is in previous periods, therefore rather than
recording in the profit or loss of this year, record in opening CRE).
Accounts Debit Credit Comment
Investment in associate 5,000 The gain of 5,000 is recognized as part of the share
Profit from associate of the associate’s profit. The investment is increased
5,000
(opening CRE) to show the value of the investor’s share of the net
assets acquired (35,000 + 5,000 = 40,000)
Gain on bargain purchase is recognized in profit or loss of the current period, unless arise in prior
periods.
After that all other things remain same:
Accounting entries to record the share of profits:
Up to previous period Debit Credit
Investment 8,400
Opening CRE 8,400
Current period
Investment 10,000
Share of profit 10,000
356
Therefore, the investment in Associate will appear in consolidated statement of financial position at:
(35,000 + 5,000 + 8,400 + 10,000) = 58,400
Summary of equity method:
The following will be relevant when applying the equity method:
1) Only the investor’s proportionate share is accounted for and thus non-controlling interest is not
recognized.
2) Only a single line item, the investment in associate is reflected in the statement of financial position.
Therefore, unlike consolidated statement of financial position the assets and liabilities of associate are
not added. Similarly, a single line item i.e. share of profit from associate is reflected in statement of
comprehensive income. Therefore, unlike consolidated statement of comprehensive income, income
and expenses of associate are not added.
Presentation of Share of Profit of associate in income statement:
The share of profit of associate is presented in consolidated statement of comprehensive Income
immediately before calculating the group profit before tax.
3) Any goodwill arising at acquisition (i.e. where the consideration given is more than the investor’s
share of fair value of associate’s net assets at the date of acquisition) is simply included as part of
carrying amount of investment in associate and is not disclosed separately. There is no concept of
amortization of this goodwill.
4) A gain made on bargain purchase (i.e. where the consideration given is less than the investor’s
share of fair value of associate’s net assets at the date of acquisition) must be recognized in profit or
loss as part of the investor’s share of profit from associate.
Accounting for goodwill or gain on bargain purchase
If the amount paid by investor was more than the share of associate’s net assets (i-e goodwill is assumed
to have been purchased) the goodwill will be automatically recognized as an asset when debiting the
Investment with the total amount paid. This goodwill is not required to be separately disclosed and
therefore no further entry is required.
Conversely, if the amount paid by the investor was less than its share of the associate’s net assets, the gain
on bargain purchase must be included in share of profit from associate by making an entry.
Investment XXX
Profit from associate XXX
Question-1:
The draft statements of financial position as at 31 December 2016 of three companies are set out below:
Assets: Helium Sulphur Arsenic
Rs. 000 Rs. 000 Rs. 000
Non-current assets:
Property, plant and equipment 400 100 160
Investments:
- Shares in Sulphur (60%) 75 - -
- Shares in Arsenic (30%) 30 - -
Current assets: 445 160 80
950 260 240
Equity and liabilities:
Share capital 100 30 60
Retained earnings 650 180 100
Non-current loans 200 50 80
357
950 260 240
The reserves of Sulphur and Arsenic when the investments were acquired were Rs. 70,000 and Rs.
30,000 respectively.
Required:
Prepare the consolidated statement of financial position as at 31 December 2016.
Answer-1:
Helium Group
A s at 31 December 2016
Assets Rs. 000
Non-current assets:
Property, plant and equipment (400+100) 500
Interest in associate (30+21) 51
Goodwill 15
Current assets: (445+160) 605
Total assets 1,171
Capital and reserves:
Share capital 100
Retained earnings (650+66+21) 737
837
Non-controlling interest (40+44) 84
Long-term liabilities: (200+50) 250
Workings:
Analysis of equity of S: At Acquisition: P (60%) NCI (40%)
S. C 30
R. E 70
100 60 40
Goodwill 15
R. E (180 – 70) 110 66 44
Analysis of equity of A:
At Acquisition date P (30%)
S. C 60
R. E 30
90 27
No need of any entry as difference is Goodwill xxx

R. E (100 – 30) 70 21
Investment in ‘A’ 21
Share of profit (CRE) 21
358
Question-2:
Hide holds 80% of the ordinary share capital of Seek (acquired on 1 February 2016) and 30% of the
ordinary share capital of Arrive (acquired on 1 July 2015).
The draft statements of profit or loss for the year ended 30 June 2016, are set out below.
Hide Seek Arrive
Rs.000 Rs.000 Rs.000
Revenue 12,614 6,160 8,640
Cost of sales (11,318) (5,524) (7,614)
Other income 150 - -
profit before tax 1,446 636 1,026
Income tax (621) (275) (432)
Profit after taxation 825 361 594
Included in the inventory of Seek at 30 June 2016 was Rs. 50,000 for goods purchased from Hide in May
2016 which the latter company had invoiced at cost plus 25%.
There was no gain on acquisition of subsidiary and associate.
Required:
Prepare a consolidated statement of profit or loss for Hide for the year ended 30 June 2016.
Answers-2:
Hide Group
Consolidated statement of profit or loss
Sales (12,614 + 6160 x 5/12 – 50) 15,131
Cost of sales (11,318+5,524 x 5/12 – 50+10) (13,580)
Gross profit 1,551
Other income 150
Share from associate (594 x 30%) 178
Tax (621+275 x 5/12) (736)
Attributable to:
Owners of parent (bal.) 1,113
NCI (361 x 5/12) x 20% 30
1,143
Workings:
PS
50000
 25  10
125
Cost of sales 10
Stock 10
(No effect on NCI) Share of profit from associate: 594 x 30%=178
Investment in ‘A’ 178
Share of profit (CRE) 178
Example:
Entity P acquired 30% of the equity shares in Entity A during 2011 at a cost of Rs. 147,000 when the net
assets of Entity A were Rs. 350,000.
359
At 31 December 2015, the net assets of Entity A were Rs. 600,000.
In the year to 31 December 2015, the profits after tax of Entity A were Rs. 80,000.
Required: what figures would be included for the associate in the consolidated financial statements of
entity P for the year to 31.12.2015?
Solution:
The figures that must be included to account for the associate are as follows:
P (30%) No NCI
At Acquisition:
Value of net assets 350,000 105,000 0
Difference is Goodwill XXX
Since Acq. Till the end of previous year
R.E. (600,000-80,000- 350,000) 170,000 51,000 0

The journal entry is:

Investment in Associate 75,000
Opening CRE 51,000
Share of profit (income statement) 24,000
The investment in Associate in consolidated Statement of financial position will appear as follows:
The investment in the associate is as follows: Rs.
Investment at cost 147,000
Investor’s share of post-acquisition profits of A (51,000+24,000) 75,000
Investment in the associate 222,000
Statement of profit or loss

The share of the associate’s profit after-tax for the year is shown as a separate line: Share of profits of
associate (30% × Rs. 80,000): Rs. 24,000.
Example:
Entity P acquired 40% of the equity shares in Entity A during 2011 at a cost of Rs. 128,000 when the net
assets of Entity A were Rs. 250,000.
Since acquisition of the investment, there has been no change in the issued share capital of Entity A, nor
in its share premium.
On 31 December 2015, the net assets of Entity A were Rs. 400,000.
In the year to 31 December 2015, the profits after tax of Entity A were Rs. 50,000.
Required: What figures would be included for the associate in the consolidated financial statements of
Entity P for the year to 31 December 2015?
360
Solution:
The figures that must be included to account for the associate are as follows:
P (40%) No NCI
At Acquisition:
Difference is Goodwill Xxx
(no separate disclosure
required)
Since Acq. Till the end of
previous year
R.E. (400,000-50,000- 100,000 40,000 0
250,000)
The journal entry is:

Opening CRE 40,000
Share of profit (income statement) 20,000
The investment in Associate in consolidated Statement of financial position will appear as follows:
The investment in the associate is as follows: Rs.
Investment at cost 128,000
Investor’s share of post-acquisition profits of A(40,000+20,000) 60,000
Investment in the associate 188,000

Statement of profit or loss
The share of the associate’s profit after-tax for the
year will be: Share of profits of associate (40% ×
Rs. 50,000): Rs. 20,000.
Dividend distributions by Associate:

Dividend distributions that are declared by the associate must be set-off against the carrying amount of the
investment in associate in the equity-accounted financial statements and should not be reflected in
statement of comprehensive income.
Example:
P. Co a company with subsidiaries (means P. Co will prepare consolidated financial statements), acquires
25,000 of the 100,000 ordinary shares in Almond Co. for Rs. 60,000 on 1-1-2018 when net assets of
Almond were 150,000. In the year to 31-12-2018, Almond Co. earns profit after tax of 24,000 from which
it declared a dividend of 6,000 at 31-12-2018.
Required:
361
How will Almond Co.’s results be accounted for in separate and consolidated financial statements of P.
Co for the year ended 31-12-2018?
Answer:
In the separate financial statements of P. Co:
Investment in Almond Co. 60,000
Cash/Bank 60,000
The only other entry in P. Co.’s separate income statement will be to record dividend received as other
income, at the end of 31-12-2018.
Dividend Income 1,500 (6,000 X 25%)
In the Consolidated financial statements of P. Co., P. Co. will use equity method to account for the
investment in Almond Co.
At Acquisition: P (25%) No NCI
Difference is Goodwill Xxx
Since Acq. Till the end of previous
year
R.E. 0 0 0
Consolidated profit after tax will include the group’s share of Almond Co.’s profit after tax i-e
24,000 x 25% = 6,000. The double entry will be:
Share of Profit of associate 6,000
In addition, as the P. Co. has already taken credit of dividend income in its separate financial statements,
therefore another adjustment is required i.e.:
Dividend Income 1,500 Investment in Associate 1,500
The “Investment in associates” is then stated at (60,000 + 6,000 – 1,500) = 64,500 in consolidated
statement of financial position.
Example: [difference between Cost method and Equity method]
Kashif Limited (KL) acquired 30% shares in Hasan Limited (HL) on January 01, 201x. Both company’s
year-end is December 31.
Following are the details of events during the year:
1) KL purchased 30% shares at a cost of Rs. 30 million.
2) HL Limited’s profit for the year 201x is Rs. 10 million.
3) HL Limited distributed Rs. 5 million of dividend to its shareholders.
The extract of statement of profit & loss and statement of financial position where Cost model is applied is
presented below.
Solution:
Cost method
Extract in statement of profit and loss
Dividend income from associate (5,000,000 * 30%) (under the head of other income) 1,500,000 Extract in
362
statement of financial position
Investment in associate – at cost 30,000,000
The extract of statement of profit & loss and statement of financial position where Equity model is applied
is presented below.
Equity method
1) Extract in statement of profit and loss

Share of profit from associate (10,000,000 x30%) 3,000,000
(under the head of other income)
2) Extract in statement of financial position Investment in associate (working) 31,500,000
Working
Investment at cost 30,000,000
add: share of profit for the year (10,000,000 x 30) 3,000,000
Less: dividend income (5,000,000 x 30%) (1,500,000)
CLOSING VALUE OF INVESTMENT 31,500,000
Inter group Transactions: (Also termed as “Upstream” and “Downstream” transactions)
==> “Upstream” Transactions are, for example, sale of assets from an associate to investor.
==> “Downstream” Transactions for example, sale of assets from investor to associate.
Transaction between an associate and its investor would include unrealized gains and losses. Only the
investor’s share in profit and loss of such transactions must thus be eliminated in equity-accounted
financial statements. There is no such adjustment with regard to sale of inventory or property, plant and
equipment if company opt other than equity method. [Please remember unrealized gains and losses
between parent and subsidiary were eliminated in full on consolidation]
Example: Inter-group transactions
A. P is a 40% shareholder of A. P sells inventory to A:
 During the year, P sold inventory to A for 3,000.
 The inventory cost P 2,500 and was sold at a 20% mark-up (i.e. for 3,000).
 None of the inventory had been sold by A by year-end.
Required:
Prepare the necessary journal entries in equity accounted consolidated financial statements.
B. Use the same information as above, except that:
 Only 80% of the inventory that was sold to A was on hand at year-end.
Required:
C. P is a 40% shareholder of A. P buys inventory from A:
 During the year, P bought inventory from A for 3,000.
 This inventory had cost A 2,500.
 80% of this inventory was on hand at year-end.
Required:
D. P is a 40% shareholder of A. A sold a plant (property, plant and equipment) to P:
 At the beginning of the current year with a carrying amount of 20,000 to P for 25,000.
 On the date of sale, the asset had a remaining useful life of five years.
363
Required:
E. Discuss how the journals in example D would alter if P had sold the asset to A (i.e. as opposed to
A having sold to P).
Solution to example A: Inter-group sale of inventory (investor to associate) – all still unsold
3,000/120 x 20 = 500 (unrealized profit) 40% investor’s share (relevant) = 200 60% other’s share
(irrelevant)
Journal entry:
According to the discussion in the parent and subsidiary relationship:
Cost of sales (investor) 200
Stock (associate) 200
stock of associate does not appear in consolidated statement of financial position therefore stock is
replaced with investment in associate because net assets of associate (including stock) were recorded at
higher amount without considering the above unrealized gain, resultantly investment was debited with
higher amount while applying the equity method.
If only consolidated statement of financial position is prepared, then
Accounts Debit Credit
CRE 200
Investment in associate (500x 40%) 200
Solution to example B: Inter-group sale of inventory (investor to Associate) – some still unsold
3,000 x 80% = 2,400/120 x 20 = 400 (unrealized profit)
40% investor’s share (relevant) = 160
60% other’s share (irrelevant) Journal entry:

Accounts Debit Credit
CRE 160
Investment in associate (500x 80% x 40%) 160
Solution to example C: Inter-group sale of inventory (Associate to investor)

3,000 x 80% = 2,400/120 x 20 = 400 (unrealized profit)
40% investor’s share (relevant) = 160
60% other’s share (irrelevant) Journal entry:
Cost of sales (associate) 160
Stock (investor) 160
Stock of investor appears in consolidated statement of financial position, so adjustment can be made, but
cost of sales of associate does not appear in consolidated income statement therefore share of profit in
associate should be reduced to incorporate the effect of decrease in profit.
Share of profit in associate 160
364
Stock (investor) 160

Consolidated Retained earnings CRE) 160
Inventory (investor) 160
Solution to example D: Inter-group sale of property, plant and equipment (Associate to investor)
Gain 5,000 Dr.
Deprecation (5,000/5) 1,000 Cr
Net gain (to be reversed) 4,000 x 40% = 1,600
Journal entry:
Gain (associate) 1,600
Plant (investor) 1,600
Plant of investor appears in consolidated statement of financial position, so adjustment can be made, but
gain of associate does not appear in consolidated income statement therefore share of profit in associate
should be reduced to incorporate the effect of decrease in gain.
Share of profit in associate 1,600
Consolidated Retained earnings (CRE) 1,600
Solution to example E: Inter-group sale of property, plant and equipment (investor to associate)
Gain 5,000 Dr.
Deprecation (5,000/5) 1,000 Cr
Net gain (to be reversed) 4,000 Cr x 40% = 1,600
Journal entry:
Gain (investor) 1,600
Plant (associate) 1,600
Plant of associate does not appear in consolidated statement of financial position therefore is replaced
with investment in associate because net assets of associate (including plant) were recorded at higher
amount without considering the above unrealized gain, resultantly investment was debited with higher
amount while applying the equity method.
Gain (investor) 1.600
Investment in associate 1.600
Consolidated Retained earnings (CRE) 1,600
Example:
Entity P acquired 40% of the equity shares of Entity A on 01.01.2016. The cost of the investment was Rs.
205,000. Assume no gain at acquisition.
As at 31 December 2016 Entity A had made profits of Rs. 275,000 since the date of acquisition (means
365
post acquisition).
In the year to 31 December 2016, Entity P sold goods to Entity A at a sales price of Rs. 200,000 at a mark-
up of 100% on cost.
Goods amounted to Rs. 30,000 were still held as inventory by Entity A at the year-end.
Required: prepare necessary journal entries.
Solution:
The necessary adjustments for unrealized profit, and the double entries are as follows:
Unrealized profit adjustment Rs.
Unrealized profit (30,000/200 x 100) 15,000
Entity P’s share (40%) 6,000
Journal entries:
Dr (Rs.) Cr (Rs.)
Investment in associate 110,000
Share of profits 110,000
Being: Share of post-acquisition profits (40% of Rs. 275,000)
Cost of sales 6,000
Being: Elimination of share of unrealized profit
If only statement of financial position is required to be prepared:
CRE 6,000
Investment in associate Rs.
Cost of the investment 205,000
Entity P’s share of post-acquisition profits of Entity A 110,000
Minus: Entity P’s share of unrealized profit in inventory (6,000)
309,000
Example:
Entity P acquired 30% of the equity shares of Entity A on 01.01. 2016.at a cost of Rs. 275,000.
Assume no gain at acquisition.
In the year to 31 December 2016, the reported profits after tax of Entity A were Rs. 100,000.
In the year to 31 December 2016, Entity P sold goods to Entity A for Rs. 180,000 at a mark- up of 20% on
cost.
Goods amounted to Rs. 60,000 were still held as inventory by Entity A at the year-end.
Required:
1. Calculate the unrealized profit adjustment and state the double entry.
2. Calculate the investment in associate balance that would be included in Entity P’s statement of
financial position as at 31 December 2016.
Solution
a) Unrealized profit adjustment Rs.
Unrealized profit (60,000/120 x 20) 10,000
Entity P’s share (30%) 3,000
Journal entry Dr (Rs.) Cr (Rs.)
366
Cost of sales 3,000
Being: Elimination of share of unrealized profit
If only statement of financial position is required to be prepared:

CRE 3,000
b) Investment in associate (see above for adjustments) Rs.
Cost of the investment 275,000
Entity P’s share of post-acquisition profits of Entity A (30% of Rs.100,000) 30,000
Minus: Entity P’s share of unrealized profit in inventory (3,000)
302,000
Impairment losses: In case there is an impairment loss against investment in associates; the accounting
entry would be:
Impairment loss XXX
Investment in Associate XXX
If only consolidated statement of financial position is prepared, then impairment loss is deducted from
CRE. If income statement is to be prepared, then include in admin expenses. Definitely of course, NCI will
not be affected as this impairment loss belongs to investor in associate (means parent with respect to
consolidated financial statements)
Finally, in Statement of Financial Position, calculation of equity method can be summarized as
follows:
1) Cost
2) Plus: Gain on acquisition (if any)
3) Plus/(Minus): investor’s share of profit/(loss) of associate since Acquisition till statement of
financial position date (means Post-Acq)
4) Plus(Minus): Investor share of OCI in associate since Acquisition till statement of financial
position date (means Post-Acq) [will be discussed in questions]
5) Minus: dividend income
6) Minus: Impairment loss (if any) [will be discussed in questions]
Finally, in Statement of profit or loss and other comprehensive income, calculation of equity
method can be summarized as follows:
There should be separate lines for:
 Share of profit of associate in profit and loss section of SOCI immediately before profit
before tax.
 Share of other comprehensive income of associate in OCI section of SOCI [will be discussed
in questions].
Inter – Company balances:
Inter-company balances: between the members of a group (parent and subsidiaries) are cancelled out
on consolidation.
Intercompany balances between the members of a group (parent and subsidiaries) and associates are not
cancelled out (because Associate’s balances are not included in Consolidated SOFP). An associate is not
a member of the group but is rather an investment made by the group. This means that it is entirely
appropriate that consolidated financial statements show amounts owed by the external party as an asset
367
and amount owed to the external party as a liability. (The same rule apply in case if a parent has an
associate and no subsidiaries).
(Para 6) Significant Influence: (for reading only)
IAS-28 sates that associates “20% or more” rule is a general guideline; however, the existence of
significant influence is usually evidenced in one or more of the following ways:
 Representation on board of directors.
 Participation in policy – making process, including representation in decisions about dividends.
 Material transactions between entities;
 An interchange of management personnel between the two entities: or
 Providing of essential technical information by one entity to the other.
Accounting for associates

Example: Recognition
Entity A has following shareholders with their Shareholding percentages:
Entity Percentage of Shareholding
Entity B 1%
Entity C 99%
Entity A is a group Company of Entity B & C and all Board of directors of Entity A are on the Board of
Directors of Entity B and C. Entity B and C have other directors as well.
How should Entity B accounts for Investment in Entity A?
Answer: Although Entity B has only 1% shareholding of Entity A, but Entity B has significant influence
on the decision making of Entity A as all directors of Entity A are also the directors of Entity B,
therefore, Entity B shall account for Equity Method of Accounting for Entity A and for all purposes,
Entity A is Entity B’s Associated Company.
Exemptions from applying the equity method. [para 17]
An entity is exempt from applying the equity method if the investment meets one of the following
conditions:
The entity is a parent that is exempt from preparing consolidated financial statements under IFRS 10
Consolidated Financial Statements or if all of the following four conditions are met (in which case the
entity need not apply the equity method):
1. the entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and
its other owners, including those not otherwise entitled to vote, have been informed about, and do
not object to, the investor not applying the equity method;
2. the investor or joint venture’s debt or equity instruments are not traded in a public market;
3. the entity did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of instruments in a
public market; and
4. the ultimate or any intermediate parent of the entity produces financial statements available for
public use that comply with IFRSs, in which subsidiaries are consolidated or are measured at fair
value through profit or loss in accordance with IFRS 10.
Para 18 and Para 19

Investment in Associate held by Venture Capital Organizations etc. (Para 18)
When an investment in an associate is held by an entity that is:
a) A venture capital organization, or
b) A mutual fund, unit trust and similar entities including investment - linked insurance funds, the entity
368
may elect to measure the investment at fair value through profit or loss in accordance with IFRS-9.
An entity shall make this election separately for each associate at initial recognition of the associate.
Entity has an investment in an associate, a portion of which is held indirectly through:
 Venture capital organization, or
 A mutual fund, until trust and similar entities including investment – linked insurance funds The
entity may elect to measure that portion of the investment in the associate at fair value through profit or
loss in accordance with IFRS-9 regardless of whether it has significant influence over that portion of
investment.
 If the entity makes that election, the entity shall apply the equity method to any remaining
portion of investment in an associate.
369
Practice questions
Question 1
The statement of financial position of J Co and its investee companies, P Co and G Co, at 31 December
2015 are shown below.
STATEMENTS OF FINANCIAL POSITIONAS AT 31 DECEMBER J Co P Co G Co
2015
000 000 000
Non-Current assets
Freehold property 1,950 1,250 500
Plant and machinery 795 375 285
Investment 1,500 - -
4,245 1,625 785
Current assets
Cash and cash equivalent 50 120 20
955 710 655
Total assets 5,200 2,335 1,440

Share capital – Rs.1 shares 2,000 1,000 750
3,460 1,885 1,140
12% loan stock 500 100
Current liabilities
Trade and other payables 680 350 300
Bank overdraft 560 - -
1,240 350 300
Total equity and liabilities 5,200 2,335 1,440
Additional Information
1. J Co acquired 600,000 ordinary shares in P Co on 1 January 2010 for 1,000,000 when the retained
earnings of P Co were 200,000.
2. At the date of acquisition of P Co, the fair value of its freehold property was considered to be
400,000 greater than its value in P Co.’s statement of financial position. P Co had acquired the
property in January 2000 and the buildings element (comprising 50% of the total value) is
depreciated on cost over 50 years.
3. J Co acquired 225,000 ordinary shares in G Co on 1 January 2014 for 500,000 when the retained
earnings of G Co were 150,000.
4. P Co manufactures a component, the Ringo, used by J Co. Transfer are made by P Co at cost plus
25%. J Co held 100,000 inventory of the Ringo at 31 December 2015. In the same period J Co sold
goods to G Co of which G Co had 80,000 in inventory at 31 December 2015. J Co had marked these
goods up by 25%.
5. The goodwill in P Co is impaired ad should be fully written off. An impairment loss of 92,000 is to
be recognized on the investment in G Co.
6. Non-controlling interest is valued at full fair value. P Co shares were trading at 1.80 just prior to the
acquisition by J Co.
370
Required:
Prepare, in a format suitable for inclusion in the annual report of the J Group, the consolidated statement
of financial position at 31 December 2015.
Question 2
Hever Co. has held shares in two companies. Spiro Co and Aldridge Co. for a number of years. As at 31
December 2014 they have the following statements of financial position:
Hever Co Spiro Co Aidridge Co
Non-current assets 000 000 000
Property, plant & equipment 370 190 260
Investments 218 - -
586 190 260
Current assets
Cash and cash equivalents 50 40 10
380 230 290
968 420 550
Equity
Share capital (Rs. 1 ordinary share) 200 80 50
Share premium 100 80 30
868 360 480
Current liabilities
Trade and other payables 100 60 70
968 420 550
You ascertain the following additional information:
(i) The ‘investment’ in the statement of financial position comprise solely Hever’s investment in Spiro
Co (128,000) and in Aidridge Co (90,000).
(ii) The 48,000 shares in Spiro Co were acquired when Spiro Co retained earnings stood at 20,000.
The 15,000 shares in Aidridge Co were acquired when that company had a retained earnings
balance of 150,000.
(iii) When Hever Co acquired its shares in Spiro Co the fair value of Spiro Co.’s net assets equaled
their book values with the following exceptions:
000
Property, plant and equipment 50 higher
Inventories 20 lower (sold during 2014)
Depreciation arising on the fair value adjustment to non-current assets since this date is 5,000.
(iv) During the year, Hever Co sold inventories to Spiro Co for 16,000, which originally cost Hever Co
10,000. Three-quarters of these inventories have subsequently been sold by Spiro Co.
(v) No impairment losses on goodwill had been necessary by 31 December 2014.
(vi) It is group policy to value non-controlling interests at full (on fair) value. The fair value of the
non-controlling interests at acquisition was 90,000.
Required:
Produce the consolidated statement of financial position for the Hever group (incorporating the
associate). (20 marks)
371
Solutions:
A. 1
J GROUP
As on 31-12-2015. ‘000’
Assets Rs. 000
Non-current assets:
Freehold property (1,950 + 1,250 + 400 - 30) 3,570
Plant and Machinery (795 + 375) 1,170
Goodwill (120-120) -
Investment in Associate (500 + 72 - 4.8 - 92) 475.2
Current assets: 605
Inventories (575 + 300 - 20) 855
Receivables (330 + 290) 620
Cash and Cash equivalents (50 + 120) 170
Total Assets
Capital and reserves:
Share capital 2,000
Cons. Retained earnings (1,460 + 411 - 18 - 12 - 72 +72 - 4.8 - 92)= 1,744.2 3,744.20
Non-controlling interest (720 + 274 - 12 - 8 - 48) 926
12% loan stock (500 + 100) 600
Trade payables (680 + 350) 1,030
Bank overdraft 560
Total Equity and liabilities 6,860.2
Analysis of Equity of Subsidiary
At Acquisition: 1-1-2010 P(600/1000 = 60%) NCI (40%)
S.C 1,000
R.E 200
1,200
Rev. Surplus 400
1,600 960 640
FV of NCI (400 X 1.8) 720
Goodwill 40 80
Total Goodwill 120
Since Acq. Till SOFP
R.E. (885 – 200) 685 411 274
Accounting entries:
Property 400
CRE (60%) 18
372
NCI (40%) 12
Property 30
(400 x 50% ÷ 40 x 6)
S–P
100/125 x 25 = 20
CRE (60%) 12
NCI (40%) 8
Inventory 20
Impairment Loss:
CRE (60%) 72
NCI (40%) 48
Goodwill 120
(goodwill fully written off)
Analysis of Equity of Associate:
At Acquisition: 1-1-2014
P(225/750 = 30%)
No. NCI
S.C 750
R.E 150
900 270
No goodwill to be recorded separately xxx
R.E (390 - 150) 240 72
Investment 72
CRE 72
Investor to Associate:
80 /125 x 25 = 16 x 30% = 4.8
CRE 4.8
Investment in Associate 4.8
[80/125 x 25 x 30%]
(As associate inventory is not consolidated).
It however income statement is also prepared, then
Cost of sale 4.8
Investment 4.8
CRE 92
investment in associate 92
If income statement is also prepared, then
Admin 92
A. 2 Hever Co

As on 3-12-2014
Non-Current Assets: Rs. ‘000’
373
Property Plant & Equipment (370 + 190 + 50 - 5) 605
Goodwill 8
Investment in Associate (90 + 75) 165
Current Assets:
Inventories (160 + 100 – 20 + 20 - 1.5) 258.5
Trade receivables (170 + 90) 260
Cash and Bank (50+40) 90
1,386.5
Equity:
Share Capital 200
Share Premium 100
Con. Retained Earnings 758.5
(568 + 108 - 3 + 12 - 1.5 + 75)
1,058.5
Non-Controlling Interest (90+72-2+8) 168
1,226.5
Trade payables (100+60) 160
1,386.5
Workings:
Analysis of Equity of Subsidiary: At Acquisition: P (48/80 = 60%) NCI (40%)
S.C 80
S. P 80
R.E 20
180
R.S 50
R. L (20)
210 126 84

FV of NCI 90
2 6
Total Goodwill 8
Since Acquisition till SOFP date:
R.E (200 – 20) 180 108 72
Entries:
iii) PPE 50
R.S 50
R. Loss 20
Inventory 20
CRE 3
NCI 2
PPE 5
374
[adjustment of depreciation]
Inventory 20
CRE 12
NCI 8
[adjustment of sale of inventory]
iv) P – S:
16,000 x 1/4 = 4,000
Profit % = 6,000/16,000 x 100 = 37.5% of sales 4,000/100 x 37.5 = 1,500
CRE 1.5
Stock 1.5
Analysis of Equity of Associate:
At Acq: P (15/50 X 100 = 30%) No NCI
Share Capital 50
Share Premium 30
230 69
Goodwill not to be recorded separately XXX
Since Acquisition. Till SOFP date:
R.E (400 – 150) 250 75
Journal Entry
Investment 75
Profit from Associate (CRE) 75
375
DIAMOND LIMITED
On July 01,2013, Diamond limited acquired 80% shares in Gold Limited, a subsidiary company. After
three months of acquisition; Diamond limited acquired 35% ordinary shares in Silver Limited. Extracts
from the individual statements of profit or loss of the three companies for the year ended June 30,2015 are
set out below:
Statement of Profit or Loss
For the Year ended 30-6-2015
Rs in ‘million’
Diamond Ltd Gold Ltd Silver Ltd
Revenue 3,000 1,800 1,500
Cost of sales (1,650) (1,170) (1,050)
Gross profit 1,350 630 450
Operating Expenses (900) (324) (375)
Interest income 50 - -
Financial charges (150) (36) (150)
Profit after taxation 350 270 (75)
Income tax (105) (81) (15)
Profit for the year 245 189 (90)
(1) On January 01,2015 Diamond Limited purchased goods from Gold limited for Rs.250 million
inclusive of profit margin of Rs.50 million. On June 30,2015 goods of Rs.100 million purchased from
Gold limited were still in inventory of Diamond Limited.
(2) On March 01,2015 Silver limited sold goods costing Rs.150 million to Diamond limited at 25%
markup on cost. on June 30, 2015 the inventories of Diamond limited included Rs. 75 million from
silver limited.
(3) At the year ended on June 30, 2015 total impairment losses of Rs. 20 million were to be recognized in
the consolidated financial statement of Diamond limited. The total amount of impairment losses
included Rs. 15 million in respect of goodwill arising on the business combination with gold limited
and Rs. 5 million in respect of the carrying amount of Silver limited.
(4) On January 01, 2014, gold limited sold a machine of Rs. 40 million to diamond limited having a
carrying value of Rs. 30 million. At the date, the remaining useful life of the machine was reassessed
as five years. Depreciation on this machine was recorded by diamond limited on its costs of sale using
straight line method of depreciation.
(5) On January 01 2015, Diamond limited invested Rs. 100 million in an 11% loan notes from gold
limited. All interest occurring to June 30,2015 had been accounted by both companies.
(6) It is group policy to value the non-controlling interest at proportionate share of the subsidiary’s net
assets.
Required:
Prepare consolidated statement of profit and loss for diamond group for the year ended 30 June 2015 as
per relevant international financial reporting standards. (IFRS) (16)
376
PAST PAPER QUESTION
Q-1 Spring 2021
Following are the summarized statements of financial position of Safawi Limited (SL) and Khudri Limited
(KL) as at 30 June 2021:
SL KL
Intangible assets 525 135
Investment in Anbara Limited – at cost 540 -
Inventories 1,200 600
Other current assets 1,485 445
6,140 2,390
Share capital (Rs. 10 per share) 2,500 1,000

Share premium 1,040 -
6,140 2,390
(i) On 1 October 2020, SL acquired 80% shareholdings in KL through share exchange of one share in
SL for every share in KL. At acquisition date, KL’s retained earnings were Rs. 1,000 million and the
fair values of each share of SL and KL were Rs. 25 and Rs. 23 respectively. Shares issued by SL
have not been recorded in the books.
(ii) On acquisition date, carrying values of KL’s net assets were equal to their fair values except the
following:
 Inventories were carried at Rs. 240 million and had a fair value of Rs. 340 million. 60% of these
were sold during the year ended 30 June 2021.
 Land was carried at nil value and had a fair value of Rs. 50 million. The land was allotted
unconditionally to KL by the government free of cost in 2018 when its fair value was Rs. 40
million.
(iii) On 1 January 2021, SL disposed of a software license to KL for Rs. 120 million. Its carrying value
and remaining useful life at that date was Rs. 90 million and 3 years respectively.
(iv) Due to temporary adverse economic conditions, an impairment test carried out at 30 June 2021
indicated that goodwill has been impaired by Rs. 60 million.
(v) On 1 July 2020, SL acquired 3 million shares of Anbara Limited (AL) representing 25%
shareholdings. On that date, AL’s retained earnings and fair value of each share were Rs. 2,400
million and Rs. 172 respectively.
(vi) During the year ended 30 June 2021, AL reported net loss of Rs. 280 million and other
comprehensive income of Rs. 60 million.
(vii) On 1 July 2020, SL disposed of machinery to AL for Rs. 200 million at a gain of 100%. The
remaining useful life of the machinery at the time of disposal was 5 years.
(viii) An impairment test carried out at year end has indicated that investment in AL has been impaired by
Rs. 130 million.
(ix) SL values non-controlling interest on the acquisition date at its fair value.
Required:
Prepare SL’s consolidated statement of financial position as at 30 June 2021 in accordance with the
requirements of IFRSs. (18)
377
Answer
Safawi Limited
Rs. in million
Assets:
Property, plant and equipment 2,390+1,210+50 3,650
Intangible assets other than goodwill 525+135–25(W-3) 635
Goodwill 310(W-1)–60 250
Investment in associate – AL (W-5) 335
Inventories 1,200+600+40(W-2) 1,840

Other current assets 1,485+445 1,930
8,640
Share capital (Rs. 10 each) 2,500+80×10 3,300
Share premium 1,040+80×(25–10) 2,240
Consolidated retained earnings (W-3) 1,114
Non-controlling interest (W-4) 476
Liabilities 1,320+190 1,510
8,640
W-1: Computation of Goodwill
Consideration paid 80×25 2,000
Fair value of non-controlling interest 20×23 460
Fair value of net assets (W-2) (2,150)
310
W-2: Net assets of KL At acquisition At reporting
date date
Fair value adjustment – land 50 50
Fair value adjustment – inventory 100 40
2,150 2,290
W-3: Consolidated retained earnings Rs. in million
SL 1,280
Share of post-acquisition profit (W-2) (2,290–2,150)×80% 112
Impairment of goodwill share 60×80% (48)
Unrealized gain on disposal of license 30×2.5÷3 (25)
Share of net loss 280×25% (70)
Share of other comprehensive income 60×25% 15
Impairment in investment of AL (130)
Unrealized gain on disposal of machinery 100×4/5×25% (20)
1,114
W-4: Non- controlling interest
Non- controlling interest at acquisition 460
Share of post-acquisition profit (W-2) (2,290–2,150)×20% 28
Impairment of goodwill share 60×20% (12)
476
378
W-5: Investment in associate - AL
Investment in associate at cost 540
Share of net loss 280×25% (70)
Share of other comprehensive income 60×25% 15
Impairment in investment (130)
Unrealized gain on disposal of machinery (W-3) (20)
335
Q-2
Following are the summarized statements of financial position of Pistachio Limited (PL), Mint Limited
(ML) and Jalapeno Limited (JL) as on 31 December 2019:
PL ML JL
--------- Rs. in million ---------
Property, plant and equipment 850 750 500
Investment in ML at cost 900 - -
Investment in JL at cost 170 - -
Cash and bank balances 60 170 50
2,520 1,460 900
Share capital (Rs. 10 per share) 1,400 700 400

Share premium - 100 -
Liabilities 340 180 160
2,520 1,460 900
(i) Details of PL's investments are as follows:
Date of investment Retained earnings of
Holding % Investee Investee
Rs. in million
1-Jan-19 25% JL 200
1-Apr-19 80% ML 360
(ii) The following considerations relating to acquisition of ML’s shares are still unrecorded:
 Transfer of PL's freehold land having carrying value and fair value of Rs. 88 million and Rs. 108
million respectively.
 Cash of Rs. 115 million would be paid in January 2020 if ML's net profit for the year 2019 would
increase by 20% as compared to last year. Fair value of this consideration on acquisition date was
estimated at Rs. 70 million. At the year end, said target of profit is achieved by ML.
(iii) On the date of investment, the fair values of each share of ML and JL were Rs. 18 and Rs. 16
respectively.
(iv) At the date of acquisition of ML, carrying values of ML’s net assets were equal to fair value except
for inventory which was carried at Rs. 130 million and had a fair value of Rs. 180 million. 20% of
this inventory is still included in ML's inventory as at 31 December 2019.
(v) On 1 July 2019, ML sold a machine to PL for Rs. 55 million at a gain of Rs. 10 million. The
remaining useful life of the machine at the time of disposal was 5 years.
(vi) JL paid 10% dividend for the half year ended 30 June 2019. PL recorded this as other income.
379
(vii) During the year, PL made sales of Rs. 72 million to JL at 20% above cost. 60% of these goods were
sold by JL during the year.
(viii) As at 31 December 2019, PL has receivable of Rs. 8 million from JL.
(ix) An impairment test carried out at year-end has indicated that goodwill of ML has been impaired by
10%.
(x) PL measures non-controlling interest at the acquisition date at its fair value.
Required:
Prepare PL’s consolidated statement of financial position as at 31 December 2019 in accordance with the
requirements of IFRSs. (18)
Answer: Pistachio Group

Consolidated statement of Financial Position
As on 31-12-2019
Non-Current Assets:
Property, Plant & Equipment (850 + 750 - 88 - 9) 1,503
Goodwill (120 – 12) 108
Investment in JL (170 + 35 - 10 - 1.2) 193.8
Current Assets:
Inventories (300 + 340 + 50 - 40) 650
Trade receivables (240 + 200) 440
Cash and Bank balances (60 + 170) 230
Total 3,124.8
Equity:
Share capital 1,400
Share premium -
Con. Retained earnings 826 2,226
(780 + 96 + 35 + 20 - 45 - 32 - 7.2 - 10 - 1.2 - 9.6)
Non-Controlling Interest (252 + 24 - 8 - 1.8 - 2.4) 263.8
2,489.8
Liabilities (340 + 180 +70 +45) 635
Total 3,124.8
Analysis of Equity of ML: (S)
P (80%) NCI (20%)
At Acq: 1-4-2019
S.C 700
S.P 100
R.E 360
1,160
R.S (Inventory) 50
1,210 968 242 1,210
Cost of Investment (900 + 108 + 70) 1,078 1,078
FV of NCI 252 252
1,330
Goodwill 110 10 120
Since Acq till the SOFP date:
R.E (480 - 360) 120 96 24
25%
At Acq: 1-1-2019
380
S,C 400
R.E 200
600 150
Investment 170
Goodwill not to be recorded x
Since Acq. Till the SOFP date:
R.E (340 - 200) 140 35*
*Investment 35
CRE 35
Workings:
At Acq:
ii) Investment in ML 108
Land 88
CRE (Gain as per IFRS - 10) 20
At Acq:
Investment in ML 70
70
Payable 258
At the SOFP date: (115 - 70) = 45
CRE (exp) 45
Payable 45
Adjustment of change in estimate when the target is achieved.
iii) Fair value of NCI: 700/10 = 70 x 20% = 14 x 18 = 252
iv) At Acq:
Inventory 50
R.S 50
80% inventory sold on balance sheet date:

CRE (80%) 32
NCI (20%) 8
Inventory 40
(50 x 80% = 40)
v) S P
Gain to be reversed 10 Dr.
Depreciation to be reversed 1 Cr.
( 10/5 x 6/12)
Net gain to be reversed 9 Dr.
CRE (80%) 7.2

NCI (20%) 1.8
PPE (machine) 9
vi) Dividend of JL to PL: 400 x 10% = 40 x 25% = 10

Dividend income (CRE) 10
Investment in JL 10
vii) P A:
70 x 40% = 28.8/120 x 20 = 4.8 x 25% = 1.2
381
CRE 1.2
Investment 1.2
viii) No adjustment of inter group receivable between investor and associate.
ix) CRE (80%) 9.6

NCI (20%) 2.4
Goodwill 12
120 x 10% = 12
Impairment of goodwill
(a) Information to be ignored:
Receivable from JL
382
Financial instruments [IFRS 9]
Basic discussion of Financial Instruments
Financial instrument is a contract between two parties in which:
 One entity has a financial asset in its books; and

 The other entity has financial liability or equity instrument in its books.
As a basic discussion financial asset simply means a right to receive money or an equity instrument of another
entity;
Similarly, a financial liability means an obligation to pay money.
For example:
1. Company X sells goods to company Y on credit for Rs. 200,000.
Company X Company Y
Debtor-Y 200,000 Purchase 200,000
Sales 200,000 Creditor-X 200,000
There is a receivable in the books of company X. There is a payable in the books of company. (Payable
(Receivable means a right to receive; in other words, means an obligation to pay;
Receivable is an example of a financial asset) In other words, Payable is an example of financial
liability)
2. Company XYZ deposited money in MCB bank Rs. 300,000

Company XYZ MCB Bank
MCB Bank 300,000 Cash 300,000
Cash 300,000 XYZ a/c 300,000
Company has a right to receive money (a financial MCB bank has an obligation to pay money (a
asset) from MCB financial liability) on demand by depositor (i.e
Company XYZ).
Similarly, there are other examples of financial instruments around us but this word of financial instruments is new
for us. E.g. bank loans, redeemable preference shares, debentures, interest receivable/interest payable.
3. Company ABC issued debenture certificates of 500,000
Company ABC Debenture Holder
Cash 500,000 Investment in debentures (F.A) 500,000 Cash
Debenture (Financial liability) 500,000 (Obligation 500,000
to repay amount means a financial liability) (Right to receive back amount means a financial
asset)
4. Company X issues 100,000 ordinary shares of Rs. 10 each at Rs. 12 each to company Y for 1,200,000.
Company X Company Y
Cash 1,200,000 Investment in shares 1,200,000
Share Capital 1,000,000 Cash 1,200,000
Share premium 200,000 (Company Y has Financial asset in the form of
(Company X has an equity instrument in its books) shares of another Company)
383
Ordinary vs. preference shares
Companies issue two main types of shares:
 Ordinary Shares
 Preference Shares
 Irredeemable Preference shares
 Redeemable Preference shares
Comparison of ordinary shares and irredeemable preference shares
Ordinary shares Irredeemable Preference shares
Dividend rate Variable – higher in a good year, Fixed per annum
lower in a bad year
Dividend distribution Paid only if there are spare Receives the dividend before
funds after the payment of ordinary shareholders (therefore lower
preference dividend risk)
Liquidation The last to be repaid in a Repaid before (in preference to) the
liquidation ordinary shareholders
Voting rights Receive the right to vote on No right to vote on company
major decisions. Each ordinary decisions.
share would attract one vote.
Dividend presentation In equity In equity (before ordinary dividend)
Amount of capital In equity In equity
presentation
Comparison of redeemable preference shares and irredeemable preference shares
Irredeemable preference shares Redeemable Preference shares
Dividend rate Fixed per annum Fixed per annum
Dividend Paid only if there are spare funds Receives the dividend before
distribution after the payment of a redeemable Irredeemable preference
preference dividend in preference to shareholders and ordinary
ordinary shareholders shareholders (therefore lower
risk)
Liquidation The last to be repaid in a liquidation Repaid before (in preference to)
but before ordinary shareholders. Irredeemable preference
shareholders and the ordinary
shareholders
Voting rights No right to vote on company no right to vote on company
decisions decisions
Dividend In equity (before ordinary dividend) In financial charges in income
presentation statement
Amount of capital In equity In non-current liabilities
presentation
Comparison of ordinary shares and redeemable preference shares
Ordinary shares Redeemable Preference shares
Dividend rate Variable – higher in a good year, Fixed per annum
lower in a bad year
Dividend distribution Paid only if there are spare funds Receives the dividend before
after the payment of preference Irredeemable preference
dividend shareholders and ordinary
shareholders (therefore lower risk)
Liquidation The last to be repaid in a Repaid before (in preference to)
liquidation Irredeemable preference
shareholders and the ordinary
shareholders
Voting rights Receive the right to vote on major no right to vote on company
decisions. Each ordinary share decisions
would attract one vote.
Dividend presentation In equity In financial charges in income
statement
Amount of capital In equity In non-current liabilities
presentation
384
Example: Financial Assets
Discuss whether any of the following are financial assets:
a. Inventory
b. Debtors
c. Balance in bank
d. Property, plant and equipment
e. Prepaid rent
Solution
a. No, there is no contractual agreement to receive cash.
b. Yes, there is a contractual right to receive cash from the debtor.
c. Yes, there is a contractual right to receive a cash from the bank.
d. No, there is no contractual right to cash by owning property, plant and equipment.
e. No, there is a contractual right to receive services and not a right to receive cash.
Example: Financial liabilities
Discuss whether any of the following are financial liabilities:
a. Creditors
b. Redeemable preference shares
c. Warranty obligations
d. Bank loans
e. Current tax payable
Solution
a. Yes, the entity is contractually obligated to settle the creditor with cash.
b. Yes, the entity must, in the future, redeem the preference shares with cash.
c. If the entity has to pay the warranty obligation in cash, it is a financial liability. If the entity merely has
to repair the goods, then since there is no obligation to pay cash, it is not a financial liability.
d. Yes, there is a contractual obligation to repay the bank for the amount of cash received plus interest on
respective due date.
e. No, a contractual obligation does not exist, only a statutory obligation exists.
385
Accounting for Financial Assets
There are two types of Financial Assets;
1. Financial Asset in the form of a Debt instrument [means a contract in which debentures or
bonds are purchased]
2. Financial Asset in the form of an Equity instrument [means a contract in which shares are
purchased]
1. Financial Asset in the form of a Debt instrument
Example:
Suppose Honda limited invested in 100 debentures of company X @ 10 each on 1-1-2015; it carries interest
@15% receivable in arrears. It has a five-year term. These debentures are listed and therefore tradable in
market.
Total investment 100 x 10 = 1,000
1-1-2015: Investment in debentures (F.A) 1,000
Bank 1,000
31-12-2015: Let’s assume on reporting date market price per debenture is 15.
Now question is whether the financial asset is to appear in statement of financial position at cost of 1,000
(means cost basis measurement) or at its fair value which is 100 x 15 = 1,500 (means fair value basis
measurement)
Let’s discuss what will be implication of choosing the above two alternates.
If the Fair value basis is used then our statement of financial position will reflect changed figure of this
investment from year to year (because of increase/decrease in prices as a result of market factors), until
disposed of.
If cost basis is used, then figures in statement of financial position will be 1,000 (cost) from year to year until
disposed of.
BASIC PRINCIPAL OF MEASUREMENT:
The IFRS-9 recommends the use of fair value unless conditions are met for measurement at cost.
Conditions for cost basis of measurement:
i) Business model of the entity is to hold the investment to recover contractual cash flows arising
on specific dates; and
ii) The contractual cash flows comprise recovery of solely principle and interest.
The key aspect in above points is that irrespective of changes in fair value of the financial asset, entity’s
intention is to hold the investment and wait for those dates on which contractual cash flows will arise; i.e the
date on which interest and principal will be received according to the agreement. In such a case, cost basis
measurement can be used; means instrument should remain at 1,000 in statement of financial position.
Interest income is recognized in profit or loss and fair value changes are simply ignored.
If, however entity’s intention is to sell the financial asset as the market values increase then it means entity is
not interested with contractual cash flows of principal and interest on specific dates. In such a case, investment
is re measured at each reporting date to fair value; i.e at 100 x 15 = 1,500 as on 31.12.2015 onwards until
disposal. Interest income is recognized in profit or loss.
Example of a debt instrument:
Company X invested Rs. 1,000 in a fixed deposit @ 10% for 2 years on 1-1-2015. This arrangement includes:
A principal amount of 1,000; and
Interest of Year-1 100
31-12-2015 1,100
386
Interest of Year-2 110
31-12-2016 1,210 (this balance is sum of principal; 1,000 and interest; 210)
If the objective of the company is to hold the investment and then receive contractual cash flows, then following
accounting treatment will be adopted:
Accounting entries:
1-1-2015: Investment -Financial Asset 1,000
Bank 1,000
31-12-2015: Investment -Financial Asset 100
Interest Income 100
31-12-2016: Investment -Financial Asset 110
Interest Income 110
End of 31-12-2016 (on maturity date after two years)

Bank 1,210
Investment -Financial asset 1,210
Point to remember: IFRS 9 uses word of Amortized cost for cost basis measurement of debt instruments.
Important terms used in questions:
Bond simply means loan
Coupon rate means actual interest rate
1. If today’s invested amount is similar to redemption amount than actual rate (means coupon rate)
and effective rate will be same.
Example of a debt instrument
Company X invests in a bond of company Y on 1-1-2015 carrying interest of 6%. Assume conditions of using
cost method are met.
Investment amount is 3,000 which will be redeemed after four years...
Effective Interest @ 6 Interest received @ 6% Balance
%
1.1.2015 3,000
31.12.2015 180 180 3,000
31.12.2016 180 180 3,000
31.12.2017 180 180 3,000
31.12.2018 180 180 3,000
Total 720 720
2. If today’s invested amount is dissimilar to redemption amount than actual rate (means couponrate)
and effective rate will be different.
Company X invests in a bond of company Y on 1-1-2015 carrying interest of 6%. Assume conditions of using
cost method are met.
Investment amount is 3,000 and the redeemed amount will be 3,400 after four years...
Effective Interest @ % Interest received @ 6% Balance
1.1.2015 3,000
31.12.2015 180 3,000
31.12.2016 180 3,000
31.12.2017 180 3,000
31.12.2018 180 3,400(3,000+1,120-720)
Total 1,120 (400+720) 720
387
3. Zero coupon bond Example of a debt instrument
Company X invests in zero-coupon bond of company Y on 1-1-2015.
Zero coupon bond means a debt instrument in which all investor gain will arise on maturity at the end of the
bond period; and no interest is received during the period.
Assume conditions of using cost method are met. Investment amount is 6,000.
After 3 years company Y will pay 8,000 to company X. Year ended 31-12 each year. Effective rate of interest
is 10.064 %
Effective Interest Cash flows Balance
@ 10.064 % Interest received
1.1.2015 6,000
31.12.2015 604 - 6,604
31.12.2016 665 - 7,269
31.12.2017 731 - 8,000
Total 2,000
Accounting entries:
1-1.2015: Investment 6,000
Bank 6,000
31-12-2015: Investment 604
Interest income 604
31-12-2016: Investment 664
Interest income 664
31-12-2017: Investment 731
Interest income 731
31-12-2017: Cash 8,000
Investment 8,000
4. If there is a transaction cost associated with debt instrument (e.g. documentation charges or brokers
fee)
Company X invests in a bond of company Y on 1-1-2015 carrying coupon of 6%. Assume conditions of
using cost method are met.
Investment amount is 3,000 and the redeemed amount will be 3,400 after four years. The associated
transaction costs are 200.
a) If transaction cost is recognized as an expense in the year in which it is incurred:
Transaction cost expense 200
Cash 200
In this case the expense will be recognized in the first year and income of 1,120 will be recognized over the
four years.
Effective Interest @ Interest received Balance
% @ 6%
01.01.2015 3,000
31.12.2015 180 3,000
31.12.2016 180 3,000
31.12.2017 180 3,000
31.12.2018 180 3,400(3,000+1,120-
720)
Total 1,120 (400+720) 720
388
b) If transaction cost is capitalized in the cost of investment if effective interest rate is 7.05%.
Investment 200
Cash 200
In this case the expense will be recognized over the four years in the form of reduced interest income.
Effective Interest @ 7.05% Interest received @ 6% Balance
01.01.2015 3,200(3,000+200)
31.12.2015 226 180 3,246
31.12.2016 229 180 3,295
31.12.2017 232 180 3,347
31.12.2018 236 180 3,403(3,200+920-720)
Total 920 (400+720-200) 720
Conclusion: As per IFRS 9 transaction costs should be capitalized in case of debt instrument measured at
amortized cost.
Point to remember
Effective rate will be different from actual interest rate:
 If today’s amount is different from redemption amount in terms of principal; and
 If today’s amount is equal to future amount but there are more than one actual interest rates during the
term of loan.
Summary of Amortized cost (means cost basis measurement) (for financial assets)
 This method of measurement is used for Debt instruments that met the business model test for holding as
well as cash flow characteristics test.
 The amortized cost of an asset equals: initial cost plus interest less cash received.
 The interest will be charged at the effective rate. This is the internal rate of return of the instrument.
 The interest will be received at the actual coupon rate.
The simplest way to prepare a working for amortized cost is to use the following table.
Effective interest Cash Flows Balance (SOFP)
income % (P/L) Cash received
(coupon %)
Beginning of Y 1 X
End of 1 X (X) X
End of 2 X (X) X
End of 3 X (X) X
The balance at the beginning is the total investment (cash invested) Financial Asset xx
Cash xx
Effective interest is calculated on the balance and is credited to the statement of profit or loss (P/L) as finance
income:
Financial Asset xx
Finance income xx
The coupon received is the coupon percentage multiplied by the face/nominal value of the instrument:
Cash xx
Financial Asset xx
The closing balance is the figure for the statement of financial position (SOFP) at the reporting date.
Concept of profit or loss portion and other comprehensive income portion in statement of
comprehensiveincome
If the business model for debt instruments is to:
389
 Collect contractual cash flows; and
 Selling financial assets whenever a favorable opportunity arises then:
In this case the IFRS-9 does not allow to use Amortized cost method. In such a case then entity should use FV
through OCI method for debt instruments. Under this approach, any interest based on effective rate will be
taken to P.L but changes in fair value (either gain/loss) are recognized in other comprehensive income.
For example:
Company X has purchased debentures of Rs. 1,000 at Par redeemable at par; which are listed on an exchange
on 01.01.2016
It carries interest rate of 6% receivable in arrears; i.e. annual interest of 60. Fair value on 31.12.2016 is 1,020
Assume the business model for debt instruments is to:
 Collect contractual cash flows; and

 Selling financial assets whenever a favorable opportunity arises then:
Total Income for the year ended 31.12.2016 is
60 20 (1,020 – 1,000)
Interest income Fair value gain
Accounting entries:
Investment 1,000
Bank 1,000
Investment 60
Interest income 60
Bank 60
Investment 60
Investment 20
OCI (Gain) 20
In this case, changes in fair value are recognized in OCI rather than profit or loss because the business model is
to hold the investment to earn interest as well selling it whenever a favorable opportunity arises (rather than
selling in the short term)
If the business model for debt instruments is trading means selling in the short term as soon as the
favorable opportunity arise. The objective of the investment is not to hold the investment and receive
contractual cash flows on specific dates of the contract.
Even in this case the IFRS-9 does not allow to use Amortized cost method. In such a case then entity should
use FV through PL method for debt instruments. Under this approach, any actual interest (means coupon)
based on face value as well as changes in fair value (either gain/loss) are recognized in profit or loss.
There is no need of any amortization table.
Recognition and Measurement of Financial Assets (Debt instruments):
Example:
On 1-1-2011, Abacus Co. purchased a debt instrument (e.g. debentures) at its fair value of 1,000 (from stock
market). The debt instrument is due to mature on 31-12-2015. The instrument has a face value of 1,250 (which
is receivable at maturity) and the instrument carries fixed interest rate of 4.72% that is paid annually (not
mentioned then always arrears). The effective rate of interest is 10%.
Fair value as on 31.12.2011 of debt instrument is 1,080. Required:

1. How should Abacus Co. account for the debt instruments? Assume Abacus Co. decided to hold the
investment till maturity and receive contractual cash flows comprising principal and interest therefore
use Amortized cost method.
2. How should Abacus Co. account for the debt instrument? Suppose Abacus Co.’s investment objective
is to collect contractual cash flow as well as selling when an opportunity arises at a good price
therefore this investment is carried at Fair value through other comprehensive income rather than
Amortized cost.
3. How should Abacus Co. account for the debt instrument? Suppose Abacus Co.’s investment objective
390
is trading in the short term (means speculation) rather than to collect the contractual cash flows up to
maturity; therefore, this investment is carried at Fair value through profit or loss rather than Fair value
through other comprehensive income or Amortized cost.
391
Answer:
1. Amortized cost
Abacus will receive interest of 59 (1,250 x 4.72%) each year for five years in arrears and 1,250 when the
instrument matures on 31.12.2015.
income @ 10% Interest received (SOFP)
(P.L) 1,250 x 4.72%
1.1.2011 1,000
31.12.2011 100 (59) 1,041
31.12.2012 104 (59) 1,086
31.12.2013 109 (59) 1,136
31.12.2014 113 (59) 1,190
31.12.2015 119 (1,309) -
[1,250+59]
Every year the carrying amount of the financial asset is increased by the interest income for the year and
reduced by the interest actually received during the year. Fair value is simply ignored.
2. Fair value through other comprehensive income (FVTOCI)
In this case, fair value changes will go through OCI. Interest income measured at amortized cost will go to
profit or loss (other income) just as above. In addition, as on 31-12-2011 difference in fair value 39 (1,080 –
1,041) would go to OCI and the investment would be shown in statement of financial position at 1,080 as on
31-12-2011.
3. Fair value through profit or loss (FVTPL)
In this case, fair value changes will go to P.L. Actual Interest income of Rs. 59 will go to profit or loss (other
income). In addition, as on 31-12-2011 difference in fair value of Rs. 80 (1,080 – 1,000) will go to P.L and the
investment would be shown in statement of financial position at 1,080 as on 31-12-2011.
Amortized cost criteria:

The rules try to limit the use of amortized cost method to those situations where it best reflects the substance of
transaction. Therefore, it can only be used by an entity whose business model is to purchase debt instruments
and collect contractual cash flows in the form of principal and interest.
392
Decision tree for classification:
Financial asset is Debt Instruments [e.g. debentures or bonds]
“Contractual cash flow characteristics” test (at debt instrument level)

(means cash flows under the contract comprise solely payment of principal and interest)
Pass
Business model test (at an aggregate level means at entity level) 3.debt
Business models can be: instrument
Held for
trading
(speculation
purpose)
1. Debt Instruments Held 2. Debt Instruments Held to collect contractual
to collect contractual cash cash flows as well as selling it when an opportunity
flows till maturity arises at a good price.
YES
YES
Conditional fair value
YES option elected? Conditional fair value
option elected?
NO
NO
Classify at
Classify at
Amortized cost
FVTPL FVTOCI
[any changes in FV
are simply ignored] (Changes in fair value are
recognized in OCI)
YES
393
In summary, debt instruments are classified as either:
1. At amortized cost if both conditions of measurement at amortized cost are met (and FVTPL option is
not elected)
2. At FV through OCI if conditions of FVTOCI are met (and FVTPL option is not elected)
3. At FV through PL if entity made an irrevocable* election at initial recognition for any of the debt
instrument; or if held for trading
*(Means cannot subsequently change)
2. Financial Asset in the form of an Equity instrument:
E.g. Honda ltd purchased ordinary shares in Google of Rs. 5,000,000. In this case, the share price will change
in stock exchange on daily basis. Google may or may not pay dividends. It depends upon availability of profits
and decision of management and Google will only repay the initial investment if there are surplus funds at the
time of liquidation; so, this is not an investment in which contractual cash flows will be received on specific
dates. (Honda Ltd. may or may not receive dividends. Dividend on ordinary shares is discretion of
management; and if no surplus funds at liquidation Honda ltd will not get the invested amount as well)
Therefore, these equity shares should not be measured on cost basis (means at amortized cost).
Example of an equity instrument:
Company X invested in 1,000 ordinary shares of company Y on 1.1.2016 at 10 per share (it is a financial asset
for company X and equity instrument of company Y)
Investments in ordinary shares neither results into contractual cash flows on specific dates nor recovery of
solely principal or interest. This type of investment will always be shown at Fair value (not at cost) as the
conditions for cost basis measurement are not fulfilled. [Please remember there is a choice of cost basis for debt
instruments]
Let’s assume at 31.12.2016; Fair value is 15 per share therefore fair value of investment will be 1,000x15 =
15,000.
At 31.12.2017; Fair value is 8 per share therefore fair value of investment will be 1,000x8 = 8,000.
If we use fair value; then next discussion is whether to recognize gain/loss on re measurement to fair value in
profit or loss or in reserves (means in other comprehensive income).
If investment in shares is for speculative or short If investment in shares is for long term purposes
term trading purposes (for future dividend)/or strategic (e.g. to obtain
(means purpose is to earn immediate gain by selling control or significant influence over the long term; in
shares as soon as the favorable opportunity arises) other words, no plan to sell in the short term) then
then Recognize gain or loss in profit or loss recognize gain or loss in reserves (OCI)
On 31.12.2016 On 31.12.2016
Investment 5,000 Investment 5,000
P. L (gain) 5,000 [15,000- OCI (gain) 5,000
10,000=5,000] On 31.12.2017
On 31.12.2017 OCI (loss) 7,000
P. L (loss) 7,000 Investment Investment 7,000
7,000
[15,000-8,000=7,000]
394
Decision tree for classification:
Financial asset is an Equity Instruments [e.g. investment in ordinary shares of another

company]
“Contractual cash flow characteristics” test (at equity instrument level)

(means cash flows under the contract comprise solely payment of principal and interest)
[This test will most likely fail in case of equity instruments]
FAIL
NO
Held for trading
(means for short term speculation)
Irrevocable FVTOCI option elected

(This election is at equity instrument level
means can be different for different equity
instruments mean other equity
YES instruments can be classified as FVTPL)
NO YES
Then no choice classify as FVTPL Classify as FVTOCI

[Changes in fair value are recognized in profit [Changes in fair value are recognized in OCI]
or loss]
395
In summary, equity instruments are classified as either:
1. Held for trading FVTPL is Mandatory
2. Not held for trading means a long term investment entity can make an irrevocable election at the
initial recognition to measure at FVTOCI; otherwise even then FVTPL.
3. Never at amortized cost.
Important point: the FVOCI (for debt instruments) is a mandatory classification (i.e if the requirements are met
the debt instrument met be classified at FVOCI). In contrast the FVOCI (for equity instruments) is purely an
elective classification.
Recognition and Measurement of Financial Assets (Equity instruments):
At FVTPL for Equity Instruments:
Example:
On 1-1-2018, Honda ltd acquires 1,000 ordinary shares of Nestle ltd for Rs. 100,000. On 31-12-2018, the fair value
of shares in Nestle ltd is 60,000.
On 31-12-2019, the fair value of shares is increased to 110,000. On 3 Jan, 2020; Honda ltd sold the shares for
105,000.
Required:
Prepare accounting entries; if the investment in shares is accounted for at FVPTL?
Answer:
1-1-2018: Investment 100,000

Bank 100,000
31-12-2018: Profit or loss 40,000
Investment 40,000
[100,000 – 60,000]
31-12-2019: Investment 50,000
Profit or loss 50,000
[60,000 -110,000]
3-1-2020: Cash/Bank 105,000
P.L 5,000
Investment 110,000
FV TOCI for Equity Instruments:
Example:
On 1-1-2018, Honda ltd acquires 1,000 ordinary shares of Nestle ltd for Rs. 100,000. On 31-12-2018, the fair value
of shares in Nestle ltd is 60,000.
On 31-12-2019, the fair value of shares is increased to 110,000. On 3 Jan, 2020; Honda ltd sold the shares for
105,000.
Required:
Prepare accounting entries; if the investment in shares is accounted for at FVTOCI?
1-1-2018: Investment 100,000
Bank 100,000
31-12-2018: FV Reserve (OCI) 40,000
Investment 40,000
31-12-2019: Investment 50,000
FV Reserves (OCI) 50,000
After this the FV Reserves has a credit balance of 10,000.
3-1-2020: Cash/Bank 105,000

Investment 110,000
396
After this the FV Reserves has a credit balance of 5,000.
3-1-2020: FV Reserve () 5,000
(On sale of Investment; reclassification is allowed through statement of changes in equity but not through profit or
loss)
Transaction costs
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or
disposal of a financial instrument (means the cost that would not have been incurred if the entity had not acquired,
issued or disposed of the financial instrument). Examples of transaction costs are:
1. fees and commissions paid to agents, advisers, brokers and dealers;
2. levies by regulatory agencies and securities exchanges;
3. transfer taxes and duties;
4. credit assessment fees;
5. registration charges and similar costs.
Cost that do not qualify as transaction costs are financing costs (means interest costs), internal administration costs
and holding costs. These costs are expensed when incurred.
Accounting treatment of Financial Assets:
1. Accounting treatment of Debt Instruments:
At Amortized Cost At Fair value through other At Fair value through profit or
comprehensive income loss( FVTPL)
(FVTOCI)
Initial Recognition Initial Recognition Initial Recognition
Fair value + Transaction cost Fair value + Transaction cost Fair value + (NO)
[any transaction cost is expensed]
Subsequent measurement: Subsequent measurement: Subsequent measurement:
1. Interest income in P.L by using 1. Interest income in P.L using 1. Interest income in P.L using
effective interest rate effective interest rate nominal (actual) rate.
2. Changes in FV - Ignored 2. Changes in FV in Other 2. Changes in FV directly in

Comprehensive income (in reserves P.L whether there is gain or loss.
within equity) whether there is
gain/loss DE recognition (means disposal)
Gain/loss of F.A:
DE recognition (means disposal) DE recognition (means disposal)
Gain/loss of F.A: Gain/loss of F.A: In P/L.
In OCI; then transfer the fair value
In P.L reserve from OCI to P/L (this
recycling is allowed in case
of debt instruments)
Initial Measurement:
Initial measurement of financial assets is always at fair value, and may involve the adjustment for transaction costs
Important Note:
Exceptions from using fair value occurs in the event of a trade receivable that does not have a Significant financing
component (Interest element). Trade receivables that do not have a significant financing Component are always
measured at the relevant transaction price as defined by IFRS 15 Revenue from contracts with customers.
Effective interest rate method is defined as: the method that is used in the calculation of the amortized cost of a
Financial Assets (or F Financial Liability) and the allocation and recognition of the interest revenue (expense) in
profit or loss over the period
397
2. Accounting Treatment of Equity Instruments:
At Amortized Cost At Fair value through other At Fair value through profit or
comprehensive income(FVTOCI) loss( FVTPL)
Equity instruments are Initial recognition Initial recognition Fair value + (No)
never classified here. Fair value + Transaction costs [any
transaction cost is expensed]
Subsequent measurement
1. Dividend Income in P.L
2. Changes in FV is taken to OCI.
DE recognition (means disposal) Subsequent measurement
Gain/loss of F.A: 1. Dividend income P/L
In other comprehensive income (No 2. Change in FV P/L
reclassification from fair value reserve in
OCI to P.L on de recognition is allowed DE recognition (means disposal)
in case of equity instruments, however Gain/loss of F.A:
any balance in fair value reserve can be
transferred to retained earnings through In profit or loss
Statement of
changes in equity)
Example: In February 2018, company XYZ purchased 20,000 Rs. 10 listed equity shares at a price of Rs. 40 per
share. Transaction costs were Rs. 2,000. At the year ended 31-12-2018 these shares were traded at Rs. 55 per share.
A dividend of Rs. 2 per share was received on 30th Sept. 2018.
Required:
Show how the financial statements extracts of company XYZ as on 31-12-2018 relating to this investment
assuming separately that:
a) The shares were acquired for trading (therefore carried at FVTPL).
b) The shares were not acquired for trading and company has made an irrevocable FVTOCI election at initial
recognition.
Answer:
a) Statement of profit or loss:
Gain on Investment [20,000 x (55 – 40)] 300,000

Dividend income [20,000 x 2] 40,000
Transaction cost expense (2,000)
Statement of financial position:
Investment in shares [20,000 x 55] 1,100,000
b) Statement of profit or loss:
Dividend income [20,000 x 2] 40,000
Other comprehensive income:
Gain on investment 298,000
[(20,000 x 55) – (20,000 x 40 + 2,000)]
Statement of financial position:
Investment in shares [20,000 x 55] 1,100,000
398
An application of cash flow characteristics test and business model test means that equity investments cannot be
classified as measured at amortized cost and must be measured at fair value. This is because contractual cash
flows on specified dates are not a characteristic of equity instruments. They are held at fair value, with changes
going through profit or loss unless investment is not held for trading and the entity makes an irrevocable election
at initial recognition to recognize it at fair value through other comprehensive income (FVTOCI). If this option is
selected, only dividend income will be recognized in profit or loss.
Practice question Financial assets

1. A company invested in 10,000 shares of a listed company in November 2017 at a cost of 42 per share.
Transaction costs relating to the investment were 1,300. At 31 December 2017 the shares have a market value of
49 per share. The shares are held for trading purposes.
Required:
a) Prepare extracts for the statement of profit or loss for the year ended 31 December 2017 and statement of
financial position as at that date.
b) Explain how the treatment would differ if there was no plan to sell the shares.
2. MNB acquired 100,000 shares in AB & Co. on 25 October 2015 for 30 per share. The investment resulted in
MNB holding 5% of the equity shares of AB. The related transaction costs were 120,000. AB’s shares were
trading at 34 per share on 31 December 2015. The investment has been classified as held for trading.
Required:
The journal entry required to record the change in fair value of the investment in shares at 31 December 2015 is:
(select the relevant option)
A. Investment 280,000
B. Investment 280,000
Other comprehensive income 280,000
C. Investment 400,000
D. Investment 400,000
Other comprehensive income 400,000
3. MNB acquired an investment in a debt instrument on 1 January 2015 at its par value of 3 million. Transaction
costs relating to the acquisition were 200,000. The investment earns a fixed annual return of 6%, which is
received in arrears. The principal amount will be repaid to MNB in 4 years’ time at a premium of 400,000. The
investment has passed the cash flow test as well as the business model test of held to collect. In addition, fair value
option has not been elected by MNB. Therefore, the investment is correctly classified to be measured at
amortized cost. The investment has an effective interest rate of approximately 7.05%.
MNB has recently employed a new financial controller, Junaid and the finance director has requested you to
explain Junaid how the above investment should be accounted for in the financial statements.
Required:
a) Prepare a briefing note to Junaid, explaining how to account for the above investment in the financial
statements of MNB.
b) Prepare journal entries for the year ended 31-12-2015.
4. G limited purchased 25,000 shares at a total cost of 25,000 on the 1 November 2015. At the year-end (31
December 2015) the fair value of the shares was 55,000. G limited purchased these shares with the intention to
sell in the short term.
Required:
Show the necessary journal entries to record the change in fair value.
5. E ltd purchased 10% debentures for 200,000 on 1 January 2015, (redeemable at 200,000 on the 31 December
2016). company intends to hold them to maturity and collect the contractual cash flows. The fair value on 31
December 2015 was 400,000.
Required:
399
Prepare the necessary journals for the year ended 31 December 2015.
6. ABC limited lent 50,000 to XYZ limited on 30 June 2015. Interest as per the agreement was charged at 20%. The
principal is redeemable after five years.
Required:
Show the necessary journals for ABC Limited’s year ended 31 December 2015.
7. Dilly limited purchased 500,000 shares in Sane limited on the 31 March 2015. They were purchased for
1,000,000. On the 31 December 2015 the fair value of these shares was 2,000,000. These shares are held for long
term and are not designated as FVTPL.
Required:
Prepare the relevant accounting entries for the year ended 31.12.2015.
8. Dally limited purchased the following financial assets on 1 January 2011 using some of its excess cash derived
from a bumper year of exceptionally high profits:
A. 10,000 shares in Slow limited an unlisted company. The price paid was 10 per share and transaction costs
were 1,000. These shares were purchased for long-term capital growth and were not designated as fair value
through profit or loss.
B. 12,000 shares in Quick limited a listed company. The price paid was 12 per share and transaction costs came
to 2,000. These shares were purchased for long term capital growth and were not designated as fair value
through profit or loss.
C. 15,000 shares in Speedy limited a listed company. The price paid was 15 per share and transaction costs came
to 5,000. These shares were purchased for speculative purposes. (means short term trading purposes)
D. Debentures that were purchased at a discount of 10% off the face value of 100,000. Transaction costs incurred
came to 1,000. These debentures will mature on 31 December 2013. A 20% coupon rate is receivable in
arrears on 30 June and 31 December. Dally limited has purchased this with the intention to hold the
debentures and collect the contractual cash flows. These debentures were not designated as fair value through
profit or loss.
Required:
Explain the categorization of each and calculate the initial amount that should be capitalized.
400
Answers:1.
a) The equity investment should be classified as fair value through profit or loss as the shares are held for trading
purposes.
Statement of profit or loss For the year ended 31-12-2017
Gain on financial assets [10,000 x (49 - 42)] 70,000
Transaction cost expense (1,300)
Statement of financial position As on 31-12-2017
Current assets*
Investments (10,000 x 49) 490,000
*Because held for trading
b) The financial asset would instead be classified as FV through OCI if option is elected, otherwise use FVTPL
[as in (a)].if the option is elected then the transaction costs would be added to the financial asset upon initial
recognition rather than being expensed out, therefore the initial asset would be recognized at an amount
421,300 (10,000 x 42 +1,300).
The asset would be recognized as non-current on the statement of financial position and the subsequent
gain of 68,700 (490,000 – 421,300) would be taken to reserves and shown in other comprehensive income in
the statement of comprehensive income for the year ended 31.12.2017.
Answer-2:
The correct journal entry is C:
Investment 400,000
The investment is held for trading and therefore should be classified as fair value through profit or loss. The
transaction costs of 120,000 are therefore expensed and the initial recognition of the investment would be at
3,000,000. The fair value at the year-end is 34 x 100,000 = 3,400,000 and therefore the gain to be reflected in
profit or loss is 400,000.
Answer-3:
a) Briefing note to Junaid
The investment has been classified to be measured at amortized cost. It should be initially recognized at fair
value and any transaction costs associated with the investment should be added to the initial recognition of the
asset.
The investment has a fair value of Rs. 3 million at the date of acquisition. The transaction costs were 200,000
and therefore the investment will be initially recognized at an amount of 3.2 million.
Subsequent measurement is then required using the amortized cost method. This means that the asset is increased
to reflect interest income at the effective rate of interest of 7.05% and reduced by the amount of cash received in
the period, which is 6% x nominal value i.e. 3 million =180,000.
401
Effective Cash flows Balance
interest income Interest (SOFP)
@ 7.05% (P.L) received @ 6%
1.1.2015 3,200,000
(3,000,000+200,000)
31.12.2015 225,600 180,000 3,245,600
31.12.2016 228,815 180,000 3,294,415
31.12.2017 232,256 180,000 3,346,671
31.12.2018 235,940 180,000
3,402,611
(Approx. 3,400,000)
(Principal + Premium)
b)
1-1-2015: Investment 3,000,000
Bank 3,000,000
1-1-2015: Investment 200,000
Bank 200,000
31-12-2015: Investment 225,600
Finance income 225,600
31-12-2015: Bank 180,000
Investment 180,000
Answer-4:
1 November 2015:
Investment in shares 25,000
Bank 25,000
31 December 2015:
Investment in shares [55,000 – 25,000] 30,000
Gain (P.L) 30,000
[Re-measurement of shares to FV at year end]
Answer-5:
This investment in debt instruments will be measured at Amortized cost if Fair value option is not opted.
[There is no need to calculate the effective interest rate because principal amount to be returned at the end is equal
to principal amount at the beginning]
1 January 2015:
Debentures 200,000
Bank 200,000
(Purchase of debentures)
31 December 2015:
Debentures [200,000 x 10%] 20,000
(Interest earned on debentures) 31 December 2015:
Bank [200,000 x 10%] 20,000
Debentures 20,000
Notice that no entry is made for the increase in fair value: entries for changes in fair value at year end are made
only for “fair value through profit or loss” and for “fair value through OCI” financial assets.
Answer 6:
This investment in debt instruments will be measured at Amortized cost if Fair value option is not opted.
[There is no need to calculate the effective interest rate because principal amount to be returned at the end is equal
to principal amount at the beginning]
30 June 2015:
402
Loan to XYZ limited 50,000
Bank 50,000
(Loan granted to XYZ limited)
31-12-2015:
Bank/loan to XYZ limited 5,000 [50,000 x 20% x 6/12]
Interest income 5,000 (Interest charged for the year ended 31
December 2015)
Answer-7:
This equity investment should be classified as FVTOCI. 31 March 2015:
Shares in Sane limited (asset) – Given 1,000,000
Bank 1,000,000
31 December 2015:
Shares in sane limited (asset) 1,000,000 [2,000,000 – 1,000,000]
Fair value adjustment (OCI) 1,000,000 (Fair value adjustment on
shares in Sane limited)
Answer-8:
A. These equity shares must be classified as fair value through OCI as these are not held for trading. These shares
in Slow limited will be measured at fair value with transaction costs capitalized. The initial measurement of
the asset would be: 10,000 shares x 10 + 1,000 = 101,000.
Changes in fair value must be recognized in other comprehensive income.
B. These equity shares must be classified as FVTOCI because not held for trading.
These shares in Quick limited should also be measured at fair value with transaction costs capitalized. The
initial measurement of the asset would be: (12,000 shares x 12) + 2,000 = 146,000
Changes in fair value must be recognized in other comprehensive income.
C. These shares must be classified as FVTPL because they are held for trading. The shares in Speedy limited will
be measured at fair value with transaction costs expensed.
The initial measurement of the asset would be 15,000 shares x 15 = 225,000. Changes in fair value must be
recognized in profit or loss.
D. The debentures, a debt instrument satisfies the amortized cost criteria. The company seems to operate a
business model whose objective is to hold financial assets in order to collect the contractual cash flows and it
seems that cash that it will collect will be solely payment of principal and interest and thus measured at
amortized cost with transaction costs capitalized.
The initial measurement of the asset would be: 100,000 x 90% + 1,000 = 91,000.
Interest income is to be recognized in profit or loss. Changes in fair value are not recognized.
Amortized Cost:
Examples of Financial Assets measured in this category are:
 Intercompany loans and receivables

 Investments in term deposits/debentures
All investments in equity instruments must be measured at fair value; only difference is whether to classify the re
measurement gain/loss in profit or loss or in other comprehensive income (OCI)
Examples of instruments measured at FVTPL:
1. All financial assets held for trading
2. All Debt instruments (if management opts at initial recognition).
3. All Equity instruments not held for trading (if management opts at initial recognition) In other words, all
financial assets can be classified as FVTPL.
403
Financial liabilities:
Classification
On recognition, IFRS-9 requires that financial liabilities are classified as;
1. At Amortized cost; or
2. At fair value through profit or loss FVTPL.
Accounting Treatment of Financial

Liabilities
1. Financial Liabilities 2. Financial Liabilities At Fair

At amortized cost value through profit or loss
(FVTPL)
Applies to:
Applies to: Financial liabilities
All financial liabilities held for trading
other than FVTPL
Measurement:
Measurement:
 Record at fair value
 Record at fair value less
transaction costs (net  Expense transaction costs in P.L
proceeds received)  Restate to fair value at each
 Measurement reporting date
subsequently at amortized  Any gain or loss is taken to
cost. profit or loss (one exception
 Interest expense is discussed next)
calculated at effective  Interest expense calculated
interest rate and at nominal (actual) rate will
recognized in P.L be recorded in P.L
 No fair value adjustment
 On derecognition any
gain or loss is taken to
P.L.
404
1. Financial liabilities at Amortized cost:
Initial measurement:
Initially recognize at Fair value net of transaction costs (net proceeds) [means cash received –
issuance costs incurred]
[It simply means transaction costs are not expensed when incurred; rather over the term of the
liability] There is as such no business model test for financial liabilities like as was in financial assets.
1. Debentures of Rs. 100,000 carrying interest @ 10%, issued on 01.01.2015 at Par and redeemable
at Par after four years. Transaction cost is 1,000.
a) If transaction cost is recognized as an expense in the year in which it is incurred:
Cash 100,000
Debentures 100,000
Transaction cost expense 1,000
Cash 1,000
Effective Interest @ Balance

% Interest paid @
10%
01.01.2015 100,000
31.12.2015 10,000
31.12.2016 10,000
31.12.2017 10,000
31.12.2018 10,000 100,000
Total 40,000 40,000
In this case the transaction cost expense will be recognized in the first year and interest expense of
40,000 will be recognized over the four years.
b) If transaction cost is deducted from financial liability
Cash 100,000
Debentures 100,000
Debentures 1,000
Cash 1,000
Effective Interest @ Balance

% Interest paid @
10%
01.01.2015 99,000
31.12.2015 10,000
31.12.2016 10,000
31.12.2017 10,000
31.12.2018 10,000 100,000
Total 41,000 40,000
(40,000+1,000)
In this case the transaction cost expense will be recognized over the four years included within interest
expense.
Conclusion: As per IFRS 9 transaction costs should be deducted from fair value of financial liability
so that expense is recognized over four years.
405
2. Debentures of Rs. 100,000 carrying interest @ 10%, issued on 01.01.2015 at Par and redeemable at
a premium of 25,000. Transaction cost is 1,000.
Cash 100,000
Debentures 100,000
Debentures 1,000
Cash 1,000
Effective Interest @ % Interest paid @ 10% Balance

01.01.2015 99,000
31.12.2015 10,000
31.12.2016 10,000
31.12.2017 10,000
31.12.2018 10,000 125,000
Total 66,000 40,000
(40,000+1,000+25,000)
Summary of financial liabilities at Amortized cost

The simplest way to prepare a working for amortized cost is to use the following table.
Effective interest Coupon (interest) Closing balance
expense % (P/L) paid % (SOFP)
Beginning of Y1 -
31.12.Y1 - (-) -
31.12.Y2 - (-) -
31.12.Y3 - (-) -
The balance at the beginning is the net proceeds (i.e. after the deduction of any discounts and issue
costs): Cash xxx

Financial Liability xxx
Effective interest is calculated on the balance and is charged to the statement to profit or loss (P/L) as
an interest expense:
Finance costs (P/L) xxx
The coupon paid is the coupon percentage multiplied by the face/nominal value of the debt instrument:
Cash xxx
The closing balance is the figure for the statement of financial position (SOFP) at the reporting date.
Example:
Amortized cost:
A company issues 5% loan notes at their nominal value of 20,000 on 1.1.2015. The loan notes are
repayable at par after 4 years.
Required: prepare the extracts from statement of comprehensive income and statement of financial
position for all the relevant years.
Important Note: Because the loan is repayable at par i.e. face (nominal) value of 20,000, the coupon
rate is equal to the effective rate.
When the loan notes are issued:
Bank 20,000
Loan notes 20,000
Financial statement extracts over 4 years term

Statement of comprehensive income Year ended 31.12.
406
2015 2016 2017 2018
Finance costs (W-1) (1,000) (1,000) (1,000) (1,000)
Statement of financial position (SOFP) As on 31.12.
2015 2016 2017 2018
Non-current liabilities 20,000 20,000
Current liabilities 20,000 0
(W-1) Amortized cost table:
Effective interest Cash flows Balance (SOFP)
expense 5% (P/L) Coupon paid 5%
1.1.2015 20,000
31.12.2015 1,000 (1,000) 20,000
31.12.2016 1,000 (1,000) 20,000
31.12.2017 1,000 (1,000) 20,000
31.12.2018 1,000 (1,000) -
(20,000)*
*The loan notes are repaid at par i.e. 20,000 at the end of year 4.
Example: A Company issued 20,000 redeemable debentures at their Par value of Rs.100 each on 1.1.2015,
incurring issue costs of 100,000. The debentures are redeemable at a 5% premium in 4 years’ time and
coupon (interest) rate of 2%. The effective rate on debentures is 4.58%.
Required:
Calculate the amounts to be shown in statement of financial position and statement of profit or loss for each
of the four years of debentures.
Answer: ‘000’
Interest expense* **Cash Paid @ Balance
@ 4.58% 2% of 2,000 (in SOFP)
1.1.2015 1,900 (W 1)
31.12.2015 87 (40) 1,947
31.12.2016 89 (40) 1,996
31.12.2017 91 (40) 2,047
31.12.2018 93 (40) NIL
(2,100)
[2000x1.05]
W.1 [20,000 x 100 – 100,000] = 1,900,000
*Finance cost
Financial liability
**Financial liability
Cash
DE recognition (settlement)
Financial liabilities are derecognized when they have been paid in full or transferred to another party (e.g.
bank has sold its individual customers deposits portfolio to another bank to focus only on suppose corporate
customers or its investment activities).
Practice questions [financial liability]
1) A company issues 0% loan notes at their nominal value of 40,000 on 1.1.2015. The loan notes are
repayable at a premium of 11,800 after 3 years. The effective rate of interest is 9%.
Required:
(a) What will be accounting entry when the loan notes are issued?
(b) Prepare extracts of the statement of profit or loss and statement of financial position for years ended
31.12.2015 to 2017?
2) A company issues 5% redeemable preference shares at their nominal value of 10,000 on 1.1.2015. The
preference shares are repayable at a premium of 1,760 after 5 years. The effective rate of interest is
8%.
Required:
a) Explain how the instrument should be classified? (means whether as a financial liability or equity
instrument)
407
b) Prepare extracts of statement of profit or loss and statement of financial position for years ended
31.12.2015 to 2019?
3) A company issues 360,000 of redeemable 2% debentures having a nominal value of Rs. 1 each at a
discount of 14% on 1 January 2015. Issue costs were 5,265. The debentures will be redeemed on 31
December 2017 at par. Interest is paid annually in arrears and the effective interest rate is 8%.
Required:
Show the effect of transaction on the statement of financial position and statement of profit or loss for
the three-year term of debenture.
4) 4.A company issues 4% loan notes with a nominal value of 20,000 on 1.1.2015. The loan notes are
issued at a discount of 2.5% and 534 of issue costs are incurred.
The loan notes will be repayable at a premium of 10% after 5 years. The effective rate of interest is
7%.
Required:
The initial measurement of the loan notes is:
a) 18,966
b) 19,466
c) 19,500
d) 20,034
5) An entity issues 3% bonds with a nominal value of 150,000 on 1-1-2015. The bonds are issued at a
discount of 10% and issue costs of 11,450 are incurred.
The bonds will be repayable at a premium of 10,000 after 4 years. The effective rate of interest is 10%.
The initial recognition of the bonds was correctly recorded by the entity at 123,550. However, the
entity has not re-measured the bonds and has instead expensed the interest paid to the statement of
profit or loss.
Required:
Calculate the carrying value of the bonds that should be presented in the statement of financial
position atthe end of the year 31-12-2015.
6) Tempo limited issued 200,000 0% debentures (means zero coupon bonds) on 1-1-2015 for Rs. 7 each.
The debentures are compulsorily redeemable on 31-12 2017 for Rs. 10 (i.e. at a premium). Effective
interest rate is 12.6248%.
Required:
Calculate the finance cost and the carrying amount of debentures for each affected year.
7) Galaxy Co. issues a bond for Rs. 503,778 on 1-1-2012. No interest is payable on the bond (means a
zero- coupon bond), but it will be held to maturity and redeemed on 31-12-2014 for 600,000. The bond
has not been designated as at fair value through profit or loss. The effective interest rate is 6%.
Required:
Calculate the charge to profit or loss in the financial statements of Galaxy Co. for the year ended 31-
12-2012 and the balance outstanding at 31-12-2012.
8) Sun limited issues 6% loan notes with a nominal value of Rs. 200,000 on 1-1-2014. They are issued at
a 5% discount and 1,700 of issue cost was incurred. The loan notes will be repayable at a premium of
10% after four years. The effective interest rate is 10%.
Required:
Prepare extracts from statement of profit or loss and statement of financial position at the end of the
years from 31-12-2014 to 31-12-2017.
9) On 1-1-2012, an entity issued a debt instrument (i.e. a debenture) with a coupon (interest) rate of 3.5%
at a par value of Rs. 6,000,000. The directly attributable costs of issue were 120,000. The debt
instrument is repayable on 31-12-2018 at a premium of Rs. 1,100,000.
Required:
What is the total amount of finance cost associated with the debt instrument?
408
10) On 1-1-2013, an entity issued Rs. 600,000 loan notes. Issue costs were 200. The loan notes do not
carryinterest but are redeemable at a premium of 152,389 on 31-12-2014.
The effective interest rate on loan notes is 12%
Required:
What is the finance cost in respect of loan notes for the two years ended 31-12-2014?
409
Answers
Answer-1:
a) When the loan notes are issued:
Bank 40,000
Loan notes 40,000
b) Financial statement extracts:
Statement of profit or loss (P/L) For the ended 31.12.
Year 2015 2016 2017
Finance cost (W-1) (3,600) (3,924) (4,276)
Statement of financial position (SOFP) As on 31.12.
Year 2015 2016 2017
Non-current liabilities 43,600
Current liabilities 47,524 -
(W-1) Amortized cost table
Effective interest Cash flows Balance (SOFP)
9% (P/L) Coupon paid 0%
1.1.2015 40,000
31.12.2015 3,600 - 43,600
31.12.2016 3,924 - 47,524
31.12.2017 4,276 - -
(51,800)*
*The loan notes are repaid at par i.e. 40,000, plus a premium of 11,800 at the end of year 3.
Answer-2:
a) The redeemable nature of the preference shares means that there will be an outflow of economic
resources at the redemption date and therefore the instrument meets the definition of a financial
liability and should be classified as such.
b) Statement of profit or loss (P/L) For the year ended
Year 2015 2016 2017 2018 2019
Finance cost (W-1) (800) (824) (850) (878) (908)
Statement of financial position (SOFP) As year ended

Year 2015 2016 2017 2018 2019
Non-current liabilities 10,300 10,624 10,974
Current liabilities 11,352 -
(W-1) Amortized cost table:

Year Effective Cash flows Balance (SOFP)
interest* 8% (P/L) Coupon paid**5%
1.1.2015 10,000
31.12.2015 800 (500) 10,300
31.12.2016 824 (500) 10,624
31.12.2017 850 (500) 10,974
31.12.2018 878 (500) 11,352
31.12.2019 908 (500) -
(11,760)
*Note: Effective interest rate is multiplied by balance.
**Note: Coupon rate is multiplied by face value of debt i.e. 10,000 x 5% = 5,000.
Answer-3:
Amortized cost table:
Year Effective interest Cash flows Balance (SOFP)
1.1.2015 304,335 (W 1)
31.12.2015 24,347 (7,200) 321,482
410
31.12.2016 25,718 (7,200) 340,000
31.12.2017 27,200 (7,200) -
77,265 (360,000)
Note: Effective interest rate is multiplied by balance.
Note: Coupon rate is multiplied by face value of debt, i.e. (360,000 x 20%) =7,200
Important note:
The total finance cost will be as follows:
Redemption value At par 360,000
Payments 2% x 360,000 x 3 years 21,600
381,600
Net proceeds (W-1) (304,335)
Total finance cost 77,265
For effective rate
1−(1+i)−3
304,335 = 7,200 ] + 360,000 (1+i)-3
I
The total finance cost will be allocated at a constant rate based upon carrying value over the life of the
instrument. This is performed by applying the 8% effective interest rate.
(W-1) Net proceeds = opening balance:
Nominal value 360,000
Discount 14% (50,400)
Issue costs (5,265)
304,335
Answer-4:
The correct answer is A = 18,966
Working: Nominal value 20,000
Discount 2.5% (500)
Cash received 19,500
Issue costs (534)
initial amount 18,966
Answer-5:
Carrying value of bonds at the end of 31.12.2015 = 131,405 Amortized cost working:
Year Effective interest Cash flow Balance (SOFP)

1.1.2015 123,550 (W 1)
31.12.2015 12,335 (4,500) 131,405
w.1 [150,000 x 90% -11,450 = 123,550]
Note: Effective interest rate is multiplied by opening balance.
Note: Coupon rate is multiplied by face value of debt. (150,000 x 3%) = 4,500
Answer:6
Year Effective Finance cost Cash flows Coupon Closing balance
@ 12.6248% paid @ (SOFP)
(P.L) 0%
1.1.2015 1,400,000
(200,000 x 7)
31.12.2015 176,747 - 1,576,747
31.12.2016 199,061 - 1,775,808
31.12.2017 224,192 - -
(2,000,000)
Answer 7:
The bond is a zero-coupon bond and is a financial liability of Galaxy Co. It is measured at amortized
cost. Although, there is no annual interest, the difference between the initial cost of the bond and the
411
price at which it will be redeemed is a finance cost. This must be allocated over the term of the bond at
a constant rate on carrying amount. This is done by applying the effective interest rate.
The annual charge to profit or loss is 30,226 (503,778 x 6%). The balance outstanding at 31-12-2012
is 534,004 (503,778 + 30,226).
Answer 8:
Statement of Profit or loss Year ended 31-12
2014 2015 2016 2017
Finance cost (18,830) (19,513) (20,264) (21,093)
Statement of Financial Position As on 31-12

2014 2015 2016 2017
Loan notes 195,130 202,643 - -
Current liabilities: Loan
notes - - 210,907 -
Workings:
Effective Interest Cash flows Coupon Balance
expense @ 10% paid @ 6%
1.1.2014 188,300 (200,000x95% -1,700)
31.12.2014 18,830 (12,000) 195,130
31.12.2015 19,513 (12,000) 202,643
31.12.2016 20,264 (12,000) 210,907
31.12.2017 21,093 (12,000) -
(220,000)
(200,000x 1.1)
79,700 48,000
Answer 9:
expense Coupon paid
1.1.2012 5,880,000 (6,000,000-
120,000)
31.12.2012
31.12.2013
31.12.2014
31.12.2015
31.12.2016
31.12.2017
31.12.2018 7,100,000
(6,000,000+1,100,000)
2,690,000 1,470,000*
Interest to be paid on the face value [6,000,000 x 3.5%] = 1,470,000
Answer 10:
Effective Interest Cash flows Interest Balance
expense @ 12% paid @0%
1.1.2013 599,800
(600,000 – 200)
31.12.2013 71,976 - 671,776
31.12.2014 80,613 - 752,389
(600,000+152,389)
412
2.A financial liability is classified at fair value through profit or loss if:
1. It is held for trading (means e.g. liability incurred for the purpose of selling (e.g. to another
bank) or repurchasing in the near future (repurchase of debentures from market before
maturity); or
2. Upon initial recognition it is designated at fair value through profit or loss. Any such
designation is irrevocable.
This designation is only allowed if:
a) It eliminates or significantly reduce a measurement or recognition inconsistency; or
b) Because the financial liability is evaluated by the entity’s key management personnel (e.g.
board of directors) on a fair value basis in accordance with a documented risk management
strategy.
Accounting Treatment of Financial liabilities at FVTPL:
 Record at fair value.

 Transaction costs are recognized as an expense.
 Restate to fair value at each reporting date.
 Any gain or loss is recognized in profit or loss except as a result of own credit risk then to
OCI
(discussed next).
 Interest expense is recognized in P.L calculated on the basis of nominal rate.
Example: Mousse limited issued 100,00 debentures on the 1 January 2015. Proceeds totaling 200,000.
 On the 31 December 2015 the debentures had a fair value of 300,000.
 Mousse limited designated these debentures to be held at ‘fair value through profit or loss’
 Transaction costs incurred by Mousse limited came to 1,000.
Required:
Provide the necessary journals to show how Mousse limited should account for the debentures during
the year ended 31.12.2015.
Answer:
1 January 2015: Transaction costs expense 1,000
Bank 1,000
(Transaction costs on the issue of debentures)
Bank 200,000
200,000
Debenture (liability)
(Issue of debenture)
31 December 2015: Fair value adjustment on financial 100,000
liabilities (P/L)
Debentures (liability) 100,000
(Re-measurement of debentures at
year end)
[300,000 – 200,000]
Own Credit Risk:

Credit Risk: This is the risk that one party to a financial instrument will fail to discharge an obligation and
cause the other party to incur a financial loss. A typical example is our debtor, being our financial asset, if
he is in a financial difficulty and therefore unable to pay his debt (a bad debt for us).
Own credit risk is the reserve situation our company is in a financial difficulty and we are unable to pay
our financial liability (means payable).
For example, debentures of Rs. 100,000 are issued on 01.01.2018, trading on an exchange. Assume
financialliability is held for trading and therefore measured at FVTPL.
Cash 100,000
Debentures 100,000
Fair value of debentures is supposing 10,000 as on 31.12.2018.
Debentures 90,000
Gain 90,000
413
(100,000 - 10,000)
In this case, the gain or loss in a period must be classified into:
i) Gain or loss resulting from credit risk; and
ii) Other gain or loss (because of changes in market conditions).
Changes in an entity’s credit risk affect the fair value of that financial liability. This means that when an
entity’s credit worthiness deteriorates, the fair value of its issued debt will decrease (and vice versa). For
Financial liabilities measured at fair value, this causes a gain (or loss) to be recognized.
The problem is that a company which is in a severe financial trouble can record a large profit based on its
ability to buy back its own financial liability (e.g. a debenture) at a reduced fair value.
Therefore, IFRS-9 requires the gain or loss as a result of credit risk to be recognized in other comprehensive
income (means in reserves). The other gain or loss (not as a result of credit risk) is recognized in profit or
loss.
1-1-2015: Issuance of debentures
Cash 500,000
Debentures 500,000
31-12-2015: Fair value is 270,000
Therefore, a total gain is 230,000 [500,000 – 270,000]. Suppose:
200,000 due to 30,000 Otherwise due to

deterioration of own market forces credit risk.
Debentures 230,000
OCI 200,000
PL 30,000
Presentation In Statement of Comprehensive Income
Profit due to change in fair value 30,000 (Other Income)
Other Comprehensive Income:
Fair value gain on financial liability attributable to
change in credit risk 200,000
414
IFRS-9 test questions
Question 1
A company purchased a debt instrument for Rs. 30,000 plus 1% transaction costs on 1 April 2006. Company
correctly classified the investment at FVTOCI.
At the end of financial year (31 December 2006) the investment has a value of Rs. 40,000. On 11 January
2007 the investment was sold for Rs. 50,000.
Required: prepare necessary journal entries.
Question 2
A company issued a bond on 1-1-2011.
The bond is issued at par value of Rs. 1 million and pays a coupon rate of 5% interest for first two years,
then 7% interest for next two years (this is known as a stepped bond).
Interest is paid annually in arrears.
The bond will be redeemed at par after four years. The effective rate for this bond is 5.942%
Required: discuss the relevant accounting treatment from issuance of bond till maturity date.
Question 3:
X purchased a bond on 1 January 2015 and classified it at amortized cost, redeemable at Par with the
following details.
Terms:
Nominal value Rs. 50 million
Coupon rate 10%
Term to maturity 3 years
Purchase price Rs. 48 million
Effective rate 11.67%
Required
Calculate the amortized cost of the bond and show the interest income for each year till maturity date.
Question 4:
A company issues 100,000 6% bonds on 1-1-2011 at a price of Rs. 100.50 each. These bonds have a
nominal value of Rs. 100 each. The issue cost was Rs. 50,000.
The bonds are redeemable after four years for Rs. 10,444,000.
The effective annual interest rate for this financial instrument is 7%.
Required
Calculate the amortized cost of the bond and show the interest expense for each year to maturity.
Question 5:
Rite Company Limited purchased bonds of Might Limited on January 01, 2010. Relevant information is as
follows:
Face value of bonds Rs. 100,000
Purchase Price Rs. 93,134
Interest rate 12%
Effective rate 14%
Interest payable each January 1
year
Bonds maturity date January 1, 2015
Required:
i. Prepare schedule of interest revenue and bond discount amortization. `
ii. Give journal entries in the books of accounts of Rite Company Limited for the year ended December
31, 2010 and December 31, 2011.
iii. Prepare extracts from the Income Statement for the year ended December 31, 2010 and December 31,
2011 and Statement of Financial Position as of December 31, 2010 and December 31, 2011 of Rite
Company Limited.
Question 6
A Limited owns a debt instrument purchased from Middle east, classified as held for trading. It has a fair
value of Dhs.5 million as on June 30, 2011. On June 30, 2012 the fair value of the debt instrument increased
to Dhs. 6 million. The exchange rates on different dates were as follows:
One UAE Dirham is equivalent to:
June 30, 2011 Rs. 24
June 30, 2012 Rs. 26
Required:
Explain the treatment of above transaction of A Limited according to the relevant IFRS. The functional
415
currency of A limited is rupees.
Question 7
Galaxy Co. purchased 15,000 shares of Star Ltd from open market on July 01, 2012 for Rs.35 per share. The
market price on June 30, 2013 was Rs.38 per share.
On October 01, 2013 Galaxy Ltd. sold its entire shares of Star Ltd for Rs. 40 per share. Galaxy Ltd paid the
transaction cost of 1% of the purchase/sale price. The shares are classified as FVTOCI.
Required:
Prepare the extracts of Statement of Profit or loss and other comprehensive income and Statement of
Financial Position of Galaxy Co. for the year ended June 30, 2013 and 2014 showing the above transactions.
Question 8
Best Appliances Limited issued a deep discount bond on July 1, 2015. Following information is relevant to
the bond:
Interest payable semi – annually on January 1 and July 1 8%
Effective interest rate 14%
Issue date July 1 2015
Redemption date July 1,2018
Rupees
Nominal value 650,000
Discount on issuance 65,000
Cost of issue 15,000
Premium on redemption 19,430
Required:
Compute the amounts of interest expense and carrying values of bonds payable, which will be taken to the
statement of profit or loss and the statement of financial position for the year to June 30, 2016 to
2018.Assume financial liability is not classified at Fair value through profit or loss.
Question 9
On July 01, 2013, Tauseef investment company purchased 500,000 debentures at par value of Rs. 50 each,
bearing interest rate of 8% per annum, redeemable after 3 years at fair value. The debentures were classified
as FVTOCI in the company’s financial statements.
Following detail have been extracted from the books of accounts of Touseef Investment company:
Year Ended Revenue (Rupees) Gross profit % Fair value of each
debenture (Rupees)
June 30, 2014 40,000,000 15 53
June 30, 2015 50,000,000 16 57
June 30, 2016 50,000,000 17 58
Assume no other income or expenses except as much as the information is available.
Required:
How the above information would be presented in the Statements of Financial Position, Statement of Profit
or Loss and Other Comprehensive Income and Statement of change in Equity of Touseef Investment
company in accordance with the relevant International Financial Reporting Standards (IFRSs), for the year
ended June 30, 2016 with comparatives of 2015 and 2014
Question 10
Large Limited (a public listed company) has following financial instruments in the financial statements for
the year ended December 31, 2017:
 An investment in the debentures of Small limited, nominal value Rs. 600,000, purchased on their
issuance on January 01, 2017 at a discount of Rs.90, 000 and carrying 4% coupon redeemable at
585,703. Large Limited plans to hold these until their redemption on December 31, 2020 and collect
contractual cash flows. The internal rate of return (IRR) of debenture is 8% (means effective rate).
 10,000 redeemable preference shares issued in 2017 at Rs.10 per share (their nominal vlue) with an
annual dividend payment of 6% redeemable in 2020 at their nominal value.
Required:
Being a chief Financial (CFO) of the Large limited, advice the directors about the accounting for the
financial instruments, as required by the relevant international Financial Reporting standards (IFRS) on
financial instruments stating the effect of the each on the gearing of the company. Your answer should be
accompanied with calculations where appropriate.
416
Answers
A.1
The following double entries are necessary:
1 April 2006: Initial Recognition Dr (Rs.) Cr (Rs.)
Financial asset 30,300
Cash 30,300
Being: Initial recognition of financial asset
(At cost plus transaction cost = Rs. 30,000 + (1% of Rs. 30,000))
31 December 2006: Subsequent measurement Dr (Rs.) Cr (Rs.)
Financial asset (Rs. 40,000 – Rs. 30,300 ) 9,700
Other comprehensive income (Gain) 9,700
Being: Re-measurement of financial asset to fair value
11 January 2007: Disposal Dr (Rs.) Cr (Rs.)
Cash 50,000
Other comprehensive income(Gain) 10,000
Being: Recognition of profit on disposal of financial asset
11 January 2007 Dr (Rs.) Cr (Rs.)
Other comprehensive income (9,700 + 10,000) 19,700
Being: Reclassification adjustment arising on disposal of financial as set to profit or loss as it is a
debt instrument.
A.2
The company in the above bond would recognize a financial liability at amortized cost unless it is held for
trading.
The amortized cost of the liability at the end of each year is calculated by constructing an amortization
table as follows:
Effective
Interest at Interest paid @ 5%
Date 5.942% & 7% Balance (SOFP)
1-1-2011 1,000,000
31-12-2011 59,424 (50,000) 1,009,424
31-12-2012 59,980 (50,000) 1,019,404
31-12-2013 60,572 (70,000) 1,009,977
1,000,000
31-12-2014 60,012 (70,000) (Approx)
240,000 240,000
The bond is initially recorded at cost (Rs. 1,000,000) and by the end of year 2011 it has an amortized cost of
Rs. 1,009,424. The difference is due to the difference in the interest expense recognized in the statement of
profit or loss (Rs. 59,424) and the interest actually paid (Rs. 50,000).
A.3
The amount recognized as income in profit or loss each year is based on the effective rate of return, but the
cash actually received is based on the coupon rate of 10%.
This is calculated as follows:
Rs. In ‘million’
Effective
Interest at Interest received @
Date 11.67% 6% Balance
1-1-2015 - 48.00
31-12-2015 5.60 (5) 48.60
31-12-2016 5.67 (5) 49.27
31-12-2017 5.75 (5) 50.00
17 15
A.4
The initial liability is (Rs. 100.000 × 100.5) – Rs. 50,000 = Rs. 10,000,000.
Effective Interest Interest paid 10M
Date at 7% @ 6% Balance
1-1-2011 10,000,000
417
31-12-2011 700,000 (600,000) 10,100,000
31-12-2012 707,000 (600,000) 10,207,000
31-12-2013 714,490 (600,000) 10,321,490
31-12-2014 722,510 (600,000) 10,444,000
2,844,000 2,400,000
The final interest payment of Rs. 722,510 contains a rounding adjustment of Rs. 6.
Note the difference between the interest charged and the interest paid. This is because there is a
redemption premium of Rs. 444,000 which has already been recognized as an expense during the term of
bond.
A.5:
Effective Interest Interest (Cash flow)
Income @ 14% Received 100,000 x12% Balance
Rs. Rs. Rs.
1-1-2010 93,134
1-1-2011 13,039 (12,000) 94,173
1-1-2012 13,184 (12,000) 95,357
1-1-2013 13,350 (12,000) 96,707
1-1-2014 13,539 (12,000) 98,246
1-1-2015 13,754 (12,000) 100,000
Debit Credit
1-1-2010 Debt Investment 93,134
Bank 93,134
1-1-2011 Bank 12,000
Debt investment 12,000
Rite Company Limited
Statement of Comprehensive Income (Extracts)
For the year ended 31-12
2010 2011
Other Income:
Interest Income 13,039 13,184
Rite Company Limited
For the year ended 31-12
2010 2011
Non-current Assets:
Bonds 94,173 95,357
[2010: 93,134+13,039-12,000]
[2011: 94,173+13,184-12,000]
Current Assets:
Interest receivable 12,000 12,000
A. 6
The debt instrument is held for trading and will therefore should be carried at fair value through profit and
loss in its financial statements.
On June 30, 2012 there will be a gain of Dh 1 million (Dh 6-Dh 5) and in accordance with IFRS 9, this will
be credited to profit or loss.
In statement of financial position the carrying value of debt would be calculated using the exchange rates
prevailing at June 30, 2011 and 2012, which shows an increase of Rs.36 million at June 30, 2012 as given
below:
Rs in million
Balance as on June 30, 2011 (Dh 5 million X 24) 120.00
Balance as on June 30, 2012 (Dh 6 million X 26) 156.00
Total increase in year (in P.L) 36.00
Financial asset 36
Gain (P.L) 36
418
Note: there is no need to segregate the fair value changes and exchange differences.
A.7
Galaxy Company
Statement of Profit or loss (Extract) 30 June 2013 2014
Other income - -
Fair value gain 39,750 24,000
Galaxy Company
Statement of Financial position (Extract)
30 June 2013 2014
Non-current assets
Investment at FVOCI 570,000 -
Equity
Retained earnings (39,750+24,000) - 63,750
Fair value reserve 39,750 -
Working notes:
W-1:
Fair value at June 30, 2013 (15,000X38) 570,000
Cost (15,000X35=525,000)+525,000X1%) (530,250)
Gain on fair value adjustment (to other comprehensive income) 39,750
W-2:
Sale proceeds (15,000X40=600,000 - (1%X600,000) 594,000
Less: carrying value of shares (570,000)
Gain (to other comprehensive income) 24,000
Total gain in OCI will be 63,750 (24,000+39,750) which cannot be reclassified to P.L but can be transferred
to retained earnings through Statement of changes in equity (as it is an equity instrument).
A. 8
Effective interest @14% Coupon paid 650,000 x 8% Balance
1-7-2015 570,000 (650-65-15)
1-1-2016 39,900* 26,000** 583,900
1-7-2016 40,873 26,000 598,773
1-1-2017 41,914 26,000 614,687
1-7-2017 43,028 26,000 631,715
1-1-2018 44,220 26,000 649,935
1-7-2018 45,495 26,000 669,430
(650,00+19,430)
*570,000 x 14% x 6/12 = 39,900
**650,000 x 8% x 6/12 =26,000

A.9
Touseef Investment Company Statements of Comprehensive Income For the year ended June 30
Rupees 2016 2015 2014
Revenue 50,000,000 50,000,000 40,000,000
Cost of sale (bal) (41,500,000) (42,000,000) (34,000,000)
Gross profit (17%,16% &15%) 8,500,000 8,000,000 6,000,000
Interest income (500,000 x 50 x 8%) 2,000,000 2,000,000 2,000,000
Gain on redemption 4,000,000 - -
Profit for the year 14,500,000 10,000,000 8,000,000
FVOCI Investment(W-1) 500,000 2,000,000 1,500,000
*Gain transferred to profit or loss (W-2) (4,000,000) - -
(3,500,000) 2,000,000 1,500,000
Total comprehensive income 11,000,000 12,000,000 9,500,000
it is a debt instrument so this reclassification is allowed.
Touseef Investment Company
For the year ended June 30
Rupees
Retained Earning Fair Value reserve Total
Opening balance July 01,2013 - - -
419
Closing balance June 30,2014 8,000,000 1,500,000 9,500,000
Closing balance June 30,2015 18,000,000 3,500,000 21,500,000
Total comprehensive income 14,500,000 (3,500,000) 11,000,000
Closing balance June 30,2016 32,500,000 - 32,500,000
Touseef Investment Company

For the year ended June 30
Rupees
2016 2015 2014
Non-Current assets
Financial assets - - 26,500,000
Current assets
Financial assets - 28,500,000 -
Equity
Retained earnings 32,500,000 18,000,000 8,000,000
Fair value reserve - 3,500,000 1,500,000
Working:
W-1 Gains recognized in other comprehensive income:
Year ended June 30, 2014
500,000 x 53 (Market value) 26,500,000
Less: Par value 500,000 x Rs.50 5,000,000
Fair value adjustment (OCI) 1,500,000
500,000 x 57 (Market value) 28,500,000

Less: 500,000 x Rs.53 26,500,000
Fair value adjustment (OCI) 2,000,000
500,000 x 58 (Market value) 29,000,000
Less: 500,000 x Rs.57 28,500,000
Fair value adjustment on redemption (OCI) 500,000
W-2 =Gain realized on redemption and transferred from OCI to P.L

As on June 30,2014 1,500,000
As on June 30,2015 2,000,000
As on June 30,2016 500,000
Total 4,0000,000
Accounting entries on 30.06.2016:
Debit Credit
30.06.2016 Cash 29,000,000
Financial Asset 28,500,000
Fair value reserve (OCI) 500,000
30.06.2016 Fair value reserve (OCI) 4,000,000
P.L 4,000,000
A.10
Investment in Debentures:
Given that these debentures are planned to be held until redemption, under IFRS 9 – Financial instruments,
they would be measured at amortized cost unless designated at fair value through PL is elected, on the basis
that:
a. The objective of the business model within which the asset is held is to hold assets in order to collect
contractual cash flows, and
b. The contractual terms of the financial asset give rise to cash flows on specific dates that are solely
payments of principal and interest.
This means that they are initially shown at their cost (including any transaction cost) and this cost will
increase over time by applying a constant effective interest rate. Their value is reduced by interest received
i.e the coupon.
420
Consequently, the amortized cost valuation of these debentures at the year-end would be:
Rupees
Cost (600,000-90,000) 510,000
Effective interest rate @ 8% Coupon received (4% x 600,000)
40,800 shown as finance income
(24,000) debited to cash
526,800
Date Effective interest @ Coupon received Balance

8% 600,000 x 4%
1-12-2017 510,000
31-12-2017 40,800 24,000 526,800
31-12-2018 42,144 24,000 544,944
31-12-2019 43,596 24,000 564,540
31-12-2020 45,163 24,000 585,703
Effect on gearing:
These debentures are an asset and so as the increase in value is recognized until redemption, the equity of
of the business will increase thus reducing gearing.
Redeemable Preference Shares

Redeemable preference shares, although called as shares, are not, in substance equity, they are a debt
instrument, i.e. a loan received by the company.
Consequently, they should be classified as such, i.e. as a non current liability in the statement of financial
position. The ‘dividend’ paid will be shown in profit or loss as finance costs and accrued at the end of the
year if outstanding, whether declared or not.
The shares are consequently a financial liability held at amortized cost unless designed at fair value through
P.L. In this case, given that the shares are issued and redeemed at the same value, the effective interest rate
and nominal coupon rate will be the same and each year Rs. 6,000 will be shown as a finance cost in profit
or loss and the balance outstanding under non-current liabilities at each year end will be Rs. 100,000,
calculated as follows:
Rupees
Cash received (10,000 x 10) 100,000
Effective interest rate 6% 6,000 shown as finance cost
Coupon paid (6% x 100,000) (6,000) Credited to cash
Closing balance 100,000
In the financial statements for the year ending December 31, 2019, the shares will need to be reclassified as
a current liability given that they will be repaid within one year.
Given that these shares are classified as a financial liability, gearing will be higher.
421
ICAP Question bank
Q.1 On 1 January 2011 Ahmad Ltd has the following capital and reserves.
Equity Rs.
Share capital (Rs. 10 ordinary shares) 1,000,000
Retained earnings 5,670,300
6,870,300
During 2011 the following transactions took place.
1 January An issue of Rs. 100,000 8% Rs. 1 redeemable preference shares at a premium of 60%.
Issue costs are Rs. 2,237. Redemption is at 100% premium on 31 December 2015. The
effective rate of interest is 9.5%. This financial liability is not designated as FVTPL.
31 March An issue of 30,000 ordinary shares at a price of Rs. 13 per share. Issue costs were Rs.
20,000
30 June A 1 for 4 bonus issue of ordinary shares by first utilizing the share premium.
Profit for the year, before accounting for the above, was Rs. 508,500. The dividends paid on the redeemable
preference shares for the year have been charged to retained earnings.
Required
 Prepare relevant accounting entries for the year ended 31.12.2011.
 Prepare extracts from statement of financial position as on 31.12.2011.
Q.2 Explain how the following should be accounted for in accordance with IFRS 9 in the financial
statements to 31 December 2013.
(i) A 3% bond was purchased on 1 January 2013 for Rs. 250,000. The nominal value is Rs. 300,000
and redemption will be at par on 31 December 2016. The coupon is received annually in arrears.
The effective interest rate on the bond is 8.04%. The company intends to hold the bond until its
maturity. The market value of the bond at 31 December 2013 is Rs. 275,000.
(ii) An investment was made in the equity shares of XYZ. 3,000 shares were purchased (a 1% stake)
at a cost of Rs. 10 per share on 1 April 2011. A transaction fee of Rs. 300 was charged on the
purchase. The entity intended to sell the shares in the near term. The market value of the shares
over the three years has been as follows:
Rs.000
31 December 2011 32
31 December 2012 34
31 December 2013 35
Q.3 Espanol Ltd acquired 100,000 shares in X ltd on 25 October 2016 for Rs.3 per share. The investment
resulted in Espanol Ltd holding 5% of the equity shares of X Ltd. The related transaction costs were
Rs. 12,000. X Ltd.’s shares were trading at Rs. 3.40 on 31 December 2016.The investment has been
classified as held for trading.
Required:
Prepare the journal entries to record the initial AND subsequently measurement of this financial
instrument in the financial statements of Espanol Ltd. for the year to 31-12-2016.
Q.4 Sandia Limited acquired 40,000 shares in another entity Y Ltd in March 2016 for Rs. 2.68 per share.
The investment was classified as measured at FVOCI on initial recognition. The shares were trading at
Rs. 2.96 per share on 31 July 2016. Commission of 5% of the value of the transaction is payable on all
purchases and disposal of shares.
Required:
Prepare the journal entries to record the initial recognition of this financial asset and its subsequent
measurement at 31 July 2016 in accordance with IFRS-9 Financial Instruments.
Q.5 GEO Alloys Ltd made an investment in debt instrument on 1 July 2014 at its nominal value of Rs.
4,000,000. The instrument carries a fixed coupon interest rate of 7%, which is receivable annually in
arrears. The instrument will be redeemed for Rs. 4,530,000 on 30 June 2018. Transaction costs
associated with the investments were Rs. 200,000 and were paid on 1 July 2014. The effective interest
rate applicable to this instrument has been calculated at approximately 8.4%. GEO Alloys Ltd intends
422
to hold this investment till redemption date.
Required:
Explain how this investment should be classified and measured in accordance with IFRS-9. Also
Calculate the carrying value of the investment to be included in GEO Alloys Ltd’s statement of
financial position as at 30 June 2016 in accordance with IFRS-9.
Q.6 On 15 October 2016, Rashid Industries Limited (RIL) made the following investments:
Name of Investees No. of shares Percentage of shareholding *Cost of investment
acquired (Rs. inmillion)
Karim Limited (KL) 155,000 4% 20
Bashir Limited (BL) 135,000 2% 65
* including brokerage commission.
Investment in KL was made with no intention to sell the shares while investment in BL was made with
the intention to sell the shares.
The market price of shares of KL and BL as on 31 December 2016 was Rs. 80 and Rs. 621
respectively. RIL’s broker normally charges transaction costs of 2%.
Required:
Explain the accounting treatment of above transactions in accordance with International Financial
Reporting Standards.
423
ICAP Study Text Question Solution
Solution 1
a) Accounting entries for the year ended 31-12-2011:
i) Redeemable preference shares:
1-1-2011 Cash/Bank 160,000
Financial Liability 160,000
(Redeemable preference shares)
(100,000 x 1.6)
1-1-2011 Financial Liability 2,237
Cash/Bank 2,237
Net initial measurement of financial liability is 157,763
Effective Interest @ 9.5% Dividend Paid

100,000@8% Balance
1-1-2011 157,763
31-12-2011 14,987 (8,000) 164,750
31-12-2012 15,651 (8,000) 172,402
31-12-2013 16,378 (8,000) 180,780
31-12-2014 17,174 (8,000) 189,954
31-12-2015 18,046 (8,000) 200,000
31-12-2011:
Financial Cost 14,988
31-12-2011:
(Wrongly charged to retained earnings)
ii) Share Issuance:
31-3 Cash (30,000 x 13) 390,000

31-3 Share Premium 20,000
Cash 20,000
(Share Issuance cost)
30-6 Bonus Shares:

1-1 1,000,000
31-3 300,000
1,300,000
(1,300,000/10 x ¼ x 10) 325,000
Dividend (Share Premium) 270,000

Dividend (Retained Earnings) 55,000
*As on 30-6-2011 the balance on share premium was (200,000 + 90,000 – 20,000) = 270,000 before
the entryof bonus shares.
(b) Ahmad Limited
Statement of Financial Position (Extracts) As on 31-12-2011
Equity:
Share capital (Rs. 10 each) (w-2) 1,625,000
424
Share premium (w-3) -
Retained earnings (w-4) 6,116,812
7,741,812
Redeemable preference shares (from entries) 164,750
Workings: 1.
Profit for the year (Given) 508,500
Less: Finance Cost (14,988)
Adjusted profit 493,512
2. Share Capital:
At 1-Jan-2011 1,000,000
Issue of shares on 31-March(30,000 x 10) 300,000
1,300,000
Bonus shares (1,300,000/10 x ¼ x 10) 325,000
At 31-Dec-2011 1,625,000
3. Share Premium:
At 1-Jan-2011 200,000
Issue of shares on 31-March[(30,000 x 3) - 20,000] 70,000
270,000
Bonus issue 270,000
Nil
4. Retained earnings:
At 1-Jan-2011 5,670,300
Add preference dividend charged to retained earnings 8,000
Bonus shares (325,000 – 270,000) (55,000)
Profit for the year (Adjusted) (W 1) 493,513
At 31-12-2011 6,116,812
Solution 2
(i) 3% Bond
The bond must initially be recorded at its purchase price of Rs. 250,000. The bond seems to satisfy the
amortized cost criteria. The company seem to operate a business model whose objective is to hold financial
assets in order to collect contractual cash flows and it seems that the cash it will collect will be solely
payment of interest and principle. Therefore, market value is not relevant.
Interest will be credited to profit or loss using the effective interest rate, resulting in finance income of Rs.
20,100 (8.04 % x 250,000). The coupon received will be Rs. 9,000 (3% x 300,000)
The amortized cost at the end of 2013 will be Rs. 261,100 (250,000 + 20,100 – 9,000) will appear in
statement of financial position.
Effective Interest interest Paid Balance

@ 8.04% 300,000 x 3%
1-1-2013 250,000
31-12-2013 20,100 (9,000) 261,100
31-12-2014 20,992 (9,000) 273,092
31-12-2015 21,957 (9,000) 286,049
31-12-2016 22,998 (9,000) 300,047
(ii) Equity shares in XYZ

The shares must be classified as FVTPL. They will initially be recorded at their cost of Rs. 30,000. As they
425
have been classed as ‘fair value through profit or loss’ the transaction costs must be expensed to profit or
loss immediately. At the end of each reporting period, the shares must be re-measured to their market value,
with the resulting gain or loss being taken to profit or loss.
At 1 January 2013, the investment had a carrying value of Rs. 102,000(3000 x 34). By the 31 December
2013 this value is now Rs. 105,000 (3,000 x 35). A Rs. 3,000 gain will therefore be recognized in profit or
loss for the year ended 31.12.2013.
Solution 3
Held for trading investment
Initial recording:
Current asset investment 300,000

Bank 300,000
[100,000 x 3]
Being the purchase of shares
Transaction cost (Expense) 12,000
Bank 12,000
Being the write off of the transaction costs to the statement of profit or loss as the investment is an asset held
at fair value through profit or loss
Current asset investment 40,000

profit or loss – gain 40,000
[(100,000 x 3.4) – 300,000]
Being the uplift in value and the recording of the gain in the statement of profit or loss
Solution 4
Investment initially is recorded at fair value plus transactions costs:
March 2016:
Investment 107,200
(40,000 shares x Rs. 2.68)
Bank 107,200
Being initial recognition
Investment 5,360 Bank
5,360
Commission (107,200 x 5%)
Total value of investment is 107,200 + 5,360 = 112,560.
The investment is subsequently measured at the fair value of the shares
31.07.2016
Investment 5,840
[(40,000 x Rs. 2.96) – Rs. 112,560].
Solution 5
(i) The investment should be classified as measured at Amortized cost because it seems to satisfy the
amortized cost criteria. The company seems to operate a business model whose objective is to hold
financial assets in order to collect the contractual cash flows and it seems that cash that it will collect is
solely payment of principal and interest. Initially the investment will be measured at its fair value (which
in this case is its cost), plus any associated costs.
The initial journal entry required is therefore:
Investment 4,200,000
Bank 4,200,000
(4,000,000 + 200,000)
426
(ii) Subsequent measurement
Effective interest Interest received Balance
8.4% (P.L) 7% x Rs. 4m (SOFP)
1-7-2014 4,200
30-6-2015 353 (280) 4,273
30-6-2016 359 (280) 4,352
30-6-2017 365 (280) 4,437
30-6-2018 373 (280) 4,530
The investment will be held at Rs. 4,352,000 in the statement of financial position at 30 June 2016.
Solution 6
Investment in KL
Initial measurement
According to IFRS 9, at initial recognition, RIL may make irrevocable election to present subsequent
changes in fair value in equity investment in other comprehensive income instead of profit or loss account.
If RIL opted as above, investment in KL would initially be recognized at fair value plus transaction costs
i.e. Rs. 20 million.
However, if RIL opted to measure the investment at fair value through profit and loss (FVTPL), investment
should initially be measured at Rs. 19.61 million (20/102 x 100) and transaction costs of Rs. 0.39 million
(20–19.61) should be charged to profit and loss.
On 31 December 2016, if fair value through other comprehensive income has been opted, investment in KL
should be measured at fair value of Rs. 12.4 million (155,000 x 80) and a loss of Rs. 7.6 million [20–12.4]
should be recorded through other comprehensive income.
According to IFRS 9, in case of equity instrument amount presented in other comprehensive income shall
not be subsequently transferred to profit or loss. However, the entity may transfer the cumulative gain /
(loss) within equity to retained earnings.
If fair value through profit or loss has been opted, then RIL should account for the loss of Rs.7.21 million
(19.61–12.4) through profit and loss.
Investment in BL
Initial measurement
It is as held for trading therefore measure at fair value through profit or loss. The investment in BL should
be recognized at Rs. 63.73 million (65÷102 x 100) and transaction cost of Rs. 1.27 million should be
charged to profit and loss account.
As at 31.12.2016, the investment should be re-measured to fair value at the market price of Rs. 83.835
million (135,000×621) and a gain of Rs. 20.105 million (83.835–63.73) shall be recorded in the profit and
loss.
427
Comprehensive questions
Question 1: [IFRS 9 and IAS 21]
Omega Limited (OL) is incorporated and listed in Pakistan. On 1 May 2012, it acquired 20,000 ordinary
shares (2% shareholding) in Al-Wadi Limited (AWL), a Dubai based company at a cost of AED 240,000
which was equivalent to Rs. 6,000,000. The face value of the shares is AED 10 each. OL intends to hold the
shares to avail benefits of regular dividends and capital gains.The company has irrevocably opted for the
FVOCI.
On 1 June 2013, AWL was acquired by Hilal Limited (HL), which issued three shares in HL in exchange for
every four shares held in AWL.
AWL HL
Final dividend declared / received on 31 March 2013:
Cash 15% -
Bonus shares 10%
Final cash dividend declared / received on 10 April - 20%
2014
Fair value per share as at: 31 December 2012 AED 13.00
1 June 2013 AED 14.00 AED
18.00
31 December 2013 - AED
19.50
Exchange rates on various dates were as follows:
31-Dec-2012 31-Mar-2013 1-Jun-2013 31-Dec-2013 10-Apr-2014
1 AED Rs. 25.00 Rs. 26.50 Rs. 28.00 Rs. 28.70 Rs. 28.20
Required:
a) Prepare journal entries for the year ended 31-12-2012 and 31-12-2013.
b) Determine the amounts (duly classified under appropriate heads) that would be included in OL’s
statement of comprehensive income for the year ended 31 December 2013 in respect of the above
investment with comparatives.
c) Prepare extracts from Statement of financial position as on 31-12-2013 with comparatives.
Note AED Arab Emirates Dirham
Question-2: [IAS 21, IFRS 9 and IAS 40]

Kangaroo Limited (KL), a Pakistan based company, is preparing its financial statements for the year ended
31 December 2017. Following transaction were carried out during the year.
i) Foreign currency transactions:
KL purchased an investment property in United States for USD 2.6 million. 10% advance payment
was made on 1 May 2017 and 70% payment was made on 1 July 2017 on transfer of title and
possession of the property. The remaining amount was paid on 1 August 2017.
On 1 September 2017, KL rented out this property at annual rent of USD 0.24 million for one year
and received full amount in advance on the same date.
KL uses fair value model for its investment property. On 31 December 2017, an independent valuer
determined that fair value of the property was USD 2.5 million.
Following spot exchange rates are available:
Date 1-May-2017 1-Jul-2017 1-Aug-2017 1-Sept-2017 31-Dec-2017
USD 1 Rs. 100 Rs. 105 Rs. 108 Rs. 110 Rs.116
ii) Equity investments:
On 1 May 2017 KL acquired following equity investments:
Purchase price Transaction cost Total
----------------Rs. in million------------------
Investment A 100 2 102
Investment B 150 3 153
Investment A was designated as measured at fair value through profit or loss whereas investment B
was irrevocably elected at initial recognition as measured at fair value through other comprehensive
income.
In October 2017, KL earned dividend of Rs. 12 million and Rs. 9 million on investment A and B
respectively.
20% of investment A and 30% of investment B were sold for Rs. 23 million and Rs. 50 million
respectively in November 2017. Transaction cost was paid at 2% on these sale transactions.
428
As on 31 December 2017, fair values of the remaining investments are given below:
Fair value Transaction cost on Net amount

disposal
-----------------Rs. in million-------------
Investment A 105 2.1 102.9
Investment B 130 2.6 127.4
Required:
a) Prepare all necessary journal entries for the year ended 31-12-2017.
b) Prepare the extracts relevant to the above transaction from KL’s statements of financial position and
comprehensive income for the year ended 31 December 2017, in accordance with the IFRSs.
(Comparative figures and notes to the financial statements are not required)
429
Answer 1:
a) Journal entries:
Date Description Debit Credit

1-May-2012: Investment 6,000,000
Cash/bank 6,000,000 (investment
is not held for trading)
31-12-2012: Investment 500,000
Reserves (OCI) 500,000
FV = 20,000 x 13.00 x 25 =
6,500,000
[exchange gain or loss will be recognized in the same place where the fair value gain or loss will be
recognized]
31-3-2013: Cash 795,000
Dividend income 795,000
(20,000 x 10 x 15% x 26.5)
No entry of bonus shares is made by receiving company; only number of shares will increase i.e. 20,000
x 1.1 = 22,000 after bonus issue on 31-3-2013.
1-June-2013: Investment 1,816,000
P.L(gain) 1,816,000
22,000/4 x 3 = 16,500 x 18 x 28 = 8,316,000 Difference 1,816,000 (in P.L) because as Already carrying
amount = 6,500,000 a result of share exchange.
31-12-2013: Investment 918,225
Reserves (OCI) 918,225
(Fair value gain)
16,500 x 19.5 x 28.7 = 9,234,225
Already carrying amount = 8,316,000
Difference ( FV gain) 918,225
b)
Omega Limited
Extracts from statement of comprehensive income
Rupees
2013 2012
Profit or loss
Dividend received from AWL (20,000 x 10 x 15% x 26.5) 795,000 -
Gain on exchange of shares 1,816,000 -
FV gain/(loss) on investment 918,225 500,000
c)
Omega Limited
Extracts from Statement of financial position
As on 31-12-2013
2013 2012
Non-current assets:
Investment in shares 9,234,225 6,500,000
Equity:
Share capital - -
Retained earnings - -
Fair Value reserves 1,418,225 500,000
(500,000+918,225)
430
Answer-2:
(a) Journal entries: “Rs. in million”
(i) Investment Property
1-5-2017: Advance 26
Bank (2.6 x 10% x 100) 26
1-7-2017: Investment Property (bal) 271.7
Bank (2.6 x 70% x 105) 191.1
Advance 26
Payable (2.6 x 20% x 105) 54.6
[All gains or loss up to the date of transfer of risks and rewards are not separately identified (means
adjusted from cost of relevant assets)]
1-8-2017: Payable 54.6
Exchange loss (bal) 1.56
Bank (2.6 x 20% x 108) 56.16
1-9-2017: Bank (0.24 x 110) 26.4
Unearned rental income 26.4
31-12-2017: Unearned rental income 8.8
Rental income(26.4/12 x 4) 8.8
As on 31-12-2017 closing balance of unearned rental income will be (26.4 – 8.8) = 17.6 [as it is neither
a payable nor receivable; only an obligation to provide services in future (a non-monetary item)
therefore no need of any remeasurement on closing date].
31-12-2017: Investment property 18.3
P.L (other income) 18.3
FV (2.5 x 116) =290
Cost = 271.7
Gain = 18.3
There is no concept of depreciation of investment property, if held at fair value model.
(ii) Equity investments:
Date Descrption Debit Credit

1-05-2017: Investment A 100
Bank 100
(As classified as FVTPL therefore transaction costs are expensed out)
Expense 2
Bank 2
Investment B (150+3) 153
Bank 153
(As classified as FVTOCI, therefore transaction costs are capitalized)
1-10-2017: Bank (12+9) 21
Dividend income 21
Nov. 2017: a) Bank (23 x 98%) 22.54
Gain (P.L) 2.54
Investment A(100 x 20%) 20
b) Bank (50 x 98%) 49
Gain (OCI) 3.1
Investment B (153 x 30%) 45.9
(No recycling of gain or loss from OCI to P.L in case of equity investments even on disposal)
Fair value reserve (OCI) 3.1
31-12-2017: Investment A 25
Gain (P.L) 25
FV = 105
C.A (100 x 80%) = 80
Difference (Gain) = 25
Investment B 22.9
Gain (OCI) 22.9
C.A (153 x 70%) = 107.1
Difference (Gain) = 22.90
431
b)
Kangaroo Limited
Extracts of Statement of financial position As on 31 December 2017
Assets – Noncurrent assets Rs. in million
Investment property (W-1) 290.00
Investment (105+130) (W-2) 235.00
Liabilities – Current liabilities
Unearned rent [0.24 x 110 – 8.8] 17.60
Kangaroo Limited
Statement of comprehensive income
Profit or Loss Rs. in million
Exchange loss on 20% payment [2.6 x 20% x (105 - 108)] (1.56)
Increase in fair value of investment property (W-1) 18.30
Rent income (0.24 x 4 ÷ 12 x 110) 8.80
Transaction cost – investment-A (2.00)
Dividend income (12 + 9) 21.00
Realized gain on investment-A [23 x 0.98 – (100 x 20%)] 2.54
Gain – investment-A (W-2) 25.00

Unrealized gain- investment-B (W-2) 22.90
Realized gain on investment-B [50 x 0.98 – (153 x 30%)] 3.10
Workings:
W-1: Investment property Rs. in million
Advance payment (2.6 x 10% x 100) 26.00
Initial recognition (2.6 x 70% x 105) 191.10
(2.6 x 20% x 105) 54.60
Total cost 271.70
Fair value (2.5 x 116) 290.00
Gain (P.L) 18.30
W-2: Investments Investment A Investment B

-----------Rs. in million-------------
Purchase price 100.00 150.00
Transaction cost 3.00
Total cost 100.00 153.00
Cost of shares held at 31 Dec 2017 80.00 107.10
(100 x 80%) (153 x 70%)
Fair value – 31 Dec 2017 105.00 130.00
Gain (bal) 25.00 22.90
432
Question No 1 (ICAP Study text)
On 1 July 2016, Passila Ltd, issued 20,000 8% debentures at Rs. 97.50. The security is redeemable in five
years’ time. The interest on the debentures is payable bi-annually on 30 June and 31 December.
On 31 December 2016, the Company’s year-end date, the debentures were quoted on the Karachi Stock
Exchange for Rs. 96.00. The company accountant has suggested each of the following as possible valuation
basis for reporting the debentures liability on the statement of financial position as at 31 December 2016:
(i) Face value of the debentures
(ii) Face value of the debenture plus interest payment for five years.
(iii) Market value on the statement of financial position as at the year end.
Required
a) Determine the face value of the debentures and the proceeds accruing to the company.
b) Determine the amount and explain the nature of the differences between the face value and the market value
of the debentures on 1 July, 2016.
c) Distinguish between nominal and effective rate of interest.
d) Determine the nominal interest payable on the debentures for the year ended 31 December 2016.
e) State arguments for or against each of the suggested alternatives for reporting the debentures liability on the
statement of financial position as at 31 December 2016.
Question No 2 (Autumn 2019)

On 1 July 2018, Gypsum Limited purchased 5,000 debentures issued by Iron Limited at par value of Rs. 100
each. The transaction cost associated with the acquisition of the debentures was Rs. 24,000. The coupon interest
rate is 11% per annum payable annually on 30 June. On 1 July 2018, the effective interest rate was worked out
at 9.5% per annum whereas the market interest rate on similar debentures was 11% per annum.
As on 30 June 2019, the debentures were quoted on Pakistan Stock Exchange at Rs. 96 each.
Required:
Prepare journal entries for the year ended 30 June 2019 if the investment in debentures is subsequently measured
at:
(a) amortized cost (03)
(b) fair value through profit or loss (03)
(c) fair value through other comprehensive income (03)
Question No. 3 (Spring 2020)

Bilal has recently joined your organization. He has prepared a summary of classification and measurement
requirements of financial assets which will help him in handling the transactions related to the financial assets.
He has requested you to review the following summary:
Amortized cost FV through OCI FV through P/L
Business model Hold to collect and sell Hold to collect Hold to sell
Cash flows Solely payment of principal No condition No condition
and interest
Categories Debt and equity securities Debt securities Equity securities
Initial measurement Fair value plus transaction Fair value Fair value plus
cost transaction cost
Subsequent Amortized cost Fair value less transaction Fair value
measurement cost
Required:
Prepare the corrected summary in the light of IFRSs. (07)
Question No. 4 (Autumn 2020)

On 1 January 2019, Jannat Limited (JL) issued 1.6 million debentures of Rs. 100 each at a premium of Rs. 10
each. The transaction cost associated with the issuance of these debentures was Rs. 5.5 per debenture. The
coupon interest rate is 16% per annum payable annually on 31 December. Khushi Limited (KL) purchased 0.32
million of these debentures on 1 January 2019.
 On 1 January 2019, the approximate effective interest rates were 15% and 14% per annum for JL and
KL respectively. As on 31 December 2019, the debentures were quoted on Pakistan Stock Exchange at
Rs. 112 each.
 Debentures are subsequently measured at amortized cost by JL and fair value through profit or loss by
KL.
Required: Prepare journal entries in the books of JL and KL for the year ended 31 December 2019. (07)
433
Question No. 5 (Autumn 2021)
Rabbi Limited (RL) has made the following investments for the first time:
(a) RL purchased 1 million ordinary shares of Kholas Limited at the fair value of Rs. 23 per share. RL also
incurred transaction cost of Rs. 0.5 million. RL considers this investment as a strategic equity investment
and not held for trading.
(b) RL also purchased 1 million bonds of Barhi Limited having face value of Rs. 100 each at Rs. 95. These
bonds are redeemable in five years’ time. RL also incurred transaction cost of Rs. 0.8 million. RL intends
to hold the bonds till maturity in order to collect contractual cash flows.
Required:
In respect of each of the above investments, discuss the possible classification option(s) available to RL for
accounting purposes. Also compute the amount at which these investments would be initially recognised under
each option. (08)
Question no 6 (Spring 2022)

Draft financial statements of Determined Limited (DL) for the year ended 31 December 2021 show the
following amounts:
Rs. in '000
Total assets 43,500
Total liabilities 12,300
Net profit for the year 4,573
While reviewing the draft financial statements, following issues were identified:
(i) DL has classified investment in Jubilant Limited (JL) as an investment in associate and accounted for
using equity method despite having no significant influence over JL.
On 1 February 2021, DL purchased 40,000 shares of JL representing 15% shareholdings at Rs. 80 per
share. On 30 September 2021, JL announced interim cash dividend of Rs. 5 per share. JL reported net profit
of Rs. 2.4 million for the year ended 31 December 2021. The fair value of each share of JL was
Rs. 70 as on31 December 2021.
(ii) Transaction cost incurred on bonds issued by DL was recorded as an asset and being amortized over five
years. Further, half of interest to be paid on 30 June 2022 has been accrued.
On 1 July 2021, DL issued 6,000 bonds of Rs. 1,000 each at a discount of Rs. 50 each with maturity in five
years. The transaction cost associated with the issuance of these bonds was Rs. 20 per bond. The coupon
interest rate is 11% per annum payable annually on 30 June. The approximate effective interest rate was
13% per annum. Bonds are subsequently measured at amortized cost.
Required:
Determine the revised amounts of total assets, total liabilities and net profit, after incorporating the required
corrections. (07)
Question no 7 (Autumn 2022)

While reviewing the draft financial statements of Hexagon Industries (HI) for the year ended30 June 2022, following
mistakes were identified:
(i) Investment in bonds of Oval Limited (OL) was accounted for as a financial asset subsequently measured
at fair value through profit or loss instead of measuring the investment at amortised cost.
On 1 July 2021, HI purchased 1 million bonds of OL of Rs. 100 each at a discount of Rs. 5 each with
maturity in three years. Transaction cost of Rs. 2 million was also incurred on purchase of these bonds.
The coupon interest rate is 12% per annum payable annually on 30 June while the approximate
effective interest rate was 13.28% per annum. The fair value of each bond of OL was Rs. 99 on 30 June
2022.
(ii) HI has accounted for investment in shares of Kite Limited (KL) as a financial asset subsequently
measured at fair value through other comprehensive income instead of applying its policy of equity method
for investment in associates.
On 1 September 2021, HI purchased 500,000 shares (par value at Rs. 10 each) of KL representing 20%
shareholdings at Rs. 60 per share. On 30 April 2022, KL paid interim cash dividend of Rs. 3 per share. KL
reported net profit of Rs. 15 million for the year ended 30 June 2022. The fair value of each share of KL
was Rs. 67 on 30 June 2022.
Required:
Prepare correcting entries in the books of HI for the year ended 30 June 2022. (08)

Zinc Limited (ZL) has entered into the following transactions:
i) On 1 January 2022, ZL purchased 1.5 million bonds of Copper Limited having face value of Rs. 100 each
434
at a premium of Rs. 5 each with maturity of five years. The transaction cost associated with the purchase
of these bonds was Rs. 2 each. The coupon interest rate is 13% per annum payable annually on 31
December while the effective interest rate was approximately 11.1% per annum. The investment was
classified at fair value through other comprehensive income. At 31 December 2022, the bonds were
quoted at Rs. 103 each on stock exchange.
ii) On 1 July 2022, ZL issued 2 million 10% redeemable preference shares having face value of Rs. 100 each
at a discount of Rs. 10 each. The transaction cost associated with the issuance of these shares was Rs. 3
million. ZL measured preference shares at fair value through profit or loss. At 31 December 2022, the
shares were quoted at Rs. 80 each on stock exchange and ZL has estimated that 70% reduction in the fair
value is due to drop in ZL’s credit rating. No dividend was declared during 2022 in respect of these shares.
Required: Prepare journal entries in the books of ZL for the year ended 31 December 2022 in accordance
with IFRSs (08)

While reviewing the draft financial statements of Heavenly Limited (HL) for the year ended 31 December 2023, the
following mistakes were identified:
(i) HL has classified its investment in Fair Limited (FL) as an investment in associate and has applied equity
method, despite having no significant influence over FL.
On 1 May 2023, HL purchased 90,000 shares of FL having a par value of Rs. 50 each, representing 20%
shareholding, at Rs. 180 per share. On 31 October 2023, FL paid a 30% interim cash dividend. FL reported a
net profit of Rs. 24 million for the year ended 31 December 2023. The fair value of each share of FL
was Rs. 270 as on31 December 2023.
(ii) Bonds issued by HL have been treated as equity instruments.
On 1 April 2023, HL issued 40,000 bonds of Rs. 1,000 each at a premium of Rs. 300, redeemable in 8 years.
The transaction cost associated with the issuance of these bonds was Rs. 20 per bond, which was expensed
out. The coupon interest rate is 20% per annum, payable annually on 31 March. The approximate
effective interest rate was16% per annum. HL measures financial liabilities at amortized cost.
Required:
Prepare correcting entries in the books of HL for the year ended 31 December 2023. (08)
435
Answer 1
a. The face value of the debentures
Rs. 100 X 20,000 = Rs. 2,000,000
The amount accrued to the company as proceeds = Rs. 97.5 X 20,000 = Rs. 1,950,000
b. The difference between the face value and the market value of the debentures is Rs. 50,000. This is as a
result of discount allowed on the issue on the debentures. Discount on debentures attracts investors.
c. Nominal interest rate is the rate based specifically on the face value of the loan capital. In case of Passila
Ltd., the nominal interest rate on the debentures is 8% per annum on Rs. 2,000,000
The effective interest is the rate based on the market value. This is the actual value collected on issue
which can be at par, discount or premium. For Passila Ltd., the effective interest rate will be 8% of Rs.
1,950,000
d. The nominal interest payable
Rs. 2,000,000 X 8% X 6 months ÷ 12 months = Rs. 80,000
e.
(i) The face value of Rs. 2,000,000 will be the most appropriate valuation to be disclosed in the
Statement of financial position. The management may be interested in the quoted market value or the
proceeds, but for the sake of outside investors who would only be interested in the company having
good reputations devoid of trading losses, it is advisable that the face value be adopted.
(ii) Disclosing the debentures’ liability at face value plus interest payment for five years may seem proper
in the eyes of external investors and credit institutions, but principally, it would be wrong to credit
debentures’ account with both the face value and the interest payments. An interest payment on
debentures is a revenue item which is debited to the Profit and Loss Account.
(iii) Disclosing debentures’ liability at market value on the Statement of financial position will amount to
disclosure at replacement value. The market value should be disclosed.
Answer 2
(a) Gypsum Limited
General Journal
Debit Credit
Date Description ----- Rupees -----
1-Jul-18 Investment/Debenture – Amortized cost 500,000
Cash/Bank 500,000
1-Jul-18 Investment/Debenture – Amortized cost 24,000
Cash/Bank 24,000
30-Jun-19 Investment/Debenture – Amortized cost 49,780
Interest income (P&L) 524,000×9.5% 49,780
30-Jun-19 Bank 500,000×11% 55,000
Investment/Debenture – Amortized cost 55,000
(b) General Journal

Debit Credit
1-Jul-18 Investment/Debenture – FVTPL 500,000
Cash/Bank 5,000×100 500,000
1-Jul-18 Transaction cost (P&L) 24,000
Cash/Bank 24,000
30-Jun-19 Bank 500,000×11% 55,000
Interest income (P&L) 55,000
30-Jun-19 Fair value adj. (P&L) 500,000 480,000(5,000×96) 20,000
Investment/Debenture – FVTPL 20,000
(c) General Journal
Debit Credit
1-Jul-18 Investment/Debenture – FVTOCI 500,000
Cash/Bank 5,000×100 500,000
1-Jul-18 Investment/Debenture – FVTOCI 24,000
Cash/Bank 24,000
436
30-Jun-19 Investment/Debenture – FVTOCI 49,780
30-Jun-19 Bank 500,000×11% 55,000
Investment/Debenture – FVTOCI 55,000
Fair value loss (OCI) {500,000 + 24,000 +49,780 –
30-Jun-19 55,000} 38,780
480,000(5,000×96) 38,780
Investment/Debenture – FVTPL
Answer 3
Amortized Cost F.V through OCI F.V through P/L
Business model Hold to collect Hold to collect and sell Hold to sell
Cash flows Solely payment of principal Solely payment of principal No condition
and interest and interest
Categories Only debt securities Debt and equity securities Debt and equity securities
Initial Fair value plus Fair value plus Fair value
measurement transaction cost transaction cost
Subsequent Amortized cost Fair value Fair value
measurement
Answer 4
JL Books General Journal
Debit Credit
Date Description ----- Rs. in ‘000 -----
1-Jan-19 Cash/Bank 1,600×110 176,000
Debenture – amortized cost 176,000
1-Jan-19 Debenture – amortized cost 1,600×5.5 8,800

Cash/Bank 8,800
31-Dec-19 167,200(176,000–
Interest expense
8,800)×15% 25,080
Debenture – amortized cost (Bal.) 25,080
31-Dec-19 Debenture – amortized cost 25,600

Cash 160,000×16% 25,600
KL Books General Journal

Debit Credit
Date Description ----- Rs. in ‘000 -----
1-Jan-19 Investment/Debenture – FVTPL 35,200
Cash/Bank 320×110 35,200
31-Dec-19 Cash/Bank (320×100×16%) 5,120

31-Dec-19 Investment/Debenture –FVTPL 640

Gain on fair value adj.(P & L) 320×2(112 –110)
640
Answer 5
a. Option (i)
As this investment is not “held for trading”, the investment can be irrevocably elected to measure at fair value
through other comprehensive income. In this case, investment should initially be measured at fair value
plus transaction cost i.e. Rs. 23.5 million.
Option (ii)
If election under option (i) is not made, then it should be classified as measured at fair value through profit or
loss and will initially be measured at fair value i.e. Rs. 23 million.
437
b) Option (i)
Since the objective of business model is to hold the investment till maturity, the investment can be classified as
financial asset at amortized cost and will initially be measured at fair value plus transaction cost i.e. Rs. 95.8
million.
Option (ii)
The investment can be designated as financial asset at fair value through profit or loss if classifying at
amortized cost would have caused an accounting mismatch. In this option, the bonds will initially be measured
at fair value i.e. Rs. 95 million.
Answer 06
Total Total
Net Profit
Assets Liabilities
---------- Rs. in '000 ----------
As per Question
(i) 4,573 43,500 12,300
Dividend 40×5 200 200 -
Reversal of share of profit
(2,400/12×11×15%) (330) (330) -
Loss on fair value adjustment of shares
40×(80–70) (400) (400) -
(ii) Transaction cost (120/5×6/12) 12 (108) (120)
Additional finance cost (W-1) (33) - 33
Revised amounts 4,022 42,862 12,213
W-1: Additional finance cost
Rs. in '000
Correct cost (5,700–120)×13%×6/12 363
Wrongly charged 6,000×11%×6/12 (330)
33
Answer 07
Hexagon industries
Correcting Entries
i.
Debit Credit
S. No. Description
----- Rs. in '000 -----
(i) Investment / Financial asset 2,000
Transaction cost (P&L) 2,000
(ii) Investment / Financial asset 12,882(97,000×13.28%) –
12,000(100,000×12%) 882
Interest Income (P&L) 882
(iii) Gain on FV adj. (P&L) 1,000×4[99–95(100–5)] 4,000
Investment / Financial asset 4,000
ii.
Debit Credit
S. No. Description
----- Rs. in '000 -----
(i) Dividend income (P&L) 500×3 1,500
(ii) Investment / Financial asset 15,000×20%×10/12 2,500
Share of Profit (P&L) 2,500
(iii) Fair value reserve (OCI) 500 ×7(67–60) 3,500
Answer 08
i)
Debit Credit
Date Description
---- Rs. in million ---
1-Jan-22 Investment / Financial asset 1.5×(100+5) 157.50
438
Bank 157.50
1-Jan-22 Investment / Financial asset 1.5×2 3.00
Bank 3.00
31-Dec-22 Investment / Financial asset 17.82
Interest income (P&L) 160.5(157.5+3)×11.1% 17.82
31-Dec-22 Bank 150×13% 19.50
Investment / Financial asset 19.50
31-Dec-22 Fair value reserve (OCI) 154.5(1.5×103) –158.82(157.5+3+17.82–19.5) 4.32

Investment / Financial asset 4.32
ii)
Debit Credit
S. No. Description
1-Jul-22 Bank 2×(100–10) 180.00
Financial liability / Redeemable pref. shares 180.00
1-Jul-22 Transaction cost (P&L) 3.00
Bank 3.00
31-Dec-22 Interest expense (P&L) 200×10%×6/12 10.00
Financial liability 10.00
31-Dec-22 Financial liability 190(180+10)–160(80×2) 30.00
Fair value reserve (OCI) 30×70% 21.00
Gain on fair value adj. (P&L) bal. 9.00
439
Q. Debt Instrument at FV through P/L
H Limited has invested in a debt instrument, details of which are as follows: Face Value of the instrument
=100,000
Premium paid on the investment of the instrument =8000 Transaction cost paid on the investment of the
instrument=5800
Coupon rate of the Instrument =12%
Term of the instrument =3 years
H Limited has a policy to classify investment in debt instrument at Fair Value through
P/L. IRR of the Instrument =8.848%
Market value of the Instrument at the end of year 1 =107,000 The relevant entries for 1st year shall be prepared
as follows:
Answer Entries
Yr. 0 Financial Asset Transaction cost 108,000
Cash/Bank 5,800
113,800
Yr. 1 Cash/Bank 12,000
Interest income (100,000 x 12%)
12,000
Yr. 1 Loss (P/L) [108,000- 107,000] 1,000
Financial Asset 1,000
Financial instrument
Substance over form [IAS 32: 15]
Some financial instruments have the legal form of equity but are, in substance, liabilities. For example, an issuer
(company) has contractual obligation to deliver cash in case of redeemable preference shares.
Therefore, dividend on redeemable preference shares is treated as finance cost in profit or loss while dividend
on ordinary shares is presented in statement of changes in equity.
► Example:
Item Financial instrument or otherwise
Trade payable A financial liability (to be settled in cash)
Investment in loan notes of another entity A financial asset
Bank loan obtained A financial liability
Ordinary shares issued An equity instrument
Irredeemable preference shares issued An equity instrument
Unfavorable forward currency contract A financial liability
Redeemable preference shares issued A financial liability
Investment in redeemable preference shares A financial asset
Prepaid rent A non-financial asset
Current tax payable A non-financial liability
(statutory obligation)
Inventory A non-financial asset
Recognition [IFRS 9: 3.1.1]

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.
A financial asset might be an investment in debt or in equity. Example:
Identify the classification of following financial assets:
a) Investments in shares held for trading purposes.
b) Investment in equity shares. The entity has no intention of selling these shares in foreseeable future.
► ANSWER:
a) Fair value through profit or loss
b) Fair value through other comprehensive income
440
Example:
XYZ Limited makes a large bond issue to the market. Three companies (A Limited, B Limited and C Limited) each
buy identical Rs. 10,000,000 bonds. The following further information is available:
a) A Limited holds bonds for the purpose of collecting contractual cash flows to maturity.
b) B Limited holds bonds for the purpose of collecting contractual cash flows but sells them on the market
when prices are favorable.
c) C Limited buys bonds to trade in them.
Required:
How A Limited, B Limited and C Limited should classify their financial asset based on their respective business
model?
Answer:
a) Classification by A Limited: Amortized Cost
b) Classification by B Limited: Fair value through OCI
c) Classification by C Limited: Fair value through PL
Example:
Identify the classification of following financial assets?
a) Investment in interest bearing debt instruments. The instrument is redeemable in five years. The
intention is to collect cash flows (which are interest and principal amounts only).
b) Investment in interest bearing debt instruments. The instrument is redeemable in five years. The
intention is to collect cash flows (which are interest and principal amounts only). However, the entity
may sell the loan notes earlier if any good offer is received.
c) Investment in loan notes. The objective is to collect contractual cash flows which consist of interest,
changes in oil prices in next five years and principal amount at the end of year 5.
d) Investment in loan notes. The objective is to collect contractual cash flows which consist of interest,
changes in oil prices in next five years and principal amount at the end of year 5. However, the entity
may sell the loan notes earlier if any good offer is received.
Answer
a) Amortized Cost (Business model is to hold for collection of cash flows solely consisting of principal and
interest)
b) Fair value through OCI (Business model is to hold for collection of cash flows solely consisting of
principal and interest or to sell)
c) Fair value through PL (contractual cash flows also include payments other than principal and interest)
d) Fair value through PL (contractual cash flows also include payments other than principal and interest)
Example:
Identify the classification of following financial liabilities?
a) A 12% bank loan obtained by A Limited payable in 5 years’ time.
b) 8% loan notes issued by C Limited.
c) A short term currency swaps agreement entered into by B4-Bank Limited which is currently
unfavorable. These types of transactions are usual feature of B4-Bank Limited’s business.
d) Trade payable.
Answer:
a) Amortised Cost
b) Amortised Cost
c) Fair value
d) Amortised Cost
Example:
An equity investment is purchased for Rs. 30,000 plus 1% transaction costs on 1 January 2016. It is classified as at
fair value through other comprehensive income. At the end of the financial year (31 December 2016) the
441
investment is revalued to its fair value of Rs. 40,000. On 31 December 2017, the fair value had declined to Rs.
38,000.
Required: Prepare journal entries from acquisition to 31 December 20X7
Answer:
Date Particulars Debit Rs. Credit Rs.
1 Jan 20X6 Financial asset [Rs. 30,000 + 1%] 30,300
Bank 30,300
31 Dec 20X6 Financial asset [Rs. 40,000 – 30,300] 9,700
Gain (OCI & FV reserve) 9,700
31 Dec 20X7 Loss (OCI & FV reserve) 2,000
Financial asset [Rs. 38,000 – 40,000] 2,000
► Example:
Momin Limited (ML) purchased 5000 shares for Rs. 100 each on 1st January 2009. Transaction costs are 2%
(in both buying and selling). Fair values at different dates are as follows:
1 January 2009 Rs.100
31 December 2009 Rs.108
30 June 2010 Rs.111
31 December 2010 Rs.110
Dividend amounting Rs. 4 per share was declared on 30 June 2010. ML year-end is 31 December.
Required: Prepare necessary entries assuming ML classifies the shares under:

a) Fair Value Through PL
b) Fair Value Through OCI
Answer:
Part (a) Classified and measured at fair value through profit or loss
1 Jan 2009 Financial asset [5,000 shares x Rs. 100] 500,000
Profit or loss [Rs. 500,000 x 2%] 10,000
Bank 510,000
31 Dec 2009 Financial asset [5,000 x Rs. (108 – 100)] 40,000
Gain (profit or loss) 40,000
30 Jun 2010 Dividend receivable [5,000 x Rs. 4] 20,000
Dividend income (PL) 20,000
Gain (profit or loss) 10,000
Part (b) Classified and measured at fair value through other comprehensive income
1 Jan 2009 Financial asset [5,000 x Rs. 100 x 102%] 510,000
Bank 510,000
Gain (OCI) 30,000
30 Jun 2010 Dividend receivable [5,000 x Rs. 4] 20,000
Dividend income (PL) 20,000
Gain (OCI) 10,000
Example:
Jalal Limited invested in a debt instrument with a nominal value of Rs.10,000. The instrument is redeemable
in two years at a premium of Rs.2,100 and has been classified as ‘at amortised cost’. The coupon rate is 0%
while the effective interest rate is 10%.
442
Required: How will this be reported in the financial statements of Jalal Limited over the period to redemption?
► ANSWER:
Effective interest Cash @ 0% Closing balance
Opening 10%
Year balance [PL] [cash flows] [SFP]
Rs.
1 10,000 1,000 0 11,000
2 11,000 1,100 0 12,100
Example:
Bilal Limited invested in a debt instrument with a nominal value of Rs.10,000. The instrument is redeemable
in two years at a premium of Rs. 1,680 and has been classified as ‘at amortised cost’. The coupon rate is 2%
while the effective interest rate is 10%.
Required: How will this be reported in the financial statements of Bilal Limited over the period to redemption?
► ANSWER:
Effective Cash @ 0% Closing balance
Opening interest 10%
Rs.
1 10,000 1,000 (200) 10,800
2 10800 1080 (200) 11,680
► Example:
MK Limited has invested in a debt instrument, details of which are as follows:
Face Value Rs.
10,000
Premium paid on the investment Rs. 800
Transaction cost paid on the investment Rs. 200
Coupon rate of the Instrument 12%
Term of the instrument 4 years
MK Limited has a policy to classify investment in debt instruments at Amortized Cost. Effective rate of
instrument is approximately 8.92%.
Required: Calculate initial and subsequent measurement amounts of above investment and prepare the journal
entries
Initial recognition Rs.

Par value 10,000
Add: premium at 16% 800
Fair value 10,800
Add: Transaction costs 200
11,000
Opening Effective Cash @ 12% Closing balance
Year balance interest 8.92%
[PL] [cash flows] [SFP]
Rs.
1 11,000 981 (1,200) 10,781
2 10,781 962 (1,200) 10,543
3 10,543 940 (1,200) 10,283
4 10,283 917 (1,200) 10,000
Journal entries:
443
Acquisition Financial asset 11,000
Bank 11,000
Year 1 Financial asset 981
Interest income (PL) 981
Bank 1,200
Bank 1,200
Bank 1,200
Bank 11,200
Example:
Kaalaam Limited has invested in a debt instrument on 1.1.2021, details of which are as follow:
Face Value of the Instrument Rs. 10,000
Premium paid on the investment Rs. 1,245
Transaction cost paid on the investment Rs. 325
Coupon rate of the instrument 16%
Term of the instrument 4 years
IRR of the Instrument (Effective Rate) 10.95%
Kaalaam Limited has a policy to classify Investment in debt instruments at fair value through other
comprehensive income. It is redeemable after 4 years at face value.
Fair values of the instrument at each year end is as follows:
31.12.2021 Rs. 11,500
31.12.2022 Rs. 11,200
31.12.2023 Rs. 10,700
Required: Prepare journal entries for each of four years.
ANSWER:
Initial recognition Rs.
Par value 10,000
Add: premium 1,245
Fair value 11,245
Add: Transaction costs 325
Initial amount 11,570
Date Interest Income @ Interest @ Balance

10.95% 16%
1.1.2021 11,570
31.12.2021 1,267 1,600 11,237
31.12.2022 1,230 1,600 10,867
31.12.2023 1,190 1,600 10,457
31.12.2024 1,145 1,600 10,000

Rs. Rs.
Acquisition Financial asset 11,570
Bank 11,570
2021 Financial asset 1,267
Interest income (PL) 1,267
444
Bank 1,600
Financial asset 263
Gain (OCI) [11,500 – 11,237] 263

Bank 1,600
Financial asset 70
Gain (OCI) 70
Carrying Amount [11,500 + 1,230 –
1,600] = 11,130
Fair value: 11,200
Gain 70
Bank 1,600
Loss (OCI) 90
Financial asset 90
Carrying Amount [11,200 +1,190 –
1,600] = 10,790
Fair value 10,700
Loss (OCI) 90
Bank 1,600
Bank 10,000
Loss (OCI) 245
Financial asset 245
Carrying Amount [10,700 +1,145 – 1,600 – 10,000] = 10,790
Fair value 0
Loss (OCI) 245
(After that there is no net Gain/Loss in OCI)
► Example:
On 1 January 2021, Kashif Limited (KL) issued a deep discount debenture with a Rs. 100,000 nominal value. The
discount rate was 16% of nominal value, and the costs of issue were Rs. 4,000.
Interest of 5% on par value is payable annually in arrears. The debenture must be redeemed on 31 December 2025
(after 5 years) at a premium of Rs. 9,223. The effective interest rate is 12% per annum.
Required: Calculate the amounts to be reported in the financial statements of KL over the period to redemption?
Effective interest Cash @ 5% Closing balance
Opening 12%
2021 [100,000- 9,600 (5,000) 84,600

16,000-4,000]
80,000
2022 84,600 10,152 (5,000) 89,752
2023 89,752 10,770 (5,000) 95,522
2024 95,522 11,463 (5,000) 101,985
2025 101,985 12,238 (5,000) 109,223
445
Total 54,223 25,000
Example:
Adeel Limited (AL) regularly invests in assets that are measured at fair value through profit or loss. On January 1,
2018 AL issued 9% debentures at nominal value of Rs. 80,000 to finance a similar investment in assets. The
management has decided to classify these debentures to be measured at fair value through profit or loss in order to
avoid accounting mismatch.
The fair value of debentures was Rs. 88,000 on 31 December 2018, there was no change in own credit risk of AL in
this time period.
The fair value of debentures was Rs. 82,000 on 31 December 2019, and AL has estimated that it includes Rs.
4,000 due to change in own credit risk as AL’s credit rating was dropped during the year.
Required: Prepare journal entries.
ANSWER:
Rs. Rs.
1 Jan 2018 Bank 80,000
Debentures (financial liability) 80,000
31 Dec 2018 Interest expense [9% x Rs. 80,000] 7,200
Cash 7,200
31 Dec 2018 FV loss (Profit or loss) 8,000
Debentures (financial liability) 8,000
(88,000 – 80,000)
31 Dec 2019 Interest expense [9% x Rs. 80,000] 7,200
Cash 7,200
31 Dec 2019 Debentures (financial liability) 6,000
FV gain (Other comprehensive income) 4,000
FV gain (Profit or loss) 2,000
(88,000 – 82,000) = 6,000
446
Provision, Contingent Liabilities & Contingent Assets IAS-37
Theory
Provision is a liability of uncertain timing or amount.
Liability is a present obligation arising from past events, the settlement of which is expected to result in
an outflow of resources.
Examples of Provisions
 Provision for taxation
 Provision for gratuity
 Provision for dismantling
 Provision for litigation
 Provision for warranty etc
Difference between a provision and liability:
Provision Liability
Here timing or amount is uncertain (example of a Here timing or amount is not normally uncertain
court case by a debtor, warranty obligation etc.) (trade payable and accrual of expenses)
When to recognize a provision (means incorporation in the Financial statement) [Para 14]
1) There is a present obligation as a result of past events.
Obligation may be
Legal Constructive (Self Assumed Obligations)
That derives from a contract or legislation or That derives from entity’s action that create valid
operation of law (court decision) expectations among the interested parties that
entity will discharge those responsibilities
(Example below)
2) There is a probability of outflow of the resources
3) Although timing or amount is uncertain but a reliable estimate can be made
If all the above conditions are fulfilled, recognize a provision.
Example
Zee Ltd owned a road tanker that overturned in December 20X3 during a bad rain storm. The tanker spilled
its contents thus contaminating a local river. Zee ltd has never before contaminated a river. Zee Ltd has no
legal obligation to clean the river, has no published policies as to its views on the rehabilitation of the
environment and has not made any public statement that it will clean the river. It intends to clean-up the
river and has been able to calculate a reliable estimate of the cost thereof.
Required
Explain whether or not Zee Ltd should recognize a provision in its statement of financial position as at 31 st
December 20X3.
Solution:
The event is the accident and since it happened before year end it is a past event. There is, however, no
present obligation since:
 There is no legal requirement
 There is no constructive obligation to rehabilitate the river since neither:
 A public statement has been made and nor
 There is an established pattern of past practice since this was its first accident like this.
Although Zee Ltd intends to clean-up the river and even has a reliable estimate of the costs thereof, no
provision should be recognized because an obligating event is one that results in the entity having no
realistic alternative but to settle the obligation. Zee Ltd can still change its intension. If however, this
intension has been announced then there is a constructive obligation and a provision should be recognized.
Measurement of Provision [Para 36]
The amount recognized as a provision shall be the best estimate at the reporting date.
The best estimate of the amount of an obligation is the amount that an entity would pay to settle the liability.
It is sometimes difficult to determine the amount of the obligation or the timing of the settlement of the
obligation. When making these estimates, management should consider:
447
 Previous experience:
 Similar transaction:
 Possibly expert advice: and
 Events after the reporting period. (IAS-10) (will be discussed Later)
Previous experience may indicate a range of possible outcomes, for which it may be possible to estimate a
probability. This is referred to as the calculation of expected values using this theory of probabilities. The
application of this theory is best explained by way of example.
Under Para 39 of IAS-37.
Example:
Sahiwal Manufacturing has sold 10,000 units in the year. Sales accrued evenly over the year. It estimates
that for every 100 items sold, 20 will require small repairs at a cost of Rs. 100, 10 will require substantial
repairs at a cost of Rs. 400 each and 5 will require major repairs or replacement at a cost of Rs. 800 each.
On average the need for a repair becomes apparent 6 months after a sale.
What is the closing provision? A provision will be required for the sales in the second six months of the
year because the repairs necessary in respect of the sales in the first six months would have been completed
by the year end.
Sales accrue evenly, therefore, the sales in the second six months are 5,000 units (10,000 x 6/12)
Repair Number of units Cost per repair (Rs.) Total (Rs.)
Small 20% x 5,000 = 1,000 100 100,000
Substantial 10% x 5,000 = 500 400 200,000
Major 5% x 5,000 = 250 800 200,000
Provision 500,000
Future Events [Para 48]
When calculating the amount of the provision, expected future events should be taken into account when
there is 'sufficient objective evidence' available suggesting that the future event will occur.
Example: Future events
A company owns a number of nuclear plants. The company is presently obliged to dismantle one of these
nuclear plants in 3 years’ time.
The last nuclear plant dismantled by the company cost Rs. 1,000,000 to dismantle, but the company expects
to dismantle this nuclear plant, if using the same technology, at a slightly reduced cost of Rs. 800,000 due
to the increased experienced. There is, however, a chance that completely new technology may be available
at the time of dismantling which could lead to a further Rs. 200,000 cost saving.
Required:
Discuss the measurement of the provision.
Solution:
A provision should reflect expected future events where there is sufficient objective evidence that these
will occur. Since the company has had experience in dismantling plants, it is argued that the expected cost
savings through this experience is reasonably expected to occur. The cost savings expected as a result of
the possible introduction of completely new technology, being outside of the control of the company, should
not be taken into account, unless of course the company has sufficient objective evidence that this
technology will be available. The provision should be measured at Rs. 800,000.
Gains on disposals of Assets: [Para 51]
When an obligation involves the sale of an entity's assets and the sale thereof is expected to result in a gain,
this gain should not be included in the calculation of the provision since this would reduce the provision,
which would not be consider prudent.
Example:
New legislation means that U LTD must dismantle its nuclear plant in a year's time. The dismantling is
estimated to cost Rs. 300,000 but U Ltd also expects to earn income from the sale of scrap metal from plant
of Rs. 100,000. The effects of discounting are expected to be immaterial.
Required:
Process the required journal entry to raise the provision.
448
Solution: Gain on disposal of assets
Debit Credit
Nuclear plant 300,000
Provision for dismantling costs 300,000
Expected costs of dismantling (i.e. the Rs 100,000 expected Income is not offset against the expected costs)
Gain will be recognized when it will be earned at the time of sale of scrap metal. (As per IAS-16)
Decommissioning liabilities and similar provisions
A company may be required to ‘clean up’ a location where it has been working when production ceases.
This is often the case in industries where companies are only granted licenses to operate on condition that
they undertake to perform future clean-up operations.
Such industries include, oil and gas, mining and nuclear power.
For example, a company that operates an oil rig may have to repair the damage it has caused to the sea bed
once the oil has all been extracted.
The normal rules apply for the recognition of a provision: a company recognizes a provision only where it
has an obligation to rectify environmental damage as a result of a past event.
A company has an obligation to ‘clean-up’ a site if:
 it is required to do so by law (a legal obligation); or
 its actions have created a constructive obligation to do so.
A constructive obligation might exist if (for example) a company has actually promised to decontaminate
a site or if it has adopted environmentally friendly policies and has made the public aware of this.
Accounting for a provision for a decommissioning liability
IAS 16 Property, plant and equipment identifies the initial estimate of the costs of dismantling and removing
an item and restoring the site upon which it is located as part of the cost of an asset.
Future clean-up costs often occur many years in the future so any provision recognized is usually discounted
to its present value.
Illustration: Initial recognition of a provision for a decommissioning liability
Debit Credit
Non-current asset XXX
Provision XXX
The asset is depreciated over its useful life in the same way as other non-current assets.
The provision is remeasured at each reporting date. If there has been no change in the estimates (i.e. the
future cash cost, the timing of the expenditure and the discount rate) the provision will increase each year
because the payment of the cash becomes one year closer. This increase is described as being due to the
unwinding of the discount.
The amount due to the unwinding of the discount must be expensed as borrowing cost.
Future cash flows and discounting: [Para 45]
The possibility that the settlement of an obligation may occur far into the future has an effect on the value
of the obligation in current day terms. The effect that the passage of time has on the value of money is often
referred to as the 'time value of money'.
Imagine being asked whether you would prefer to receive Rs. 100 today or Rs. 100 years’ time. For many
reasons, (including the fact that you could utilize the Rs. 100 immediately), you would choose to receive it
immediately. This is because the value of Rs. 100 received in the future is less to you than the value of Rs.
100 received today. In other words, today's value (The present value) of a future cash flow is less than the
actual (absolute/future) amount of the cash flow. This is essentially the present value effect or the effect of
the time value of money.
If the difference between the actual (future) amount of the cash flow and the present value is material, then
the liability should be recorded at its present value. The present value is calculated using a discount rate.
As the period between the present and the date of the future cash flow gets shorter, so the difference between
the present value and the actual (future) value of the cash flow gets smaller. Therefore, each year the present
value of the future outflow must be recalculated with the result that the provision (the P.V) will gradually
be increased until the actual settlement date is reached, when the provision will finally be equal to the actual
amount of obligation.
449
The increase In the liability each year will be debited to finance charges, (As a second effect of Journal
entry) means:
Financial charge XXX
Provision XXX [Para 60]
Example:
A factory plant bought on 1sl January 20X1 for Rs. 450,000 cash including costs of installation. The entity
is obliged to decommission the plant after a period of 3 years.
Future decommissioning costs are expected to be Rs. 399,300.
The company uses a discount rate of 10%.
Required:
a) Draw up a P.V table showing the P.V of the future costs on January 20X1 and at the end of each
year together with the annual movements.
b) Journalize all related entries.
Solution
Closing liabilities Financial charges
01-01-20x1 (1+0.1) -3 x 399,300 300,000 -
31-12-20x1 (1+0.1)-2 x 399,300 330,000 30,000 (300,000- 330,000)
31-12-20x2 (1+0.1)-1 x 399,300 363,000 33,000 (330,000-363,000)
31-12-20x3 (1+0.1)0 x 399,300 399,300 36,300 (363,000 -
399,000)
99,300
Debit Credit
1 January 20X1
Plant: cost (A) 450,000
Bank 450,000
Purchase of plant for cash
Plant (decommissioning) (A) 300,000
Provision for decommissioning 300,000
Initial recognition of the decommissioning obligation
31 December 20X1
Finance charges (E) 30,000
Increase in liability as a result of unwinding of the discount
Depreciation (E) 250,000
Depreciation of plant (450,000 + 300,000) / 3 years
31 December 20X2
31 December 20X3
450
Bank 399,300
Payment in respect of decommissioning
A total of 849 300 is expensed over the 3 years: depreciation of 750,000 (250,000 for 3 years) and the
finance charges of 99 300. This is the total cost of using and decommissioning the asset: 450,000 (cost of
asset excluding cost of decommissioning) and 399 300 (cost of decommissioning). Also notice how the
cost (present value) of the decommissioning of the plant is debited to the plant’s cost account (IAS-16).
Plant A/c Accumulated Depreciation
Cash 450,000 depreciation
Provision 300,000 C/d 750,000 C/d 250,000 (750,000/3) 250,000
750,000 750,000 250,000 250,000
b/d 750,000 b/d 250,000
depreciation
C/d 750,000 C/d 500,000 (750,000/3) 250,000
750,000 750,000 500,000 500,000
b/d 750,000 b/d 500,000
depreciation
C/d 750,000 C/d 750,000 (750,000/3) 250,000
750,000 750,000 750,000 750,000
Provision
Plant 300,000
C/d 330,000 Finance Charges 30,000
330,000 330,000
b/d 330,000
Finance Charges 33,000
C/d 363,000
363,000 363,000
b/d 363,000
Bank 399,300
399,300 399,300
Obligations can be;

If Present Obligation If Present Obligation If Possible Obligation
(an obligation that may arise in
future)
  
Recognition criteria is met. but suppose no reliable estimate No provision
  
Recognize a provision. No provision instead disclose Only disclose the event under
the obligation in notes under the the heading contingent liabilities
heading of contingent liabilities.
451
unless possibility of outflow of
resources is remote.
Summary of the Provisions and the Contingent liabilities: From volume B
Present obligation and Possible or present obligation Possible obligation but remote
probability of the outflow of but is not probable that outflow chance of the outflow of
resources. of resources will occur. resources.
(Greater than 50%). (Less than 50% or equal to (Less than 5%).
50%).
Recognize the provision No provision No provision
Disclosure is required Only Disclosure (if Material) No Disclosure
Reimbursement: [Para 53]

Reimbursement means amount incurred is expected to be recovered.
It occurs when, for example, a retailer offers a guarantee to its customer, but where the manufacturer in turn
offers the retailer a counter-guarantee.
Expected reimbursement from the manufacturer (or other supplier) should:

 Only be recognized if it is virtually certain that the reimbursement will be received; and
 Should be recognized as a separate asset.
Scenario 1: There is a warranty agreement between manufacturer and customer:
In the instance where the retailer does not the offer a guarantee for faulty goods, but the manufacturer does,
faulty goods would be returned to the retailer who would then send the goods back to the manufacturer who
would then replace the goods. In this case, the retailer should not make a provision for any guarantee since
no guarantee was offered by the retailer; the retailer has no obligation, but is merely acting as an agent
between the customer and manufacturer. In such a case there is no question of any reimbursement as well.
Scenario 2: there is a warranty agreement between retailer and customer. In addition, retailer has a
counter warranty agreement with manufacturer:
A retailer may offer its customers a guarantee that is either partially or fully covered by the manufacturer.
In this case, since the retailer offers the guarantee, the retailer should make a provision for the total expected
costs of fulfilling the guarantee despite the fact that the retailer may then return the goods to the
manufacturer for a full or partial refund. There could be following three possibilities:
a) If reimbursement is virtually certain than recognize a separate receivable, which should not be set off
against the provision for the total expected costs of fulfilling the guarantee. Although the resultant asset
and liability should not be set off against each other, the income and expense may be in the Statement
of Comprehensive Income. [Para 54]
b) If reimbursement is probable, then disclose in notes to financial statements.
c) If reimbursement is only possible, then ignore the reimbursement.
Summary of Reimbursement: [From volume B]
Entity has no obligation for the Obligation remains with the Obligation remains with the
part of expense and there is no entity and it is Virtually certain entity and it is not Virtually
question of reimbursement. that amount will be reimbursed certain that amount will be
received
No provision is recognized. Separate provision and separate Provision is recognized; and
No reimbursement is reimbursement receivable is only disclosure of
recognized. recognized. reimbursement, if probable
otherwise ignore.
Example: Reimbursements
A retailer company sells goods to its customers that are guaranteed.
Required:
State whether the retailer must raise a provision for the cost of meeting future guarantee obligations:
A. The retailer company provides the guarantee.
B. The manufacturer provides the guarantee. The retailer is not liable in any way.
452
C. The manufacturer provides the guarantee but the retailer company provides a guarantee irrespective of
whether the manufacturer honors his guarantee.
D. The manufacturer and retailer company provides a joint guarantee and jointly & severally accept
responsibility for the guarantee.
E. The manufacturer and retailer company provide a joint guarantee, whereby they share the costs of
fulfilling the guarantee. The retailer is not liable for amounts that the manufacturer may fail to pay.
Solution:
A. The retailer has the obligation and must therefore raise the provision.
B. The manufacturer has the obligation. The retailer has no obligation. No provision should be raised.
C. The retailer must raise a provision for the full cost of the provision and must recognize a separate
reimbursement asset to the extent that it is virtually certain to receive the reimbursement.
D. The portion of the costs that the retailer is expected to pay is recognized as a provision, whereas the
portion of the costs that the manufacturer is expected to pay is disclosed as a contingent liability in case
the manufacturer does not honor his obligation.
E. The portion of the costs that the retailer is expected to pay is recognized as a provision. A contingent
liability is not recognized for the portion for the costs that the manufacturer is expected to pay since the
retailer has no obligation to pay this amount in the event that the manufacturer does not honor his
obligation.
 The amount Recognized as reimbursement shall not be more than the amount of provision.
Example: Reimbursement
A retailer company estimates that it will cost Rs. 100,000 to fulfill its obligation in respect of the guarantees
offered to its customers. The manufacturer, however, offers a guarantee to the retailer company.
Required:
Show all related journal entries assuming that
A. The entire Rs. 100,000 is virtually certain of being received from the manufacturer.
B. Amount of Rs. 120,000 is virtually certain of being received from the manufacturer.
Solution:
A Debit Credit
Warranty Expense 100,000
Provision for warranty 100,000
Provision for the cost of fulfilling guarantees
Receivable from supplier 100,000

Warranty expense 100,000
Provision for guarantee reimbursements
B
The journal entries will be same as in scenario A because the reimbursement asset is not allowed to be
measured at more than amount of the provision.
Contingent Asset:
“It is a possible asset that arises from past events and whose existence will be confirmed by the future
events not wholly within the control of entity (e.g. a possible court decision in our favour)”.
Recognition Criteria:
Where the flow of economic benefits from a Contingent asset is:
 Possible or remote then the Contingent assets is simply ignored.
 Probable, a Contingent asset would be disclosed (if material) and
 Virtually Certain The asset is no longer considered to be a Contingent asset and should therefore be
recognized.
Changes in Provisions: [Para 59]
Provision should be reviewed at each balance sheet date and adjust to reflect the best estimate.
453
Provision is estimated based on circumstances in existence at the time of making the provision. As
circumstances change, the amount of the provision must be reassessed and increased or decreased as
considered necessary. This adjustment is made prospectively (as a change in accounting estimate).
Example:
Cash purchases price (1st January 20x1) 450,000
Future decommissioning cost (the outflow expected on 31st December 20x3) as assessed
399,300
on 1st January 20x1
Discount rate is 10%
Depreciation straight line to nil residual values is 3 years
During 20x2, it was established that due to unforeseen prices increases, the expected future cost of
decommissioning will be Rs. 665,500.
Required:
Draw up a present value table showing the present value of the future costs on January 20x1 and the end
of each subsequent year together with the annual movement.
Show all related entries in T-account format.
Solution
Present value table:
Calculation of liability balance Closing Finance
Date
(present value) balance charges
-3
1 -1-20X1 399,300 (1+0.1) 300,000
31-12-20X1 399,300 (1+0.1)-2 330,000 30,000
1-1-20X2 665,500(1+0.1)-2 550,000
220,000
31-12-20X2 665,500(1+0.1)-1 605,000 55,000

31-12-20X3 665,500(1+0.1)-0 665,500
Total 60 500
Plant A/c Accumulated Depreciation

Cash 450,000 depreciation
Provision 300,000 C/d 750,000 C/d 250,000 (750,000/3) 250,000
750,000 750,000 250,000 250,000
b/d 750,000 b/d 250,000
Provision 220,000 depreciation
C/d 970,000 C/d 610,000 (970,000 – 250,000/2) 360,000
970,000 970,000 610,000 610,000
b/d 970,000 b/d 610,000
depreciation
C/d 970,000 C/d 970,000 (970,000 – 250,000/2) 360,000
970,000 970,000 970,000 970,000
Provision A/c
Plant 300,000
C/d 330,000 Finance Charges 30,000
330,000 330,000
b/d 330,000
Plant 220,000
C/d 605,000
454
605,000 605,000
b/d 605,000
Bank 665,500
665,500 665,500
Uses of Provisions: [Para 61]

A provision shall be used only for expenses for which it was created.
Other specific Issues:
Contracts:
Costs that have been contractually committed to but not yet incurred in the current year should not be
recognized as a liability since these are considered to be future costs e.g contract for future capital
expenditures which are only disclosed in notes. One exception to this rule is an onerous contract.
Onerous Contract:
“An onerous contract is one where the unavoidable costs of meeting the obligations under the contract
exceed the benefits expected to be derived from the contract”.
In this case, the unavoidable costs should be provided for. The unavoidable costs (as per IAS-37) are
the Lower of:
 The cost of fulfilling the contract and
 The compensation or penalties that would be incurred if the contract were to be cancelled. [Para 68]
Example: Onerous Contract
Sillium Ltd entered into a contract to perform certain services.
 The total contract price is Rs. 80,000
 The estimated costs of fulfilling these contractual obligations have been recently reassessed to be Rs.
140,000. No work has yet been done
 A penalty of Rs. 30,000 is payable if the contract is to be cancelled.
Required:
Process the required journal entry.
Solution:
Contract cost 30,000
Provision for Onerous contract 30,000
Minimum cost related to an onerous contract: the cost to exist is Rs. 30,000
Whereas the expected loss is Rs. 60,000 (140,000 – 80,000)
Future Operating Losses: [Para 63]
A provision shall not be recognized for future operating losses.
A company may forecast that it will make a substantial operating loss in the next year or years. Provision
cannot be made for future operating losses because they arise from future events and not past events.
Important Consideration:
The past event must:
 Exist independent of the entity’s future actions, i.e. if the company closed down today, would the
obligation still exist: and
 Always include another party (3rd party) besides the entity. The standard does, however, state that
this other party does not need to be known. (i.e. it could be the public at large). For example, goods
sold on warranty to several customers.
This means that a decision made at a board meeting would not lead to a present obligation because this
event does not involve a third party and is not separate from the entity’s future actions (its future actions
could be changed if the board later decides to change its mind). If, however it is communicated then a
provision may be recognized.
Disclosures:
Provision: For each class of provision; disclose the followings:
455
 Opening balance
 Additions due to change in estimates
 Provisions used
 Additions due to passage of time
 Unused amount reversed
 Closing balance
In addition, for each significant provision, following shall be disclose in notes to financial statements
1) Brief description of nature
2) Indication of uncertainties
3) Possibility of any reimbursement (If any).
Contingent Liabilities: For each class of contingent liability:
 A brief description of nature
 Estimate of financial effect
 Indication of uncertainties
 Probability of reimbursement (if any)
Contingent Asset: Where contingent asset is to be disclosed, the following information is to be provided:
 A brief description of the nature of contingent asset
 An estimate of financial effect.
Restructuring Provisions: [Para 72,80 & 81]
Restructuring is defined in IAS-37 as:
 A program that is planned and controlled by management: and
 Materially changes either:
- The scope of a business undertaken by an entity: or
- The manner in which that business is conducted.
Restructuring occurs when for example, a line of business is sold (e.g. Nestle sells a factory) or there is a
change in the management structure. In both cases, there will be a variety of costs involved: for example,
retrenchment (termination benefits) packages will probably need to be paid out and in the case of the sale
of the factory, there may be costs incurred in the removal of certain machinery.
The same definition and recognition criteria must be met before making a provision for the costs of
restructuring although IAS-37 provides further criteria to assist in determining whether the definition and
recognition criteria have been met. These extra criteria are:
(i) There must be a detailed formal plan that identifies at least the following:
- The business or part of the business affected:
- The principal location affected:
- The location, function and approximate number of employees who will be compensated for
terminating their services;
- The expenditure that will be undertaken;
- When the plan will be implemented; and
(ii) The entity must have raised valid expectations in those affected before the end of the reporting period
that it carries out restructuring, by either having:
- Started to implement the plan; or
- Announced its main features to those affected by it.
Costs of restructuring a business should provide for costs for only those costs that are directly associated
with the restructuring, being:
 Those that are necessary; and
 Not associated with the ongoing activities of the entity (future operating costs are not part of the provision,
for example; retaining and relocation costs for continuing staff, investment in new systems, marketing
etc.)
Example: Restructuring Cost
A few days before year end, D Ltd announced its intention to close its shoe factory within six months of
year end. There is a detailed formal plan that lists, amongst other things, the expected cost of closure:
456
 Retrenchment packages (means termination benefits) costs Rs. 1,000,000
 Retraining the staff members who will be relocated to other factories Rs. 500,000
 Loss on sale of factory assets Rs. 100,000
Required:
Process the journal entry.
Solution:
Restructuring costs 1,000,000
Provision for restructuring costs. 1,000,000
Contingent Liability is a
1. Possible obligation from the past events, whose existence will be confirmed only by the occurrence or
nonoccurrence of one or more uncertain future events.
2. Present obligation from the past events that is not recognized because the recognition criteria are not
met.
Example of contingent liability:
At the year-end Omnicorn is defending itself in a court case. If Omnicorn loses, then it will have to pay out
Rs 3 million in fines and court fees. If they win then they will not have to pay anything. Their lawyers have
advised them that the verdict could go either way.
The Rs 3 million fine is a possible obligation arising out from the past event (otherwise they would not have
been in court at the yearend). But the obligation will only be confirmed by the verdict of the court. The
jury’s verdict is beyond the control of Omnicorn.
Omnicorn will not recognize the Rs 3 million. Instead it will disclose the detail of court case and the
amounts involved in the “Notes to the Financial Statements”
For example, in notes a disclosure of contingent liability will look like as follows:
“Company is defending a court case. In the opinion of the lawyer its outcome is uncertain because it is
dependent on court verdict. Therefore, a provision has not been recognized. If the company losses the case,
it may have to pay approximately Rs 3 million in fines.” There is no possibility of any reimbursement.
457
Events after the Reporting Period (IAS-10)
Some legal requirements in Pakistan relating to this topic
1. Every company in Pakistan is required to conduct an AGM of its shareholders within a period of
120 days following the close of its financial year.
2. One agenda item of AGM is to discuss and approve the financial statements.
3. At least 21 days before AGM a notice of AGM along with a signed copy of financial statements
should be dispatched to shareholders.
Overview:
Although one might assume that events that occur after the current year end should not be taken into account
in the current year’s financial statements, this is not always the case.
Events after the reporting period are defined in IAS-10 are:
 Those events, both favorable or unfavorable,
 That occurs between the end of the reporting period and the date when the financial statements are
authorized for issue.
Events after the Reporting Period
Adjusting Events Non-Adjusting Events

Assume that an entity has a December year end and that the financial statements for 20x1 were completed
and ready for authorization on 25th March 20x2. In this case, the period 1st January 20x2 to 25th March
20x2, is the post-reporting date period’, and events taking place during this period need to be carefully
analyzed in terms of this standard into one of two categories:
 Adjusting events and
 Non-adjusting events.
Definition
Events after the reporting period are those events, Favourable and unfavorable, that occur between the end
of the reporting period and the date when the financial statements are authorised for issue.
Two types of events can be defined as:
a) Those that provide evidence of conditions that existed at the end of the reporting period (adjusting
events after the reporting period); and
b) Those that are indicative of conditions that arose after the reporting period (non--adjusting events
after the reporting period).
Date of authorization
IAS 10 explains that the process involved in authorizing the financial statements for issue will vary
depending upon the management structure, statutory requirements and procedures followed in preparing
and finalizing the financial statements.
In Pakistan, the financial statements must be approved by the board of directors of the company and signed
on behalf of the board of directors by the chief executive and at least one director of the company, and in
case of a listed company also by the chief financial officer. The date of approval by members in annual
general meeting is not the date of authorisation.
Events after the reporting period include all events up to the date when the financial statements are
authorized for issue, even if those events occur after the public announcement of profit or of other
selected financial information.
Examples
The management of an entity completes draft financial statements for the year to 30 June 20X2 on 31
August 20X2. On 18 September 20X2, the board of directors reviews the financial statements and
authorizes them for issue. The entity announces its profit and selected ‘other financial information’ on 19
September 20X2. The financial statements are made available to shareholders and others on 1 October
458
20X2. The shareholders approve the financial statements at their annual meeting on 24 October 20X2 and
the approved financial statements are then filed with SECP/registrar on 20 November 20X2.
Required
What is date of authorization for issue of financial statements?
Answer
The financial statements are authorised for issue on 18 September 20X2 (date of board of directors
authorisation for issue).
Examples
1. Statement of financial position date is 30-6-2014. As on reporting date there is stock costing Rs 75,000.
On July 5th, 2014 stock is damaged due to rains because of which it is sold for Rs 5,000 on 10 th July,
2014.
Ans. This loss in value of stock is a non-adjusting event because the condition of loss do not exist at the
reporting date. It should however be disclosed in notes if considered material.
2. Statement of financial position date is 30-6-2014. Suppose stock costing Rs 100,000 was damaged on
June 25th, 2014. It is sold on 8th July, 2014 for Rs 20,000.
Ans. Condition of loss existed at the reporting date, therefore it is an adjusting event. Loss of Rs 80,000
should be recorded at reporting date by measuring the stock at 20,000.
3. On 20th June, 2014 factory of a debtor is destroyed by fire. On 20th July 2014, court declared the
customer insolvent and he is not able to pay anything against his debts. As on reporting date, Rs 5
million was receivable.
Ans. Condition of loss existed at reporting date therefore it is an adjusting event. Loss of Rs 5 million
should be provided in the financial statements for the year ended 30th June, 2014.
4. Example of discovery of fraud after the reporting date which existed at the reporting date.
Adjusting Events:
Adjusting events are defined in IAS-10 as:
Those that provide evidence of conditions that existed at the end of the reporting period. Adjusting events
are taken into account (adjusted for) when preparing the current year’s financial statements.
Example: Events after the Reporting Date
A debtor that owed New-year Limited Rs. 100,000 at 31st December 20x2.
 Had his factory destroyed in a fire and as a result, filed for insolvency:
 A letter from the debtor’s lawyers to state that they will probably pay 30% of the balance was received
in February 20x3
 The financial statements are not yet authorized for issues
 The fire occurred during December 20x2
Required:
Explain whether the above event should be adjusted for or not in the financial statements of New-year
limited as at 31st December 20x2. If the event is adjusting provide the journal entries.
Solution:
The event that resulted in the debtor to become insolvent was the fire, which happened before year end.
This is therefore an adjusting event. The adjustment would be as follows:
Bad Debts 70,000
Expected loss on debtor: (100,000 x 70%)
Please note that the event need to not to be unfavorable to be an adjusting event, For example, a debtor that
was put into provisional liquidation at year end may reverse the liquidation proceedings during the post-
reporting date period, in which case it may be considered appropriate to exclude the value of this account
from the estimated doubtful debts and thus increase the value of the debtors at year end.
Non-Adjusting Events after the Reporting Period:
Non-adjusting events after the reporting period are defined in IAS-– 10 as:
 Those that are indicative of the condition that arose after the reporting period.
459
 Non-adjusting events are not taken into account (adjusted for) when preparing the current year’s
financial statements, but may need to be disclosed if considered material.
 If the event gives information about a condition that only developed after year end, then this event has
obviously no connection with the financial statements that are being finalized. If, however, the event is
so material that non-disclosure thereof would affect the user’s understanding of the financial statements,
then, although the event is a non-adjusting one, disclosure of the event may be appropriated.
Example: Event after the Reporting Period
A debtor that owed New year Limited Rs. 100,000 31st December 20x2 (year-end) had their factory
destroyed in a fire.
 As a result, this debtor filed for insolvency and will probably pay 30% of the balance owing. A letter
from the debtor’s lawyers to this effect was received by New Year Limited in February 20x3
 The financial statements are not yet authorized for issue.
 The fired occurred during January 20x3
Required:
Explain whether the above event should be adjusted for or not in the financial statements of New year
Limited as at 31st December 20x2. If the event is adjusting provide the journal entries.
Solution:
The event that caused the debtor to go insolvent was the fire, which happened after year end. This is
therefore a non-adjusting event. Disclosure of this may be necessary if the amount is considered to be
material.
Dividends: [Para 12]
Dividends relating to the period under review that are declared during the post-reporting date period must
not be recognized (adjusted for) since they do not meet the criteria of a present obligation. They do not
reflect a present obligation because the obligation event is the declaration and where this declaration does
not occur before year end, it is not a past event. These must be disclosed in the notes to the financial
statements.
Going Concern Assumption: [Para 14] An entity will continue its business in the foreseeable future
(normally 12 months after the reporting date) and has neither the intention nor the necessity of liquidation
or cease trading.
i) If business is going concern than prepare the financial statements according to the requirements of
IFRS.
ii) If going concern assumption is no longer valid then financial statement shall be prepared on the basis
of market values and settlement values rather than according to relevant IFRS requirements.
The going concern assumption
A deterioration in operating results and financial position after the end of the reporting period may
indicate that the going concern presumption is no longer appropriate.
There are a large number of circumstances that could lead to going concern problems.
Example
Suppose government banned the products manufactured by the company after the reporting date but before
the date of authorization of financial statements.
It is a non-adjusting event according to the previous discussion. However, if a non-adjusting event affects
the going concern assumption of the entity, then it is treated as an adjusting event. Therefore, financial
statement should be prepared according to the market and settlement values on the reporting date.
This is one important exception to the normal rule that the financial statements reflect conditions as at the
end of the reporting period.
For example:
 The financial difficulty of a major customer leading to their inability to pay their debt to the agreed
schedule if at all.
 An event leading to a crucial non-current asset falling out of use. This might cause difficulties in
supplying customers and fulfilling contracts.
 Shortages of important supplies
 The emergence of a highly effective competitor.
460
Disclosure: [Para 17]
The following information should be disclosed:
 The Date that the Financial Statements Were Authorized for Issue;
 The Person or Persons who authorized the issue of the financial statements;
 For each material category of non-adjusting event the end of the reporting period a narrative description
of:
 The nature of the event; and
 The estimated financial effect or a statement that such an estimate is not possible
Example of Adjusting Events: [Para 9]
 Settlement of a court case after the reporting period that confirm that present obligation existed at the
reporting date.
 Sale of inventories after the reporting date may give evidence about NRV at the reporting date (if the
condition or price of stock has not changed between the reporting date and date of sale)
 Determining after the reporting date of cost of asset purchased or proceeds from sale before reporting
date.
 The discovery of fraud or error after the reporting date that shows that Financial Statement were
incorrect at the reporting date.
Example of Non-Adjusting Events: [Para 22]
 Destruction of plant by fire after the reporting date.
 Change in market value of shares after the reporting date.
 Commencement of major litigations after the reporting date.
 Acquisition or disposal of asset after the reporting date.
461
Self-Test Question
Q.1 The following information pertains to Skyline Limited (SL) for the financial year ended December 31,
2010:
(i) A customer who owed Rs. 1 million was declared bankrupt after his warehouse was destroyed by fire
on February 10, 2011. It is expected that the customer would be able to recover 50% of the loss from
the insurance company.
(ii) An employee of SL forged the signatures of directors and made cash withdrawals of Rs. 7.5 million
from the bank. Of these, Rs. 1.5 million were withdrawn before December 31, 2010. Investigations
revealed that an employee of the bank was also involved and therefore, under a settlement arrangement,
the bank paid 60% of the amount to SL on January 27, 2011.
(iii) SL has filed a claim against one of its vendors for supplying defective goods. SL’s legal consultant is
confident that damages of Rs. 1 million would be paid to SL. The supplier has already reimbursed the
actual cost of the defective goods.
(iv) A suit for infringement of patents, seeking damages of Rs. 2 million, was filed by a third party. SL’s
legal consultant is of the opinion that an unfavorable outcome is most likely. On the basis of past
experience, he has advised that there is 60% probability that the amount of damages would be Rs. 1
million and 40% likelihood that the amount would be Rs. 1.5 million.
Required:
Advice SL about the amount of provision that should be incorporated and the disclosures that are required
to be made in the financial statements for the year ended December 31, 2010. [QB# 10.8]
Q.2 Attock Technologies Limited (ATL) manufactures five hi-tech products, each on a different plant. It is in
the process of preparing its financial statements for the year ended June 30, 2010. As the CFO of the
company, the following matters are under your consideration:
(i) Inventory carried at Rs. 25 million on June 30, 2010 was sold for Rs. 15 million after it had been
damaged in a flood, in July 2010.
(ii) On July 5, 2010 one of ATL’s corporate customers declared bankruptcy. The liquidator announced
on August 25, 2010 that 20% of the debt would be paid on liquidation.
(iii) A new product introduced by a competitor on August 1, 2010 had caused a significant decline in
the market demand of one of ATL’s major products. As a result, ATL is considering a reduction in
price and a cut in production.
(iv) On August 18, 2010 the government announced a retrospective increase in the tax rate applicable
to the company.
(v) The directors of ATL declared a dividend of Rs. 3 per share on August 28, 2010.
Required:
State how the above events should be treated in ATL’s financial statements for the year ended June 30,
2010. You may assume that all the above events are material to the company. [QB# 10.10]
Q.3 The following information pertains to Qallat Industries Limited (QIL) for its financial year ended June 30,
2010:
(i) QIL sells all its products on one-year warranty which covers all types of defects. Previous history
indicates that 2% of the products contain major defects whereas 10% have minor defects. It is
estimated that if major defects were detected in all the products sold, repair cost of Rs. 150 million
would result. If minor defects were detected in all products sold, repair cost of Rs. 70 million would
result. Total sales for the year are amounted to Rs. 830 million.
(ii) On July 18, 2010, QIL was sued by an employee claiming damages for Rs. 6 million on account of
an injury caused to him due to alleged violation of safety regulations on the part of the company,
while he was working on the machine on June 15, 2010. Before filing the suit, he contacted the
management on June 29, 2010 and asked for compensation of Rs. 4 million which was turned down
by the management. The lawyer of the company anticipates that the court may award compensation
ranging between Rs. 1.5 million to Rs. 3 million. However, in his view the most probable amount
is Rs. 2 million.
462
(iii) On November 1, 2009 a new law was introduced requiring all factories to install specialized safety
equipment within four months. The Equipment costing Rs. 5.0 million was ordered on December
15, 2009 against 100% advance payment but the supplier delayed installation to July 31, 2010. On
August 5, 2010 the company received a notice from the authorities levying a penalty of Rs 0.4
million i.e.
Rs 0.1 million for each month during which the violation continued. QIL has lodged a claim for
recovery of the penalty from the supplier of the equipment.
Required:
Describe how each of the above issues should be dealt with in the financial statements for the year ended
June 30, 2010. Support your answer in the light of relevant International Accounting Standards and
quantify the effect where possible. [QB# 10.7]
Q.4 Akber Chemicals (Pvt.) Limited is engaged in the business of manufacture and sale of different type of
chemicals. The following transactions have not yet been incorporated in the financial statements for the
year ended June 30, 2008:
(i) On June 15, 2008, one of its tankers, carrying chemicals fell into a canal, thus polluting the water.
The company has never faced such a situation before. The company has neither any legal obligation
to clean the canal nor does it have any published environmental policy. In a meeting held on July.
26, 2008 the Board of Directors decided to clean the canal, which is estimated to cost Rs. 5.5
million.
(ii) During the second week of July 2008, a significant decline in the demand for company’s products
was observed which also led to a decrease in net realizable value of finished goods. It was estimated
that goods costing Rs. 25 million as at June 30, 2008 would only fetch Rs. 23 million.
(iii) On June 21, 2008, a customer lodged a claim of Rs. 2 million as a consignment dispatched on June
1, 2008 was not according to the agreed specifications. The company’s inspection team found that
this defect arose because of inferior quality of raw materials supplied by the vendor. On June 28,
2008, the company lodged a claim for damages of Rs. 5.0 million, with its vendor, which include
reimbursement of the cost of raw materials. The company anticipates that it will have to pay
compensation to its customer and would be able to recover 50% of the amount claimed from the
vendor.
Required:
Discuss how Akber Chemicals (Pvt.) Limited would deal with the above situations in its financial
statements for the year ended June 30, 2008. Explain your point of view with reference to the guidance
contained in the International Financial Reporting Standards. [QB# 10.6]
Q.5 Blossom Limited is a large distributor of fresh flowers. The company has large contracts to supply florists
and corporate event coordinators throughout the country. The financial director and his staff are in the
process of preparing the financial statements for the year ended 31 December 20X8.
The following events took place between the reporting date and the date of authorization for issue of the
financial statements:
a) It was discovered that a customer, Violet Florists, who owed Rs 100,000 at year-end was declared
insolvent on 15 January 20X9 after its premises burnt down over the previous weekend. The premises
were completely destroyed and were not insured.
b) Legal action was brought against Blossom Limited for delivering old flowers to an event coordinator
who needed them for a government function that hosted foreign heads of state on 23 December 20X8.
The claim is for Rs 10,000. Blossom Limited’s lawyers believe it is highly likely that Blossom Ltd
will have to pay Rs 10,000.
c) Flowers in stock often pass their sell-by date before they are sold and are left in the corner of the store
room. At the year-end stock count on 31 December, some old flowers were inadvertently included in
stock at their cost of Rs 5,000. They will never be sold by Blossom Limited.
d) There was a burglary at Blossom Limited’s premises on 2 January 20X9 and pesticide and insecticide
to the value of Rs 10,000 was stolen. Such items are included in consumable stores.
The financial statements are authorized for issue on 20 January 20X9.
Required:
463
Prepare the journal entries that are necessary to correct the financial statements of Blossom Limited to
ensure compliance with International Financial Reporting Standards. Provide reasons as to why a journal
entry is or is not prepared.
Q.6 Flyby night Limited is a delivery company that delivers packages between Durban and Johannesburg on an
overnight basis. During the past few years, the trucks have suffered a number of mechanical failures and an
increasing number of accidents. In order to reduce the cost of travelling by road, the company purchased
an aero plane at a cost of Rs 4 500,000. As a condition to its continued use, the aero plane requires a major
inspection every 10,000 flying hours. The aero plane had flown 4,000 hours since its last major inspection
on the date of purchase and has flown 273 hours since the date of purchase. Flyby night Limited has
estimated that the next major inspection is expected to cost Rs 500,000 (based on the aero plane’s previous
major inspection, which cost the seller Rs 420,000).
The following entry has been processed;
Major inspection(Asset) 500,000
Provision for major inspection (Liability) 500,000
Required:
Analyze and discuss the accounting treatment of the major inspection. Your analysis should include a
discussion of a liability, a provision and an asset.
Q.7 Batter Sea Shipping Limited is a South African shipping company that transports crude oil from Saudi
Arabia to South Africa. On 28 September 20X9 one of the company’s oil tankers was damaged in a violent
storm off St Lucia on the KwaZulu Natal coastline (South Africa) and started leaking oil.
Management contracted a specialist repair contractor to repair the damage temporarily at sea, in order to
prevent the oil from leaking further. The necessary repairs were carried out on 29 September 20X9 at a cost
of Rs 365 000, but not yet paid.
The tanker was then sailed to Durban harbor, South Africa, where the cost of repairing it was assessed to
be Rs 2 750 000. Management entered into a contract on 12 October 20X9 to repair the ship at the harbor
dry dock. The cost of the repairs would be financed by a loan from the bank.
The oil spill affected a 15 kilometer stretch of coastline and by 29 September 20X9 there had been a huge
outcry from the general public, as well as environmentalists who were concerned about the damage to an
area of such environmental significance. In light of this, the managing director made a public announcement
on 30 September 20X9, on television and in the newspapers, of the company’s intention to clean up the
entire area affected by the spill.
Clean up of tire environment would only commence once an expert team of environmentalists had assessed
the extent of the damage and the most effective method of removing the spilt oil. On 20 October 20X9
management engaged a team to perform this assessment. The assessment will be available before 31
October 20X9.
The company’s financial year end is 30 September and the financial statements are scheduled to be
approved on 15 November20X9.
Required:
(i) Discuss how the directors of Batter Sea Shipping Limited should account for and disclose in the
financial statements for the year ended 30 September 20X9 in accordance with the framework and IAS
37.
a) the repairs at sea
b) the repairs at the dry dock, and
c) the cost of cleaning up the environment
(ii) Discuss the disclosure requirements of provision in IAS-37.
Q.8 Leo Limited leases an industrial site close to a game reserve. The company recently obtained approval for
heavy plant and machinery to operate on the site for a period of five years. The approval is in terms of
464
license granted by the Minister of Environmental Affair approved the licensee because the main activity of
Leo Limited is the production of environmental friendly paper from recycled material
The plant and machinery was purchased on 1 October 20X2 for Rs 1,000,000. Installation costs of Rs 175
480 were incurred and paid over the months of October, November and December of 20X2. The plant and
machinery was in a condition necessary for it to be capable of operating in the manner intended by
management on 1 January 20x3
The plant and machinery has an estimated useful life of five years with no residual value. In terms of the
license, Leo Limited is obliged to dismantle the plant and machinery and restore the area at the end of its
useful life. Future decommissioning costs are expected to be Rs 120,000. The company uses a discount rate
of 10% to calculate the present value of the decommissioning cost.
The financial accountant prepared the Following schedule reflecting the unwinding of the discounted
decommissioning costs:
Years to
Date. 10% discount factor PV
decommissioning date
01/01/X3 5 0.621 74,520
31/12/X3 4 0.683 81,960
31/12/X4 3 0.751 90,120
31/12/X5 2 0.826 99,120
31/12/X6 1 0.909 109,030
31/12/X7 0 1.000 120,000
Required:
a) Discuss the appropriate accounting treatment for the future decommissioning costs. Your answer
should refer to the accounting framework and to the relevant accounting standards.
b) Prepare all the journal entries relating to the above transactions that would have been processed in the
accounting records of Leo Limited for the year ended
c) 31- December 20X3
d) Prepare the relevant extracts from the income statement of Leo Limited for the year ended 31 December
20X4 and from the balance sheet at 31 December 20X4.
Comparatives are required.
Q.9 Company prepares its financial statements to 31 December each year. During the years ended 31 December
2000 and 31 December 2001, the following event occurred.
Company is involved in extracting minerals in a number of different countries. The process typically
involves some contamination of the site from which the minerals are extracted. Company makes good this
contamination only where legally required to do so by legislation passed in the relevant country.
The company has been extracting minerals in Copperland since January 1998 and expects its site to produce
output until 31 December 2005. On December2000, it came to the attention of the directors of company
that the government of Copperland was virtually certain to pass legislation requiring the making good of
mineral extraction sites. The legislation was duly passed on 15 March 2001. The directors of company
estimates that the cost of making good the site in Copperland will be Rs 2 million. This estimate is - the
actual cash expenditure that will be incurred on 31 December 2005.
Required
Compute the effect of the estimated cost of making good the site on the financial statements of company
for both of the years ended 31 December 2000 and 2001. Give full explanations of the figures you compute;
The annual discount rate to be used in any relevant calculations is 10%. The relevant discount rates at 10%
are:
 Year 4 at 10% = 0.683
 Year 5 at 10% = 0.621
Q.10The following events are under consideration for finalization of the financial statements of Galaxy Super
Stores Limited (GSSL) for the year ended 31 December 2013.
465
i. 15% of the goods sold by GSSL in December 2013 were returned in January 2014. It was
determined that the return was due to a manufacturing defect. Cost of removing the defect is
recoverable from the manufacturer.
ii. GSSL owns 150,000 shares of a listed company whose price on 31 December 2013 was Rs. 190
per share. In January 2014, after the government’s announcement of new trade policy, the share
price decreased by Rs. 40.
iii. A customer who owed Rs. 35 million as at 31 December 2013 was declared bankrupt on 10 January
2014.
iv. In January 2014, after the introduction of a new version of a mobile phone, GSSL reduced the
prices of the previous versions significantly.
v. In March 2013, GSSL issued a guarantee against a loan obtained by its subsidiary, RAY Limited
(RL) amounting to Rs. 40 million. In January 2014, the factory of RL was destroyed in a fire and
RL will not be able to repay the loan amount.
Required:
Describe how each of the above issues should be dealt with in the financial statements for the year ended
31 December 2013. Support your answer in the light of relevant International Financial Reporting
Standards.
Note:
 If the date of authorization of financial statements is not available; then assume financial statements are
not yet authorized.
 If the date of event because of which customer went bankrupt is not available; then assume that event
occurred before the reporting date.
 If the date of event because of which inventories are sold at below NRV after the reporting date is not
available; then assume that event occurred before the reporting date
466
Solutions
A.1
(I) Although the debt owing by the customer existed at reporting date, the inability of the customer to
pay did not exist at reporting date. This condition only arose in January 2011 after the fire.
Thus, this is a non-adjusting event. However, if it is material for the financial statements, the
following disclosure should be made.
 Nature of the event
 An estimate of its financial effect
(II) Amount withdrawn before year end i.e. Rs. 1.5 million is an adjusting event as it existed at year end
but discovered after year end. However, since 60% has been recovered subsequently, Rs. 0.6 million
would be provided.
Loss 1.5
Cash 1.5
Receivable 0.9
Loss 0.9
Further withdrawal of Rs. 6.0 million is a non-adjusting event as it occurred after year end. However,
if considered material following disclosures should be made:
 Nature of the event
 The gross amount of loss
 The amount recovered subsequently
(III) SL should not recognize the contingent gain until it is realized. However, if recovery of damages is
probable and material to the financial statements, SL should disclose the following facts in the
 Brief description of the nature of the contingent asset
 An estimate of the financial effect.
(IV) SL should make a provision of the expected amount i.e. Rs. 1.2 million (Rs. 1.0 million x 60% +
Rs. 1.5 million x 40%) because
 it is a present obligation as a result of past event;
 it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligations; and
 a reliable estimate can be made of the amount
In addition, SL should disclose the following in the notes to the financial statements:
 Brief nature of the event
 The possibility of other relevant amount
 An indication of the uncertainties relating to the amount or timing of any outflow.
A.2
(I) Since the event which caused the inventory to be sold at a loss occurred after the year end, it is non-
adjusting event. However, the effect of the event should be disclosed in the financial statements for
the year ended June 30, 2010.
(II) It is an adjusting event in accordance with the requirement of IAS-10. The debtor’s balance should
be written down by 80% amount.
(III) It is non-adjusting event as the subsequent reduction in price is due to an event, introduction of
competitive product, occurred after the reporting period.
(IV) Since this change was not enacted before the reporting date, it is a non-adjusting event. However, a
disclosure should be made for this change.
(V) Since the declaration was announced after the year-end and there was no obligation at year-end it is
a non-adjusting event. Details of the dividend declaration must, however, be disclosed.
A.3
(I) Provision must be made for estimated future claims by customers for goods already sold.
467
The expected value i.e. Rs. 10 million ([Rs. 150m x 2%] + [Rs. 70m x 10%]) is the best estimate of
the provision.
(II) A provision is to be made by QIL against a contingent liability as:
a. There is a present obligation (legal or constructive) as a result of a past event; i.e. accident
occurred on June 15, 2010.
b. It is probable that outflow of resources will be required to settle the obligation; and
c. A reliable estimate can be made of the amount of the obligation.
The amount of provision shall be Rs. 2.0 million i.e. the most probable amount as determined by
the lawyer.
(III) A provision of Rs 0.4 million is required in relation to penalty for March 1 to June 30, 2010 because
t the reporting date there is a present obligation in respect of a past event.
The reimbursement of penalty amount from the vendor shall be recognized when and only when it
is virtually certain that reimbursement will be received if the entity settles the obligation. The
reimbursement should be treated as a separate asset in the balance sheet. However, in profit and loss
statement, the expense relating to a provision may be netted off with the amount recognized as
recoverable, if any.
A.4
(I) The event is the accident and since it happened before year end it is a past event. There is, however,
no present obligation since:
 There is no legal requirement
 There is no constructive obligation to rehabilitate the river since neither:
 A public statement has been made and nor
 There is an established pattern of past practice since this was its first accident like this.
Although the company intends to clean-up the river and even has a reliable estimate of the costs
thereof, no provision should be recognized because an obligating event is one that results in the
entity having no realistic alternative but to settle the obligation. If the company can still change
its intension. If, however, this intension has been announced then there is a constructive obligation
and a provision should be recognized.
(II) As significant decline occurred after the balance sheet date i.e. these circumstances are not prevailing
at balance sheet date so non-adjusting and hence inventories are not written
down below cost but only disclosure is required:
Disclosure:
Nature of event: decrease in net realizable value stock due to decline in demand.
Amount: Rs. 2 million
(III) As per particular circumstances, it seems that company has to pay the compensation to the customer
so a provision of Rs. 2 million is to be created.
Claim expense 2,000,000
Provision for claim 2,000,000
Secondly, the likelihood of recovery is not virtually certain, therefore it should only be disclosed if
it is probable otherwise ignore.
A.5
a) Although the debt owing by the customers existed at reporting date, the inability of the customers to
pay did not exist at reporting date; this condition only arose in January 2009 after the fire. No journal
entries required.
b) The delivery of old flowers to a customer occurred before the reporting date. Thus the cause for the
court case and expected outflow of Rs 10,000 was already in existence at reporting date. A provision
must be raised for this outflow on 31-12-2008 as it an adjusting post reporting event.
Legal Claim Expense 10,000

Provision For Legal Claim 10,000
468
c) An error has been made in the financial statements; inventory has been overstated by Rs 5,000. The
error was made before reporting date, and thus existed at the reporting date. This is an adjusting post
reporting period event and it must be corrected
Cost of Sales 5,000
Inventory 5,000
d) The burglary and theft of consumable stores occurred after reporting date, thus the over-valuation of
consumable stores on hand was not in existence at reporting date. This is a non-adjusting post
reporting period event, which should be disclosed in notes if considered as material (which should be
disclosed in notes if considered as material). No journal entry is required.
A.6
Flyby Night
Is the future major inspection an asset?
The future major inspection does not, meet the definition of an asset:
 The company does not control a resource since the major inspection has not yet been performed;
 There is no past event since the major inspection is to be performed in the future;
 If there is no resource, there can be no expectation of an inflow of future economic benefits.
Is the future major inspection as a liability?
Similarly, a provision for the future major inspection should not be raised because there is no liability:
 Since the major inspection has not yet occurred, there is no past event;
 Therefore, there is no present obligation at year end (the major inspection could, in fact, be
completely avoided by selling or otherwise disposing off/ abandoning the airplane before the
inspection becomes necessary); and
 Since there is neither a past event nor present obligation, the outflow of future economic benefits
is not yet expected.
Assets – cost of acquisition and significant parts:
 The acquisition of an asset should be measured at the necessary cost incurred in bringing the asset
to a location and condition suitable for its intended use.
 10,000 – 4,000 = 6,000 flying hours available on the date of acquisition.
 Note that the previous major inspection performed should be recognized as a separate component
to the aeroplane asset (i.e. a significant part of) since it is significant in cost and has a different
useful life to the rest of the aeroplane parts.
Asset – subsequent measurement:
The major inspection, which is recognized as a separate significant part, is depreciated as the flying hours
are used up. Thus a ‘major inspection’ asset of Rs 252,000 (Rs 420,000 [cost of previous inspection] x 6000
hrs. / 10,000 hrs.) should be recognized on acquisition date. This will result in the cost of the ‘physical
aeroplane’ asset being Rs 4 248,000 (Rs 4 500,000 – Rs 252,000). The ‘major inspection’ asset will have
been depreciated by Rs 11 466 since purchase date (Rs 252,000 x 273 hours / 6,000 hours). Once the 6,000
flying hours that were available on purchase date are used up, and a new inspection is actually performed,
the previous major inspection cost asset will be derecognized and the new inspection costs will be
capitalised (when the next inspection is performed) and depreciated over the future flying hours.
Conclusion:
The journal must be reversed as follows:
DEBIT CREDIT
PARTICULARS
(Rs.) (Rs.)
Provision for Major Inspection (Liability) 500,000

Major Inspection (asset) 500,000
A.7
i)
469
a) Repairs at Sea
The cost of repairing the tanker at sea results in a ‘pure’ liability. Applying the definition and recognition
criteria above:
(i) the work was carried out by the special crew on 29 September 20X9, which is classified as a past
event since this date occurs before year end;
(ii) since there is a past event, being the repair carried out on 29 September 20X9, there is a present
legal obligation to pay for these repairs;
(iii) the future, payment of Rs 365 000 is an outflow of economic resources;
(iv) the amount will probably be paid since there is no evidence to the contrary; and
(v) The repair has already been invoiced at Rs 365 000 and is therefore a reliably measure.
A liability of Rs 365 000 should therefore be recognized in the statement of financial position at 30
September 20X9 and an expense of Rs 365 000 included in the statement of comprehensive income for the
year.
b) Repairs at the dry-dock
Batter Sea Shipping need to assess whether the cost of repairs to the tanker in the dry dock meet the
definition of a liability at 30 September 20X9.
The Framework defines a liability as:
(i) a present obligation of the entity
(ii) arising from a past event
(iii) The settlement of which is expected to result in an outflow of economic benefits.
As at 30 September 20X9 no work has been performed and therefore there is no past event and consequently
no present obligation has yet arisen. The amount of Rs 2 750 000 would, however, be disclosed in the
commitments note in the annual financial statements, as ‘capital expenditure not yet contracted for. Since
the definition has not been met, the estimated cost of Rs 2 750 000 to repair the tanker once docked may
not be recognized as a liability.
However, impairment test should be performed on tankers at the year end.
c) Cleanup of the environment
Introduction:
It is necessary to determine whether or not the costs of cleaning up the environment meet the definition of
a provision.
IAS 37 defines a provision as.
 a liability
 Of uncertain timing or amount.
The Framework defines a liability as:
• A present obligation of the entity
 arising from a past event
 The settlement of which is expected to result in an outflow of resources.
The entity is not legally obliged to rehabilitate the area but the managing director’s announcement in the
press on 30 September 20X9 of the company’s intention to clean up the entire area of the spill, indicates
the company’s acceptance of its responsibility to rehabilitate the area. This action has created a valid
expectation on the part of the public and environmentalists that the company will actually bear these costs.
After making a public announcement, it is unlikely that the company will not clean up the environment; as
such an action would have an adverse effect on their business reputation. Therefore, the announcement
before year-end is the past obligating event that has created a constructive obligation on behalf of the
company to clean up the area.
Past event:
There is a past event since the public statement that obligated the entity was made before year-end.
Expected outflow of future economic benefits:
470
There will be costs incurred from the specialists hired to advise on the extent/ most effective method of
cleaning up to the actual costs of cleaning up.
It is probable that there will be an outflow of resources as a constructive obligation exists and a team of
experts was engaged to assess the extent of the damage and the most effective method of cleaning up the
spill.
A reliable estimate of the cost of the cleanup can be made based on the past experience of the team of
environmentalists. Since this estimate will be available before the financial statements are authorized for
issue, a provision should be recognized in the financial statements of the company at 30 September 20X9.
In effect, the results of the environmental assessment on 31 October 20X9 will be an adjusting post reporting
period event.
1) IAS 37 requires disclosure of the following in respect of a provision
 the amount of the provision made during the period;
 a brief description of the nature of the obligation;
 the expected timing of any resulting outflows of economic benefits; and
 An indication of the uncertainties about the amount or timing of those outflows.
 Possibility of any reimbursement.
A.8
a) Appropriate Accounting Treatment for the cost of Future Decommissioning:
The issue is to determine whether to recognize a provision in respect of future decommissioning costs.
The licence granted allows the operation of the plant and machinery but includes a clause that requires
the entity to dismantle the plant and restore the area in the future. There is therefore a legal obligation
for the costs associated with the future dismantling and restoration.
A past event that leads to present obligation is called as obligating event. The obligating event is the
installation of plant and machinery in terms of this license and thus there is a legal obligation present
at the year end. Since there is a:
i. Past Obligating Event: The installation of plant that leads to present obligation because of license.
ii. There is a probability of cash outflow of resources; and
iii. A reliable estimate can be made (i.e 120,000 but it should be on the basis of present value.)
Therefore, provision should be recognized and must be capitalized as per IAS-16 to the cost of plant
and machinery (because this obligation gives the company access to an inflow of resources from the
related plant and machinery).
Note: Decommissioning and dismantling are two terms that are used frequently in the accounting world
for the de-installation of plant and machinery.
b) Journal Entries
1-10-2003
Plant 1,000,000
Cash 1,000,000
31-12-2002
Plant 175,480
Cash 175,480
1-1-2003
Plant 74,520
(At PV of Future cash outflow)
31-12-2003
Finance Cost 7,440
Provision for Decommissioning 7,440
(74,520-81,960)
31-12-2003
471
Depreciation 250,000
(1,175,480+74,520)÷5
c) Extracts from Income Statements
2004 2003
Finance Cost (8,160) (7,440)
Depreciation (250,000) (250,000)

As on 31-12-2004
2004 2003
Non-Current Assets
Plant 1,250,000 1,250,000
Acc Depreciation (500,000) (250,000)
750,000 1,000,000
Equity & Liability
Provision for Decommissioning 90,120 81,960
A.9
Company should recognize a provision for the estimated costs of making good the site because:
(i) It has a present obligation to incur the expenditure as a result of a past event. In this case the
obligating event occurred when it became virtually certain that the legislation would be passed.
Therefore, the obligation existed at 31 December 20X0, and
(ii) An outflow of resources is probable, and
(iii) It is possible to make a reliable estimate of the amount.
Effect on the financial statements
For the year ended 31 December 20X0:
 A provision of Rs 1,242,000 (2,000,000 x 0.621) should be reported as a liability.
 A non-current asset of Rs 1,242,000 is also recognized. The provision results in a corresponding
asset because the expenditure gives the company access to an inflow of resources. There is no effect
on profit or loss for the year.
For the year ended 31 December 20X1:
 Depreciation of Rs 240,400 (1,242,000 x 20%) is charged to profit or loss. The non-current asset
is depreciated over its remaining useful economic life of 5 years from 31 December 20X0 (the site
will cease to produce output on 31 December 20X5).
 Therefore, at 31 December 20X1 the net book value of the non-current asset will be Rs 993,600
(1,242,000 — 248,400) related to restoration cost.
 At 31 December 20X1 the provision will be Rs 1,360,000 (2.000,000 x 0.603).
 The increase in the provision of Rs 24,000 (1,366,000 -1,242,000) is recognized in profit or loss as
a finance cost this arises due to the unwinding of the discount.
A.10
In accordance with the International Financial Reporting Standards, the given events after the reporting
period would be dealt in the financial statements of GSSL for the year ended 31 December 2013 as
explained under:
a) It is an adjusting event as return of the goods provide evidence that goods were defective at the time of
sale. Therefore, the financial statement should be adjusted by reversing sales and account receivables
and reducing cost of sales by increasing inventory. However, since the cost of removing the defect is
recoverable from the manufacturer, there will be no change in the valuation of defective inventory
(means not at lower of cost and NRV). If it is probable that cost will be recovered, it should be disclosed.
472
b) It is a non-adjusting event as the change in fair value of investments does not normally relate to the
condition of the investments at the end of the reporting period. The change reflects circumstances that
have arisen subsequently. However, if decrease in the value of investments after the reporting period is
material, GSSL should disclose the decrease in the notes to financial statements for the year ended 31
December 2013.
c) It is an adjusting event as declaration of the customer as bankrupt within only 10 days of the yearend
suggests that a loss existed at the end of the reporting period. Therefore, the financial statements should
be adjusted by writing off the debtor’s amount of Rs. 35 million.
d) It is a non-adjusting event as introduction of a new version of mobile phone after the reporting period
is indicative of conditions that arose after the reporting period. Therefore, the price decrease will not
affect NRV of the old version mobile phones on the reporting date.
However, if decrease in the value of the mobile phone inventory after the reporting period is material, GSSL
should disclose the decrease in the financial statements for the year ended 31 December 2013.
e) It is a non-adjusting event as the event that caused inability to repay the loan by RL was the fire, which
happened after the reporting date.
However, if the guarantee amount is material, GSSL should disclose the amount in its financial statement
s for the year ended 31 December 2013.
473
Some other Examples:
Example 1:
A clothing retailer has a policy of taking back items of clothing that customers have purchased, and
refunding the purchase price, simply because the purchaser has changed his or her mind about the item.
The retailer does not have a legal obligation to do this under the consumer protection legislation that applies
in the jurisdiction in which it operates.
If this is the usual practice of a particular retailer, and the retailer’s policy is well known or has been made
known to customers, then a constructive obligation exists whenever a sale is made.
A provision would be recognized for sales returns subject to the other two criteria being satisfied.
Example 2:
Jhang Energy Company operates in a country where there is no environmental legislation. Its operations
cause pollution in this country.
Jhang Energy Company has a widely published policy in which it undertakes to clean up all contamination
that it causes and it has a record of honoring this published policy.
Analysis:
There is an obligating event. Jhang Energy Company has a constructive obligation which will lead to an
outflow of resources regardless of the future actions of the company. A provision would be recognized for
the clean-up subject to the other two criteria being satisfied.
An obligation always involves another party to whom the obligation is owed.
However, it is not necessary to know the identity of that party. It is perfectly possible to have an obligation
to the public at large or to a group of people.
Example 3:
Sheikhupura Household Appliances Corporation gives warranties at the time of sale to purchasers of its
products. Under the terms of the sale contract the company undertakes to make good any manufacturing
defects that become apparent within three years from the date of sale.
In the period it has sold 250,000 appliances and estimates that about 2% will prove faulty.
Analysis:
There is an obligating event being the sale of an item with the promise to repair it as necessary. The fact
that Sheikhupura Household Appliances Corporation does not know which of its customers will seek repairs
in the future is irrelevant to the existence of the obligation.
A provision would be recognized for the future repairs subject to the other two criteria being satisfied.
Example 4:
On 13 December Kasur Engineering decided to close a factory. The closure will lead to 100 redundancies
at a significant cost to the company.
At 31 December no news of this plan had been communicated to the workforce.
Analysis:
There is no obligating event. This will only come into existence when communication of the decision and
its consequences are communicated to the workforce.
Example 5:
Gujrat Prefabricators Limited (GPL) has won a contract to provide temporary accommodation for workers
involved in building a new airport. The contract involves the erection of accommodation blocks on a public
park and two years later the removal of the blocks and the reinstatement of the site.
The blocks have been built and it is now GPL’s year-end.
GPL estimates that the task of removing the blocks and reinstating the park to its present condition might
be complex, resulting in costs with a present value of Rs. 2,000,000, or straightforward, resulting in costs
with a present value of Rs. 1,300,000.
GPL estimates that there is a 60% chance of the job being straightforward.
Should a provision be recognized and if so at what value?
Analysis
Should a provision be recognized?
474
Is there a present obligation as a result of a past Yes. A present obligation arises due to the
event? existence of a contractual term and the building of
the block.
Is it probable that there will be an outflow of Yes. This is certain.
economic benefits to settle the obligation?
Can a reliable estimate be made of the amount of Yes. Data is available.
the obligation?
A provision should be recognized.
How should the provision be measured? (What is the best estimate of expenditure required to settle the
obligation?)
The most likely outcome is that the job will be straightforward. In this case the provision would be
recognized at Rs. 1,300,000.
Illustration:
Usual double entry on initial recognition of a provision
Debit Credit
Profit or loss (expense) XXX
Provision XXX
Using a provision (means payment against provision)
Provision XXX
Cash XXX
DE recognition of a provision that is no longer needed.
Provision XXX
Increase in a provision:
Provision XXX
Decrease in a provision:
Provision XXX
Profit or loss XXX
Example 6:
31 December 2014
A company was sued by a customer in the year ended 31 December 2014.
Legal advice is that the customer is virtually certain to win the case as several similar cases have already
been decided in the favour of the injured parties.
At 31 December 2014, the company’s lawyer was of the opinion that, the cost of the settlement would be
Rs 1,000,000.
A provision is recognized in the amount of Rs 1,000,000 as follows
Debit (Rs.) Credit (Rs.)
Expenses 1,000,000
Provision 1,000,000
31 December 2015
The claim has still not been settled. The lawyer now advises that the claim will probably be settled in the
customer’s favour at Rs 1,200,000.
The provision is increased to Rs 1,200,000 as follows.
Expenses 200,000
Provision 200,000
31 December 2016
The claim has still not been settled. The lawyer now believes that the claim will be settled at Rs 900,000.
The provision is reduced to Rs 900,000 as follows.
Provision 300,000
475
Expenses 300,000
The reduction in the provision increases profit in the year and the provision in the statement of financial
position is adjusted down to the revised estimate of Rs 900,000.
31 December 2017
The claim is settled for Rs 950,000. On settlement, the double entry in the ledger accounts will be:
Expenses 50,000
Provision 900,000
Cash 950,000
The charge against profit on settlement of the legal claim is Rs 50,000.
The provision no longer exists. The total amount charged against profit over the four years was the final
settlement figure of Rs 950,000 (1,000,000 + 200,000 – 300,000 + 50,000).
Example 7:
Nawabsha Clothing has a contract to buy 300 meters of silk from a supplier each month for Rs 3,000 per
meter.
Nawabsha Clothing had a contract with a Dubai retailer to sell each dress for Rs. 5,000 but this retailer has
fallen into liquidation and liquidator has cancelled the contract as they were entitled to do under one of its
clauses.
Nawabsha Clothing cannot sell the dresses to any other customer.
The contract to buy the silk can be cancelled with three months’ notice.
Analysis
The company can cancel the contract but must pay for the next three months’ deliveries:
Cost (300metres × Rs. 3,000 × 3 months) Rs. 2,700,000
A provision should be recognized for this amount immediately as the contract to buy becomes an onerous
contract.
Example 8:
A company is about to begin operating a coal mine. At the end of the reporting period, the mineshaft
(extraction equipment) has been prepared and all the necessary equipment has been constructed and is in
place, but no coal has yet been extracted.
Under local law, the company is obliged to rectify all damage to the site once the mining operation has been
completed (this is expected to be several years from now).
Management estimates that 20% of the eventual costs of performing this work will relate to removing the
equipment and various buildings and the remaining 80% will relate to restoring the damage caused by the
actual extraction of coal.
Analysis
The company has a legal obligation to rectify the environmental damage caused by the actual digging of
the mineshaft and construction of the site. An outflow of economic benefits is probable.
Therefore, the company should recognize a provision for the best estimate of removing the equipment and
rectifying other damage which has occurred to date.
This is expected to be about 20% of the total cost of restoring the site.
Because no coal has yet been extracted, the company has no obligation to rectify any damage caused by
mining. No provision can be recognized for this part of the expenditure (estimated at about 80% of the
total).
Example 9:
Shan Properties owns a series of high rise modern office blocks in several major cities in Pakistan.
The government introduces legislation that requires toughened safety glass to be fitted in all windows on
floors above the ground floor. The legislation only applies initially to new buildings but all buildings will
have to comply within 5 years.
Analysis:
There is no obligating event.
476
Even though Shan Properties will have to comply within 5 years it can avoid the future expenditure by its
future actions, for example by selling the buildings. There is no present obligation for that future
expenditure and no provision is recognized.
Future repairs to assets
Some assets need to be repaired or to have parts replaced at intervals during their lives.
For example, suppose that a furnace has a lining that has to be replaced every five years. If the lining is not
replaced, the furnace will break down.
AS 37 states that a provision cannot be recognized for the cost of future repairs or replacement parts
Instead of recognizing a provision, a company should capitalize expenditure incurred on replacement of an
asset and depreciate this cost over its useful life.
This is the period until the part needs to be replaced again. For example, the cost of replacing the furnace
lining should be capitalized, so that the furnace lining is a non-current asset; the cost should then be
depreciated over five years. (Note: IAS 16: Property, plant and equipment states that where an asset has
two or more parts with different useful lives, each part should be depreciated separately.)
Normal repair costs, however, are expenses that should be included in profit or loss as incurred
477
EXTRA PRACTICE QUESTION
Question No. 1
The following information pertains to Zamil Limited (ZL) for the year ended 31 December 2014:
(a) On 20 December 2014, ZL lodged a claim of Rs. 10 million with one of its vendors for supply of
inferior quality goods. On 1 February 2015, the vendor agreed to adjust Rs. 6 million against future
purchases of ZL. For the remaining claim amount, ZL took up the matter with vendor’s parent
company in UK and it is probable that 70% of the remaining claim would be recovered. (04)
(b) In February 2015, it was revealed that ZL’s cashier withdrew Rs. 10 million fraudulently from ZL’s
bank accounts. Of these, Rs. 7 million was withdrawn before 31 December 2014. ZL and its
insurance company reached an agreement for settlement of the claim at Rs. 8 million. (05)
(c) In October 2014, ZL decided to relocate its production unit from Sukkur to Karachi. In this respect,
a detailed plan was approved by the management and a formal public announcement was made on 1
December 2014. ZL has planned to complete the relocation by the end of June 2015. the related costs
have been estimated as under:
Rs. In million
Redundancy cost 3.58
Relocation of staff to Karachi 6.45
Staff training 0.86
Salary of existing operation manager (responsible to supervise the relocation) 1.20
6.09
(d) In December 2014, a citizen committee of the area met with the directors of the company and lodged
a complaint that ZL’s vehicles carrying chemicals are not fully equipped with the safety equipment
and resultantly creating serious threats to health of the residents. The management held a meeting in
this regard on 25 December 2014 and decided to install the safety equipment in its vehicles.
The estimated cost of installing the equipment is Rs. 25 million. The company has neither legal
obligation nor any published policy regarding installation of such safety equipment in its vehicles.
(04)
Required:
Discuss how each of the above issues should be dealt with in ZL’s financial statements for the year ended
31 December 2014. (Quantify effects where practicable) (Spring 2015, Q#3)
Question No. 2
Quality Garments Limited (QGL) is a manufacturer of readymade garments. During May 2014, a fire
broke out in one of its units which resulted in deaths and severe injuries to a number of workers.
At the time of finalisation of QGL’s financial statements for the year ended 30 June 2014, the following
issues pertaining to the fire are under consideration:
(i) Families of certain deceased workers have filed compensation claims amounting to Rs. 60 million.
A government agency has imposed a penalty of Rs. 35 million for negligence on the part of the
company. QGL’s lawyers anticipate that the company would have to pay Rs. 20 million and Rs. 10
million to settle the workers’ claims and the penalty respectively.
(ii) To maintain goodwill of the company, the Board of Directors is considering additional payments to
the families of the deceased workers amounting to Rs. 25 million.
(iii) Loss to fixed assets and inventories is estimated at Rs. 60 million. In this respect, a fire insurance
claim has been lodged. Due to certain policy clauses, QGL’s consultant anticipates that the claim
for Rs. 15 million may not be accepted. The matter is under negotiation with the insurance
company.
478
(iv) Due to closure of the unit for repair, QGL would not be able to meet sales orders of Rs. 50 million.
This will reduce QGL’s profitability for the half year ending 31 December 2014 by Rs. 10 million.
Required:
Discuss how the above issues should be dealt with in the financial statements of QGL for the year ended
30 June 2014. Support your answers in the context of relevant International Financial Reporting
Standards. (13)
(Autumn-14, Q.3)
Question No. 3
Terrific Industries Limited (TIL) is in the process of preparing its financial statements for the year ended
31 December 2012. As the Chief Financial Officer of the company, following matters are under your
consideration:
(i) The board of directors, in their meeting held on 26 December 2012, approved the payment of bonus
to sales team.
(ii) On 29 December 2012, the Federal government announced a policy whereby it allowed the import
of a product which is produced by TIL locally. As a result of competition, TEL anticipates that the
sale of this product would decline considerably.
(iii) On 5 January 2013, owing to liquidity constraints and poor recovery position, the directors
introduced a policy under which all customers having outstanding balances of more than 12 months
were allowed to settle their accounts by paying 80% of the outstanding amount within 30 days. This
policy resulted in the recovery of Rs. 40 million.
(iv) On 10 January 2013, a case pending before the Income Tax Appellate Tribunal was decided in favour
of the company. An amount of Rs. 60 million had been provided by the company in this regards.
(v) On 11 January 2013, the factory of a debtor, who owed an amount of Rs. 22 million at year end, was
destroyed in a fire. No recovery is expected from this debtor.
(vi) On 27 February 2013, TIL announced issue of 25% bonus shares for the year ended 31 December
2012.
Required:
State how the above matters should be treated in TIL’s financial statements for the year ended 31 December
2012. You may assume that all the above matters are material to the company. (12)
(Spring 13, Q.3)
Question No. 4
Walnut Limited (WL) is engaged in the business of import and distribution of electronic appliances. The
following events took place subsequent to the reporting period i.e. 31 December 2011:
(i) On 15 January 2012, one of WL’s competitors announced launching of an upgraded version of DVD
players. WL’s inventories include a large stock of existing version of DVD players which are valued
at Rs. 15 million. Because of the introduction of the upgraded version, the net realizable value of the
existing version in WL’s inventory at 31 December 2011 has reduced to Rs. 12.5 million.
(ii) On 20 December 2011, the board of directors decided to close down the division which imports and
sells mobile sets. This decision was made public on 29 December 2011. However, the business was
actually closed on 29 February 2012.
Net costs incurred in connection with the closure of this division were as follows:
Rs. In million
Redundancy costs 1.50
Staff training 0.15
Operating loss from 1 July 2011 to closure of division 0.80
Less: profit on sale of remaining mobile sets (0.50)
1.95
479
(iii) On 16 January 2012, LED TV sets valuing Rs. 3 million were stolen from a warehouse. These sets
were included in WL’s inventory as at 31 December 2011.
(iv) WL owns 9,000 shares of a listed company whose price as on 31 December 2011 was Rs. 22 per
share. During February 2012, the share price declined significantly after the government announced
a new legislation which would adversely affect the company’s operations. No provision in this regard
has been made in the draft financial statements.
(v) On 31 January 2012, a customer announced voluntary liquidation. On 31 December 2011, this
customer owed Rs. 1.5 million.
(vi) On 15 February 2012, WL announced final dividend for the year ended 31 December 2011
comprising 20% cash dividend and 10% bonus shares, for its ordinary shareholders.
Required:
Describe how each of the above transactions should be accounted for in the financial statements of Walnut
Limited for the year ended 31 December 2011. Support your answer in the light of relevant International
Financial Reporting Standards. (16)
(Spring 2012, Q.3)
Question No. 5
A factory worker of Industrial Chemicals Limited (ICL) was seriously injured on 10 June 2015 during a
production process. Subsequent developments in this matter are as follows:
(i) On 26 July 2015, the worker filed a claim for Rs. 25 million and alleged violation of safety measures
on the part of ICL. The lawyers of ICL anticipate that there is 60% probability that the court would
award Rs. 12 million and 40% likelihood that the amount would be Rs. 8 million.
(ii) According to the terms of the insurance policy, ICL filed a claim of Rs. 18 million which was
principally accepted by the insurance company on 5 august 2015 to the extent of Rs. 14 million. ICL
is negotiating with the insurance company and it is probable that ICL would recover a further sum
of Rs. 2 million.
(iii) On representation by the Labour Union, the management is considering to pay to the affected worker
an amount of Rs. 1.5 million, in addition to the compensation that may be awarded by the court.
Required:
Explain accounting treatment and the disclosure requirements in respect of the above matters in ICL’s
financial statements for the year ended 30 June 2015. Support your answer b referring to the relevant
guidelines contained in International Financial Reporting Standards. (12)
Question no 6
The following information pertains to Neptune Limited (NL) which is engaged in the manufacturing
of batteries and chemicals:
(a) In July 2015, NL was sued by a customer who claimed damages of Rs. 2 million on account of supply
of 2000 defective batteries in January 2015. The legal advisor at that time anticipated that it is probable
that the case would be decided in favour of the customer.
In March 2016, an independent team submitted a report to the Court showing that 80% of the batteries
were not faulty and there were minor defects in the remaining batteries. As a result, the company's
lawyer formed the view that it was highly unlikely that the Court would award compensation to the
customer.
On 5 July 2016, the Court decided the suit and ordered NL to replace all (20%) the faulty batteries
supplied to the customer. (05)
(b) In July 2014, NL entered into a two-year contract with a supplier of raw material. With effect from 1
November 2014, the supplier stopped the supply of raw material and demanded price increase of 30%.
Due to stoppage of supply, NL was unable to meet its sales orders. NL filed a suit claiming damages
of Rs. 40 million from the supplier on 15 June 2015. On 30 June 2015, NL’s lawyer anticipated that
NL would be awarded damages up to 60% of its claim. On 15 August 2016 the Court decided the case
in favour of NL and awarded damages of Rs. 30 million to the company. (05)
480
(c) On 30 April 2015, NL’s Board of Directors decided to dispose of the chemical division which was
incurring heavy losses. The decision was made public on 10 December 2015. NL commenced
negotiations with Venus Limited in March 2016. The sale was finally executed on 31 July 2016.
Costs incurred during the months of July and August 2016 in connection with the closure of the
division were as follows:
Rs. in
million
Redundancy cost 10.5
Staff training for relocation to battery segment 3.5
Operating loss from 1 July 2016 till closure of business 2.0
Required:
Discuss giving reasons how each of the above issues should be dealt with in the financial statements of NL
for the years ended 30 June 2015 and 2016 in accordance with the requirements of International Financial
Reporting Standards. (Statements are authorized for issue three months after the year-end) (05)
Question 7
Multan Petrochem Limited (MPL) operates in the oil extraction and refining business and is preparing its
draft financial statements for the year ended 31 December 2016. The following information has been
collected for the preparation of the provisions and contingencies notes.
(1) A new site was acquired on 1 January 2015 and is being used as the site for a new oil refinery. Initial
preparation work was undertaken at the site at the start of 2015 and the oil refinery was completed and
ready for use on 31 December 2015. The new refinery was expected to have a useful life of 25 years.
MPL has a well-publicized policy that it will reinstate any environmental damage caused by its
activities. The present value of the estimated cost of reinstating the environment is Rs. 1,300,000 for
damage caused during the initial preparation work. This amount is based on a discount rate of 8%.
(2) An explosion at one of MPL’s oil extraction plants on 1 July 2016 has led to a number of personal injury
claims being made by employees who were injured during the explosion. Five claims have been made
to date but if these claims are successful, it is likely that a further three employees who were also
injured will make a claim. MPL’s lawyers estimate that it is probable that the claims will succeed and
that the estimated average cost of
each payout will be Rs. 150,000. The lawyers have recommended that MPL settles the claims out of
courts quickly as possible at their estimated amount for all eight employees injured to avoid any
adverse publicity. An additional two claims have been made by employees for the stress, rather than
injury, that the explosion has caused them. If these claims were to succeed the lawyers have estimated
that the likely payout would be around Rs. 10,000 per employee. However, the lawyers have stated
that they believe it to be unlikely that these employees will win such a case.
MPL made an insurance claim to try to recover the personal injury costs that it is probable that it will
incur. The claim is now in its advanced stages and the insurance company has agreed to meet the cost
of the claims in full. The insurance company will refund MPL once the claims have been settled.
(3) The future of MPL’s business operations is in doubt following the explosion at the oil extraction
plant. The national press criticized MPL for the way that it handled the problem. To address this, on 1
October 2016 MPL paid Rs. 12,000 to a risk assessment specialist who has recommended introducing
a new disaster recovery plan at an estimated cost of Rs.500,000.
(4) MPL entered into a lease in the previous period for some office space. However, the company’s plans
changed and the office space was no longer required. At 1 January 2016 a correctly calculated
provision had been made for the future outstanding rentals of Rs. 80,000 for the remaining five years.
481
This was based on a discount rate of 8%. The rent paid during the period was Rs. 15,000. In addition,
MPl has signed a sub-lease to rent out the space for the first six months of next year for total rental
income of Rs. 6,000. No other tenants are expected to be found for the office space.
Required:
(a) Prepare the provisions and contingencies notes for inclusion in the financial statements of MPP
for the year ended 31 December 2016.
(b) List the amounts that should be recognized in the statement of profit or loss for the year ended
31 December 2016.
Question no 8
Oval Limited (OL) deals in medicines and surgical instruments. OL is in the process of finalizing its
financial statements for the year ended 31 December 2018. Following matters are under consideration:
(i) OL sells instruments A-1 and B-1 with 1-year warranty. These units are purchased from a
manufacturer Star Limited (SL). The details of warranty are as under:
A-1: SL provides warranty services to the customers and recovers 50% of the cost from OL.
However, in case of SL’s default, the warranty services would have to be provided by OL.
B-1: OL provides warranty services to the customers and recovers the entire cost from SL. On 31
December 2018, it is estimated that total cost of Rs. 4 million and Rs. 7 million would be incurred in
next year for providing warranty services for A-1 and B-1 respectively sold in 2018.
(ii) In October 2018, OL was sued by a customer for Rs. 18 million on account of supply of substandard
surgical instruments.
By end of the year, OL communicated to the customer via email to pay Rs. 5 million. In respect of
the remaining amount of the claim, OL’s lawyers anticipate that there is 70% probability that the
court would award Rs. 6 million and 30% probability that the amount would be Rs. 4 million.
OL lodged a claim with the supplier in December 2018. The supplier principally accepted the claim
to the extent of Rs. 9 million. However, OL is still negotiating with the supplier and it is probable
that OL would recover a further sum of Rs. 3 million.
(iii) OL has imported 7,000 units of a medicine at a cost of Rs. 70 million. However, in November 2018,
a study was published in a medical journal which reveals that results of an alternate medicine are
much better. At year end, 5000 units were in stock. On 25 January 2019, 4000 units were sold at Rs.
8,000 per unit. OL also paid 10% commission.
Required:
Discuss how the above issues should be dealt with in the financial statements of OL for the year ended 31
December 2018. Support your answers in the context of relevant IFRSs. (12)
Question 9
Sahiwal Transformers Ltd (STL) is organized into several divisions. The following events relate to the year
ended 31 December 2017.
1. A number of products are sold with a warranty. At the beginning of the year the provision stood at Rs.
750,000. A number of claims have been settled during the period for Rs. 400,000.
As at the yearend there were unsettled claims from 150 customers. Experience is that 40% of the
claims submitted do not fulfil warranty conditions and can be defended at no cost.
The average cost of settling the other claims will be Rs. 7,000 each.
2. A transformer unit supplied to Rahim Yar Khan District Hospital exploded during the year. The hospital
has initiated legal proceedings for damages of Rs. 10 million against STL.
STL’s legal advisors have warned that STL has only a 40% chance of defending the claim successfully.
The present value of this claim has been estimated at Rs. 9 million.
The explosion was due to faulty components supplied to STL for inclusion in the transformer. Legal
482
proceedings
have been started against the supplier. STL’s legal advisors say that STL have a very good chance of
winning the case and should receive 40% of the amount that they have to pay to the hospital.
3. On 1 July 2017 STL entered into a two-year, fixed price contract to supply a customer 100 units per month.
The forecast profit per unit was Rs. 1,600 but, due to unforeseen cost increases and production problems,
each unit is anticipated to make a loss of Rs. 800.
Required:
Prepare the provisions and contingencies note for the financial statements for the year ended31 December
2017, including narrative commentary.
483
Answers
Answer No. 1
(a) Claim for supply of inferior quality goods
 Claim to the extent of Rs. 6 million is accepted by the vendor, therefore, a claim would be
recognized as an asset by ZL as it is virtually certain that it will be received.
 For the probable claim amount of Rs. 2.8 million [(10 – 6) × 70%].
a contingent asset amounting to Rs. 2.8 million should also be disclosed, giving a brief
description of the contingent asset at the end of the reporting period.
 Recovery of Rs. 1.2 million (10 – 6) × 30% is not probable (remote), therefore, it would not
be accounted for or disclosed.
(b) Withdrawal of funds from ZL’s bank accounts fraudulently
 Cash withdrawal before 31 December 2014 amounted to Rs. 7 million for ZL’s bank accounts
is an adjusting event as the event existed on 31 December 2014 though it was revealed after
the year end. Cash lost to the extent of 80% is certain to be received, therefore a claim of Rs.
5.6 million (7 x 80%) would be recognized as an asset. Remaining amount of Rs. 1.4 million
(7 x 20) is no more receivable, therefore, it would be charged to profit and loss account for the
year ended 31 December 2014.
Loss 1.4
Receivable 5.6
Bank 7
 Cash withdrawal of Rs. 3 million is a non-adjusting event as it occurred after year end.
However, if the event is considered to be material, a disclosure should be made along with the
expected recovery their against.
(c) Relocation of unit from Sukkur to Karachi
 A provision for restructuring cost is to be recognised, as a formal restructuring plan has been
finalised and approved by the management and a formal public announcement was made prior
to 31 December 2014. Therefore, a constructive obligation has arisen on 1 December 2014.
 However, a provision should only be made for redundancy cost of Rs. 3.58 million as it
pertains to the closing of Sukkur unit.
 Costs for staff training and relocation of staff relate to future conduct of the business and
should not be recorded in the year ended 31 December 2014.
 Salary of the existing operation manager should not be recorded as it is not incremental cost
of restructuring and would be incurred whether relocation takes place or not.
(d) Installation of safety equipment to carrying vehicles of ZL:
 For the year ended 31 December 2014, ZL is not required to make any provision for liability
due to non-installation of safety equipment to its chemical carrying vehicles. As
- There is no law requiring ZL to install the safety equipment.
- There is no constructive obligation to install the safety’ equipment, since ZL has neither
past practice nor any published policy in this respect.
484
 Although, decision has been made on 25 December 2014 to install the safety’ equipment, cost
would only be recorded on actual incurrence of cost, i.e purchase and installation of safety
equipment.
Answer No. 2
Accounting treatment for the issues pertaining to the fire
IAS 37 prescribes the following accounting and disclosure requirements for provisions, contingent
liabilities and contingent assets.
Provisions:
A provision shall be recognized when all of the following conditions are met:
 There is a present obligation (legal or constructive) as a result of past event.
 It is probable that outflow of resources will be required to settle the obligation.
 A reliable estimate can be made of the amount of the obligations.
Reimbursements:
Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another
party:
 The reimbursement shall be recognised where it is virtually certain that reimbursement will be received.
 The amount recognized in respect of the reimbursement shall not exceed the amount of provision.
 The reimbursement receivable shall be treated as a separate asset.
Disclosure for contingent liabilities and assets:
Where a disclosure of a contingent liability or a contingent asset is appropriate, for each class of contingent
liability/asset, the following disclosures are required:
 A brief description of the nature of the contingent liability/asset.
 Where practicable: an estimate of its financial effect, and
an indication of uncertainties
 The possibility of any reimbursement.
In view of the above, issues as given would be dealt in QGL’s financial statements as under:
(i) Liability for workers’ compensation and penalty
 All the conditions as mentioned for provisions are met to the extent of Rs. 20 million for the
claims of families of workers and Rs. 10 million for the penalty levied by a government
agency. Therefore, a provision of Rs. 30 million (20 + 10) would be made.
 For the remaining amount of Rs. 65 million (60 + 35 – 30), it is not probable that an outflow
of economic benefits will be required. Therefore, a contingent liability would be disclosed
giving information as per the above discussed requirements.
(ii) Additional compensation for the families of the deceased workers:
The obligation for additional compensation to the families of the deceased workers is neither legal
nor constructive as the matter is still under consideration and no formal announcement was made
that may create a valid expectation. Therefore, no provision or disclosure is required in this respect.
(iii) Insurance claim
485
 As the insurance claim to the extent of Rs. 45 million (60 – 15) is virtually certain to be
received; an insurance claim would be recognised for this amount.
 Where an inflow for the remaining amount of Rs. 15 million is probable, a contingent asset
would be disclosed giving information as per the above requirements.
OR
 Where an inflow for the remaining amount of Rs. 15 million is not probable, no contingent
asset should be disclosed.
(iv) Reduction in future profit by Rs. 10 million for the half year ending 31-12-2014:
No provision or disclosure is required for future operating losses as they arise from future events not
past events.
However, an expectation of future operating losses is an indication that certain assets may be
impaired and it should test these assets for impairment.
Answer No.3
(i)As it is not mentioned in question that it is communicated to sales team before year end, therefore it
would be a non-adjusting event because this bonus payment can be avoided by the future actions of
the TIL’s management and does not meet the definition of obligating event. Therefore, TIL is neither
legally nor constructively obligated to pay the bonus to sales team.
(ii)It is a non-adjusting event because the expected future losses on account of a change in government
policy does not give rise to an obligation at year end.
However, an expectation of future operating losses is an indication that certain assets of the operation
may be impaired and TIL should test these assets for impairment.
(iii)Although the announcement was made after the year end, the condition (non collection for a long
period of time) period that prompted the management to allow cash discount existed at year-end.
Therefore, it is an adjusting event.
TIL should provide the amount of discount availed by the debtors.
(iv)Although the court’s decision was announced after year end, it pertains to past years. Therefore, it is
an adjusting event.
TIL should reverse the amount of provision provided the TIL’s lawyer assures that decision given
by the ITAT will have a no chance; or ‘a remote chance’ of change if the Income Tax Department
appeals against the decision of the Tribunal.
(v)It is a non-adjusting event because the event that caused the debtor to go insolvent was the fire, which
happened after year-end.
(vi) It is a non-adjusting event because the announcement was made after the year end and there was
no obligation at year end.
However, details of declaration of bonus shares must be disclosed.
Answer No. 4
(i) It is a non-adjusting event as introduction of a new version of DVD Player after the reporting period
is indicative of conditions that arose after the reporting period. Therefore, the price decrease will not
affect NRV.
However, if decrease in the value of inventory after the reporting period is material, it should be
disclosed in the financial statements.
486
(ii) The provision should be recognized because the obligating event is the communication of event to
the public which creates a valid expectation that the division will be closed.
However, the provision should only be recognized to the extent of redundancy cost.
IAS prohibits the recognition of future operating losses, staff training and profits on sale of assets.
(ii) Entry
Dr. Cr.
Restructuring expenses Rs. 1.50
Provision for restructuring expenses Rs. 1.50
Additionally, operating loss of Rs. 0.20 million (i.e. 0.80 × 2/8) for 2012 will be disclosed as under:
Disclosures:
Nature of event: Future operating losses will be incurred in 2012.
Amount: Rs. 0.20 million.
(iii) This is a non-adjusting event because the burglary and theft of consumable stores occurred after
reporting date.
However, if the event is material, it should be disclosed in the financial statements unless the loss is
recoverable from the insurance company.
(iii) Disclosures
Nature of event: LED TV sets were stolen from a warehouse.
Amount: Rs. 3 million.
(iv) The drop in value of investment in shares is a non-adjusting event. Since the legislation was
announced after the reporting date, the event is not a past event. However, if the amount is material,
it should be disclosed in the financial statements.
(v) This is an adjusting event as it provides evidence of conditions that existed at the end of the reporting
period. The insolvency of a debtor and the inability to pa usually builds up over a period of time and
it can therefore be assumed that it was facing financial difficulty at year-end. A bad debts expense
of Rs. 1.5 million should be recognized in income statement.
(vi) It is a non-adjusting event because the declaration was announced after the year-end and there was
no obligation at year end. Details of the bonus shares declaration must, however, be disclosed.
Disclosures
Nature of event: Share price declined significantly.
Amount: Decrease in per share value - -------
Answer No. 5
Industrial Chemicals Limited
Accounting treatment and disclosures for the year ended 30 June 2015
Provisions and contingent liability:
According to IAS 37, a provision shall be recognised when all the following conditions are met:
 It is probable that outflow of resources will be required to settle the obligations.
In view of the above, a provision shall be made to the extent the above conditions are met as explained
under:
487
(i) Rs. 10.4 million (12 × 60% + 8 × 40%) for the pending claim of the worker as it is most likely that
ICL would require to pay this amount as advised by ICL’s lawyers. For the remaining amount of Rs.
14.6 million (25 – 10.4), it is not probable that an outflow of economic benefits will be required.
Therefore, a contingent liability would be disclosed giving information as under:
 A brief nature of the contingent liability.
 Where practicable an estimate of finance liability and indication of uncertainties; and
 The possibility of any reimbursement
(iii) As regards the additional compensation of Rs. 1.5 million under consideration of the management,
neither provision nor disclosure shall be made as the obligation is neither legal nor constructive as
the matter is still under consideration and no formal intimation was made that may create a valid
expectation in this respect.
(ii) Reimbursements:
According to IAS 37, where some or all of the expenditure required to settle a provision is expected
to be reimbursed by another party:
 The reimbursement shall be recognized where it is virtually certain that reimbursement will
be received.
 The amount recognized in respect of the reimbursement shall not exceed the amount of
provision.
In view of the above, accounting treatment and disclosure in respect of insurance claim will as under:
 Insurance claim to the extent of Rs. 14 million is accepted in principle by the insurance
company; therefore, it will be taken as ‘virtually certain to be received’. However, the
insurance claim to be recognized as receivable shall be restricted to Rs. 10.4 million for which
the provision is recorded.
 Recovery of the insurance claim to the extent of Rs. 2.0 million is probable, therefore, a
contingent asset would be disclosed for this amount giving information as under:
 A brief nature of the contingent asset; and
 An estimate of financial effect and indication of uncertainties.
 If however recovery is not probable, then ignore the remaining 2 million receivable.
Answer 06
2015 Financial Statements:
NL should have made a provision of Rs. 2 million because:
(i) NL had a present obligation as a result of past event;
(ii) The validity of customer's claim was confirmed by the company's lawyer which shows
that an outflow will be required to settle the obligation
(iii) A reliable estimate of the amount of outflow was available.
The settlement of the case in July 2016 was an adjusting event for the year ended 30 June 2016. The
provision created in 2015 is to be reversed. The company should revise the provision keeping in view of
the cost of replacement.
NL should disclose the recoverable damages as contingent assets because:
a) IFRS does not allow recognition of a contingent asset in the financial statement;
b) an inflow of economic benefits is probable and is confirmed by the company's lawyer
c) NL should disclose the brief description of the nature of contingent assets and an
estimate of their financial effect i.e. inflow of Rs.24 million.
488
Since this is an adjusting event as subsequent to year ended 30 June 2016, the court has decided to
award a compensation of Rs. 30 million. After the court's order recovery of Rs. 30 million is virtually
certain, as a result, it is no longer a contingent asset and it should be recognized as an asset.
Neither provisions nor disclosure should be made as there is no constructive or legal obligation as on 30
June 2015 because:
 NL has no detailed formal plan for the disposal
 NL has not made its decision public and consequently did not raise any valid expectation in
those affected
The provision should be recognized because the obligating event is the communication of the plan to the
public which creates a valid expectation that the division will be closed.
However, the provision should only be recognised to the extent of redundancy cost. IAS-37 prohibits
the recognition of future operating losses and staff training costs.
Answer 07
Part (a) Provisions and contingencies
Environmental Legal Onerous Total
damage claims lease
At 1 Jan 2016 1,300,000 – 80,000 1,380,000
Unwinding of the discount (8%) 104,000 6,400 110,400
Utilized in the year – – (15,000) (15,000)
Charge/(credit) to statement of – 1,200,000 (6,000) 1,194,000
profit or loss (150,000 x 8)
At 31 Dec 2016 (W) 1,404,000 1,200,000 65,400 2,669,400
Environmental damage
The provision in respect of the environmental damage relates to restoration of land following the initial
ground work undertaken to set up a new oil refinery. The company has an advertised policy that it will
restore all environmental damage caused by its business operations. The provision is based on the estimated
cost of reinstating the environmental damage caused and is not likely to be paid until 2040.
Legal claims
During the year an explosion at one of the company’s oil extraction plants caused a number of employees
to suffer injury. This provision is to cover personal injury claims made by the individuals concerned. The
provision is based on lawyers’ best estimate of the likely amount at which the claims can reasonably be
settled. It is hoped that the claims will be settled in the next financial year. It is expected that the full amount
of these claims will be reimbursed by an insurance company following their payment.
Onerous lease
The company has an ongoing lease obligation in respect of office space that is not being utilized by the
company. The outstanding lease liability at the year-end was Rs. 65,000 and the lease has another four years
to run. MPP has found a tenant for the office space on a six-month short lease and this will reduce the
outstanding obligation by Rs. 6,000 in 2017.
Contingent liability
Following the explosion at the oil extraction plant a number of employees have made claims against the
489
company for undue stress. Based on lawyers’ advice the company do not believe that it is probable that a
court case against the company will be brought. If such a case was to be heard the estimated payout in total
is Rs. 20,000 (10,000 x 2).
Workings
Personal injury claims: 8 × 150,000 = 1,200,000
Part (b)
Summary of amounts included in income statement for year ended 31 December 2016
Operating costs: Rs.
Movement in provision (1,200,000 – 6,000) 1,194,000
Consultancy fees 12,000
Depreciation on oil refinery environmental damage (1,300,000 ÷ 25yrs) 52,000
Borrowing costs
Unwinding of the discount (104,000+6,400) 110,400
Answer 08
(i) As on 31 December 2018, OL should recognize a provision for warranty service to be provided as
there is a present obligation as a result of a past event (sale of A-1 and B-1 in 2018). The amount
of provision would be:
 Rs. 2 million (4×50%) in respect of A-1 as OL is liable to SL for 50% cost of services.
 Rs. 7 million (entire cost) in respect of B-1 as OL is responsible to the customers for providing
warranty services.
OL is required to disclose a contingent liability for remaining warranty cost of (which should be
incurred by SL) as OL would be responsible for it in case of default. (Joint and several liability)
Further OL should recognize a separate asset (receivable) to the extent that reimbursements from
SL in respect B-1 are virtually certain. In the statement of profit or loss, the expense relating to
warranty services may be presented net of the amount recognized as receivable (reimbursement). If,
however, reimbursement is only probable then disclose.
(ii) As on 31 December 2018, OL is required to record a liability of Rs. 5 million as this has already
been approved by OL. In respect of remaining amount of the claim, a provision of Rs. 5.4 million
(6 x 70% + 4 x 30%) shall be made as it is most likely that OL would require to pay this amount
as advised by OL’s lawyers.
Further OL should recognize a separate asset (receivable) to the extent of Rs. 9 million as it is
accepted in principle by the supplier. Therefore, it will be taken as ‘virtually certain to be received’.
In the statement of profit or loss, the expense relating to the provision may be presented net of
amount recognized as receivable (reimbursement).
(iii) However, recovery of the claim to the extent of Rs. 3 million is probable, therefore, a contingent
asset would be disclosed.
(iv) Introduction of new alternative drug with better results is an indication of reduction in value of
existing medicine kept in stock. It is more evident by subsequent sales of such units at lower price
i.e. Rs. 8,000 with 10% commission to distributors. According to IAS 2, inventory should be
recorded at lower of cost or NRV (i.e. estimated selling price less estimated costs necessary to
make the sale). So OL is required to carry entire stock of this medicine at NRV i.e. Rs. 36 million
[5,000×7,200 (8,000 – 800)] as against the cost of Rs. 50 million (5,000 x 70,000,000/7,000)
Answer 09
Warranty Legal claim Onerous contract Total
490
Rs. 000 Rs. 000 Rs. 000 Rs. 000
At 1 January 2017 750 nil nil 750
Used in the year (400) (400)
Statement of profit or loss (balance) 280 9,000 1,440 10,720
At 31 December 2017 630 9,000 1,440 11,070
W1 W2
Warranty: The Company grants warranties on certain categories of goods. The measurement of the
provision is on the company’s experience of the likelihood and cost of paying out under the warranty.
Legal claim: The legal claim provision is in respect of a claim made by a customer for damages as a result
of faulty equipment supplied by the company. It represents the present value of the amount at which the
company's legal advisors believe the claim is likely to be settled.
Onerous contract: The provision for the onerous contract is in respect of a two-year fixed-price contract
which the company entered into on 1 July 2017. Due to unforeseen cost increases and production problems,
a loss on this contract is now anticipated. The provision is based on the amount of this loss up to the end of
the contract.
Contingent asset: The Company is making a claim against a supplier of components. These components led in
part to the legal claim against the company for which a provision has been made above. Legal advice is that
this claim is likely to succeed and should amount to around40% of the total damages (Rs. 9 million x 40% =
3.6 million).
W1 Warranty provision: 150 x 60% x Rs. 7,000 = Rs. 630,000.
W2 Onerous contract: 18 months (from Jan 2018 to June 2019) x 100 units x Rs. 800 = Rs. 1,440,000 (actual loss
of past six months would have already been recognized).
491
Past Papers
Question 1
For the purpose of this question, assume that the date today is 1 August 2021.
On 1 January 2021, Holwah Automobiles Limited (HAL) launched vehicle with the brand name of
‘Deluxe’. In March 2021, reports were circulated in social media that carbon emissions from Deluxe exceed
the regulatory limits. In May 2021, HAL announced to halt the sales of Deluxe upon receiving an inquiry
from regulatory authority.
On 1 June 2021, HAL announced that:
 high emissions were confirmed in those batches of Deluxe which were produced from March 2021
and onwards due to defect in assembling of emission kit.
 customers can get the defect fixed from the authorized dealers free of cost from 1 July 2021.
 sales of Deluxe will also resume from 1 July 2021.
The senior management has summarized the following financial implications of the above matter:
(i) On 10 June 2021, a penalty of Rs. 20 million was imposed by the regulatory authority. On 25 July
2021, an additional penalty of Rs. 2 million was imposed due to non-payment of penalty within 40
days. HAL has decided to challenge the additional penalty on the relevant forum.
(ii) Defect in the existing inventory of Deluxe will be fixed by HAL at its factory in the month of August
2021. The rework cost will be Rs. 15 million and loss of profit due to temporary suspension of
production will be Rs. 30 million.
(iii) Defect in all vehicles sold during March to May 2021 will be fixed by the authorized dealers in July
and August 2021. The cost will be reimbursed to dealers at the end of each month on the basis of actual
number of vehicles fixed. Though HAL is legally bound to fix the defect in all vehicles which will
cost approximately Rs. 50 million, management estimates that only 85% of customers will get their
vehicle fixed.
(iv) Market value of internally generated brand of Deluxe would reduce by Rs. 150 million.
(v) Value in use of the production line of Deluxe would reduce by Rs. 80 million.
(vi) In June 2021, the regulatory authority has introduced new emission protocol to ensure that the
emissions are within the limits and needs to be complied by 30 September 2021. The new protocol
will require modification in the existing production line at a cost of Rs. 100 million.
Required:
In the context of relevant IFRSs, discuss how the above financial implications should be dealt with in the
financial statements of HAL for the year ended 30 June 2021. (15)
Answer 1
The treatment of the given financial implications in the financial statements for the year ended 30 June
2021 would be as follows:
(i) Penalty of Rs. 20 million should be recognized due to legal obligation arising on 10 June
2021.Additional penalty of Rs. 2 million should not be recognized as it has been imposed after year
end.
(ii) Rework cost of Rs. 15 million should not be recognized. Rework cost should be deducted in
calculating NRV of inventory of Deluxe and would be compared with the cost for identifying any
potential NRV adjustment. No provision needs to be made for loss of profit of Rs. 30 million as
future operating losses does not require any provision.
(iii) Repair cost which will be reimbursed to dealers should be provided because constructive / legal
obligation arose due to announcement made on 1 June. The amount recognized as provision shall be
the best estimate based on the most likely outcome hence provision should be recorded at 85% of Rs.
50 million i.e. 42.5 million.
492
(iv) Internally generated brands are not recognized in financial statements; hence no question arises of
their impairment.
(v) Reduction in value in use of Rs. 80 million should not be recorded. The reduced value in use of the
production line should be compared with the fair value less cost of disposal for assessing recoverable
amount. If carrying amount exceeds recoverable amount than recognize impairment loss.
(vi) The modification cost of Rs.100 million should not be provided despite announcement made by
regulatory authority before year end. HAL has no present obligation for future expenditures as it can
avoid the expenditure by its future actions i.e. by changing operations. The cost should be considered
in estimating value in use of the related assets.
Question 2
On 16 June 2020, an aircraft of Sukoon Airlines Limited (SAL) made an emergency landing near a factory
building. Though all persons on board were safe, the nearby factory was damaged. As a result, two factory
workers lost their lives and five workers were injured.
After one week of this accident, SAL’s CEO informed in a press conference that SAL will pay Rs. 1.5
million for each loss of life and Rs. 1 million for each injured worker.
On 8 July 2020, the factory owner filed a claim of Rs. 25 million for factory damages. The case is still
pending; however, SAL’s legal advisor is of the view that there is 70% probability that the amount of
damages would be Rs. 20 million and 30% probability that the amount would be Rs. 15 million.
Due to this accident, the aircraft was damaged beyond repairs and consequently SAL cannot use this aircraft
anymore. The aircraft was acquired on lease on monthly rental of USD 0.5 million for 10 months expiring
on 31 October 2020. As per lease agreement, if aircraft faces any accident, SAL is required to pay monthly
rentals to the lessor till settlement of insurance claim. The insurance claim was settled on 31 August 2020.
Required:
In the context of relevant IFRSs, discuss how the above issues should be dealt with in the financial
statements of SAL for the year ended 30 June 2020. (07)
Ans 2
Loss/injuries of workers
As CEO committed in a press conference, it is constructive obligation/valid expectation that SAL would
compensate factory workers. Therefore, SAL should make a provision of Rs. 8 million (2×1.5+5×1) in this
regard.
Factory damages
The claim was filed subsequent to year-end but the obligating event i.e. emergency landing occurred before
the year-end so this is an adjusting event.
As per legal advisor advice, SAL would be liable to pay damages in any case but amount is uncertain. So
SAL should make a provision for most likely amount i.e. Rs. 20 million.
Aircraft lease
Since aircraft is no more usable for SAL and insurance claim is expected to settle by 31 August 2020, the
contract became onerous. Therefore, SAL should make a liability for rentals of July and August i.e. USD
1 million(0.5×2).
USD amount should be translated into PKR by applying closing exchange rate.
Question.3
Atif Anwar, ACA is Finance Manager at Hot Coffee Limited (HCL) and reports to Jamal Ahmed, FCA
who is the CFO.
On returning from leaves, Atif noted that draft financial statements for the year ended 31 December 2019
have been prepared. He found that financial statements have not been updated for the revision in
decommissioning cost related to a plant, as advised by the engineering department at the start of 2019. Atif
discussed the matter with Jamal who advised him to finalize the financial statements without revising the
decommissioning cost as HCL’s profit would be decreased if revised cost would be taken into account.
493
Decommissioning cost related to the plant has increased from initial estimate of Rs. 50 million to Rs. 88
million. Applicable discount rate is 12%. This plant had a useful life of 6 years when it was purchased on
1 July 2017 at a purchase price of Rs. 860 million. HCL uses cost model for subsequent measurement of
its property, plant and equipment and follows straight line method for charging depreciation.
Required:
(a) Compute the change in net profit, assets and liabilities if revised decommissioning cost is included in
the financial statements for the year ended 31 December 2019. (05)
Ans 3(a)
Change in net profit: Rs. in

million
Increase in depreciation expense 22.82(W-1)÷4.5 (5.07)
Increase in finance cost 22.82(W-1)×12% (2.74)
Decrease in net profit (7.81)
Change in assets:
Increase in property, plant and equipment 22.82–5.07 17.75
Change in liabilities:
Increase in decommissioning liability 22.82+2.74 25.56
W-1: PV of change in decommissioning liability
22.82[(88–50) ×1.12‒4.5]
Question.4
For the purpose of this question, assume that the date today is 1 February 2020.
You are the Finance Manager of Wonderland Limited (WL). Your assistant is preparing financial
statements of WL for the year ended 31 December 2019. He has brought following matters for your
consideration:
(i) In mid of 2019, WL launched new model of laptops with the name of Champ which became popular
among customers.
In November 2019, WL started receiving complaints about incidents of electric shock and excessive
heating. Some of these incidents resulted in serious injuries to customers. Several customers filed
claims for damages with WL for injuries. The matter was highly publicized in media as well.
On 1 December 2019, WL suspended sales of Champ. WL conducted an inquiry which led to the
conclusion that these incidents were happening because of defective chargers. On 25 December 2019,
WL announced that all customers can collect the replacement charger from 15 January 2020 and
onwards from WL's service center without any additional cost. The sales of Champ will also resume
on the same date at a reduced price. Further, it has been internally decided that a free USB shall be
given to customers coming for collecting replacement chargers as a good gesture.
The matter was raised with the supplier of chargers i.e. Battery Limited (BL). On 20 January 2020,
BL admitted the fault and agreed to only adjust the cost of the defective chargers against the future
purchases.
In respect of this matter, your assistant has proposed a provision of Rs. 105.3 million in financial
statements for the year ended 31 December 2019 having the following breakup
Rs in
million
1 Cost of replacement chargers to be acquired for:
 customers 6.8
494
 wholesaler and retailers 2.3
 closing stock of Champ with WL 4.9
Recovery from BL (11.5)
3 Cost of USBs to be given 5.8
4. Expected litigation cost and settlements in respect of claims for damages for injuries to
customers including Rs. 5.4 million for claims made in January 2020 and Rs. 10
million for claims expected to be received in future. 25.9
5 Decrease in WL share price in December 2019 38.4
6 Marketing cost to be incurred in 2020 to counter the negative publicity by the incidents 15.5
7 Decrease in gross profit for 2020 due to reduction in selling price 17.2
105.3
(ii) In November 2019, WL introduced a promotion scheme in which a scratch card was included in each
pack of one of its products. These cards carry cash prizes ranging from Rs. 100 to Rs. 50,000 and are
valid for claims till 29 February 2020.
All scratch cards were printed by system and packed directly into the product without any human
interaction. As per the scheme, WL had decided to include total prizes of Rs. 25 million.
As at year-end, WL had already received claims for prizes worth Rs. 32 million. An inquiry has led
to the conclusion that the software for printing scratch card has certain programming errors which
has led to printing of unknown amount of total prizes as compared to the original plan of WL.
Further, claim of Rs. 12 million had been received till 31 January 2020. Considering the reputation,
WL would honor all the claims. (04)
Required:
Discuss how the above issues should be dealt with in the financial statements of WL for the year ended 31
December 2019. Support you answer in the context of relevant IFRSs.
Ans.4
(i) The treatment of each of item would be as follows:
1. Cost of replacement charges to customers, wholesaler and retailers would be provided in 2019 due to
the constructive obligation arising out of the announcment made on 25 december 2019.
Cost of replacement charges would be included as deduction in calculating NRV of the closing stock
of champ and would be comapred with the cost of the stock in books for assessing potential NRV
adjustment.
2. Reimbursement from BL would be recognized in 2019 only when it is virtually certain as at 31
decemeber 2019 that BL would reimburse the cost which does not seems to be the case here due to
subsequent agreement of BL on 20 january 2020 for the reimbursement.
3. WL has no obligation as 31 December 2019 to give USBs to the customers. As giving of USBs has not
been announced. Therefore provision need not to be made at 31 December 2019
4. Provision for expected litigaton and settlement cost in respect of all claim of Rs. 25.9 million shoyuld
be made in 2019.
Sale of defective laptop is the obligating event in this respect which were made in 2019. The filling of
claims in 2020 would be considered as adjusting event for 2019 financial statements.
5. The loss would not be recorded in WL’s book as market of company shared is not reflected in the books
of accounts.
6. Marketing cost to be incurred in 2020 would not be recorded in 2019 as it is a discretionary cost and
there is no obligation to incur marketing cost at 31 december 2019.
7. No entry needs to be made for decrease in gross profit for 2020 due to reduction in selling price.
However, the effect of decrese in selling price shoyld be considered for calculating NRV of closing
stock of Champ as at 31 December 2019
495
(ii)In respect of claim received till year end of Rs. 32 million, WL should record an expense
Further claim of Rs. 12 million received during January 2020 would be considered as an adjusting event
and should be recorded as an expense in 2019.
In respect of remaining claims which have not yet been received:
 WL has a present obligation to honor the claim for prizes as a result of past event i.e. sale of product
 It is probable that outflow of economic will be required to settle the obligation,
 as cards of higher amount were printed and issued as compared to original plan but amount could
not be determined due to absence of human intervention in printing the cards
It should be disclosed as contingent liability along with description that the amount is not measurable due
to circumstances discussed above.
Question.5
Crown Enterprise (Private) Limited (CEPL) is a supplier of specialized machines Being the first year
of its operations, it is unsure about accounting treatment of the following transactions:
(a) CEPL sold a machine at a markup of 20% for Rs. 150,000. Such machines can have a 12 month
warranty in terms of which defective machines are repaired or replaced free of cost. Based on past
experience, the manufacturer of the machine has informed that 3% machines need repairs and average
repair cost is Rs 10,000 per machine.
(b) A specialized machine was supplied to a manufacturing company. According to the terms of sale,
CEPL is responsible for installation of the machine and the customer will make the payment after the
machine has been satisfactorily installed.
(c) CEPL sold a machine on credit to NIOO Limited which expects to finalize a contract for providing
maintenance facilities to a large textile mill. CEPL has agreed that the machine may be returned if
MOO Limited fails to secure the maintenance contract.
(d) A machine was sold on a lay away basis ire. the purchaser will be entitled to take possession of the
machine after payment of final installment. Out of a total of seven installments two had been received
so far.
Required:
Discuss when it will be appropriate for Crown Enterprise (Private) Limited to recognize revenue in each of
the above situation. (12)
Ans.5
a) The company should recognize the revenue at the date of sale based on meeting the recognition
criteria, i.e. transfer of risks and rewards of ownership, no managerial involvement, measurement of
revenue, probable inflow of economic benefit and reliable measurement of cost of goods sold.
Warranty will not affect any of these criteria.
b) Some of the conditions for recognition of revenue have been met such as reliable estimate of cost
and revenue at the time of supply. However, company has retained significant risk of ownership due
to non-compliance with primary condition of sale i.e. the conditions of installation. Consequently,
there is no transfer of ownership, managerial involvement exists, inflow of economic benefit is not
probable Therefore, revenue will be recognized after satisfact01Y installation.
c) The completion of the sale transaction is uncertain because it is contingent upon purchaser being
awarded the contract. Therefore the company will recognize the revenue when it is certain that the
purchaser will be granted the contract.
d) Revenue form lay away sales are recognized when the goods are delivered. However, based on
experience, such revenue may be recognized when it is probable that sale will materialize and
significant deposit is received. But in given case there is no history available and only two out of
496
seven installments have been received Therefore, revenue will only be recognized when machine
has been delivered.
Question.6
For the purpose of this question, assume that the date today is 15 February 2018. Melon Limited (ML) is
in the process of finalizing its financial statements for the year ended 31 December 2017. Following
matters are under consideration:
(i) ML undertook a sales campaign in December 2017 whereby customers can avail 20% discount on the
purchase of its new product by presenting a coupon, which formed part of newspaper advertisements.
The offer is valid from 1 January 2018 to 28 February 2018.
So far discounts of Rs. 4.5 million have been availed and the management estimates that a
further discount of Rs 3 million will be given before the end of the scheme.
(ii) On 15 December 2017, a machine was disposed of for Rs. 3.5 million to Raspberry Limited (RL) for
cash. However, as per agreement ML was also entitled to additional amount of Rs. 1.5 million which
is dependent upon passing certain production tests after installation at RL's premises On 25 January
2018 RL confirmed that the required production testing had successfully been completed.
(iii) On 10 December 2017, a worker filed a claim of Rs.2.5 million and alleged violation of safety
measures on the part of ML. As of 31 December 2017 the legal advisor of ML advised that there was
only a remote possibility that the Court would award any compensation to the worker.
The case is still pending; however, ML's legal advisor now believes that there is a 40% chance that the
Court would award compensation of Rs 2 million to the worker.
(iv) In November 2017, as part of restructuring plan an option of early retirement in exchange for a one
off payment of Rs. 1 million was offered to each employee aged above 50 years. According to
restructuring plan, management expects that 25 employees would accept the offer. The option can be
exercised till 31 March 2018. 10 employees have already opted for the scheme till 31 December 2017.
A further 6 employees have opted for the scheme after year-end.
Costs related to the restructuring except one-off payments to employees have already been provided
by ML in its financial statements.
Required:
Discuss how each of the above matters should be dealt with in ML's financial statements for the year ended
31 December 2017, (12)
Answer 6
(i) In given scenario, present obligation was not existing at year end as the obligating event in this case is
the actual sales of the product rather than the publishing of coupon in newspaper. Therefore, neither
provision nor disclosure of contingent liability are required in the ML's financial statements for the year
ended 31 December 2017.
(ii) Determination of the sale price after the reporting period for an asset sold, where the sale had been made
before the year end is considered as an adjusting event under IAS 10. Consequently, ML is required to
book receivable of Rs 1.5 million at year end. Further, gain or loss on sale of machine has to be
calculated by taking into account of such receivable.
(iii) IAS 10 states that if an entity receives information after the reporting period about conditions that existed
at the end of the reporting period, it shall update disclosures that relate to those conditions, in the light
of the new information.
In light of above, ML is required to disclose the contingent liability in light of revised opinion of ML's
lawyer i.e. 40% chances that the court would award compensation of Rs. 2 million to the effected
worker,
(iv) Announcement of restructuring plan to those employees who would be affected by the plan raises
constructive obligation on ML. According to restructuring plan, management expects that 25 employees
would accept the offer so provision/liability should be made for Rs. 25 million (Rs. 1 million x 25
employees) irrespective of employees who have already opted the scheme till now.
497
Question.7
Naba Power Limited (NPL) is preparing its financial statements for the year ended 30 June 2017.
Following issues are under consideration.
(a) NPL entered into a contract on 1 August 2016 to supply customized batteries to a new customer As
per the terms of the agreement, NPL is required to deliver 50,000 batteries at the end of each month
from December 2016 to September 2017 at a consideration of Rs. 15 million per month. Penalty for
each late delivery or cancellation of the contract would be Rs. 5 million and Rs. 2D million
respectively.
On 1 August 2016 NPL had estimated that cost of production would be Rs. 10 million per month.
However, cost of production ceased subsequently Despite the increase in the cost of production, NPL
made timely deliveries till May 2017 at a
total cost of Rs. 99 million. Supply for June 2017 was made on 15 July 2017 at a total cost of
Rs. 18 million of which Rs. 14 million had been incurred till 30 June 2017. It is estimated that
Rs. 55 million would need to be spent to make the last 3 deliveries within time. (06)
(b) On 15 May 2017 an explosion occurred at one of NPL's factories. Several claims were filed by affected
employees against NPL. The details are as under
(i) Seven injured employees made claims before 30 June 2017 and further three injured employees
lodged claims in July 2017. According to NPL's legal advisor, the probability that NPL wo(uld
be determined to be negligent is 80%. If NPL is found negligent, the estimated average cost of
each payout will be Rs. 1 million.
(ii) Additional four employees made claims before 30 June 2017, seeking compensation for the
stress, rather than any injury, caused to them. If these claims succeed, the legal advisor is of the
view that the estimated average cost of each payout will be Rs. 0.7 million. However, according
to the legal advisor, the chance that these employees will succeed is 300 0.
80% of all such payouts are recoverable according to the terms of the insurance policy. (05)
(c) On 1 November 2016 a new law was introduced requiring all factories to install specialized safety
equipment within five months The equipment costing Rs. 15 million was ordered in February 2017 to
be installed by 30 April 2017. However, the supplier delayed installation till 31 July 2017. On 5 August
2017 the company received a notice from the authorities levying a penalty of Rs. 1.6 million i.e., Rs.
0.4 million for each month during which the violation continued. It is probable that this penalty will
be recovered from the supplier.
Required:
Discuss how each of the above issues should be dealt with in NPL's financial statements for the year
ended 30 June 2017. (Quantify effects where practicable)
Ans.7
(a) NPL should recognize following provision / expense as on 30 June 2017:
Rs. in million
Provision for penalty (Note 1) 05
Expense related to inventories recognized on lower of cost or NRV [14 minus 11
(15—4)] (Note 2) 03
Provision for onerous contract 45 55 Note 3 10
18
Note 1:
Supply for June 2017 was made after delay of 15 days so as per terms of agreement provision for penalty
should be made for this adjusting event.
Note 2:
Since cost incurred till 30 June 2017 (Rs. 14 million) is higher than the net realizable value of mvent01Y
i.e. Rs. 11 million (selling price of 15 million less 4 million cost to be incurred) expense of Rs. 3 million
related to write-down of inventory to NRV should be recognized.
498
Note 3:
Since estimated cost of Rs. 55 million which would need to be spent is more than the total revenue of Rs
45 million for last 3 deliveries, the contract is considered as onerous and the provision should be made at
Rs. 10 million that is lower of cost of fulfilling it (Rs. 10 million i.e. 55 — 45 ) or penalty arising from
failure to fulfill it (Rs 20 million).
(b) Claim regarding NPL's negligence

As on 30 June 2017 NPL should recognize a provision for ten Injured employees because at reporting date
there is present obligation m respect of past event (Injuries suffered from explosion occurred before year
end). NPL's lawyers estimate that probability of NPL being declared negligent is 80% which is considered
as probable. Therefore, provision should be made for total payout of Rs 10 million (1 million for each
employee).
According to the terms of insurance policy 80% of the cost is recoverable from insurance company so it is
virtually certain that reimbursement will be made. According to IAS 37, NPL should recognize a separate
asset (receivable) of Rs. 8 million (10 million x 80%). In the statement of comprehensive income provision
may be presented net of reimbursement amount
Claim seeking compensation for the stress

As per legal adviser, there is only 30% chance that the claims lodged against the company for undue stress
will succeed so payment of Rs 28 million (0.7 million x 4) is possible (not a present) obligation.
Consequently, provision is not required and NPL should disclose this amount as contingent liability giving
brief description of the event and estimate of financial effect.
(c) As on 30 June 2017, NPL should recognize expense of Rs. 1.2 million (0.4x3) in relation to penalty for
noncompliance of new law from 1 April to 30 June 2017 because at the reporting date there is a present
obligation (payment of penalty) in respect of a past event (non-compliance of statutory requirement). NPL
should disclose the penalty amount in its financial statement.
Since the reimbursement of penalty amount from the vendor is probable, the reimbursement of only two
months (May and June 2017) of Rs. 0.8 million (0.4*2)should be disclosed as a contingent asset giving
Question.8
Karim Limited (KL) bought a special purpose engineering plant on 1 January 2015 at a cost of Rs 1,755
million inclusive of sales tax @ 17% (refundable),
KL is required to decommission the plant after a period of 2 years. Decommissioning cost IS estimated at
Rs. 300 million. The applicable discount rate is 11%. KL uses the cost model for subsequent measurement
of its property, plant and equipment. Plant is being depreciated using the straight line method over its useful
life.
Required:
Prepare journal entries to record the above transactions for the years 2015 and 2016(10)
Ans 8
Debit Credit
Date Description
Rs. in million
I-Jan-2015 Plant (W.1) 1,743.49
Sales tax refundable 255.00
Bank 755.00
Provision for decommissioning (W-2) 243.49
499
(To record purchase of plant and provision for decommissioning)
31-Dec-2015 Finance cost (W-2) 26.78

Provision for decommissioning 26.78
(To record finance cost on unwinding of discount
31-Dec-2015 Depreciation expense (1743.49/2) .75

depreciation for the year
31-Dec-2016 Finance cost 29.73

(To record finance cost on unwinding of discount)
31-Dec-2016 Depreciation expense 1743.49/2 871.75

(To record depreciation for the year)
31-Dec-2016 Provision for decommissioning 300.00

Bank 300.00
(Record payment of decommissioning liability)
31-Dec-2016 Accumulated depreciation 1,743.49

Plant 1,743.49
(To record reversal of plant & accumulated depreciation thereon
upon end of its life)
Rs. in
W-1:Computation of cost of land million
Amount inclusive of sales tax 1,755.00
Less: Sales tax (1,755*17/117) (255.00)
Amount net of sales tax 1,500.00
Add: Provision for decommission cost (W-2) 243.49
1,743.49
Question.9
Quality Garments Limited (QGL) is a manufacturer of readymade garments. During May 2014, a fire broke
out in one of its units which resulted in deaths and severe injuries to a number of workers.
At the time of finalization of QGL's financial statements for the year ended 30 June 2014, the following
(i) Families of certain deceased workers have filed compensation claims amounting to Rs. 60 million. A
government agency has imposed a penalty of Rs. 35 million for negligence on the part of the company.
QGL's lawyers anticipate that the company would have to pay Rs. 20 million and Rs. 10 million to
settle the workers' claims and the penalty respectively.
(ii) To maintain goodwill of the company, the Board of Directors is considering additional payments to
(iii) Loss to fixed assets and inventories is estimated at Rs. 60 million. 111 this respect, a fire insurance
claim has been lodged. Due to certain policy clauses, QGL's consultant anticipates that the claim for
Rs. 15 million may not be accepted. The matter is under negotiation with the insurance company.
(iv) Due to closure of the unit for repair, QGL would not be able to meet sales orders of Rs. 50 million.
This will reduce QGL's profitability for the half year ending 31 December 2014 by Rs. 10 million.
Required:
500
30 June 2014. Support your answers in the context of relevant International Financial Reporting Standards.
(13)
Ans.9
Quality Garments Limited
Accounting treatment for the issues pertaining to the fire
IAS 37 prescribes the following accounting and disclosure requirements for provisions, contingent
liabilities and contingent assets.
Provisions:
A provision shall be recognized when all of the following conditions are met:
 It is probable that outflow of resources will be required to settle the obligation.
Reimbursements:
Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another
party:
 The reimbursement shall be recognized where it is virtually certain that reimbursement will be
received.
 The amount recognized in respect of the reimbursement shall not exceed the amount of provision.
Disclosure for contingent liabilities and assets:

Where a disclosure of a contingent liability or a contingent asset is appropriate, for each class of
contingent liability/asset, the following disclosures are required:
 A brief description of the nature of the contingent liability/asset.
 Where practicable:
 an estimate of its financial effect, and
 an indication of uncertainties
 The possibility of any reimbursement.
In view of the above, issues as given would be dealt in QGL's financial statements as under
W-2: Provision for decommission cost Rs. In million

Date Amount of liability Discount factor 11% Liability balance Finance charges
I-Jan-15 300 0.81 16 243.49
31-Dec-15 300 0.9009 270.27 26.78
31-Dec-16 300 1.000 300.00 29.73
I-Jan-15 300 0.81 16 243.49
31-Dec-15 300 0.9009 270.27 26.78
31-Dec-16 300 1.000 300.00 29.73
I-Jan-15 300 0.81 16 243.49
31-Dec-15 300 0.9009 270.27 26.78
31-Dec-16 300 1.000 300.00 29.73
I-Jan-15 300 0.81 16 243.49
501
31-Dec-15 300 0.9009 270.27 26.78
31-Dec-16 300 1.000 300.00 29.73
I-Jan-15 300 0.81 16 243.49
31-Dec-15 300 0.9009 270.27 26.78
31-Dec-16 300 1.000 300.00 29.73
I-Jan-15 300 0.81 16 243.49
31-Dec-15 300 0.9009 270.27 26.78
31-Dec-16 300 1.000 300.00 29.73
I-Jan-15 300 0.81 16 243.49
31-Dec-15 300 0.9009 270.27 26.78
31-Dec-16 300 1.000 300.00 29.73
(i) Liability for workers' compensation and penalty
 All the conditions as intentioned for provisions are met to the extent of Rs. 20 million for the
claims of fatuities of workers and Rs. 10 million for the penalty levied by a government agency.
Therefore, a provision of Res. 30 million (20+10) would be made.
 For the remaining amount of Rs. 65 million (60+35-30), it is not probable that an outflow of
economic benefits will be required . Therefore, a contingent liability would be disclosed giving
information as per the above requirements.
(ii) Additional compensation for the families of the deceased workers;
The obligation for additional compensation to the families of the deceased workers is neither legal
nor constructive as the matter is still under consideration and no formal announcement was made
that may create a valid expectation. Therefore, no provision or disclosure is required in this respect.
(iii) Insurance claim
 As the insurance claim to the extent of Rs. 45 million (60-15) is virtually certain to be received;
an insurance claim would be recognized for this amount.
 Where an inflow for the remaining amount of Rs. 15 million is probable, a contingent asset
would be disclosed giving information as per the above requirements.
 Where an inflow for the remaining amount of Rs. 15 million is not probable, no contingent asset
should be disclosed.
(iv) Reduction in future profit by Rs. 10 million for the half year ending 31-12-2014: No provision or
disclosure is required for future operating losses as they arise from future events not past events.
Question.10(IFRIC 1, Revaluation Model)

On 1 January 2020, Grateful Industries Limited (GIL) completed installation of a plant which will be
required to be dismantled at the end of its ten years’ useful life. GIL paid Rs. 2,000 million for the plant.
On 1 January 2020, it was estimated that the cost of dismantling would amount to Rs. 200 million.
Applicable discount rate was 10% per annum when initial estimate of dismantling costs was made.
The fair value of the plant as on 31 December 2020 was assessed at Rs. 1,845 million(including dismantling
cost).
Estimates of dismantling cost and applicable discount rate were reviewed as at 31 December 2021 and
were revised to Rs. 150 million and 12% per annum respectively.
GIL has a policy to subsequently measure plant using the revaluation model and depreciation is provided
on straight line basis.
Required:
502
Prepare accounting entries in the books of GIL, for the year ended 31 December 2021 in accordance with
IFRS. (08)
Ans.10
Description Dr. Cr.

Date
Rs. in million
31/12/21 Depreciation expense (P&L) 1,845/9 205.0
Acc. depreciation 05.0
31/12/21 Interest expense (P&L) (W-1) 8.5
Dismantling liability/Provision for decommissioning
8.5
31/12/21 Dismantling liability/Provision for decommissioning (W-1)
32.7
Revaluation gain (P&L) (W-2) 24.4
Revaluation surplus (OCI) (Bal. fig.) 8.3
W-1: Dismantling cost
Rs in
million
01/01/20 PV of dismantling cost 200*(1.1)-10 77.1
31/12/20 Unwinding of interest@10% 7.7
84.8
31/12/21 Unwinding of interest @10%(84.3*10%) 8.5
93.3
31/12/21 PV of revised cost at revised rate 150*(1.12)-8 (60.6)
31/12/21 Decrease in liability due to revision 32.7
W-2: Previous revaluation loss on 31 December 2020:
Revalued amount 1,845.0

Carrying value of plant (2,000+77.1)×9/10 (1,869.4)
(24.4)
Question 11
Turquoise Limited (TL) is in the process of finalizing its financial statements for the year ended 30 June
2019. Following matters are under consideration:
(i) On 10 July 2019, the owner of the adjacent building filed a case against TL claiming
Rs. 50 million. The claim is made in respect of severe damage to his building during a fire incident
in TL’s head office in June 2019. He is of the view that TL was negligent in maintaining fire safety
systems in its head office. According to TL’s lawyers, there is 70% probability that TL would be
found negligent and would need to pay 40% of the
Amount claimed. (04)
(ii) In May 2019, TL’s board of directors decided to relocate its regional office from Multan to Lahore.
In this respect, a detailed plan was approved by the management and a formal public announcement
was made in June. TL has planned to complete the relocation by December 2019. The related costs
have been estimated as under:
Rs. in million
Redundancy payments 20
503
Costs of moving office equipment to Lahore 3
Compensation to employees agreeing to relocate 10
Salary of existing operation manager (responsible to supervise the
relocation) 2
(04)
(iii) TL had 6,000 unsold units of product A as on 30 June 2019 acquired at Rs. 500 per unit. In June
2019, the selling price of product A has fallen to
Rs. 350 per unit.
TL acquires product A under the contract in which TL has to buy 10,000 units of product A per
month for Rs. 500 per unit. The contract is valid till 31 August 2019 and if TL decides to cancel the
contract, then it must pay a cancellation penalty of Rs. 4 million. TL is of view that the market may
not improve in near future. (04)
(iv) TL sells product B with a warranty of 12 months, though the manufacturer i.e. Sulphur Limited (SL)
provides a warranty of 8 months only. Warranty services are provided by SL. However, TL is
responsible if SL fails to honor its obligation for this warranty. If warranty claim arises within 8
months, SL does not charge any cost. However, SL charges Rs. 500, Rs. 1,000 and Rs. 2,500 for a
minor, moderate and major defect respectively in each unit if the defect arises in the extended
warranty period of 4 months offered by TL. The probability that a warranty claim in respect of a
unit sold may arise, is as under:
Nature of defect First 8 months Last 4 months
Minor 12% 6%
Moderate 7% 10%
Major 4% 5%
During the year ended 30 June 2019, a total of 12,000 units of product B has been sold by TL and
warranty cost of Rs. 1.2 million has been paid to SL in respect of these units. (05)
Required:
Discuss how the above issues should be dealt with in the financial statements of TL for the year
ended 30 June 2019. Support your answers in the context of relevant IFRSs.
Ans.11
TL should recognise the provision of Rs. 20 million(50x40%) due to the following:
(i)
 Filing of case by owner of adjacent building is considered as an adjusting event because the fire
incident was occurred in June consequently evidence of conditions i.e. severe damage to such
building was exist at reporting date.
 The payment is probable as according to TL's lawyers, there is 70% probability that TL would be
determined to be negligent.
 Amount can also be estimated reliably as TL's lawyers is of view that TL will have to pay 40% of
the amount claimed.
(ii)A provision for restructuring cost is to be recognised, as formal restructuring plan has been finalized
and approved by the management and a formal public announcement was made prior to 30 June 2019.
However, a provision should only be made for redundancy cost of Rs. 20 million as it pertains to the closing
of Multan unit.
Costs of moving machinery to the Lahore and compensation to employees agreeing to transfer Lahore relate
to future conduct of the business / ongoing business of TL should not be recorded in the year ended 30 June
2019.
Salary of the existing operation manager should not be recorded as it is not incremental cost, and would be
incurred whether relocation takes place or not.
504
(iii)
In the given scenario, following two adjustments in respect of product A are required:
 Since selling price is lower than cost so NRV adjustment in respect of closing inventory at year
end should be made by Rs. 900,000 [6,000 X 150(500-350)]
 Further, as the contract become onerous, TL should also record provision for unavoidable cost of
Rs. 3 million being lower of:
Cost of fulfilling the contract i.e. Rs. 3 million 350)]
Cancel the contract (penalty) i.e. Rs. 4 million
(iv)In the given scenario, warranty period is divided into two i.e. First eight months and subsequent four
months. Both periods are discussed separately below:
First 8 months:
Since SL is responsible for warranty claim arising in this period and no cost is charged by SL so no provision
is required in TL's books. However, since TL is responsible if SL does not honour its obligation for this
warranty period, TL should disclose this fact as contingent liability.
Subsequent 4 months:
Since SL charges an amount from TL depend upon nature of defect, provision should be recorded in TL's
books as there is present obligation as a result of past event (Sale of Product B). Computation is as follows:
Nature of defect % defective No. of units Rs. per Rupees
units unit
Minor(12,000*6%) 6% 720 500 360,000
Moderate(12,000*10%) 10% 1,200 1,000 1,200,000
Major(12,000*5%) 5% 600 2,500 1,500,000
3,060,000
Less: Already claimed (1,200,000)
Provision to be made 1,860,000
Question.12 For the purpose of this question, assume that the date today is 1 February 2021
You are finance manager of Tibet Limited (TL). You are finalizing the financial statements of TL for the
year ended 31 December 2020. The Chief Executive of TL has sent you the following email:
2020 was a tough year for TL due to COVID-19. The net profit of TL is expectedly very low as compared
to previous years. However, I have identified the following matters which may improve TL’s net profit for
2020
(i) On 25 January 2021, Government has enacted amendments in the income tax laws to reduce the
rate of income tax for companies by 10% for 3 years including 2020
(ii) The exchange rate has risen from Rs. 150 per USD as on 31 December 2020 to Rs. 162 per USD.
TL has significant receivables in USD due to export sales.
(iii) A major local customer has settled his full balance after receiving bank loan last week. At year end,
the customer was facing financial difficulty and therefore TL had provided 40% of his balance as
doubtful receivable.
(iv) In December 2020, Government has announced a compensation scheme for entities which have not
terminated any employee in 2020. Under the scheme, these entities would be reimbursed 25% of
salaries expense of 2020. TL would initiate the process of obtaining the reimbursement after
completion of audit. The reimbursement might take few months
505
Required:
Discuss how each of the above matters would affect TL’s net profit for the year ended 31 December 2020.
Support your answer with justifications. (08)
(Discussion on disclosure requirements is not required)
Ans.12
(i) Reduction of income tax rate after the year end is a non-adjusting event as it was enacted after reporting
date i.e.31 December 2020 so it would not affect profit for 2020.
(ii) Increase in exchange rate after the year end is a non-adjusting event so it would not affect the profit for
2020.
(iii) The financial position of customer has improved after year-end upon obtaining the bank loan so it is a
non-adjusting event. The provision on this customer balance would remain in the books and it would
not affect the profit for 2020.
Though government has announced the grant/compensation scheme in 2020, the grant would be
recognized when there is reasonable assurance that the grant will be received. As the process has not
yet initiated and would take few months, it seems that there is no reasonable assurance as at 31
December 2020 that the grant will be received. Therefore, it would not affect the profit for 2020.

For the purpose of this question, assume that the date today is 1 September 2023.
Jahlar Cosmetics Limited (JCL) is currently in the process of finalizing its financial statements for the
year ended 30 June 2023.In May 2023, JCL was on the verge of launching an innovative line of beauty
products. However, the launch was cancelled due to alarming reports that employees involved in internal
testing of the new cosmetics experienced adverse skin reactions, ranging from minorirritations to serious allergic
responses. The situation worsened as news of these reactions spread through media outlets, highlighting
potential risks, damaging JCL's reputation, and causing public doubt.
As a result of the above, JCL has incurred a net loss for the first time. Additionally, JCL hasencountered the
following matters:
(i) In July 2023, affected employees filed a lawsuit against JCL for damages. Legal advisors anticipate
that these suits could result in potential liability of Rs. 120 million. However, due to legal complexities,
the actual payout remains uncertain. The legal advisors estimate a 70% likelihood of incurring the full
liability and a 30% likelihood of incurring only half the amount.
(ii) In June 2023, the JCL’s board of directors approved a detailed restructuring plan involving the
reduction of operations in two cities due to high cost and low profitability. The plan was announced
and communicated to the employees in the same month. The implementation of this plan will span
over a six-months period, resulting in employee redundancies, lease termination charges, and
retraining cost amounting to Rs. 150 million, Rs. 24 million and Rs. 18 million, respectively. Further,
an expected disposal of assets is projected to generate a gain of Rs. 18 million.
(iii) As of 30 June 2023, JCL was in breach of one of the loan covenants related to revenue target, which
would have led to the entire long term loan becoming payable immediately. However, JCL contacted
the banks and obtained a waiver from them for compliance with the given covenant on 26 July 2023.
(iv) JCL plans to raise finance from the issuance of bonds in October 2023. Due to thechallenges, it is
estimated that the bond issuance will yield Rs. 100 million less thanthe original estimates. Further, the
interest rates would need to be increased by 2% perannum to make the issue possible. This additional interest
would result in an annual loss of Rs. 14 million, which has a present value of Rs. 70 million.
Required:
Discuss the effect of the above matters on JCL’s financial statements for the year ended30 June 2023.
(13)
Answer 13
(i) JCL has a present obligation as a result of a past event i.e., skin reactions due to testing. It is probable
that an outflow of resources would be required as both possibilities wouldresult in payment of damages.
506
A reliable estimate can be made. As it is a single instance,the most likely outcome of 70% should be
considered. So, JCL should make a provision for Rs. 120 million.
(ii) A constructive obligation for restructuring has arisen as the formal plan has been approved by the
Board, and has been communicated to all concerned before the end of reporting period. Therefore, a
provision of Rs. 174 (150+24) million should be recognized comprising of redundancy costs and lease
termination charges. Retraining cost would not be included in the provision for restructuring, as it
relates to future conduct of the business. Gains on the expected disposal of assets are not taken into
account in measuring a restructuring provision, even if the sale of assets is envisaged as part of the
restructuring process.
(iii) JCL shall classify the bank loan as current since JCL does not have an unconditionalright to defer
settlement of the loan for at least twelve months after the reporting period.Obtaining the waiver after
the year-end is a non‑adjusting event and will not change theclassification of loan from current to
non-current liabilities. However, the fact of obtaining waiver may be disclosed in the notes.
(iv) The issuance of bond at a lower amount and increase in finance cost represents future operating losses
for which provision shall not be recognized in the financial statements for the year ended 30 June
2023

For the purpose of this question, assume that the date today is 1 March 2024.
You have recently assumed the role of Finance Manager at Gorgeous Limited (GL). Your first
assignment is the finalization of GL's financial statements for the year ended31 December 2023.
The CEO has identified four specific matters where provisions may benecessary, in accordance with
IAS 37. However, the CEO is uncertain about the accurateestimation of these provisions. Below are
the details concerning these matters:
(i) Provision for renewal fees:
GL acquired a license for Rs. 96 million in 2023. The license is initially valid for a period of
five years, with the option for renewal every five years at a cost of Rs. 35 million.
Considering the substantial renewal fees, GL plans to renew the license only once and intends to
sell it at the end of the eighth year. (03)
(ii) Provision for engine replacement:
At the start of 2023, the government imposed a ban on the use of diesel engines in vehicles
effective from 31 December 2023. As of that date, GL owned eight vehicles equipped with
diesel engines, which could only be utilized in 2024 after engine replacement or potentially
sold at a loss in their current condition. On 31 December 2023, it was estimated that
the cost of replacing the engines would beRs. 15 million. However, the engines of the vehicles
were replaced in January and February 2024 at a cost of Rs. 20 million. (03)
(iii) Provision for net realizable loss:
As of 31 December 2023, GL held inventory items with a cost of Rs. 100 million. However,
the selling prices of these items were experiencing continual decline in the market. At 31 December
2023, the estimated selling price was Rs. 75 million. Subsequently, 80% of these inventory items
were sold in January and February 2024 at Rs. 50 million, while the remaining 20% is anticipated (04)
to be sold at Rs. 15 million.
(iv) Provision for pending court case:
Ten employees have initiated legal action against GL for alleged unfair dismissals in 2023.
Summary of two key correspondences with the GL's legal advisor regarding this matter is as
follows:
Correspondence dated 31 December 2023:
GL's legal advisor has opined that the dismissals were fair, with only a 30% probability
that the court may rule in favor of the employees, necessitating compensation. The potential
compensation amount varies, but is estimated to be Rs. 2 million per employee.
507
Correspondence dated 29 February 2024:
In light of new evidence presented to the court in February 2024, GL's legal advisornow believes
that the dismissals were unfair. There is a 70% probability that the court may rule in favour of
employees and order GL to pay Rs. 3 million to eachemployee.
Moreover, GL anticipates that if these claims are successful, three additionalemployees who
were similarly dismissed in 2023 may also pursue legal recourse. Therefore, based on latest
correspondence with the legal advisor, GL is considering a settlement with these three employees
before they initiate legal proceedings. (05)
The discount rate of 15% may be used, if required.

Required:
Identify whether a provision under IAS 37 needs to be made for each of the above matters.Also, discuss
the effect of the above matters on GL’s financial statements for the year ended
31 December 2023 in accordance with IFRSs.
508
Question: Earley Inc. is finalizing its accounts for the year ended 31 December 2014. The following events
have arisen since the year end and the financial director has asked you to comment on the final accounts.
(a) At 31 December 2014 trade receivables included a figure of Rs. 250,000 in respect of Nedengy Inc.
On 8 March 2015, when the current debt was Rs. 200,000, Nedengy Inc went into receivership.
Recent correspondence with the receiver indicates that no dividend will be paid to unsecured
creditors (means no further amount would be received).
(b) On 15 March 2015 Earley Inc sold its former head office building, for Rs. 2.7million. At the year
end the building was unoccupied and carried at a value of Rs. 3.1 million.
(c) Inventories at the year-end included Rs. 650,000 of a new electric tricycle, the Opasney. In January
2015 the European Union declared the tricycle to be unsafe and prohibited it from sale. An alternative
market, in Bongolia, is being investigated, although the current price is expected to be cost less 30%.
(d) Stingy Inc, a subsidiary in Outer Sonning, was nationalized in February 2015. The Outer Sonning
authorities have refused to pay any compensation. The net assets of Stingy Inc have been valued at
Rs. 200,000 at the year end.
(e) Freak floods caused Rs. 150,000 damage to the Southcott branch of Earley Inc. in January2015. The
branch was fully insured.
(f) On 1 April 2015 Earley Inc. announced a 1 for 1 rights issue aiming to raise Rs. 15 million.
Required:
Explain how you would respond to the matters listed above.
Answer:
(a) IAS 10 Events After the Statement of financial position Date states that assets and liabilities should be
adjusted for events occurring after the statement of financial position date that provide additional
evidence relating to conditions existing at the statement of financial position date. It specifically
includes the example of bad debts, where evidence of bankruptcy of a debtor occurs after the year
end.
In this case, Nedengy appears to have recovered part of the debt and as such only Rs.200, 000 needs
to be provided. It may be argued that the receivership has occurred as a result of events occurring after
the statement of financial position date, as a result of a change in legislation for example, but this is
unlikely.
(b) It is likely that the fall in the value of the property will fit the IAS 10 definition of adjusting events
noted in (a) above, unless, again, it can be argued that the decline in the property market occurred
after the year-end. IAS 36 Impairment of assets and IAS 16 Property, Plant and Equipment
require that the carrying amount of property, plant and equipment should be reviewed periodically
in order to assess whether the recoverable amount has fallen below the carrying amount. Where it
has, the property, plant and equipment should be written down to the recoverable amount, either
through the statement of profit or loss as an expense, or though other comprehensive income to
revaluation reserve in shareholder’s equity, but only to the extent that the balance on the revaluation
reserve relates to a previous revaluation surplus on the same asset.
(c) IAS 2 Inventories requires that inventories be stated at the lower on cost and net realisable value. Net
realizable value is the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale. It should only be disclosed in
current year.
(d) Unless Earley was making a significant margin on the tricycles, it is likely that the reduction in selling
price of 30% will necessitate a write- down to net realisable value, especially considering the
transportation costs to Bongolia which must be included. If the Bongolian option is unlikely to
509
proceed, it may be necessary to write the tricycles down to scrap value.
(e) Under IAS 10, the nationalization is likely to be regarded as a non-adjusting event that merely
requires disclosure in the financial statements. The loss of the investment should be accounted for
in the year in which it occurred, but disclosed in the current year.
If the loss of the subsidiary results in Earley no longer being a going concern, then the event becomes
an adjusting event
(f) As per IAS 10, Non adjusting events are those post reporting date events the conditions of which
arise after reporting date, in the given situation the loss amounting Rs.150,000 due to floods in
January 2015 i.e. after reporting date, hence the same may be disclosed as non-adjusting event.
(g) As per IAS 10, Non adjusting events are those post reporting date events the conditions of which
arise after reporting date. Since the declaration was announced after year-end, there is no past event
and no obligation at year-end, hence the same may be disclosed as non- adjusting event.
Example 02:
Question: You have been asked to advise on the appropriate accounting treatment for the following situations
arising in the books of various companies. The year end in each case can be taken as 31 December 2015
and you should assume that the amounts involved are material in each case.
(a) At the year-end there was a debit balance in the books of a company of Rs. 15,000, representing an
estimate of the amount receivable from an insurance company for an accident claim. In February
2016, before the directors had agreed the final draft of the published accounts, correspondence with
lawyers indicated that Rs. 18,600 might be payable on certain conditions.
(b) A company has an item of equipment which cost Rs. 400,000 in 2012 and was expected to last for
ten years. At the beginning of the 2015 financial year the book value was Rs. 280,000. It is now thought
that the company will soon cease to make the product for which the equipment was specifically
purchased. Its recoverable amount is only Rs. 80,000 at 31December 2015.
(c) On 30 November a company entered into a legal action defending a claim for supplying faulty
machinery. The company’s solicitors advise that there is a 20% probability that the claim will
succeed. The amount of the claim is Rs. 500,000.
(d) An item has been produced at a manufacturing cost of Rs. 1,800 against a customer’s orderat an
agreed price of Rs. 2,300. The item was in inventory at the year-end awaiting delivery instructions.
In January 2016 the customer was declared bankrupt because of an event occurred in Dec. 2015. and
the most reasonable course of action seems to be to make a modification to the unit, costing
approximately Rs.300, which is expected to make it marketable with other customers at a price of
about Rs.1,900.
(e) At 31 December a company has a total potential liability of Rs. 1,000,400 for warranty work on contracts.
Past experience shows that 10% of these costs are likely to be incurred, that 30% may be incurred
but that the remaining 60% is highly unlikely to be incurred.
Required:
For each of the above situations outline the accounting treatment you would recommend and give the
reasoning of principles involved.
Answer:
(a) IAS 37 Provisions contingent liabilities and contingent assets states that contingent gains should
not be recognised as income in the financial statements. The company has a debit balance already in
its books which indicates that it must be reasonably certain that at least part of the claim will be paid.
This element of the claim then is probably not a contingency at all. The remaining part (the difference
between the Rs.15,000 and the Rs.18,600) is, and should be disclosed and not accrued.
510
(b) IAS 16 Property, Plant and Equipment requires that the carrying amount of property, plant and
equipment should be reviewed periodically in order to assess whether the recoverable amount has
fallen below the carrying amount. Where it has, the property, plant and equipment should be written
down to the recoverable amount through the statement of profit or loss as an expense. In this case this
would result in the recognition of an expense of Rs.160,000. (240,000 (280,000 – 40,000) – 80,000).
(c) IAS 37 states that contingent liabilities should not be recognised. Though a provision should be
made for amounts where the company has an obligation to pay them.
The question in this case is whether or not there is an obligating event within the context of IAS 37.
It seems inappropriate to recognise a provision in respect of this amount but the possible liability
should be disclosed as a contingent liability by explaining:
(i) the nature of the contingency
(ii) the uncertainties surrounding the ultimate outcome
(iii) the likely effect, ie Rs.500,000 loss.
(d) IAS 2 Inventories requires that inventories be stated at the lower on cost and net realisable value. Net
realisable value is the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale.
In this case, cost is Rs.1,800 and net realisable value is Rs.1,600 [1,900-300]
(e) The company should set up a provision for Rs.100,040, i.e. should accrue for the 10% probable
liability. It should disclose the possible liability under contingent liabilities. The disclosure is as
noted in (c) except that the financial effect is Rs.300,120 (30% x Rs.1,000,400). The balance should
be ignored as it is a remote contingent liability.
Example 3: J-Mart Limited
Question: J-Mart Limited, a chain of departmental stores has distributed its operations into four
Divisions i.e. Food, Furniture, Clothing and Household Appliances. The following information has been
extracted from the records:
(i) The company allows the dissatisfied customers to return the goods within 30 days. It is estimated
that 5% of the sales made in June 2015 will be refunded in July 2015.
(ii) On June 2, 2015, three employees were seriously injured as a result of a fire at the company’s
warehouse. They have lodged claims seeking damages of Rs. 2.0 million from the company. The
company’s lawyers have advised that it is probable that the court may award compensation of Rs.
400,000.
(iii) Under a new legislation, the company is required to fit smoke detectors at all the stores by December
31, 2015. The company has not yet installed the smoke detectors.
(iv) On June 20, 2015, the board of directors decided to close down the Household Appliances Division.
However, the decision was made public after June 30, 2015.
(v) The company has a large warehouse in Lahore which was acquired under a three-yearrent agreement
signed on April 1, 2014. The agreement is non- cancellable and the company cannot sub-let
the warehouse. However, due to operational difficulties, the company shifted the warehouse to a
new location.
(vi) A 15% cash dividend was declared on July 5, 2015.
Required:
Describe how each of the above issue should be dealt with in the financial statements for the yearended
June 30, 2015. Support your point of view in the light of relevant International Accounting Standards.
Answer
(i) The conditions attached to the sale give rise to a constructive obligation on the reporting date.
511
A provision for the sales return should be recognised for 5% of June 2015 sales. The related cost
should also be treated as stock with customer.
(ii) Since the law suit was already in progress at year-end and the amount of compensation can also be
estimated, it is an adjusting event. A provision of Rs. 400,000 should be made.
(iii) There is no obligating event at the year-end either for the costs of fitting the smoke detectors or
for fines under the legislation (because still there are six months to install after the year end.).
No provision should be recognised in this regard.
(iv) The obligating event is the communication of decision to the customers and employees, which gives rise
to a constructive obligation from that date, because it creates a valid expectation that the division will
be closed.
(v) Since no communication has yet been made, no provision is required in this regard
The obligating event is the signing of the lease contract, which gives rise to a legal obligation.
A provision is required for the unavoidable rent payments.
(vi) Since the declaration was announced after year-end, there is no past event and no obligation at
year-end and is therefore non-adjusting event.
Details of the dividend declaration must, however, be disclosed.
Example 4: Badar
Question: The following information relates to the financial statements of Badar for the year to 31March
2015.
The mining division of Badar has a 3 year operating licence from an overseas government. This allows it to
mine and extract copper from a particular site. When the licence began on 1 April 2014,Badar started to build
on the site. The cost of the construction was Rs. 500,000.
The overseas country has no particular environmental decommissioning laws. In its past financial
statements Badar has given information about the company’s environmental policy and has provided
examples to demonstrate that it is a responsible company that believes in restoring mining sites at the end of
the extraction period. The cost of removing the construction at the end of the three years is estimated to be
Rs. 100,000.
The cost of the site currently shown in the trial balance is Rs. 500,000. The company has a cost of borrowing
of 10%.
Required:
Explain the correct accounting treatment for the above (with calculations if appropriate).
Answer: IAS 37 Provisions, Contingent Liabilities and Contingent Assets only permits a provision to be
made if three conditions are met:
(i) The company has a present obligation, either legally or constructively, as a result of a past
events;
(ii) Probable outflow of resources is required to settle the obligation; and
(iii) A reliable estimate is available.
Although there is no legal requirement to restore the site, the company has established a constructive
obligation by setting a valid expectation in the market, due to its published policies and past practice.
It therefore appears probable that Badar will have to pay money to improve the site and so a provision
should be created for the expected amount. As the expected payment of Rs. 100,000 will not be settled for
three years, the provision should be discounted and entered at its net present value of Rs. 75,131
(Rs.100,000 x (1.1)-3). Over the three years, the discounting should be unwound and charged to profit or loss
as finance costs, resulting in a provision of Rs. 100,000 by the end of the third year.
The cost of the construction work has been correctly capitalised. The cost of the future decommissioning
512
work should be added to this asset so that the total costs of the site can be matched to the revenue from the
copper over the period of mining. This will result in an asset of Rs. 575,131 which should be depreciated
over the three-year life.
Example 5: Georgina
Question: Georgina Company is preparing its financial statements for the year ended 30 September 2015.
The following matters are all outstanding at the year end.
(1) Georgina is facing litigation for damages from a customer for the supply of faulty goods on1
September 2015. The claim, which is for Rs. 500,000, was received on 15 October 2015.Georgina’s
legal advisors consider that Georgina is liable and that it is likely that this claim will succeed. On 25
October 2015 Georgina sent a counter-claim to its suppliers for Rs. 400,000. Georgina’s legal
advisors are unsure whether or not this claim will succeed.
(2) Georgina’s sales director, who was dismissed on 15 September, has lodged a claim for Rs.100,000
for unfair dismissal. Georgina’s legal advisors believe that there is no case to answer and therefore
think it is unlikely that this claim will succeed.
(3) Although Georgina has no legal obligation to do so, it has habitually operated a policy of allowing
customers to return goods within 28 days, even where those goods are not faulty. Georgina estimates
that such returns usually amount to 1% of sales. Sales in September 2015 were Rs. 400,000. By the
end of October 2015, prior to the drafting of the financial statements, goods sold in September for
Rs. 3,500 had been returned.
(4) On 15 September 2015 Georgina announced in the press that it is to close one of its divisions in
January 2016. A detailed closure plan is in place and the costs of closure are reliably estimated at
Rs. 300,000, including Rs. 50,000 for staff relocation.
Required: State, with reasons, how the above should be treated in Georgina’s financial statements for the
year ended 30 September 2015.
Answer:
(1) Litigation for damages
Under IAS 37, a provision should only be recognised when:
 an entity has a present obligation as a result of a past event
 it is probable that an outflow of economic benefits will be required to settle the
obligation
 a reliable estimate can be made of the amount of the obligation.
Applying this to the facts given:
 Georgina’s legal advisors have confirmed that there is a legal obligation. This arose from
the past event of the sale, on 1 September 2015 (i.e. before the year end).
 Probable is defined as ‘more likely than not’. The legal advisors have confirmed thatit is
likely that the claim will succeed.
 A reliable estimate of Rs.500,000 has been made.Therefore a provision of Rs.500,000 should be
made.
Counter-claim
IAS 37 requires that such a reimbursement should only be recognised where receipt is ‘virtually certain’.
Since the legal advisors are unsure whether this claim will succeed no asset should be recognised in
respect of this claim.
Claim for unfair dismissal
In this case, the legal advisers believe that success is unlikely (i.e. possible rather than probable).
Therefore, this claim meets the IAS37 definition of a contingent liability:
513
 a possible obligation
 arising from past events
 whose existence will be confirmed only by the occurrence or non-occurrence of one ormore
uncertain future events.
The liability is a possible one, which will be determined by a future court case or tribunal. It did arise
from past events (the dismissal had taken place by the year end).
This contingent liability should be disclosed in the financial statements (unless the legal advisors believe
that the possibility of success is in fact remote, and then even no disclosure is necessary).
Returns
Applying the IAS 37 conditions in (1) to the facts given:
Although there is no legal obligation, a constructive obligation arises from Georgina’s past actions.
Georgina has created an expectation in its customers that such refunds will be given.
 As at the year end, based on past experience, an outflow of economic benefits is probable.
 A reliable estimate can be made. This could be 1% × 400,000 but since the returns are now
all in the actual figure of Rs.3,500 can be used as 28 days have already passed.
Therefore a provision of Rs.3,500 should be made.
(4) Closure of division
Applying the above IAS37 conditions in (1) to the facts given:
 A present obligation exists because at the year-end there is a detailed plan in place and the
closure has been announced in the press.
 An outflow of economic benefits is probable.
 A reliable estimate of Rs.300,000 has been made.
However, IAS 37 specifically states in respect of restructuring that any provision should include only
direct expenses, not ongoing expenses such as staff relocation or retraining. Therefore, a provision of
Rs. 250,000 (300,000 – 50,000) should be made.
Example 6: Rowsley
Question: Rowsley is a diverse group with many subsidiaries. The group is proud of its reputation as a
‘caring’ organisation and has adopted various ethical policies towards its employees and the wider
community in which it operates. As part of its Annual Report, the group publishes details of its
environmental policies, which include setting performance targets for activities such as recycling,
controlling emissions of noxious substances and limiting use of non-renewable resources.
The finance director is reviewing the accounting treatment of various items prior to finalising the
accounts for the year ended 31 March 20X4. All items are material in the context of the accounts as a
whole. The accounts are due to be approved by the directors on 30 June 20X4.
Legal claim
During the year to 31 March 20X4, a customer started legal proceedings against the group, claiming that
one of the food products that it manufactures had caused several members of his family to become
seriously ill. The group’s lawyers have advised that this action will probably not succeed.
Environmental impact of overseas subsidiary
The group has an overseas subsidiary that is involved in mining precious metals. These activities cause
significant damage to the environment, including deforestation. The company expects to abandon the mine
in eight years’ time. The mine is situated in a country where there is no environmental legislation obliging
companies to rectify environmental damage and it is very unlikely that any such legislation will be
enacted within the next eight years. It has been estimated that thecost of cleaning the site and re-planting
514
the trees will be Rs. 25 million if the re-planting was successful at the first attempt, but it will probably
be necessary to make a further attempt, which will increase the cost by a further Rs. 5 million.
Required:
Explain how each of the items above should be treated in the consolidated financial statements for the
year ended 31 March 20X4.
Answer:
Introduction
All scenarios relate to the rules of IAS 37 Provisions, contingent liabilities and contingent assets. In
each scenario, the key issue is whether or not a provision should be recognised.
Under IAS 37, a provision should only be recognised when three conditions are met:
 There is a present obligation as a result of a past event; and
 It is probable that a transfer of economic benefits will be required to settle the obligation; and
 A reliable estimate can be made of the amount of the obligation.
Legal proceedings
It is unlikely that the group has a present obligation to compensate the customer; therefore, no provision
should be
recognised. However, there is a contingent liability. Unless the possibility of a transfer of economic
benefits is remote, the financial statements should disclose a brief description of the nature of the
contingent liability, an estimate of its financial effect and an indication of the uncertainties relating to the
amount or timing of any outflow.
Environmental damage
It is clear that there is no legal obligation to rectify the damage. However, through its published policies,
the group has created expectations on the part of those affected that it will take action to do so. There is,
therefore, a constructive obligation to rectify the damage and a transfer of economic benefits is probable.
The group must recognise a provision for the best estimate of the cost. As the most likely outcome is that
more than one attempt at re-planting will be needed, the full amount of Rs. 30 (25+5) million should be
provided. The expenditure will take place sometime in the future, and so the provision should be
discounted at a pre-tax rate that reflects current market assessments of the time value of money and the
risks specific to the liability.
The financial statements should disclose the carrying amount at the end of the reporting period, a
description of the nature of the obligation and the expected timing of the expenditure. The financial
statements should also give an indication of the uncertainties about the amount and timing of the
expenditure.
515
Further discussion of IAS 10 and 37:
Date of authorization [IAS 10: 4, 5 & 7 and Companies Act, 2017: Section 232]
In Pakistan, the financial statements must be approved by the board of directors of the company and signed
on behalf of the board of directors by the chief executive and at least one director of the company, and in case
of a listed company also by the chief financial officer. The date of approval by members in annual general
meeting is not the date of authorization.
Example:
The management of an entity completes draft financial statements for the year to 30 June 2012 on 31 August
2012. On 18 September 2012, the board of directors reviews the financial statements and authorises them
for issue. The entity announces its profit and selected ‘other financial information’ on 19 September 2012.
The financial statements are made available to shareholders and others on 1 October 2012. The shareholders
approve the financial statements at their annual meeting on 24 October 2012 and the approved financial
statements are then filed with SECP/registrar on 20 November 2012.
Required:
What is date of authorization for issue of financial statements?
ANSWER:
The financial statements are authorised for issue on 18 September 20X2 (date of board of directors
authorisation for issue).
Events after the reporting period include all events up to the date when the financial statements are
authorized for issue, even if those events occur after the public announcement of profit or of other selected
financial information
Example:
On 30 June 2011, G Limited is involved in a court case. It is being sued by a supplier. On 15 September
2011, the court decided that G Limited should pay the supplier Rs. 45,000 in settlement of the dispute. The
financial statements for G Limited for the year ended 30 June 2011 were authorised for issue on 04 October
2011.
The settlement of the court case is an adjusting event after the reporting period:
 It is an event that occurred between the end of the reporting period and the date the financial
statements were authorised for issue.
 It provided evidence of a condition that existed at the end of the reporting period. In this case,
the court decision provides evidence that the company had an obligation to the supplier as at
the end of the reporting period.
Since it is an adjusting event after the reporting period, the financial statements for the year ended
30 June 20X1 must be adjusted to include a provision for Rs. 45,000. The alteration to the financial
statements should be made before they are approved and authorised for issue.
Accounting treatment of non-adjusting events [IAS 10: 10, 11 & 21]
Non-adjusting events are indicative of conditions that arose after the year end. The accounting
treatment is not to adjust the amounts recognized in financial statements. However, the nature and
financial effect (if can be made) of material non-adjusting events shall be disclosed.
516
Example:
A decline in fair value of investments between the end of the reporting period and the date when the
financial statements are authorized for issue
ANSWER:
An entity does not adjust the amounts recognised in its financial statements for the investments. Similarly, the
entity does not update the amounts disclosed for the investments as at the end of the reporting period,
although it may need to give additional disclosure of nature of event and financial effect, if it is material
Dividends [IAS 10: 12 & 13 and Companies Act, 2017: Section 243]
In Pakistan, final dividend is proposed by the Board of Directors and is approved by members in Annual
General Meeting (AGM) i.e. date of recognising liability is the date of AGM. Interim dividend is declared
by directors i.e. date of declaration and recognizing liability is date of directors meeting.
Example:
ABC Limited is in the process of finalizing its financial statements for the year ended June 30, 2021. Assume
today is 31st August 2021 and the intended date of authorisation of financial statements is September 15,
2021.
a) On July 7, 2021, ABC Limited announced to discontinue producing its Product C due to heavy loss
which represented 22% of total revenue.
b) On July 27, 2021 the auditors have pointed out that certain sales invoices were omitted from recording
during March 2021.
c) The board of directors announced the dividend for its ordinary shareholders of Rs. 3 per share on July
09, 2021 from the profits for the year ended 30 June 2021.
d) On July 12, 2021 information was received that a foreign customer had gone into liquidation in May
2021. There are no chances of recovery of this debt now.
e) On August 20, 2021 it was discovered that another customer, who owed Rs.100,000 at year end was
declared insolvent on 15 August 2021 after its premises burnt down two weeks ago. The premises
were completely destroyed and were not insured.
f) On July 15, 2021 one of corporate customer declared bankruptcy. The liquidator announced that only
30% of the debt would be paid on liquidation.
g) On August 15, 2021 the company sold 1,000 units of Product B for only Rs. 120 per unit due to damage
caused by water spoilage on August 05, 2021. The cost per unit was Rs.200. However, this Product
had been valued at its NRV of Rs. 150 per unit on June 30, 2021.
h) On July 15, 2021 the company sold 1,000 units of Product C for only Rs. 120 per unit. The cost per
unit was Rs. 200.
Required: Identify the above events as either adjusting or non-adjusting and briefly suggest accounting
treatment.
Answer
a) Non-adjusting event – being material, only disclosure shall be made. (Discontinuance of
operations).
b) Adjusting event – The correction of error should be made in financial statements for the year
ended June 30, 20Y1 as it pertained to March 20Y1.
c) Non-adjusting event – No amount shall be recognised in the financial statements in respect of the
dividend announced after the year end. However, the same shall be disclosed in notes to the
financial statements.
517
d) Adjusting event – The foreign debt should be written off as an expense in financial statements
for the year ended June 30, 20Y1 since there are no chances of recovery.
e) Non-adjusting – Although the debt owing by the customer existed at reporting date, the inability
of the customer to pay did not exist at reporting date – this condition only arose in 15 August
20Y1 after the fire. Thus, reporting the debtor at its full carrying amount of Rs. 100,000 is correct
at 30 June 20Y1, according to circumstances in existence at this date.
f) Adjusting event – The debtor’s balance should be written down by 70% amount due to his
bankruptcy/ insolvency. (As Question is silent)
g) Non-adjusting event – The inventory shall continue to be valued at Rs. 150 per unit as the damage
caused after the year end.
h) Adjusting event – The inventory shall be valued at lower of cost (i-e. Rs.150 per unit) or net
realisable value (NRV) i-e. Rs. 120 per unit as the cost of an item would not be recoverable if
inventory will be sold. (As Question is silent)
Example: Fit Limited (FL) is in the course of finalizing its financial statements for the year ended June 30,
2020. Due to international recession the company has lost its major customers. The company now intends to
cease its business operations and liquidate the company.
Required:
What would be impact of above issue on the financial statements?
ANSWER:
FL should not prepare the financial statements on a going concern basis. It must also disclose the
fact that the financial statements have not been prepared on going concern basis and give relevant
disclosures under IAS 1
Example: A company has given guarantee for loan taken by its associated company. The company
may or may not have to pay the guaranteed amount as associated company may or may not default.
It is a contingent liability
Example:
A company has not complied with a legal requirement. The law states that penalty can be up to Rs.
1m. However, the law is not enforced strictly, and it is not probable that the amount will have to be
paid. It isa contingent liability
Example:
In a litigation, the entity’s lawyers have advised that damages will have to be paid. However, no reliable
estimate of the amount could be made. It is a contingent liability.
Example:
An entity filed a litigation against one of its vendor claiming damages for Rs. 3 million for supplying the
faulty goods. The company may or may not win the case. This is a contingent asset
Example:
An entity has legal obligation to clean up the environmental damage caused by its operation. The entity is
obliged to rectify damage already caused. The provision shall be recognised.
Example:
518
Alpha Properties owns various office floors in shopping malls across the city of Multan. The government
introduces legislation that requires safety glass to be fitted in all windows on floors above the ground floor.
The legislation only applies initially to new buildings, but all buildings will have to comply within 3 years.
Discuss.
ANSWER
There is no obligating event. Even though Alpha Properties will have to comply within 3 years it can avoid
the future expenditure by its future actions, for example by selling the office floors. There is no present
obligation for that future expenditure and no provision is recognised
Example:
Alpha Chemicals operates in a country where there is no environmental legislation. Its operations cause
pollution in this country. Alpha Chemicals has a widely published policy in which it undertakes to clean up
all contamination that it causes, and it has honoured this published policy. Discuss
ANSWER
There is an obligating event. Alpha Chemicals has a constructive obligation which will lead to an outflow
of resources embodying economic benefits regardless of the future actions of the entity. A provision would
be recognised for the clean-up
The concept of obligation [IAS 37: 20 to 22]
An obligation always involves another party to whom the obligation is owed. It is not necessary, however,
to know the identity of the party to whom the obligation is owed, indeed the obligation may be to the public
at large.
Example:
Alpha Engineering provides 3-year warranty, to make any manufacturing defects good, at time of sale. It
maintains record of product serial number and date of sale but does not keep record relating to customer
identification. Discuss
ANSWER
There is an obligating event. It is not necessary to know the identity of customers to whom obligations
owed.
An obligation always involves a commitment to another party. It means that management decision alone
does not result in obligation. It becomes obligation when it is communicated to those affected by it.
Example:
A week before year end, Alpha Textiles decided to close a factory. The closure will lead to 500
redundancies at a significant cost to the entity. At year end, no news of this plan had been communicated to
the workforce. Discuss
Answer:
There is no obligating event. This will only come into existence when decision is communicated to the
workforce.
519
An event that does not give rise to an obligation immediately may do so at a later date, because of changes in
the law or because an act by the entity gives rise to a constructive obligation
Example:
An entity caused environmental damage and there was no obligation (neither legal nor constructive) to
remedy the consequences. The cause of this damage will become an obligating event when a new law will
require the existing damage to be rectified, or the entity will publicly accepts responsibility for rectificationin
a way that creates a constructive obligation.
Where details of a proposed new law have yet to be finalised, an obligation (legal) arises only when the
legislation is virtually certain to be enacted as drafted. Differences in circumstances surrounding enactment
make it impossible to specify a single event that would make the enactment of a law virtually certain. In
many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted.
Example: Alpha Limited guaranteed ABC Bank that Beta Limited (an associate of Alpha Limited) shall
repayits loan. It is almost certain that Beta Limited will repay the loan and Alpha Limited shall not have to
pay the guaranteed amount. Discuss
Answer:
No provision is recognised. The outflow of economic benefits is not probable.
A summarized chart suggesting the accounting term and treatment based on chances of outflow may be
useful:
Qualitative Quantitativ Accounting treatment

general e range* Obligation Assets
term
Remote 0 to 5% Do nothing Do nothing
Possible 5%+ to 50% Disclose contingent liability Do nothing
Probable 50%+ to 85% Recognize provision Disclose contingent asset
Virtually certain 85%+ to 99.9% Recognize liability Recognize asset and related
Certain 100% income
*based on professional judgement and may vary according to circumstances.
Original standard (Appendix example in part B). [take before IAS 10 page 90 of Vol 2]
Example:
A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms of the
contract for sale the manufacturer undertakes to make good, by repair or replacement, manufacturing
defects that become apparent within three years from the date of sale. On past experience, it is probablethat
there will be some claims under the warranties and a reliable estimate is available.
Required: Discuss the accounting treatment
ANSWER:
Obligation: The obligating event is the sale of the product with a warranty, which gives rise to a present
legal obligation under the warranty contract.
Outflow: Probable for the warranties as a whole.
Reliable estimate: Available.
520
Conclusion: A provision is recognised for the best estimate of the costs of making good under the warranty
products sold before the end of reporting period.
Example:
An entity in the oil industry causes contamination and operates in a country where there is no environmental
legislation. However, the entity has a widely published environmental policy in which it undertakes to clean
up all contamination that it causes. The entity has a record of honoring this published policy. The entity has
reliably estimated the cost to be incurred on clean-ups.
ANSWER:
Obligation: The obligating event is the contamination of the land, which gives rise to a present constructive
obligation because the conduct of the entity has created a valid expectation on the part of those affected by
it that the entity will clean up contamination.
Outflow: Probable.
Conclusion: A provision is recognised for the best estimate of the costs of clean-up.
Example:
An entity operates an offshore oilfield where its licensing agreement requires it to remove the oil rig at the
end of production and restore the seabed. 90% of the eventual costs relate to the removal of the oil rig and
restoration of damage caused by building it, and 10% arise through the extraction of oil. At the end of the
reporting period, the rig has been constructed but no oil has been extracted. The reliable estimate for
removal of oil rig is available.
ANSWER:
Obligation: The construction of the oil rig creates a present legal obligation under the terms of the licence to
remove the rig and restore the seabed and is thus an obligating event. At the end of the reporting period,
however, there is no obligation to rectify the damage that will be caused by extraction of the oil.
Outflow: Probable.
Conclusion: A provision is recognised for the best estimate of 90% of the eventual costs that relate to the
removal of the oil rig and restoration of damage caused by building it. These costs are included as part of
the cost of the oil rig.
The 10% of costs that arise through the extraction of oil are recognised as a liability when the oil is extracted
and not before
Example:
Under new legislation, an entity is required to fit smoke filters to its factories by 30 June 2022. The entity
has not fitted the smoke filters. The cost of smoke filters is Rs. 15 million. In case of non-compliance a fine
of Rs. 3 million may be payable.
521
Required: What is impact of this at 31 December 2021, the end of the reporting period?
ANSWER
Obligation: There is no obligation because there is no obligating event either for the costs of fitting smoke
filters or for fines under the legislation.
Outflow: Not applicable
Conclusion: No provision is recognised for the cost of fitting the smoke filters.
Example:
Under new legislation, an entity is required to fit smoke filters to its factories by 30 June 2022. The entity
has not fitted the smoke filters. The cost of smoke filters is Rs. 15 million. In case of non-compliance, a
fine of Rs. 3 million may be payable.
Required: What is impact of this at 31 December 2022, the end of the reporting period?
ANSWER
Obligation: There is still no obligation for the costs of fitting smoke filters because no obligating event has
occurred (the fitting of the filters). However, an obligation might arise to pay fines or penalties under the
legislation because the obligating event has occurred (the non-compliant operation of the factory).
Outflow: Assessment of probability of incurring fines and penalties by non-compliant operation depends
on the details of the legislation and the stringency of the enforcement regime.
Conclusion: No provision is recognised for the costs of fitting smoke filters. However, a provision is
recognised for the best estimate of any fines and penalties if probable to be imposed
Example:
The government introduces a number of changes to the income tax system. As a result of these changes, an
entity in the financial services sector will need to retrain a large proportion of its administrative and sales
workforce in order to ensure continued compliance with financial services regulation. At the end of the
reporting period, no retraining of staff has taken place.
Answer:
Obligation: There is no obligation because no obligating event (retraining) has taken place.
Outflow: Not applicable.

Reliable estimate: Irrelevant.
Conclusion: No provision is recognised Example:
After a wedding in 2020, ten people died, possibly as a result of food poisoning from products sold by the
entity. Legal proceedings are started seeking damages of Rs. 20 million from the entity but it disputes
522
liability. Up to the date of authorisation of the financial statements for the year to 31 December 2020 for
issue, the entity’s lawyers advise that it is probable that the entity will not be found liable.
Required: Discuss the accounting treatment for financial statements for year 2020.
Answer:
Obligation: On the basis of the evidence available when the financial statements were approved, there is no
obligation as a result of past events.
Conclusion: No provision is recognised. The matter is disclosed as a contingent liability unless the
probability of any outflow is regarded as remote.
Example:
After a wedding in 2020, ten people died, possibly as a result of food poisoning from products sold by the
entity. Legal proceedings are started seeking damages of Rs. 20 million from the entity but it disputes
liability. Up to the date of authorisation of the financial statements for the year to 31 December 2020 for
issue, the entity’s lawyers advise that it is probable that the entity will not be found liable.
However, when the entity prepares the financial statements for the year to 31 December 2021, its lawyers
advise that, owing to developments in the case, it is probable that the entity will be found liable for the
damages as claimed.
Required: Discuss the accounting treatment for financial statements for the year 2021.
Answer:
Obligation: On the basis of the evidence available, there is a present obligation.
Outflow: Probable
Reliable estimate: Available i.e. Rs. 20 million.
Conclusion: A provision is recognised for the best estimate of the amount to settle the obligation i.e. Rs.
20 million
Example:
A furnace has a lining that needs to be replaced every five years for technical reasons. At the end of the
reporting period, the lining has been in use for three years. The cost of replacement after two years is Rs. 10
million.
ANSWER:
Obligation: There is no present obligation.

523
Conclusion: No provision is recognised. The cost of replacing the lining is not recognised because, at the
end of the reporting period, no obligation to replace the lining exists independently of the company’s future
actions—even the intention to incur the expenditure depends on the company deciding to continue operating
the furnace or to replace the lining.
Instead of a provision being recognised, the depreciation of the lining takes account of its consumption,
i.e. it is depreciated over five years. The re-lining costs then incurred are capitalised with the
consumption of each new lining shown by depreciation over the subsequent five years.
Example:
An airline is required by law to overhaul its aircraft once every three years. The next overhauling is
estimated to cost Rs. 45 million.
ANSWER:
Obligation: There is no present obligation.
Conclusion: No provision is recognised. The costs of overhauling aircraft are not recognised as a provision
for the same reasons as the cost of replacing the lining is not recognised as a provision in previous scenario.
Even a legal requirement to overhaul does not make the costs of overhaul a liability, because no obligation
exists to overhaul the aircraft independently of the entity’s future actions—the entity could avoid the future
expenditure by its future actions, for example by selling the aircraft.
Instead of a provision being recognised, the depreciation of the aircraft takes account of the future incidence
of maintenance costs, i.e., an amount equivalent to the expected maintenance costs is depreciated over three
years
Uncertainties surrounding the amount to be recognised as a provision are dealt with by various means
according to the circumstances. The following guidance is relevant:
Circumstances Suggested best estimate

The provision being measured involves Use expected value i.e. the obligation is estimated by
a large population of items. weighting all possible outcomes by their associated
probabilities.
There is a continuous range of possible The mid‑point of the range is used.
outcomes and each point in that range is
as likely as any other.
A single obligation is being measured. The individual most likely outcome may be the best estimate
of the liability. However, even in such a case, the entity
considers other possible outcomes.
Where other possible outcomes are either The best estimate will be the higher or lower amount.
mostly higher or mostly lower than the
most likely outcome.
Example:
An entity sells goods with a warranty under which customers are covered for the cost of repairs of any
manufacturing defects that become apparent within the first six months after purchase.
524
If minor defects were detected in all products sold, repair costs of Rs. 850,000 would result. If major defects
were detected in all products sold, repair costs of Rs. 4,500,000 would result.
The entity’s past experience and future expectations indicate that, for the coming year, 75% of the goods
sold will have no defects, 20% of the goods sold will have minor defects and 5% of the goods sold will have
major defects.
Required
Calculate the amount of provision to be recognised in respect of warranty
ANSWER:
The best estimate in this case is expected value of the warranty expenditure. The expected value of
the cost of repairs is
Outcome x Probability
Rs. Nil x 75% -
Rs. 850,000 x 20% 170,000
Rs. 4,500,000 x 5% 225,000
Total 395,000
Example: Many customers (i-e.30 out of 40) of Zeta Limited (ZL) filed claims for compensation due to
supply of faulty goods. ZL estimates that each claim will be settled in the range of Rs. 80,000 to Rs. 100,000
per claim, each amount in this range is as likely as any other. Calculate the amount of provision
ANSWER:
The mid-point should be used i.e. Rs. 90,000 per claim x 30 customers = Rs. 2,700,000 (Provision).
Example:
A suit for infringement of patents, seeking damages of Rs. 2 million, was filed by a third party. Entity’s
legal consultant is of the opinion that an unfavourable outcome is most likely.
On the basis of past experience, he has advised that there is 60% probability that the amount of damages
would be Rs. 1 million and 40% likelihood that the amount would be Rs. 1.5 million.
Required: Briefly advise on measurement of above provision
ANSWER:
The entity should make a provision of the amount of Rs. 1 million being most likely outcome. The expected
value is more suitable when there is large population of similar items
Example:
An entity has to rectify a serious fault in a major plant that it has constructed for a customer. The individual
most likely outcome for the repair to succeed at the first attempt at a cost of Rs. 200,000. However, there is
significant chance that second attempt would be necessary costing an additional Rs. 80,000.
Required: Briefly advise on measurement of provision
525
ANSWER:
A provision of Rs. 280,000 is best estimate as there is significant chance that second attempt would be
necessary.
Example:
An entity in the oil industry causes contamination but cleans up only when required to do so under the laws
of the particular country in which it operates. One country in which it operates has had no legislationrequiring
cleaning up, and the entity has been contaminating land in that country for several years. At 31 December
2020 it is virtually certain that a draft law requiring a clean-up of land already contaminated will be enacted
shortly after the year-end. The cleaning up will cost Rs. 4 million in present value terms.
Required: Discuss accounting treatment
ANSWER:
The obligating event is the contamination of the land because of the virtual certainty of legislation requiring
cleaning up and since outflow is probable and a reliable estimate of Rs. 4,000,000 is available, a provision
is recognised for the best estimate of the costs of the clean-up.
Example:
Z Limited installed a plant costing Rs. 25 million with a useful life of 10 years. There is legal requirement
to restore the site used by the plant at the end of its useful life which shall cost Rs. 1 million. The plant may
be sold for Rs. 3.5 million at the end of useful life. The assistant accountant is of the view that there is no
need to create the provision for restoration as this shall be adjusted against the expected gain on disposal of
the plant.
Required: Comment on the statement made by the assistant accountant

ANSWER:
Gains from the expected disposal of assets are not taken into account while measuring a provision.
Therefore, a provision at present value of Rs. 1 million shall be recognised
Example:
Daniyal Distribution (DD) are dealers of Product CC which are sold to customers with one-year warranty.
The product is manufactured by Maria Multinational (MM).
Under the warranty arrangement, DD just verifies customer data on warranty claims and repair and
replacement is made directly by MM. In case MM defaults, DD has no obligation. DD received 50 claims
and estimates that repair and replacement would cost Rs. 400,000 which shall be settled by MM.
Required: Discuss the accounting treatment for DD.
ANSWER:
DD has not obligation to settle the claim and therefore neither the provision nor the reimbursement asset is
recognised. There is no disclosure requirement.
Example:
526
Under the warranty arrangement, DD is responsible to repair and replace the items and submits the detail of
warranty claims to MM which pays 80% of the cost incurred to DD. In the past, MM has never denied any
claim of repairs and replacements made by DD.
DD received 50 claims and estimates that repair and replacement would cost Rs. 400,000
ANSWER:
DD has present obligation to settle the claims and a provision of Rs. 400,000 shall be recognised. A separate
reimbursement asset of Rs. 320,000 (80%) is also to be recognised. In SPL the net expense of Rs. 80,000
may be presented. Disclosure of reimbursement shall also be made.
Example:
Under the warranty arrangement, DD is responsible to repair and replace the items and submits the detail of
warranty claims to MM which evaluates claims and may or may not pay the claims based on their evaluation
criteria.
DD received 50 claims and estimates that repair and replacement would cost Rs. 400,000. It is probable
that Rs. 100,000 would be received from MM.
ANSWER:
DD has present obligation to settle the claims and a provision of Rs. 400,000 shall be recognised. No
separate asset shall be recognised but a contingent asset of Rs. 100,000 shall be disclosed.
Example:
A claim has been made against X Limited for damage suffered by adjacent property due to work being
undertaken on building of X Limited by a sub-contractor. The lawyers have confirmed that X Limited will
have to pay damages of Rs. 3 million but due to a clause in agreement with sub-contractor will also be able
to recover Rs. 2 million from the sub-contractor.
The recovery from sub-contractor is virtually certain.Required: Pass the journal entry for the above
Answer:
Debit Rs. Credit Rs.

Receivable from sub-Contractor 2000,000
Compensation expense (net) 1,000,000
Provision for damages 3,000,000
Review Provisions shall be reviewed at the end of each reporting period and adjusted to
reflect the current best estimate.
Reversal If it is no longer probable that an outflow of resources embodying economic
benefits will be required to settle the obligation, the provision shall be reversed.
Change in present Where discounting is used, the carrying amount of a provision increases in each
value period to reflect the passage of time. This increase is recognised as borrowing cost.
527
Example:
In Year 1, a claim of Rs. 12 million was filed against the company. The lawyers were of the opinion that it
is probable to pay the damages of Rs. 12 million.
In Year 2, the case is still pending but lawyers now estimate that an amount of Rs. 15 million might be
payable.
In Year 3, the case is still pending and due to development in the case lawyers now estimate that only Rs. 9
million might be payable
Required: Journal entries
ANSWER
Journal entries
Debit Rs. Credit Rs.

Date Particulars m m
Year 1 Profit or loss 12
Provision for legal damages 12
Year 2 Profit or loss 3
Provision for legal damages 3
Year 3 Provision for legal damages 6
Profit or loss 6
Example:
On year end of 31 December 2021, a provision is expected to be settled for Rs. 110,000 one year later.
The suitable discount rate is 10%.
Required: Pass Journal entries in respect of above for the year 2021 and 2022 assuming that the provision
was settled as expected.
ANSWER:
Journal entries

31 Dec 20Y1 Expense/Profit or loss 100,000
Provision [Rs. 110,000 x 1.10-1] 100,000
31 Dec 20Y2 Finance cost [Rs. 100,000 x 10%] 10,000
Provision 10,000
31 Dec 20Y2 Provision 110,000
Bank 110,000
Use of provision [IAS 37: 61 & 62]
A provision shall be used only for expenditures for which the provision was originally recognised. Only
expenditures that relate to the original provision are set against it. Setting expenditures against a provision
that was originally recognised for another purpose would conceal the impact of two different events.
Example:
528
A company has created a provision of Rs.300,000 for the cost of warranties and guarantees. The company
now finds that it will probably has to pay Rs.250,000 to settle a legal dispute.
It cannot use the warranties provision for the costs of the legal dispute. An extra Rs. 250,000 expense must
be recognised.
Example:
Last year an employee filed a claim of Rs. 4 million against the company. The lawyers were of the opinion
that it is probable to pay the damages of Rs. 4 million and therefore, the company recognised the provisionfor
this amount.
During the year, the case has now been decided in favour of the company. However, in another legal suit
for copyright infringement against the company (filed during the year) the company had to pay damages of
Rs. 4 million. The payment has not been recorded yet.
Required: Pass the journal entries for the above transactions.
ANSWER:
Journal entries
Sr.# Particulars Debit Rs. m Credit Rs. m

1 Provision for employee claim 4
Profit or loss (reversal) 4
2 Damages exp (PL) 4
Bank (payment of other litigation) 4
Example:
Quality Garments Limited (QGL) is a manufacturer of readymade garments. During May 2014, a fire broke
out in one of its units which resulted in deaths and severe injuries to a number of workers.
At the time of finalization of QGL's financial statements for the year ended 30 June 2014, the following
i. Families of certain deceased workers have filed compensation claims amounting to Rs. 60 million. A
government agency has imposed a penalty of Rs. 35 million for negligence on the part of the
company. QGL's lawyers anticipate that the company would have to pay Rs. 20 million and Rs. 10
million to settle the workers' claims and the penalty respectively.
ii. To maintain goodwill of the company, the Board of Directors is considering additional payments to
iii. Loss to fixed assets and inventories is estimated at Rs. 60 million. In this respect, a fire insurance
claim has been lodged. Due to certain policy clauses, QGL’s consultant anticipates that the claim
for Rs. 15 million may not be accepted. The matter is under negotiation with the insurance company.
iv. Due to closure of the unit for repair, QGL would not be able to meet sales orders of Rs. 50 million.
This will reduce QGL's profitability for the half year ending 31 December 2014 by Rs. 10 million.
Required:
30 June 2014. Support your answers in the context of relevant International Financial Reporting Standards.
529
Answer:
Part (i) Liability for workers’ compensation and penalty
Provisions are recognised when there is present obligation, probable outflow and reliable estimate. All the
conditions as mentioned for provisions are met to the extent of Rs. 20 million for the claims of families of
workers and Rs. 10 million for the penalty levied by a government agency. Therefore, a provision of Rs. 30
million (20+10) would be made.
For the remaining amount of Rs. 65 million (60+35-30), it is not probable that an outflow of economic
benefits will be required. Therefore, a contingent liability would be disclosed giving information about
nature, estimate of financial effect, indication of uncertainties and possibility of reimbursement.
Part (ii) Additional compensation for the families of the deceased workers
The obligation for additional compensation to the families of the deceased workers is neither legal nor
constructive obligation as the matter is still under consideration and no formal announcement was made that
may create a valid expectation.
There is neither present obligation (for provision) nor possible obligation (for disclosure as contingent
liability). Therefore, no provision or disclosure is required in this respect.
Part (iii) Insurance claim
This is reimbursement scenario. Reimbursement is recognised as asset when virtually certain and disclosed
as contingent asset when probable.
If the insurance claim to the extent of Rs. 45 million (60-15) is virtually certain to be received; an insurance
claim would be recognized for this amount.
If an inflow for the remaining amount of Rs. 15 million is probable, a contingent asset would be
disclosedgiving information about nature and financial effect. OR where an inflow for the remaining
amount of Rs. 15 million is not probable, no contingent asset should be disclosed.
Part (iv) Reduction in future profit by Rs. 10m for the half year ending 31 Dec 2014
There is no present obligation to incur future losses. No provision or disclosure is required for future
operating losses as they arise from future events not past events.
Example:
SK Limited is engaged in trading of chemical products and has entered into following contract on December
20, 2020 with XYZ Limited (a firm contract) to buy 500 units of Product X at Rs. 10 to be delivered on
January 20, 2021. On December 31, 2020 the purchase price of Product X has fallen to Rs. 7 per unit.
Required: Record journal entries due to change in purchase price at December 31, 2020, the year-end.
ANSWER:
Expected loss on firm purchase contract Rs. 10 – 7 = Rs. 3 x 500 units = Rs.
1,500Journal entry
31 Dec 20Y0 Loss on onerous contract 1,500
Provision for onerous contract 1,500
530
Implementation and announcement of restructuring [IAS 37: 73 & 74]
Evidence that an entity has started to implement a restructuring plan would be provided, for example, by
dismantling plant or selling assets or by the public announcement of the main features of the plan.
Only if public announcement is made in such a way and in sufficient detail that it gives rise to valid
expectations in other parties such as customers, suppliers and employees (or their representatives) that the
entity will carry out the restructuring.
If it is expected that there will be a long delay before the restructuring begins or that the restructuring will
take an unreasonably long time, it is unlikely that the plan will raise a valid expectation on the part of others
that the entity is at present committed to restructuring, because the timeframe allows opportunities for the
entity to change its plans.
Status of management decision [IAS 37: 75 to 77]
A constructive obligation is not created solely by a management decision. It must have been implemented or
announced before the end of reporting period as well. If an entity implements or announces, only after the
reporting period, disclosure is required under IAS 10. Although a constructive obligation is not createdsolely
by a management decision, an obligation may result from other earlier events together with such adecision.
For example, negotiations with employee representatives for termination payments, or with purchasers for
the sale of an operation, may have been concluded subject only to board approval. Once that approval has
been obtained and communicated to the other parties, the entity has a constructive obligation to restructure.
In some countries, notification to employees’ representatives may be necessary before the board decision is
taken. Because a decision by such a board involves communication to these representatives, it may result
in a constructive obligation to restructure.
Example:
On 12 December 2010 the board of an entity decided to close down a division. Before the end of the
reporting period (31 December 2010) the decision was not communicated to any of those affected and no
other steps were taken to implement the decision.
Required: Assuming that the reliable estimate is available, what will be accounting treatment for the
above?
Answer:
There has been no obligating event and so there is no obligation as the decision has not been communicated
and no constructive obligation has arisen. Therefore, no provision is recognized
Example:
On 12 December 2010, the board of an entity decided to close down a division making a particular product.
On 20 December 2010 a detailed plan for closing down the division was agreed by the board; letters were
sent to customers warning them to seek an alternative source of supply and redundancy notices were sent
to the staff of the division.
Required: Assuming that the reliable estimate is available, what will be accounting treatment for the
above?
Answer:
531
Obligation: The obligating event is the communication of the decision to the customers and employees,
which gives rise to a constructive obligation from that date, because it creates a valid expectation that the
division will be closed.
Outflow: Probable
Conclusion: A provision is recognised at 31 December 2010 for the best estimate of the costs of closing
the division.
Measurement [IAS 37: 80 to 83] (cost of restructuring)
A restructuring provision shall include only the direct expenditures arising from the restructuring, which
are those that are both:
 Necessary for restructuring.

 not associated with the ongoing activities of the entity. (Future operating costs are not part of
provision)
A restructuring provision does not include such costs as:
 retraining or relocating continuing staff;

 marketing; or
 investment in new systems and distribution networks.
Identifiable future operating losses up to the date of a restructuring are not included in a provision, unless
they relate to an onerous contract. Gains on the expected disposal of assets are not taken into account in
measuring a restructuring provision, even if the sale of assets is a result of the restructuring. These
expenditures relate to the future conduct of the business and are not liabilities for restructuring at the end
of the reporting period. Such expenditures are recognised on the same basis as if they arose independently
of a restructuring.
Example:
S & Co has year-end of 30 June. On June 25, 2021 S & Co has decided to change its management and
operational structure in order to work efficiently and competitively. The plan has been formally approved
and announced to all major stakeholders. The implementation shall start from August 31, 2021. The
following costs are expected to be incurred:
Answer:
Rs.
Shifting allowance to employees 500,000
Consultant fee 700,000
New computer and distribution network systems 1,500,000
Staff training 50,000
Advertisement of new and improved operations 120,000
Implementation expenses specifically incurred for restructuring 450,000
Required: Which of the above shall be included in measurement of provision for restructuring?
532
Answer: Only consultant fee of Rs. 700,000 and implementation expenses of Rs. 450,000 shall be included
in the measurement of the provision Loan guarantee / joint obligations [IAS 37: 27 to 29]
An entity may become surety (guarantor) for loan granted to some other entity. These are disclosed as
contingent liabilities being possible obligation. However, in case of default, possible obligation becomes
present obligation and a provision is to be recognised.
Where an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to
be met by other parties is treated as a contingent liability. The entity recognizes a provision for the part of the
obligation for which an outflow of resources embodying economic benefits is probable, except in the
extremely rare circumstances where no reliable estimate can be made.
Example:
Naba Power Limited (NPL) is preparing its financial statements for the year ended 30 June 2017. Following
issues are under consideration.
(a) NPL entered into a contract on 1 August 2016 to supply customised batteries to a new customer. As
per the terms of the agreement, NPL is required to deliver 50,000 batteries at the end of each month
from December 2016 to September 2017 at a consideration of Rs. 15 million per month. Penalty for
each late delivery or cancellation of the contract would be Rs. 5 million and Rs. 20 million
respectively.
On 1 August 2016 NPL had estimated that cost of production would be Rs. 10 million per month. However,
cost of production increased subsequently. Despite the increase in the cost of production, NPL made timely
deliveries till May 2017 at a total cost of Rs. 99 million. Supply for June 2017 was made on 15 July 20X7
at a total cost of Rs. 18 million of which Rs. 14 million had been incurred till 30 June 2017. It is estimated
that Rs. 55 million would need to be spent to make the last 3 deliveries within time.
(b) On 15 May 2017 an explosion occurred at one of NPL’s factories. Several claims were filed by
affected employees against NPL. The details are as under:
(i) Seven injured employees made claims before 30 June 2017 and further three injured employees
lodged claims in July 2017. According to NPL’s legal advisor, the probability that NPL would be
determined to be negligent is 80%. If NPL is found negligent, the estimated average cost of each
payout will be Rs. 1 million.
(ii) Additional four employees made claims before 30 June 2017, seeking compensation for the stress,
rather than any injury, caused to them. If these claims succeed, the legal advisor is of the view
that the estimated average cost of each payout will be Rs. 0.7 million. However, according to the
legal advisor, the chance that these employees will succeed is 30%.
(iii) 80% of all such payouts are recoverable according to the terms of the insurance policy.
(c) On 1 November 2016 a new law was introduced requiring all factories to install specialized safety
equipment within five months. The equipment costing Rs. 15 million was ordered in February 2017
to be installed by 30 April 2017. However the supplier delayed installation till 31 July 2017. On 5
August 2017 the company received a notice from the authorities levying a penalty of Rs. 1.6 million
i.e. Rs. 0.4 million for each month during which the violation continued. It is probable that this
penalty will be recovered from the supplier.
Required: Discuss how each of the above issues should be dealt with in NPL’s financial statements for the
year ended 30 June 2017. (Quantify effects where practicable).
533
Answer:
Part (a) Penalty, write-down and onerous contract
NPL should recognize following provision / expense as on 30 June 2017:
Rs. in million
Provision for penalty (Note 1) 5
Write down to NRV [14 minus 11 (15–4)] (Note 2) 3
Provision for onerous contract [45–55] (Note 3) 10
18
Note 1: Supply for June 2017 was made after delay of 15 days so as per terms of agreement provision for
penalty should be made for this adjusting event.
Note 2: Since cost incurred till 30 June 2017 (Rs. 14 million) is higher than the net realizable value of
inventory i.e., Rs.11 million (selling price of 15 million less 4 (18 – 4) million cost to be incurred) expense
of Rs. 3 million related to write-down of inventory to NRV should be recognized.
Note 3: Since estimated cost of Rs. 55 million which would need to be spent is more than the total revenue of
Rs. 45 million for last 3 deliveries, the contract is considered as onerous and the provision should be made
at Rs. 10 million that is lower of cost of fulfilling it (Rs. 10 million i.e., 55 – 45) or penalty arising fromfailure
to fulfil it (Rs 20 million).
Part (b) Claim regarding NPL’s negligence
As on 30 June 2017 NPL should recognize a provision for ten injured employees because at reporting date
there is present obligation in respect of past event (injuries suffered from explosion occurred before year
end). NPL’s lawyers estimate that probability of NPL being declared negligent is 80% which is considered
as probable. Therefore, provision should be made for total payout of Rs 10 million (1 million for each
employee).
According to the terms of insurance policy, 80% of the cost is recoverable from insurance company so it is
virtually certain that reimbursement will be made. According to IAS 37, NPL should recognize a separate
asset (receivable) of Rs. 8 million (10 million × 80%). In the statement of comprehensive income provision
may be presented net of reimbursement amount.
As per legal adviser, there is only 30% chance that the claims lodged against the company for undue stress
will succeed so payment of Rs 2.8 million (0.7 million × 4) is possible (not a present) obligation.
Consequently, provision is not required and NPL should disclose this amount as contingent liability giving
Part (c) Penalty for non-compliance of new law
As on 30 June 2017, NPL should recognize expense of Rs. 1.2 million (0.4×3) in relation to penalty for non-
compliance of new law from 1 April to 30 June 2017 because at the reporting date there is a present
obligation (payment of penalty) in respect of a past event (non-compliance of statutory requirement). NPL
should disclose the penalty amount in its financial statement.
Since the reimbursement of penalty amount from the vendor is probable, the reimbursement of only two
months (May and June 2017) of Rs. 0.8 million (0.4×2) should be disclosed as a contingent asset giving
Example:
534
In 2000, an entity involved in nuclear activities recognizes a provision for decommissioning costs of Rs.
300 million. The provision is estimated using the assumption that decommissioning will take place in 60–
70 years’ time. However, there is a possibility that it will not take place until 100–110 years’ time, in which
case the present value of the costs will be significantly reduced to Rs. 136 Million.
The narrative illustrative disclosures may be presented as follows:
Disclosure: A provision of Rs. 300 million has been recognised for decommissioning costs. These costs are
expected to be incurred between 2060 and 2070; however, there is a possibility that decommissioning will
not take place until 2100–2110. If the costs were measured based upon the expectation that they would not
be incurred until 2100–2110 the provision would be reduced to Rs. 136 million.
Aggregation [IAS 37: 87]

In determining which provisions or contingent liabilities may be aggregated to form a class, it is necessary
to consider whether the nature of the items is sufficiently similar for a single statement about them to fulfil
the disclosure requirements.
Example:
An entity manufactures two electronic products, Product A and Product B. Product A is sold under warranty
for 3 years while Product B is sold under warranty for 5 years. The provision of warranty on both products
may be aggregated.
Example: It is not appropriate to aggregate the provision of warranty and provision relating to legal
proceedings for copyright issue.
Where disclosure might affect entity’s position [IAS 37: 92]
In extremely rare cases, disclosure of some or all of the information required by IAS 37 disclosures can be
expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter
of the provision, contingent liability or contingent asset.
In such cases, an entity need not disclose the information, but shall disclose the general nature of the dispute,
together with the fact that, and reason why, the information has not been disclosed.
535
IFRIC – I
Changes in existing decommissioning, restoration and similar liabilities
IFRIC 1 applies where an entity has previously included decommissioning or restoration costswithin the
cost of an item of property, plant or equipment, and created a corresponding provision. Such a provision
should be discounted to present values using a discount rate.
IFRIC 1 mainly addresses how an entity accounts for any subsequent changes to the amountof the liability
that may arise from;
 a revision in the timing or amount of the estimated costs or

 a change in the current market-based discount rate.
Background and issue

Many entities have obligations to dismantle, remove and restore items of property, plant and equipment’.
Under IAS 16, Property, Plant and Equipment, the cost of an item of property, plantand equipment includes
the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is
located.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains requirements on howto measure
decommissioning, restoration and similar liabilities. This Interpretation provides guidance on how to
account for the effect of subsequent changes in the measurement of existing decommissioning, restoration
and similar liabilities.
Scope
IFRIC 1 applies to changes in the measurement of any existing decommissioning, restorationor similar
liability that is both:
 Recognised as part of the cost of an item of property, plant and equipment inaccordance with
IAS 16
 Recognised as a liability in accordance with IAS 37.
For example, a decommissioning, restoration or similar liability may exist for decommissioning aplant or
rehabilitating environmental damage, in extractive industries, or the removal of equipment.
Point to remember:
Effect of reimbursement of all provision is to be taken to P&L except decommissioning liability.
Consensus:
Changes in measurement of an existing decommissioning, restoration and similar liability that result from:
i. Changes in cash flows or
ii. A change in the discount rate shall be accounted for in accordance with following paragraphs:
A. If the related asset measured using the cost model:

a) Changes in liability shall be:
 Added to, or
 Deducted from,
 The cost of the related asset in the current period.
For example:
Asset Xxx or Provision xxx
536
Provision xxx Asset xxx
Q1 and Q.2 from question bank

If the change in the liability had resulted from a change in the discount rate, instead of a change in the
estimated cash flows, the accounting for the change would have been the same but the next year’s finance
cost would have reflected the new discount rate. (e.g. suppose rate is changed to 6%)
a) The amount deducted from cost of the asset shall not exceed its carrying amount. If a decrease in
liability exceeds the carrying amount of an asset, the excess shall be recognized in profit or loss.
b) If the adjustment results in an addition to the cost of an asset, the entity shall consider whether this
is an indication that new carrying amount of the asset may not be fully recoverable.If it is such an
indication, the entity shall test the asset for impairment by estimating its recoverable amount, and
shall account for any impairment loss (if any).
B. If the related asset is measured using the revaluation model:

a) Changes in liability alter the revaluation surplus or loss previously recognized on that asset, so that:
i. a decrease in liability shall be recognized in OCI and increase the revaluation surplus within
equity, except that
 it shall be recognized in profit or loss to the extent that it reverses a revaluation loss on the
asset that was previously recognized in profit or loss.
For example:
Provision xxx
R. Surplus(OCI) xxx
or in case of previous deficit recognized in profit or loss:

Provision xxx
P/L (other income) xxx
ii)An increase in liability shall be recognized in profit or loss, except that it shall be recognized in
OCIand reduce the surplus within equity to the extent of any credit balance existing in the revaluation
surplus for the asset.
P.L (other expenses) Xxx
Provision xxx
or in case of previous surplus on revaluation:
Rev. Surplus(OCI) Xxx
Provision xxx
537
Q3 and Q.4 from question bank
b) A change in liability is an indication that asset may have to be revalued in order to ensure that
the carrying amount does not differ materially from that which would be determined using fair
value at the end of the reporting period. If a revaluation is necessary, all assets of that class shall be
revalued.
c) The change in the revaluation surplus arising from a change in the liability is separately identified
and disclosed as such.
d) The periodic unwinding of discount shall be recognized in profit or loss as finance cost as it occurs.
Capitalization under IAS-23 is not permitted.
IFRIC-1- Q.B
Q.1 Violet power Limited [IFRIC 1 with cost model]
Violet Power Limited is running a coal based power project in Pakistan. The Company has built its plant
in an area which contains large reserves of coal. The company has signed a 20 years’ agreement for sale of
power to the Government. The period of the agreement covers a significant portion of the useful life of the
plant. The company is liable to restore the site by dismantling and removing the plant and associated
facilities on the expiry of the agreement.
Following relevant information is available:
 The plant commenced its production on July 1, 2015. It is the policy of the company to measure the
related assets using the cost model;
 Initial cost of plant was Rs. 6,570 million including erection, installation and borrowing costs but
does not include any decommissioning cost;
 Residual value of the plant is estimated at Rs. 320 million;
 Initial estimate of amount required for dismantling of plant, at the time of installation of plant was
Rs. 780 million. However, such estimate was reviewed as of June 30, 2016 and was revised to Rs.
1,021 million;
 The Company follows straight line method of depreciation; and
 Real risk-free interest rate prevailing in the market was 8% per annum when initial estimates of
decommissioning costs were made. However, at the end of the year such rate has dropped to 6%
per annum.
Required
1. Prepare accounting entries for the year ended June 30, 2016.
2. Work out the carrying value of plant and decommissioning liability as of June 30, 2016.
Q.2 BRAVO LIMITED [IFRIC 1 with cost model]

The financial statements of Bravo Limited (BL) for the year ended 30 September 2013 are under finalization
and the following matters are under consideration:
BL’s plant was commissioned and became operational on 1 April 2008 at a cost of Rs. 130 million. At the
time of commissioning its useful life and present value of decommissioning liability was estimated at 20
years and Rs. 19 million respectively.
BL’s discount rate is 10%.
There has been no change in the above estimates till 30 September 2013 except for the decommissioning
liability whose present value as at 1 April 2013 was estimated at Rs. 25 million.
It is the policy of the company to measure the assets using the cost model.
Required:
 Prepare journal entries for the year ended 30.09.2013
 Compute the related amounts as they would appear in the statements of financial position and
538
comprehensive income of Bravo Limited for the year ended 30 September 2013 in accordance
with IFRS. (Ignore corresponding figures)
Q.3 WASTE MANAGEMENT LIMITED [IFRIC 1 with revaluation]

Waste Management Limited (WML) had installed a plant in 2005 for generation of electricity from garbage
collected by the civic agencies. WML had signed an agreement with the government for allotment of a plot
of land, free of cost, for 10 years. However, WML has agreed to restore the site, at the end of the agreement.
 Initial cost of the plant was Rs. 80 million on April 1, 2005. It is estimated that the site restoration
cost would amount to Rs. 10 million.
 It is the policy of the company to measure its plant and machinery using the revaluation model.
 When the plant commenced its operations i.e. on April 1, 2005 the prevailing market based
discount rate was 10%.
 On March 31, 2007 the plant was revalued at Rs. 70 million including site restoration cost.
 On March 31, 2009 prevailing market based discount rate had increased to 12%.
 On March 31, 2011 future estimate of site restoration cost was revised to Rs. 14 million.
 Useful life of the plant is 10 years and WML follows straight line method of depreciation.
Required:
Prepare accounting entries for all the relevant years upto the year ended March 31, 2011 based on the above
information, in accordance with International Financial Reporting Standards. (Ignore taxation.)
Q.4 GLADIATOR LIMITED [IFRIC 1 with revaluation model]

Faraz is a chartered accountant and employed as Finance Manager of Gladiator Limited (GL). He has
recently returned after a long medical leave and has been provided with draft financial statements of GL for
the year ended 30 June 2017. Following figures are reflected in the draft financial statements:
------- Rs. in million -------

Total assets 1,420
Total liabilities 925
While reviewing the financial statements, he noted the following issues:

As at 30 June 2017, dismantling cost relating to a plant has increased from initial estimate of Rs. 30 million
to Rs. 40 million. Further, fair value of the plant on that date was assessed at Rs. 112 million (net of present
value of dismantling cost). [Sometimes this sentence is written as: Fair value of plant is112 million net of
dismantling cost]. No accounting entries have been made in respect of increase in dismantling liability and
revaluation of the plant. Appropriate discount rate is 8%.
The plant had a useful life of 5 years when it was purchased on 1 July 2015. The carrying value of plant and
related revaluation surplus included in the financial statements are Rs. 135.4 million (after depreciation for
the year ended 30 June 2017) and Rs. 3.15 million (after transferring incremental depreciation (means
surplus to retained earnings) for the year ended 30 June 2017) respectively.
Required:
Determine the revised amounts of profit before tax, total assets and total liabilities for the year ended
30.06.2017 after incorporating the impact of above adjustments, if any.
539
Solution 1:
1. Journal entries:
01-07-2015 Plant 6,570
Cash/bank 6,570
01-07-2015 Plant 167
Provision 780 (1+0.08)-20 167
30-06-2016: Depreciation 320.85
Acc. Depreciation [(6,570+167)-320] /20 320.85
30-06-2016: Finance cost 13.36
Provision [(167 x 1.08)-167] or 167 x 8% = 13.36 13.36
Plant 157
Provision 157
[1,021 (1+0.06)-19 – (167 x 1.08) or (167+13.36)] = 157
2.
i. Assets carrying value as at June 30, 2016 (assets) Rs. In million
Cost (Given) 6,570
Decommissioning liability on July 1, 2015 (780 / (1+0.08)-20) 167
Adjustment for revision in provision for decommissioning cost (increase) 157
6,573.15
ii. Carrying amount of decommissioning liability:

01-07-2015 [780 (1+0.08)-20 ] 167
30-06-2016 [unwinding of discount] 13.36
30-06-2016 [Reassessment of provision] 157
30-06-2016 Final carrying amount[1,021(1+0.06)-19 ] 337.36
Solution 2
(a) Accounting Entries:
Depreciation for the first six months; [From 1-10-2012 to 31-3-2013]
(130 + 19) ÷ 20 x 6/12 = 3.73
Depreciation 3.73
Unwinding of discount for six months [From 1-10-2012 to 31-3-2013]

[19 x (1.1)5 – 19 x (1.1)4.5] 1.42
Or [9 x 1.05 x 1.1 x 1.1 x 1.1 x 1.1 = 29.21 x 1.05 1.42(rounded)
Finance cost 1.42
Provision 1.42
As on 1-4-2013
Revised liability as on 1-4-2013 (given) 25 M Original liability as on 1-4-2013
5
(29.18 + 1.42) or 19(1.1) 30.60
Liability to be reduced as on 1-4-2013 5.60 Provision 5.60
Plant 5.60
Depreciation for the remaining six months of year ended 30-9-2013
540
Depreciation 3.54
149- [ 130 + 19] ÷ 20 x 4.5] – 3.73 – 5.60 = 106.15/15 x 6/12 = 3.54
Unwinding of discount for the remaining six months of year ended 30-9- 2013:
[25(1.1)0.5 – 25] =1.22 or 25 x 1.05 = 1.25
Finance cost 1.22
Provision 1.22
(b) BRAVO LIMITED
Bravo Limited
Amounts as they would appear in the statements of financial position and
comprehensiveincome
For the year ended 30 September 2013
-------------- Rs. in million --------------
Decrease in decommissioning liability: Finance/ Depreciation P. P. E Decommissioning
expenses liability
Carrying value as at 30.09.2012
(130+19)- (149/20 x 4.5) 115.48
[19×(1.1)4.5] 29.18
Deprecation: Oct. 2012-Mar. 2013 3.73 (3.73)
Finance cost: Oct. 2012- Mar. 2013 1.42 1.42
Decrease due to revision in liability (5.60) (5.60)*
Revised balance as at 1-4-2013 106.15 25.00

Deprecation: Apr-Sept. 2013 3.54 (3.54)
Finance cost: Apr-Sept. 2013 1.22 1.22
Carrying amount as on 30.09.2013 9.91 102.61 26.22
Solution 3
1-4-2005
Plant 80
Cash 80
Plant 3.85
Provision 3.85
10(1.1) −10
31-3-2006
Depreciation 8.385
Accumulated
dep 8.385
[80+3.85]/10
31-3-2006
Finance cost 0.385
Provision 0.385
[10(1.1) −9- 3.85] or [3.85 x 10%]
541
31-3-2007
Depreciation 8.385
31-3-2007
Finance cost 0.4235
Provision 0.4235
−8
[10(1.1) - 4.24] or [(3.85+0.385) x 10%]
31-3-2017
C.A = 67.08 [80+3.85-8.385 x 2]
F.V (given) = 70
Revaluation Surplus = 2.92
Accumulated depreciation (8.385 x 2) 16.77
Plant 16.77
Plant 2.92
Revaluation surplus (OCI) 2.92
31-3-2008
Depreciation 8.75
Acc. Dep 8.75
(70/8)
31-3-2008
Finance cost 0.47
Provision 0.47
−7 −8
[10 ((1.1) - 10(1.1) ] or [(3.85+0.385+0.4235) x 10%]
31-3-2008
R. S 0.365
R. E 0.365
[2.92/8]
31-12-2009
Deprecation 8.75
(70/8)
31-12-2009
Finance cost 0.513
Provision 0.513
[10(1.1) −6 − 10(1.1) −7] or [(3.85+0.385+0.4235+0.47) x 10%]
31-12-2009
R. S 0.365
R. E 0.365
[2.92/8]
31-12-2009
Re measurement of de commissioning Liability;
Original estimate 10(1.1) −6 = 5.64 or [3.85+0.385+0.4235+0.47+0.513]
Revised estimate 10(1.12) −6 =5.06
Difference (decrease) =0.58
Provision 0.58
R.S (OCI) 0.58
Remaining balance of revaluation surplus [2.92-0.365 x 2 +0.58 = 2.77]
31-03-2010:
542
Depreciation 8.75
Acc.Depreciation 8.75
(70/8) or (70-8 75-8.75) / 6
31-03-2010:
Finance cost 0.61
Provision 0.61
[10(1.12)-5 -10(1.12)-6] or [5.06 x 12%]
31-03-2010:
R. S 0.461
R. E 0.461
[2.77/6]
31-03-2011:
Depreciation 8.75
31-03-2011:
Finance cost 0.68
Provision 0.68
-4 -5
[10(1.12) -10(1.12) ] or [(5.06+0.61) x 12%]
31-03-2011:
R. S 0.461
R. E 0.461
[2.77/6]
31-03-2011:
Remaining balance of surplus [2.77-0.461 X 2] =1.848
31-03-2011:
Re measurement of Decommissioning Liability:
Original 10(1.12)-4 = 6.355 or(5.06+0.61+0.68)
-4
Revised 14(1.12) = 8.897
Difference (increase) = 2.542
R.S (OCI) 1.848
P.L (bal) 0.694
Provision 2.542
Solution 4:
Impact on
Profit Before tax Total assets Total liabilities
----------- Rs. in million -----------
As per question 125.00 1,420.00 925.00

Revaluation of plant (W-1) 8.35
Increase in provision (W-1) 7.94
Revised Amounts 125.00 1,428.35 932.94

Workings:
30-06-2017:
543
Plant:
C.A of Plant (GIVEN) = 135.4
F.V[112+40(1.08)-3] = 143.75
R. S = 8.35
Plant 8.35
R.S (OCI) 8.35
Revised balance of surplus [8.15+8.35] =16.5
Re measurement of Decommissioning liability as on 30.06.2017:
Original estimate = 30(1.08)-3` = 23.81
Revised estimate = 40(1.08)-3 = 31.75
Difference(increase) = 7.94
Revaluation surplus (OCI) 7.94
Provision 7.94
Revised amounts of revaluation surplus are:
Revaluation surplus
Provision 7.94 Unadjusted b/d 3.15
c/d 3.56 Plant 8.35
544
PAST PAPERS

Karim Limited (KL) bought a special purpose engineering plant on 1 January 2015 at a cost of Rs. 1,755
million inclusive of sales tax @ 17% (refundable).
KL is required to decommission the plant after a period of 2 years. Decommissioning cost isestimated at Rs.
300 million. The applicable discount rate is 11%.
KL uses the cost model for subsequent measurement of its property, plant and equipment. Plant is being
depreciated using the straight line method over its useful life.
Required:
Prepare journal entries to record the above transactions for the years 2015 and 2016. (10)

Atif Anwar, ACA is Finance Manager at Hot Coffee Limited (HCL) and reports toJamal Ahmed, FCA
who is the CFO.
On returning from leaves, Atif noted that draft financial statements for the year ended31 December 2019
have been prepared. He found that financial statements have not been updated for the revision in
decommissioning cost related to a plant, as advised by the engineering department at the start of 2019. Atif
discussed the matter with Jamal who advised him to finalize the financial statements without revising the
decommissioning cost as HCL’s profit would be decreased if revised cost would be taken into account.
Decommissioning cost related to the plant has increased from initial estimate of Rs. 50 million to Rs. 88 million.
Applicable discount rate is 12%. This plant had a useful life of 6 years when it was purchased on 1 July 2017 at
a purchase price of Rs. 860 million. HCL uses cost model for subsequent measurement of its property, plant and
equipment and follows straight line method for charging depreciation.
Required:
(a) Compute the change in net profit, assets and liabilities if revised decommissioning cost is included in
the financial statements for the year ended 31 December 2019. (05)
(b) Briefly explain how Jamal may be in breach of the fundamental principles of ICAP’s Code of
Ethics for Chartered Accountants. (03)

On 1 January 2020, Grateful Industries Limited (GIL) completed installation of a plant which will be
required to be dismantled at the end of its ten years’ useful life. GIL paid Rs. 2,000 million for the plant.
On 1 January 2020, it was estimated that the cost of dismantling would amount to Rs. 200 million. Applicable
discount rate was 10% per annum when initial estimate of dismantling costs was made.
The fair value of the plant as on 31 December 2020 was assessed at Rs. 1,845 million (including
dismantling cost).
Estimates of dismantling cost and applicable discount rate were reviewed as at31 December 2021
and were revised to Rs. 150 million and 12% per annum respectively.
GIL has a policy to subsequently measure plant using the revaluation model anddepreciation is provided
on straight line basis.
Required:
Prepare accounting entries in the books of GIL, for the year ended 31 December 2021 in accordance with
IFRSs. (08)

On 1 January 2020, Uranium Limited (UL) completed installation of a manufacturing plant which will be
required to be dismantled at the end of its eight years’ useful life. UL paid Rs. 3,000 million for the plant.
On 1 January 2020, it was estimated that the cost of dismantling would amount to Rs. 500 million. Applicable
discount rate at the time of initial estimate of dismantling cost was 10% per annum
545
Estimates of dismantling cost and applicable discount rate were reviewed as at31 December 2021
and were revised to Rs. 475 million and 15% per annum respectively
The fair value of the plant including dismantling cost as at 31 December 2022 was assessed at Rs. 1,900 million.
UL has a policy to subsequently measure plant using the revaluation model and provide depreciation on
straight line basis
Required:
Prepare relevant extracts from UL’s statement of profit or loss and other comprehensiveincome for the year
ended 31 December 2022 and statement of financial position on thatdate. (Show comparative figures) (09)
546
Solutions
Answer 1
--------- Rs. in million -------
1-Jan-2015 Plant (W-1) 1,743.49
Sales tax refundable 255.00
Bank 1,755.00
Provision for decommissioning (W-2) 243.49
(To record purchase of plant andprovision for decommissioning)
(To record finance cost on unwindingof discount)
31-Dec-2015 Depreciation expense (1743.49/2) 871.75
(To record finance cost on unwindingof discount)
31-Dec-2016 Depreciation expense (1743.49/2) 871.75
31-Dec-2016 Provision for decommissioning 300.00
Bank 300.00
(To record payment of decommissioning liability)
31-Dec-2016 Accumulated depreciation 1,743.49
Plant 1,743.49
(To record reversal of plant & accumulated depreciation thereon upon end
of its life)
W-1: Computation of cost of plant Rs. In million
Amount inclusive of sales tax 1,755.00
Less: Sales tax (1,755×17/117) (255.00)
Amount net of sales tax 1,500.00
Add: Provision for decommission cost (W-2) 243.49
1,743.49
W-2: Provision for decommission cost (Rs. in million)
Amount of Discount Liability Finance
Date
liability factor @ 11% balance charges
1-Jan-15 300 0.8116 243.49 -
31-Dec-15 300 0.9009 270.27 26.78
31-Dec-16 300 1.0000 300.00 29.73
Answer 2
a)
Change in net profit: Rs. in million
Increase in depreciation expense 22.82(W-1)÷4.5 (5.07)
Increase in finance cost 22.82(W-1)×12% (2.74)
Decrease in net profit (7.81)
547
Change in assets:
Increase in property, plant and equipment 22.82–5.07 17.75
Change in liabilities:
Increase in decommissioning liability 22.82+2.74 25.56
W-1: PV of change in decommissioning liability 22.82[(88–50) ×1.12‒4.5]
b) In the given scenario, Jamal may be in breach of the following fundamental principles of Code of
Ethics for Chartered Accountants:
(i) Principle of integrity:
Chartered Accountant should be straight forward and honest in all professional and business
relationships. It seems that the decision to defer incorporation of new decommissioning cost would
make financial statements misleading.
(ii) Principle of professional behavior:
This principle imposes an obligation on all chartered accountants to comply with the relevant laws
and regulation and avoid any action that discredits the profession. Jamal has breached this principle
as his decision to defer incorporation of new decommissioning cost is not in accordance with IFRSs.
Answer 3
Journal Entries
Dr. Cr.
Date Description Rs. in million
31/12/21 Depreciation expense (P&L) 1,845/9 205.0
Acc. depreciation 05.0
31/12/21 Interest expense (P&L) (W-1) 8.5
Dismantling liability/Provision for
decommissioning 8.5
31/12/21 Dismantling liability/Provision for (W-1)
decommissioning 32.7
Revaluation gain (P&L) (W-2) 24.4
Revaluation surplus (OCI) (Bal. fig.) 8.3
W-1: Dismantling cost Rs. in million

–10
01/01/20 PV of dismantling cost 200×(1.10) 77.1
31/12/20 Unwinding of interest @10% 7.7
84.8
31/12/21 Unwinding of interest @10% 84.8×10% 8.5
93.3
31/12/21 PV of revised cost at revised rate 150×(1.12)–8 (60.6)
31/12/21 Decrease in liability due to revision 32.7
W-2: Previous revaluation loss on 31 December 2020:

Revalued amount 1,845.0
Carrying value of plant (2,000+77.1)×9/10 (1,869.4)
(24.4)
Answer 4
Uranium Limited
Statement of financial position as at 31 December 2022
2022 2021
548
Non-current assets
Property, plant and equipment (3,000+233.3)×6/8 1,900.0 2,425.0
Provision for dismantling (205.4+30.8) ; (475×1.15–6) 236.2 205.4
Equity
Revaluation surplus - 76.9
Statement of profit or l o s s a n d o t h e r c o m p r e h e n s i v e income

for the year ended 31 December 2022
2022 2021
Profit or loss: --- Rs. in million ---
Depreciation expense (3,000+233.3)/8 (404.2) (404.2)
Unwinding of interest on dismantling (205.4×15%) ; (W-1) (30.8) (25.7)
Revaluation loss 43.9[120.8(W-2) – (43.9) -
76.9]

Revaluation surplus / (loss) 76.9[282.3(W-1)– (76.9) 76.9
205.4(475×1.15–6)]
W-1: Dismantling cost before revision Rs. in million
01/01/20 PV of dismantling cost –8 233.3
500×1.10
256.6
–6
31/12/21 OR 500×1.10 282.3
W-2: Revaluation loss on 31 December 2022
Carrying value of plant (3,000+233.3)×5/8 2,020.8
Revalued amount (1,900.0)
Revaluation loss 120.8
549
Test question
Alpha Limited (AL) bought plant on 1st July 2017 for Rs.4500 million. AL has a legal obligation to
dismantle the plant at the end of life of four years. On the date of acquisition, it was estimated that the cost
of dismantling would amount to Rs.600 million. AL uses the revaluation model for subsequent measurement
of its property, plant and equipment and account revaluation on the net replacement method. Depreciation
is provided on straight line basis. Applicable discount rate is 10%p.a.
The details of revaluation carried out by the Professional Valuer and the revision in the estimated cost of
dismantling as at 30. June 2018 and 2019 are as follows:
Rs in “million”
2019 2018
Revalued amount of plant* 1800 3375
Revised estimate of Dismantling cost 450 826
*excluding dismantling cost Required:
1. Prepare journal entries to record the above transactions in the books of AL for the year ended 30 June
2019, in accordance with International Financial Reporting Standards.
2. Prepare extracts from statement of profit or loss and statement of financial position as on 30.06.2019
with comparatives.
Note: First apply requirements of IAS-16, then other standards
Solution
Date Accounting head Debit Credit
30.6.2019 Depreciation 1331.86
Accumulated Dep. 1331.86
30.6.2019 Finance cost 62.06
Provision for Dismantling cost 62.06
30.6.2019 Revaluation Surplus 47.81
30.6.2019 Accumulated Depreciation 1331.86
Plant & Machinery 1331.86
30.6.2019 Revaluation Surplus(OCI) 95.62
Profit & Loss (P/L) 396.20
Plant & Machinery 491.82
30.6.2019 Provision for Dismantling Cost 310.74
Profit & Loss 310.74
W1
Date Particulars Cost Acc. WDV Provision Rev. Surplus P&L
Depreciation
1.7.2017 Asset 4909.81 - 4909.81 409.81 -
Purchase(4500+600(1.1)-4
30.6.2018 Depreciation(÷4) (1227.45) - - -
30.6.2018 Finance cost (X10%) - - - 40.98 -
30.6.2018 Balance before REV. 4909.81 (1227.45) 3682.36 450.79 -
Xo30.6.2 Revaluation Elimination (1227.45) 1227.45 - - -
018
30.6.2018 Revaluation 313.32 - 313.2 - 313.23 -
increase(w.1.1)
30.6.2018 Estimate Change (bal.) - - - 169.80 (169.80) -
550
30.6.2018 Balance SOFP (W1.1) 3995.59 - 3995.59 6 20.59 143.43 -
30.6.2019 Depreciation (÷3) - (1331.86) (13331.86) - (47.81) -

30.6.2019 Finance cost (x10%) - - - 62.06 - -
30.6.2109 Balance before 3995.59 (1331.86) 2663.72 682.64 95.62 -
revaluation
30.6.2019 Revaluation-Elimination (1331.86) 1331.86 - - - -
30.6.2019 Revaluation decrease(bal) (491.82) - (491.82) - (95.62) (396.20)
30.6.2019 ESTIMATE CHANGE - - - (310.74) - 310.74
30.6.2019 Balance SOFP (w1.2) 2171.90 - 2171.90 371.90 - -
Revalued amount = Fair value provided by valuer + Provision for Dismantling
=3375 +620.59* *826x(1.1)-3
=3995.59
F. V =3995.59
WDV = (3682.36)
Revaluation Surplus =313.23 (W-1.2)
=1800+450*1.1-2
=1800+371.90
=2171.90
Example 1
On 1 January 2021, Adeel Limited (AL) installed a plant at a total cost of Rs. 100,000 with useful life of 5
years and nil residual value. There is legal requirement to dismantle the plant at the end of useful life. It was
estimated that dismantling would require cash outflows of Rs. 16,105 at the end of useful life. Relevant pre-
tax discount rate was estimated as 10%.
On 31 December 2021, the estimate of dismantling cash outflows and relevant pre-tax discount rate was
revised to Rs. 19,735 and 11%, respectively.
In later December 2023, the plant suffered a damage and its recoverable amount was determined to be Rs.
5,000 only on 31 December 2023, following the impairment review.
AL has financial year end of December 31.
Required
Prepare movement of plant’s carrying amount and provision for dismantling, identifying the amounts that
will be charged to profit or loss from 1 January 2021 to 31 December 2023 for AL.
Solution
Adeel Limited
Movement in PPE and Provision
PPE Provision PL
Particulars Rupees Working
1 Jan 2021 110,000 10,000 [100,000 + 16,105 x 1.10-5]
Depreciation (22,000) 22,000 [110,000 / 5 years]
Interest 1,000 1,000 [10,000 x 10%]
551
31 Dec 2021 88,000 11,000
Increase in provision 2,000 2,000 (balancing)
31 Dec 2021 90,000 13,000 [19,735 x 1.11-4]
Interest 1,430 1,430 [13,000 x 11%]
31 Dec 2022 67,500 14,430
Decrease in provision (5,000) (5,000) (balancing)
31 Dec 2022 62,500 9,430 [13,971 x 1.14-3]
Interest 1,320 1,320 [9,430 x 14%]
31 Dec 2023 before loss 41,667 10,750
Impairment loss (36,667) 36,667 [41,667 - 5,000]
31 Dec 2023 5,000 10,750
Decrease in provision (5,000) (6,750) 1,750 (balancing)
31 Dec 2023 - 4,000 [5,382 x 1.16-2]
Example 2
On 1 January 2021, Multan Limited (ML) installed at a total cost of Rs. 100,000 with useful life of 5 years
and nil residual value. There is legal requirement to dismantle the plant at the end of useful life. It was
estimated that dismantling would require cash outflows of Rs. 16,105 at the end of useful life. Relevant
pre-tax discount rate was estimated as 10%.
On 31 December 2021, plant was revalued to Rs. 87,500 and the estimate of dismantling cash outflows and
relevant pre-tax discount rate was revised to Rs. 19,735 and 11%, respectively.
On 31 December 2022, plant was revalued to Rs. 67,000 and the estimate of dismantling cash outflows and
relevant pre-tax discount rate was revised to Rs. 13,971 and 14%, respectively.
On 31 December 2023, the plant was revalued to Rs. 40,000 and the estimate of dismantling cash outflows
and relevant pre-tax discount rate was revised to Rs. 5,382 and 16%, respectively.
ML has financial year end of December 31.
Required:
Prepare movement of plant’s carrying amount, provision for dismantling and revaluation surplus,
identifying the amounts that will be charged to profit or loss from 1 January 2021 to 31 December 2023 for
ML
Solution
Multan limited
Movement in PPE and Provision and revaluation surplus
Revaluation Other Working
Particulars PPE Provision OCI (Rs.)
PL PL
Rupees
1 Jan 2021 110,000 10,000 [100,000 + 16,105 x 1.10-5]

Interest 1,000 1,000 [10,000 x 10%]
31 Dec 2021 88,000 11,000
Revaluation loss (500) (500)
87,500 11,000
Increase in 2,000 (2,000) (balancing)
provision
552
31 Dec 2021 87,500 13,000 0 (2,500) [19,735 x 1.11-4]
75
Interest 1,430 1,430 [13,000 x 11%]
31 Dec 2022 65,625 14,430 (1,875)
Revaluation 1,375 1,375(W.1)
surplus
67,000 14,430
Decrease in (5,000) 4,500 500(W.2) (balancing)
provision
31 Dec 2022 67,000 9,430 4,500 0 [13,971 x 1.14-3]
Incremental (1,500) [4,500 / 3 years]
depreciation
Interest 1,320 1,320 [9,430 x 14%]
31 Dec 2023 44,667 10,750 3,000 0
Revaluation loss (4,667) (3,000) (1,667)
40,000 10,750 0 (1,667)
Decrease in (6,750) 5,083 1,667 (balancing)
provision
31 Dec 2023 40,000 4,000 5,083 0 [5,382 x 1.16-2]
R. Surplus = 1,375
Reversal of loss 2,500 Cr R. Surplus 0

Extra depreciation (22,000 – 21,875) 625 Dr
Net reversal of loss 1,875 Cr
However, loss up to 1,375 can be reversed
W.2) remaining loss of 500 (1,875 – 1,375) can further be reversed in the entry of decrease in provision,
which means all loss now reversed. Balancing figure of 4,500 will be taken as revaluation surplus.
553
IFRS-8 [Operating Segments]:
This standard shall be applied after preparing the financial statements correctly under therequirements
of other IFRS.
[Para 1]
Core Principle: An entity shall disclose information to enable users of its financial statements to evaluate the
nature and financial effects of business activities in which it engages and economic environments in which it
operates.
[Para 2]Scope:
This IFRS shall apply to:
a) The separate financial statements of an entity:
i) Whose debt or equity instruments (means shares or debentures) are traded in a publicmarket
(means e.g. stock exchange) ; or
ii) That files, or is in the process of filing its financial statements with a securities commission (e.g
SECP) for the purpose of issuing shares or debentures in a public market; and
b) The Consolidated financial statements of group with a parent:
 Whose debt or equity instruments (means shares or debentures) are traded in a publicmarket
(means e.g stock exchange) ; or
 That files, or is in the process of filing its financial statements with a securities commission (e.g
SECP) for the purpose of issuing shares or debentures in a public market;
[Para 4]
If a financial report contains both the consolidated financial statements of a parent as well as separate financial
statements’ segment information is required only in consolidated financial statements.
Definition of an Operating Segment [Para 5]

An operating segment is a component of an entity:
a) That engages in business activities from which it may earn revenues and incur expenses (e.g. Paints,
Chemicals and Garments department) (including revenues and expenses relating to transactions with other
components of the same entity);
b) Whose operating results are regularly reviewed by the entity’s chief operating decision marker
(e.g: Chief executive officer or Chief Operating Officer) to make decisions about resources to be allocated to the
segment and assess its performance; and
c) For which discrete financial information is available.
[Para 6]
Not every part of an entity is necessarily an operating segment, For example, head office or research and
development department may not earn revenue and therefore would not be operating segments.
Para 13]
Reportable Segments : An entity shall report separately information about an operating segment that meets any
of the following quantitative thresholds (means all operating segments are not reportable segment):
a) Its reported revenue, including both sales to external customers and intersegment sales or transfers,is
10% or more of the combined revenue, internal and external, of all operating segments.
554
b) The absolute amount of its reported profit or loss is 10% or more of the Greater of:
(i) The combined reported profit of all operating segments that did not report a loss; and
(ii) The combined reported loss of all operating segments that reported a loss; or
[Means the above threshold shall be 10% of profit or loss whichever is higher]
Q. The following information relates to a quoted company with five divisions of operation:
Operating Profit Loss
Segments Rs. M Rs. m
Division 1 10
Division 2 25
Division 3 40
Division 4 35
Division 5 40
Total 110 40
Required: Which of the business divisions are reportable segments under IFRS 8 Operating segments?
A.
Profit Loss Reportable segment
Rs. M Rs. m
Division 1 10 No
Division 2 25 Yes
Division 3 40 Yes
Division 4 35 Yes
Division 5 40 Yes
Total 110 40
Greater of theabove 110
Materiality threshold(10%) 11
c) Its assets are 10% or more of the combined assets of all operating segments.
[Para 15] [75% RULE]
If the total external revenue reported by reportable segment constitutes less than 75% of the entity’s external
revenue, additional operating segments shall be identified as reportable segments (even if they do not meet the
above quantitative thresholds) until at least 75% of the entity’s external revenue is included in reportable
segments.
Example: Reportable Segments
A listed entity reports six different types of business to its chief executive. In the most recent financial year, the
revenue of these six operations (including those to internal customers), were as follows:
Rs in millions
Business type Internal revenue External revenue Total revenue
A 0 40 40
B 0 20 20
C 12 6 18
D 5 5 10
E 0 7 7
F 0 5 5
17 83 100
555
Required: Which of the above business types are reportable segments under IFRS 8 operating segments?
Ans.
Business Internal External Total Notes
Type revenue revenue revenue
A 0 40 40 Reportable segment because 40% of total > 10%
threshold test
B 0 20 20 Reportable segment because 20% of total > 10%
threshold test
C 12 6 18 Reportable segment because 18% of total > 10%
threshold test
D 5 5 10 Reportable segment because 10% of total = 10%
threshold test
E 0 7 7 Not reportable(7% of total < 10% threshold)
F 0 5 5 Not reportable (5% of total < 10% threshold)
17 83 100
Note that the external revenue of segments reportable under the 10% test represents 71M (40 + 20 + 6 + 5) out of
the 83 M. They therefore represent 85.5% (71M/83M x 100) of external revenue and no additional segments
needed to be reported under the “75% rule”.
Discretion of management:
Operating segments that do not meet any of the quantitative thresholds may be considered reportable, and
separately disclosed, if management believes that information about the segment would be useful to users of the
556
Practice Questions
Question-1
A listed company has different operating segments, which are listed as under along with other information.
Operating Revenue Profit /(Loss) Assets
Segments Internal External
Rs. (m) Rs. (m) Rs. (m) Rs. (m)
A 110 120 22 1,500
B 65 130 (15) 750
C - 70 42 425
D - 430 16 2,500
E - 55 (7) 630
F - 85 13 1,400
Total 175 890 93/(22) 7,205
Required: - Determine the reportable segments under IFRS 8.
Question-2
A listed company has different product lines (Operating segments). The detail of which along with their
relevant information is given as under: -
Operating Revenue Profit/(loss) Assets
segment
Internal External
Rs. (m) Rs. (m) Rs. (m) Rs. (m)
A 210 150 25 70
B 12 200 (14) 85
C 70 150 18 78
D 125 170 42 102
E 80 52 23 78
F 47 153 10 12
G 45 155 7 105
Total 589 1,030 125/(14) 530
Required: - Identify the reportable segment under IFRS 8?
Question-3
Diamond Limited, a listed company, has six operating segments. These segments do not havesimilar
economic characteristics. Following segment wise information is available:
Revenue
External Inter-segment Total Profit/(loss) Total assets
Segments ---------------------------------Rs. in ‘000---------------------------------
A - 24,000 24,000 (1,800) 5,400
B 184,000 8,000 192,000 (12,000) 48,000
C 22,000 4,500 26,500 19,000 4,500
D 24,000 - 24,000 (23,200) 6,000
E 23,000 - 23,000 2,300 6,500
F 25,000 3,000 28,000 2,900 18,000
278,000 39,500 317,500 (12,800) 88,400
Required
Identify the reportable segments under IFRSs along with brief justification. (07)
557
Solution to Practice Questions
Answer 1
Identification of reportable segment
Reportable segment Basis (W 1)
A Revenue/profit/assets
B Revenue/profit/assets
C Profit
D Revenue/profit/assets
F Profit/assets
Segment E is not a reporting segment because it does not meet any of the criteria.
W-1 Identification of reportable segment 10% threshold

Segment Revenue Profit/ (loss) Assets
A (230/1,065)x100=22% (22/93) x 100=24% (1,500/7,205)x100=21%
B (195/1,065)x100=18% (15/93) x 100=(16%) (750/7,205)x100=10%
C (70/1,065)x100=7% (42/93) x 100=45% (425/7,205)x100=6%
D (430/1,065)x100=40% (16/93) x 100=17% (2,500/7,205)x100=35%
E (55/1,065)x100=5% (07/93) x 100=(8%) (630/7,205)x100=9%
F (85/1,065)x100=8% (13/93) x 100=14% (1,400/7,205)x100=19%
W-2 Identification of reportable segment 75% threshold

External revenue of reportable segment is (835 (120+130+70+430+85)/890) x 100 = 94% therefore no need to
identify additional reportable segment as the external revenue of reportable segments is greater than 75% of
entity’s external revenue.
Answer 2
Identification of reportable segment
Reportable segment Basis
A Revenue/profit/asset
B Revenue/profit/asset
C Revenue/profit/asset
D Revenue/profit/asset
E Profit/asset
F Revenue
G Revenue /asset
W- 1 10% TEST
Operating Revenue Profit or loss Assets
segment
A 360/1,619 25/125x100=20% 70/530x100=13.2%
(589+1,030)x100=22%
B 212/1,619x100=13% 14/125x100=(11.2%) 85/530x100=16.0%
C 220/1,619x100=13.5% 18/125x100=14.4% 78/530x100=14.7%
D 295/1,619x100=18.2% 42/125x100=33.6% 102/530x100=19.2%
E 132/1,619x100=8.15% 23/125x100=18.4% 78/530x100=14.7%
F 200/1,619x100=12.4% 10/125x100=8.0% 12/530x100=2.26%
G 200/1,619x100=12.4% 7/125x100=5.6% 105/530x100=19.8%
558
As all the segment are reportable therefore 100% external revenue will be reported. There is no need ofchecking
75% rule.
Answer 3
Quantitative thresholds for reportable segments:
Total 10%
Revenue 317,500 31,750
Absolute loss * 37,000 3,700
Assets 88,400 8,840
*Higher of total profit i.e. 24,200 or total loss i.e. 37,000
Segment Reportable Explanation

A No Because it fails to meet any of the criteria specified in IFRS-8
B Yes Because it meets all of the criteria specified in IFRS-8
C Yes Because its profit of Rs. 19,000 is greater than Rs. 3,700
D Yes Because its loss of Rs. 23,200 is greater than Rs. 3,700
E No Because it fails to meet any of the criteria specified in IFRS-8
F Yes Because its assets of Rs. 18,000 are greater than Rs. 8,840
Check that 75% test is satisfied: (184,000+22,000+24,000+25000) ÷278,000=91%
559
[Para 21]
An entity shall disclose the following for each period for which statement of comprehensive income is
presented (means comparatives as well):
a) General information: [Para 22]
(i) Factors used to identify the entity’s reportable segments, (& whether management has chosen to
organize the entity around differences in products and services, or geographical areas etc)
(ii) Types of products and services from which each reportable segment derives its revenues.
b) Information about reported segment profit or loss, including revenues and expenses included in
reported segment profit or loss, segment assets and segment liabilities. [Para 23 – 27]
Example of Disclosures:
[Para 23]
Information about profit or loss, assets and liabilities
Segment SegmentB SegmentC All other Entity
A segments total
Revenue – external customers X X X X X
Revenue – inter segment X X X X _
Total revenue X X X X X
Interest revenue X X X X X
Interest expense (X) (X) (X) (X) (X)
Depreciation and amortization (X) (X) (X) (X) (X)
Other material non-cash items X/(X) X/(X) X/(X) X/(X) X/(X)
Material income/expense X/(X) X/(X) X/(X) X/(X) X/(X)
Share of profit of associate X X X X X
Segment profit before tax X X X X X
Income tax expense (X) (X) (X) (X) (X)
Unallocated items X/(X)
Profit for the year X
Para 24]
Segment assets X X X X X
Investments in associate X X X X X
Unallocated assets X
Entity’s total assets X
Capital Expenditures X X X X X
Segment liabilities X X X X X
Unallocated liabilities X
560
Entity’s total liabilities X
Entity wide Disclosures:

The following applies to all listed entities or which are in the process of listing including those entities that have a
single reportable segment.
[Para 32]
1. Information of revenue from external customers for each Product and Service:
An entity shall report the revenues from external customers for each product and services unless the necessary
information is not available and the cost to develop it would be excessive, in which case that fact shall be
disclosed.
[Para 33]
2. Information about Geographical Areas:

An entity shall report the following geographical information unless the necessary information is notavailable
and the cost to develop it would be excessive:
a) Revenue from external customers:
(i) Attributed to the entity’s country of domicile; and
(ii) Attributed to all foreign countries in total from which the entity derives revenue.
If revenues from external customers attributed to an individual foreign country are material, those revenuesshall be
disclosed separately.
b) Non-Current Assets:
(i) Located in the entity’s country of domicile; and
(ii) Located in all foreign countries in total in which the entity holds assets.
If assets in an individual foreign country are material, those assets shall be disclose separately.
Example of (a) and (b) above Information about geographical areas
Country of domicile Foreign countries Total
Revenue – external customers X X X
Non – current assets X X X
[Para 34]
Information about Major Customer:
An entity shall provide information about the extent of its reliance on its major customers (IPPs and Wapda; PSO
and Railways). If revenues from transactions with a single external customer amount to 10% or moreof an entity’s
revenues, the entity shall
(i) Disclose that fact;
(ii) The total amount of revenues from each such customer; and
(iii) The identity of the segment or segments reporting those revenues.
The entity need not disclose the identity of a major customer

C) Four Reconciliation are required:
1. Reconciliation of totals of segment revenues to the corresponding combined entity’s revenue.
2. Reconciliation of the total of segment profit or loss to corresponding combined entity’s profit or loss
561
before tax.
3. Reconciliation of the total of segment assets to corresponding combined entity’s assets.
4. Reconciliation of the totals of segment liabilities to corresponding combined entity’s liabilities.
[Para 28]
[Para 16]
Information about other business activities and Operating segments that are not reportable shall becombined and
disclosed in an “all other segments” category.
Self-test question Gohar limited

[Para 5]
Start-up Operations: An operating segment may engage in business activities for which it has yet to earn
revenues. (It can even then be reportable segment based on Assets criteria or loss criteria). Therefore, startup
operations may be operating segments before earning revenues.
[Para 14] Aggregation of segments [Combining operating segments below the quantitativethreshold to
make a reportable segment]
An entity may combine information about operating segments that do not meet the quantitative threshold with
information about other operating segments that do not meet the quantitative thresholds to produce a reportable
segment only if the operating segments have similar economic characteristics.
Similar characteristics means[Para 12]:

a) Nature of the products and services;
b) Nature of the production process;
c) Type or class of customers for their products and services,
d) The methods used to distribute their products or provide their services; and
e) If applicable, the nature of the regulatory environment, for example, banking, insurance or public
utilities.
[Para 17]
If management judges that an operating segment identified as a reportable segment in the immediately
preceding period is of continued significance, information about the segment shall continue to be reported
separately in the current period even if it no longer meets the cretira of reportable segment (i.e Quantitative
thresholds).
[Para 18]
If an operating segment is identified as a reportable segment in the current period in accordance with the
quantitative thresholds, segment data for a prior period presented for comparative purposes shall be restated to
reflect the newly reportable segment as a separate segment, even if that segment did not satisfy the criteria in the
prior period unless the necessary information is not available and the cost todevelop it would be excessive.
[Para 19]
IFRS-8 does not set an upper limit as to the number of operating segments that should be separately reported.
However, the standard sets out that if the number of separately reported segments exceeds 10 then it is likely
that information may become too detailed and consequently lose its usefulness.
562
[Para 29]
If an entity changes the structure of its internal organization in a manner(e.g Internal decision making is
changed from products and services to geographical areas) that causes the composition of its reportable segments
to change, the corresponding information for earlier periods, shall be restated unless information is not available
and the cost to develop it is excessive.
563
Self-test questions:
Question-1
The following information relates to M/s Goods, a listed company with five divisions for the year ended June 30,
2013
Particular Divisions (Rs. In million)
A B C D E
Revenue from external customers 200 45 45 150 44
Inter-segment revenue 20 - 5 20 2
Reported profit 40 9 10 45 10
Total assets 1,500 300 400 2,000 400
Required:
Which of the above business divisions are reportable segments under IFRS-8 Operating Segments? Justify your
answer with reasoning. (09)
Question 2
(a) Specify the criteria for identification of operating segments, in accordance with the International
Financial Reporting Standards (Answer in para 5)
(b) Jay Limited is an integrated manufacturing company with five operating segments, following information
pertains to the year ended 31 March 2012.
Operating Internal External Total Profit/(loss) Assets Liabilities
segments revenue revenue revenue
-------------------------------Rs. In million---------------------------------------------
A 38 705 743 194 200 130
B - 82 82 (22) 44 40
C - 300 300 81 206 125
D 35 - 35 10 75 60
E 38 90 128 (63) 50 25
Total 111 1,177 1,288 200 575 380
Required:
In respect of each operating segment explain whether it is a reportable segment. (09)
Question-3
Gohar Limited (GL) a listed company, is engaged in chemicals, soda ash, polyester, paints and pharma
businesses. Results of each business segment for the year ended 31 March 2015 are as follows:
Business Total Sales Gross profit Operating Assets Liabilities
segments expenses
--------------------------------------------Rs. In million---------------------------------------
Chemical 1,790 1,101 63 637 442
Soda Ash 216 117 57 444 355
Polyester 227 48 23 115 94
Paints 247 26 16 127 108
Pharma 252 31 12 132 98
Included in total sales, inter-segment sale by Chemicals to Polyester and Soda Ash is Rs. 28 million andRs. 10
million respectively at a margin of 30%.
Total Operating expenses of the business include GL’s head office expenses amounting to Rs. 75 million which
have not been allocated to any segment. Furthermore, assets and liabilities amounting to Rs. 150 million and Rs.
27 million have not been allocated in the assets and liabilities of any segment.
Required:
564
In accordance with the requirements of International Financial Reporting Standards:
(a) Determine the reportable segments of Gohar Limited; and (07)
(b) Show how these reportable segments and the necessary reconciliation would be disclosed in GL’s
financial statements for the year ended 31 March 2015. (08)
565
Solutions
Answer-1
M/s Good Company LimitedSegment Identification
Divisions A B C D E Total
Rs. In million
Revenue from externalcustomer 200 45 45 150 44 484
Intersegment Revenue 20 - 5 20 2 47
Total revenue 220 45 50 170 46 531
Reported profit 40 9 10 45 10 114
Total assets 1,500 300 400 2,000 400 4,600
Revenue % 41.4% 8.5% 9.4% 32.0% 8.7% 100%

Reported profit % 35.1% 7.9% 8.8% 39.5% 8.8% 100%
Total assets % 32.6% 6.5% 8.7% 43.5% 8.7% 100%
Reportable Segment:
Division A and Division Dare reportable segments as they meet the requirements for an operatingsegment. B, C
and E do not meet any of the criteria.
None of them pass the 10% test for either revenue, profit or assets.
Additionally, IFRS 8 states that if total external revenue reported by operating segments constitutes less than 75%
of the entity’s external revenue then additional operating segments must be identified as reporting segments, until
75% of revenue is included in reportable segments.
As these two segments cover 72.3% [(200+150)/484] external revenue so additional segments will need to be
identified as reportable segments (even if they do not meet the criteria). For example, if we include Division B
then total reported revenue will be 81.61% [(200+150+45)/484 x 100].
Answer-2
(a) An operating segment is a component of an entity:
o That engages in business activities from which it may earn revenue and incur expenses (including
revenues and expenses relating to transactions with other components of the same entity):
o Whose operating results are regularly reviewed by the entity’s chief operating decision maker to
make decisions about resources to be allocated to the segment and assess the performance; and
o For which discrete financial information is available.
(b)
Operatingsegments A B C D E Total
Revenue from 705 82 300 - 90 1,177

External customers
Inter segmentrevenue 38 - - 35 38 111
Total Revenue 743 82 300 35 128 1,288

Reported Profit orloss 194 (22) 81 10 (63) 285/(85)
Total Assets 200 44 206 75 50 575
Total Revenue % 57.69% 6.34% 23.29% 2.7% 9.94% 100%

Profit or loss%(Note) 68.07% (7.72%) 28.42% 3.5% (22.10%) Base is285
M
Total Assets% 34.78% 7.65% 35.83% 13.04% 8.69% 100%
Note:
566
As Jay limited has both profit and loss making segments, the result of those in profit and those in loss mustbe
totaled to see which is greater:
Combined Profit = 285 M
Combined loss = (85) M
So the 10% of profit or loss test must be applied by reference to 285 M.
Conclusion:
Segment
A Reportable Segment because all relevant criteria is met.
B Not a reportable segment because neither of the criteria is met.
C Reportable segment because all criteria is met.
D Reportable segment because it has more than 10% assets. All conditions need not bemet.
E Reportable segment because its losses are more than 10% of absolute profit. All condition need not be met.
75% Criteria is also met, i-e (705+300+90)/1,177 = 93%, therefore there is no need toidentify any other
operating segment as reportable.
Answer-3
(a) Determination of reportable segments
Chemicals Soda Ash Polyester Paint Pharma Total
-------------------------------Rs. In million----------------------------
Sales 1,790 216 227 247 252 2,732
Less: Intersegmentsales (38) - - - - (38)
(28+10)
Sales to external 1,752 216 227 247 252 2,694
customers
Gross profit 1,101 117 48 26 31 1,323

Operating expenses (63) (57) (23) (16) (12) (171)
Profit before tax 1,038 60 25 10 19 1,152
Assets 637 444 115 127 132 1,455
Criteria for reporting segmentidentification Reporting segment identified
1. 10% of combined sales i.e Rs. 273.2 million Chemicals

2. 10% of profit before tax i.e Rs. 115.2 million Not any other then chemical
3. 10% of assets i.e. Rs. 145.5 million Chemical and Soda Ash
% of external sales of reportable segments (1,752+216)/2,694 x 100 = 73.05%
Further segment needs to be identified as reportable segment’s external sales is less than 75%. Let’s
e.g. take Pharma as it has highest sales and assets.
Final total external reportable revenue is [1,752+216+252]/2,694 x 100 = 82.40%
(b) Disclosure in the financial statements of Gohar LimitedDISCLOSURE OF OPERATING
SEGMENT RESULTS
Chemicals Soda Ash Pharma Other Total
operating
segments
---------------------------Rs. In million---------------------
Revenue from externalcustomers 1,752 216 252 474(227+247) 2,694
Inter segment revenue 38 - - - 38
Total Revenue 1,790 216 252 474 2,732
567
Other material information
Operating expenses 63 57 12 39 (23+16) 171
Segment profit before tax 1,038 60 19 35 (25+10) 1,152
Segment assets 637 444 132 242(115+127) 1,455
Segment liabilities (From 442 355 98 202 (94+108) 1,097
question-Given)
Reconciliation of reportable segment revenues, profit or loss, assets and liabilities
Reportablesegment Other than Elimination Other Gohar
total reportable of inter adjustment Limited’stotal
segment total segment (From
transactions question-
Given)
-------------------------------Rs. In million-------------------------
Revenue (from above) 2,258(1,790+216+252) 474 (38) - 2,694
Operating expenses 132(63+57+12) 39 - 75 246()171+75
Segment profit before tax 1,117(1,038+60+19) 35 (11)* (75)** 1,066(1,152-11-75)
Segment assets 1,213(637+ 444+132) 242 - 150 1,605(1,455+150)
Segment liabilities 895(442+355 +98) 202 - 27 1,124(1,097+27)
*elimination of profit on intercompany sale/purchase (38/100x30 = 11.4)
**unallocated head office operating expenses will be deducted from allocated segment profit to get thetotal
profit of the business.
568
IFRS 8 Q.B
Question 1
SHAZAD INDUSTRIES LIMITED
Shazad Industries Ltd has recently acquired four large subsidiaries. These subsidiaries manufacture products
which are of different lines from those of the parent company. The parent company manufactures plastics and
related products whereas the subsidiaries manufacture the following:
Product Location
Subsidiary 1 Textiles Karachi
Subsidiary 2 Car products Lahore
Subsidiary 3 Fashion garments Peshawar
Subsidiary 4 Furniture items Multan
The directors have purchased these subsidiaries in order to diversify their product base but do not have any
knowledge of the information required in the financial statements regarding these subsidiaries.
Required
(a) Explain to the directors the purpose of segmental reporting of financial information.
(b) Critically evaluate IFRS 8, Operating segments, setting out any problems with the standard.
Answer:
(a) The purposes of segmental information are:
 to provide users of financial statements with sufficient details for them to be able to appreciate the
different rates of profitability, different opportunities for growth and different degrees of risk that apply to an
entity’s classes of business and various geographical locations.
 to appreciate more thoroughly the results and financial position of the entity by permitting a better
understanding of the entity’s past performance and thus a better assessment of its futureprospects.
 to create awareness of the impact that changes in significant components of a business may have on the
business as a whole.
(b) IFRS 8 lays down some very broad and inclusive criteria for reporting segments. Unlike earlier attempts to
define segments in more quantitative terms, segments are defined largely in terms of the breakdown and analysis
used by management. This is, potentially, a very powerful method of ensuring that preparers provide useful
segmental information.
There will still be problems in deciding which segments to report, if only because management maystill
attempt to reduce the amount of commercially sensitive information that they produce.
The growing use of executive information systems and data management within businesses makes iteasier to
generate reports. It would be relatively easy to provide management with a very basic set of
internal reports and analyses and leave the individual managers to prepare their own more detailed information
using the interrogation software provided by the system.
If such analyses become routine then they would be reportable under IFRS 8, but that would be very difficult to
check and audit.
There are problems in the measurement of segmental performance if the segments trade with each other.
Disclosure of details of inter-segment pricing policy is often considered to be detrimental to the good of a
company. There is little guidance on the policy for transfer pricing.
Different internal reporting structures could lead to inconsistent and incompatible segmental reports, even from
companies in the same industry (some companies can disclose on the basis of products and others on the basis of
region).
Question 2
AZ
For enterprises that are engaged in different businesses with differing risks and opportunities, the usefulness of
financial information concerning these enterprises is greatly enhanced if it is supplemented by information on
individual business segments.
Required
569
(a) Explain why the information content of financial statements is improved by the inclusion of segmental
data on individual business segments.
(b) Discuss how IFRS 8 requires that segments be analysed.
Answer
(a) Usefulness of segmental data
Many entities carry out several classes of business and operate in a number of countries across the world. Each
of these businesses and geographical segments carries with it different opportunities for growth, different rates of
profit and varying degrees of risk. Some business segments may be strongly influenced by the health of the
economy whereas other segments may be unaffected by recession. One country may be experiencing growth;
another country may be less stable because of political events. Awareness of these cultural and environmental
differences is important to investors in order toallow them to fully understand the performance and position of the
entity over the past, its prospects for the future and the risks that it faces.
IFRS 8 requires that segmental information should be provided to enable investors to understand the impact that
the different segments of a business may have on the business as a whole. If the user of financial statements is
only provided with figures for the entity as a whole, this might hide the risks and problems or profits and
opportunities of the underlying business segments. The disaggregated financial information provided by segmental
reporting allows for analytical review on a segment by segment basis which will provide greater understanding
of the entity’s position and performance and allow a better assessment of its future.
(b) Analyzing segments
IFRS 8 defines an operating segment as a component of an entity that engages in business activities from which it
may earn revenues and incur expenses, whose operating results are reviewed regularly by the chief operating
decision maker in the entity and for which discrete financial information is available.
Not every part of a business is necessarily an operating segment or part of an operating segment. Head office is an
example, since head office does not usually earn revenues. Generally an operating segment has a segment manager
who is directly accountable to and maintains regular contact with the chief operating decision-maker, to discuss the
performance of the segment.
IFRS 8 requires that entities should report information about each operating segment that is identified and that
exceeds certain quantitative thresholds for size of revenue, operating profit or loss or assets. Financial
information about operating segments with similar characteristics can be aggregated.
IFRS 8 sets out the information about each reportable operating segment that should be disclosed, including total
assets, profit or loss, revenue from external customers, revenue from sales to other segments, interest income and
expense, depreciation, material items of income or expense and tax. The amount reported for each item should be
the same measure that is reported for the segment to the chief operating decision maker of the entity.
IFRS8 applies to quoted companies only.

Drigh Limited (DL), a listed company, has seven components. The following information is available about the
components:
Revenues
Components Profit/(loss) Total assets
External Inter-segment Total
--------------------------------- Rs. in million ---------------------------------
A 2,600 200 2,800 (300) 700
B - 600 600 (45) 135
C 1,600 - 1,600 (580) 150
D 1,550 113 1,663 475 613
E 575 - 575 58 162
F 500 75 575 60 300
G 125 - 125 13 150
6,950 988 7,938 (319) 2,210
570
(i) Operating results of all the above components are reviewed by DL’s CEO. He is of the view that all
components need to be presented separately in the DL’s financial statements as per IFRS 8.
(ii) Components A and G exhibit similar long-term financial performance because they have similar economic
characteristics while other components do not have similar economic characteristics.
(iii) Component F earns revenues that are only incidental to the activities of DL and supports components C and D.
Required:
Keeping in view the CEO’s point of view, discuss how the above components should bepresented in the note of
‘Operating Segments’ in accordance with IFRS 8.
(Preparation of note is not required) (08)
Answer
Quantitative thresholds for reportable segments:
Total 10%
Revenue 7,938 793.8
Absolute profit *925 92.5
Assets 2,210 221
*Higher of total profit i.e. 606(475+58+60+13) or total loss i.e. 925(300+45+580)
Contrary to the CEO’s point of view, DL’s components should be presented in the note of ‘operating segments’
in the following manner:
 A & G may be presented as an aggregated segment because they have similar economic characteristics and,
when combined, meet all the quantitative thresholds.
 C will be presented as a separate segment because its loss of Rs. 580 million is greater than Rs. 92.5
million. Further, its revenue of Rs. 1,600 million is also greater than Rs. 793.8 million.
 D will be presented as a separate segment because it meets all the quantitative thresholds.
 Components B, E, and F will be presented as a combined category of ‘All other segments’ for the following
reasons:
– More than 75% i.e. 84.5% [(2600+1600+1550+125)/6950)] of the revenue is reported by operating
segments so additional reportable segments need not be identified.
– Segment B is an operating segment but fails to meet any quantitative threshold.
– Segment E is an operating segment but fails to meet any quantitative threshold.
– Segment F, despite having assets of Rs. 300 million which are greater thanRs. 221 million, fails to
meet the definition of operating segment. This is because its revenues are merely incidental to the
activities of the entity, and as a result, it does not meet the definition of an operating segment.
571
IFRS 8 OPERATING SEGMENTS
Existence of segment managers [para 8 to 10 & 12]
Generally, an operating segment has a segment manager who is directly accountable to and maintains regular contact with
the CODM to discuss operating activities, financial results, forecasts, or plans for the segment.
The term ‘segment manager’ identifies a function, not necessarily a manager with a specific title. The CODM also may be
the segment manager for some operating segments and a single manager may be the segment manager for more than one
operating segment.
If the characteristics (of definition of operating segment) apply to more than one set of components of an organisation but
there is only one set for which segment managers are held responsible, that set of components constitutes the operating
segments.
Matrix Structures
The characteristics (of definition of operating segment) may apply to two or more overlapping sets of components for which
managers are held responsible. That structure is sometimes referred to as a matrix form of organisation. For example, in
some entities, some managers are responsible for different product and service lines worldwide, whereas other managers are
responsible for specific geographical areas. It is likely that the CODM regularly reviews the operating results of both sets of
components, and financial information is available for both. In that situation, the entity shall determine which set of
components constitutes the operating segments by reference to the core principle i.e. to enable users of its financial
statements to evaluate the nature and financial effects of the business activities in which it engages and the economic
environments in which it operates.
Comparative information [IFRS 8: 18]

Segment data for a prior period presented for comparative purposes shall be restated to reflect the newly reportable segment
as a separate segment, even if that segment did not satisfy the criteria for reportability in the prior period, unless the
necessary information is not available and the cost to develop it would be excessive.
All Other Segments [IFRS 8: 16]

Information about other business activities and operating segments that are not reportable shall be combined and disclosed
in an ‘all other segments’ category separately from other reconciling items in the reconciliations required by disclosure
under IFRS 8. The sources of the revenue included in the ‘all other segments’ category shall be described.
572
IFRS 8 Test Questions
Question 1
Operating Profit / (loss)
segment
Rs.
#1 300
#2 60
#3 600
#4 400
#5 700 2,060
#6 (600)
#7 (120)
#8 (960)
(1,680)
Required: Identify reportable segments as per IFRS 8.Q.2

A listed company has different product lines under, along with other information:
Rs. In million
Products Internal Revenue ExternalRevenue Profit Assets
A 110 120 42 1,500

B 65 83 8 650
C - 74 10 425
D - 430 19 2,500
E - 77 7 630
F - 104 29 1,500
Total 175 888 115 7,205
Required
Determine the reportable segment and give brief explanation in the light of IFRS 8.
Question 2
Fashion & Style Textile (FST) Limited is public listed company and renowned in the textile industry. The
company has five segments, each having its own revenues, expenses, assets and liabilities. The details of each
business segment for the year ending December 31, 2016 are as follows:
Rs. In “million”
Business Segment Revenues Gross Profit Operating Assets Liabilities
expenses
Spinning 1,969 1,211 69 701 486
Weaving 238 129 63 488 391
Dyeing 250 53 25 127 103
Home Textile 272 29 18 140 119
Garments 277 34 13 145 108
Additional Information:
 The weaving and dyeing segment revenues include external customers as well as inter segment
revenues. Intersegments revenues of both the segments are as follows:
 Revenues of weaving segment include inter segment revenue of Rs. 30 million. It supplies fabricsto
Dyeing segment at margin of 25%.
 Revenues of Dyeing segment includes inter segment revenue of Rs. 12 million as it provides
dyeing services to Garments segment at margin of 20%.
 The operating expenses of the Company’s head office amounting to Rs. 80 million have not been
573
allocated to any segment.
 Assets and liabilities of Rs. 160 million and Rs. 35 million respectively have not been reported in the
asset and liabilities of any segment.
Required:
In accordance with the IFRS
i. Identify which of the above will be classified as reportable segments of FST Limited.
ii. Show how the reportable segments and the necessary reconciliation would be disclosed in FST Limited
financial statement for the year ended December 31, 2016?
Question 3
Zeshan limited, (ZL) a listed company, is engaged in ‘spinning’, ‘weaving’, ‘knitting’, ‘dyeing’ and ’home textile’
businesses. Result of each business segment for the year ended June 30, 2018 is as follows:
Rs. In billion
Business Segments Sales Gross Profit Operating Assets Liabilities
Expenses
Spinning 20.000 1.800 0.800 15.000 0.750
Weaving 5.500 0.825 0.275 4.000 0.250
Knitting 3.000 0.420 0.220 1.200 0.075
Dyeing 3.200 0.384 0.175 4.500 0.125
Home textile 2.500 0.200 0.100 2.500 0.150
34.200 3.629 1.570 27.200 1.350
Inter- Segment sales by ‘spinning’ to ‘weaving and ‘knitting’ is Rs. 2 billion and 0.70 billion respectively and by
‘weaving’ to ‘dyeing’ is Rs. 1.5 billion. Spinning inter-segment sales have been sold at 9% margin and that of
‘weaving’ at 15% margin.
Operating expenses, assets and liabilities amounting to Rs. 0.5 billion, Rs. 0.25 billion and Rs. 0.1 billion
respectively, have not been allocated to any segment.
Required:
In accordance with the requirement of IFRS 8- Operating Segments:
i. Determine the reportable segments of ZL
ii. Show how these segments would be disclosed in ZL’s financial statements for the year ended June 30,2018.
iii. Also prepare the reconciliation of revenues, profit or loss, Assets and Liabilities.
574
Answer 1
Therefore, all industry segments with profits or loss having an absolute amount equal to or greater than Rs. 206
(10% of Rs. 2,060) meet the profit or loss test. Accordingly, industry segment # 1, 3, 4, 5, 6 and 8 are reportable
segments.
Working for reportable segments
Segments Revenue % of Profit/loss % of Assets % of
Total total total
A 230(110+120)/1,063(175+888) 22% 42/115 37% 1500/7205 21%
B 148(65+83)/1,063 14% 08/115 7% 650/7205 9%

C 74/1,063 7% 10/115 9% 425/7205 6%
D 430/1,063 40% 19/115 17% 2,500/7205 35%
E 77/1,063 7% 7/115 6% 630/7205 9%
F 104/1,063 10% 29/115 25% 1,500/7205 21%
100% 100% 100%
Reportable Segment:
Segments Basis
A Revenues, profits ,assets
B Revenues
D Revenues ,profits, assets
F Revenues ,profits, assets
Total external reportable revenue will be 83.00% [(120+83+430+104)/888 x 100] therefore there is no need to
identify any other operating segment as reportable segment.
Answer 2(i)
Rs. In million
Segments Total Revenue External sales Internalsales Profit (gross Assets Reportable
profit – Criteria metor
operating not
expenses)
Spinning 1,969 1,969 1,142 701 Yes (revenue,

(1,211-69) profit, assets)
Weaving 238 208 30 66 (129-63) 488 Yes(assets)
Dyeing 250 238 12 28 (53-25) 127 No
Home 272 272 11 (29-18) 140 No
Textile
Garments 277 277 21 (34-13) 145 No
Total 3,006 2,964 42 1,268 1,601
Only pinning and Weaving Segments meet the reportable segment criteria. However total sale of the two
segments to external customers is:
Spinning external sales 1,969
Weaving external sales 208
Total spinning and weaving external sales 2,177
% of total external sale (2,177/2,964) 73.45% which means further segments need tobe
identified
e.g. Garment segment (highest among remaining External sale is 277
segments in terms of sales and assets)
Grand total(2,177+277/2,964 x100) 82.79%
So garments segment should also be included as reportable segments.
Point to remember:
Note that while applying 10% rule, both external and internal sales are combined but in applying 75% rule,only
575
external sales are considered.
(ii)Disclosure in Financial Statements of Fashion and Style Textile
Operating Segments results. Rs. in million
Segment Spinning Weaving Garments Others Total
Revenue from external 1,969 208 277 510 2,964
customers (238+272)
Intersegment revenue 30 12 42
Revenue from reportable 1,969 238 277 522 3,006

segments
Other material
information
Operating expense 69 63 13 43 (25+18) 188
Segment profits 1,142 66 21 39 (28+11) 1,268
Segment assets 701 488 145 267 1,601
(127+140)
Segment liabilities 486 391 108 222 1,207
(103+119)
Reconciliation of reportable segments revenue, profit or loss, Assets and liabilities:

Reportable Other than Elimination of Other Fashion &
segment Total reportable Intersegment Adjustments Style Textile
segmentTotal Total
Revenue 2,484 522 (42) - 2,964
(1,969+238+277) (30+12)
Operating 145 43 - 80 268
expenses (69+63+13) (188+80)
Segment 1,229 39 (10)* (80)** 1,178
profit (1,142+66+21) (1,268-10-80)
Segment 1,334 267 - 160 1,761
Assets (701+488+145) (1,601+160)
Segment 985 222 - 35 1,242
Liabilities (486+391+108) (1,207+35)
*[30/100 x 25 + 12/100 x 20] =10
** (Unallocated head office operating expenses will result into reduction in total profit of business).
Answer 3
i. Determine the reportable segments:
Rs. In billion
Spinning Weaving Knitting Dyeing Hometextile Total
Sales 20.000 5.500 3.000 3.200 2.500 34.200

Less: Inter segment
sales (2.70) (1.5) ------ ----- ------ (4.20)
(2+0.7)
Sales to external 17.300 4.000 3.000 3.200 2.500 30.000
customers
Gross Profit 1.800 0.825 0.420 0.384 0.200 3.629
Operatingexpenses (0.800) (0.275) (0.220) (0.175) (0.100) (1.570)
Profit 1.000 0.550 0.200 0.209 0.100 2.059
576
Assets 15.000 4.000 1.200 4.500 2.500 27.200
Criteria for reportablesegment Reportable segmentidentified

identification
10% of Sales i.e. Rs. 3.42billion Spinning, Weaving
10% of Profit i.e. Rs. 0.206 Spinning, Weaving, Dyeing

billion
10% of asset i.e. Rs. 2.72billion Spinning, Weaving, Dyeing
Means reportable segments are Spinning, Weaving & Dyeing. In additional total external revenue is 82%
(17.3+4+3.2/30 x 100) which is more than 75% threshold therefore no need to identify any extra segment for
disclosure.
ii. Disclosure of reportable segments in the financial statements of Zeeshan Limited:
Rs. In billion
Spinning Weaving Dyeing Others Total
Revenue from External 17.300 4.000 3.200 5.500 30.000
customers (3+2.5)
Inter segment revenue 2.700 1.500 ----- ------ 4.200
Revenue from reportable 20.000 5.500 3.200 5.500 34.200
segment
Other material information:
Operating expenses 0.800 0.275 0.175 0.320 1.570
(0.22+0.1)
Segment profit 1.000 0.550 0.209 0.300 2.059
(0.2+0.1)
Segment assets 15.000 4.000 4.500 3.700 27.200

(1.2+2.5)
Segment Liabilities ( Given) 0.750 0.250 0.125 0.225 1.350
(0.075+0.15)
Reconciliation of reportable segments revenue, profit or loss, Assets and liabilities:

Reportable Other than Elimination of Other Totals
segment Total reportable Intersegment Adjustments
segment Total
Revenue 28.7 5.5 (4.2) - 30

(20+5.5+3.2)
Operating 1.25 0.32 - 0.5 2.07
expenses (0.8+0.275+0.175) (1.57+0.5)
Segment 1.759 0.3 (0.468)* (0.5) 1.091
profit (1.00+0.55+0.209) (2.059-0.468-0.5)
Segment 23.5 3.7 - 0.25 27.45
Asset (15+4+4.5) (27.2+0.25)
Segment 1.125 0.225 - 0.1 1.45
Liabilities (0.75+0.25+0.125) (1.35+0.1)
[*(2.7/100 x9 + 1.5/100 x 15) = 0.468]
**Unallocated head office Admin expense will result into decrease in total Profit.
577
IAS-41 [Agriculture]
Biological Asset: are living plant and animals.
Biological Asset Agricultural Produce Products that result from
processing after harvest
Sheep Wool Carpet
Dairy Cattle Milk Cheese
Cotton plant Harvested cotton Thread, Cloth
Tea bushes Picked leaves Tea
Fruit trees Picked fruit (Orange etc.) Processed fruit
Palm oil trees Picked fruit Palm Oil
Sugar cane Harvested cane Sugar
Point to member:
Sometimes trees are physically attached to particular piece of land, in that case only the tree is a biological
asset while land is not a biological asset. (land is to be measured under IAS 16)
Objective: The objective of this standard is to prescribe the accounting treatment and disclosures relatedto
agricultural activity.
[Para 5]
1. Agricultural Activity is the management of the biological transformation of a biological asset for
the purpose of sale of that asset; or
2. Agricultural activity is the management of biological transformation (reproduction) of a
biologicalasset for the purpose of creating additional biological asset; or
3. Agricultural activity is the management of biological transformation of a biological asset for the
purpose of harvesting agricultural produce from that asset.
Agricultural Produce:
It is the harvested produce from the biological assets, e.g milk, meat, eggs, fruits etc.
Harvest:
Harvest is the detachment of produce from a biological asset (milking a cow or picking the fruits from
trees)or the cessation of a biological assets useful life (meat of cows and sheep).
Biological Transformation: Results into the following types of outcomes:
a) Asset changes through
i) Growth (an increase in quantity or improvement in quality of an animal or plant e.g. lambs
growinto sheep);
ii) Degeneration (a decrease in the quantity or deterioration in quality of an animal or plant e.g.
death, cut down and old age); or
iii) Reproduction or procreation (creation of additional living animals or plants), or
b) Production of agricultural produce such as tea leaf, milk and wool etc.
Illustration: Definitions
A farmer has a herd of lambs (‘biological assets’).
As the lambs grow they go through biological transformation.
As sheep they are able to procreate or reproduce and lambs will be born (additional biological
assets) and the wool from the sheep provides a source of revenue for the farmer (‘agricultural
produce’).
Once the wool has been sheared from the sheep (‘harvested’).it is an agricultural produce (measure it
according to IAS 41 at the point of harvest and after that IAS 2 will be applied for any future
measurement)
578
Recognition and Measurement: [Para 10]
Recognition Criteria of biological asset or agricultural produce:
An entity shall recognize a biological asset or agricultural produce when, and only when:
a) The entity controls the asset as a result of past events; (e.g you have purchased cow and it is in your
control; suppose afterwards it has given birth to a baby calf and it is also in your control)
b) There is a probable future inflow of economic benefit (means you can either sell the cow or sell its
meat or sell its milk); and
c) The fair value or cost of asset can be measured reliably.
Measurement of biological Asset: [Para 12]
Biological asset is measured at fair value (means market price) less cost to sell initially and at the
end of each reporting date. Any gain or loss on initial recognition and from subsequent changes in
fair value less cost to sell to at the end of each reporting date are recorded in profit or loss for the period
in which it arises.
If an entity has thousands of cows /sheep or other biological assets, then in order to measure fair value
you do not need to check market price for individual biological asset rather entity can group
biological assets based on their significant attributable e.g age or quality and measure their fair value
in aggregate (group of biological assets is an aggregation of similar living animals or plant)
Sometimes cost of biological asset approximates fair value
(a) if little biological transformation has taken place since initial cost incurrence (e.g. for seedlings
planted immediately prior to the end of reporting period or new purchased livestock) [Para 24(a)].
(b) The impact of biological transformation on price is not expected to be material e.g. the initial
growthin 30year pine plantation life cycle.
Cost to sell: are incremental costs directly attributable to the disposal of asset, excluding finance cost and
income taxes. Examples include commission to brokers, non-refundable transfer taxes and duties and
transportation costs.
Grouping of Assets
Some biological assets are physically attached to land, for example tree plantations, and it is necessary to
value the land and biological assets together as one asset, even though agricultural land is not within the
scope of IAS 41. To obtain the fair value of the biological assets, the fair value of the land element should be
deducted from the combined fair value.
Example
A farmer wishing to value an apple orchard, in circumstances where there is no separate valuation for the
orchard from that for the land on which it is grown, would value it at the combined fair value of the land
andorchard, less the estimated fair value of land.
If fair value is not initially reliably measureable then biological asset is measured at cost less
accumulated depreciation and impairment (cost model of IAS-16). However, depreciation can only be
started after the asset is matured.
Point to remember:
These above biological assets are not revalued under IAS-16. If fair value subsequently is reliably
measurable then entity must measure these biological assets from that point at fair value less cost to sell as
per IAS-41.
According to IAS-41, there is a presumption that fair value can be measured reliablly for a biological asset.
However, that presumption can be rebutted only on initial recognition for a biological asset for which
quotedmarket price are not available.
1. Example:
An entity purchased a cow for Rs. 120,000. In addition, there is a carriage cost of Rs. 2,000. The entity
estimates that if it sells the cow then the auctioneers charge a sale commission of 2% of market value and
there is a government levy based on market value of 3% on sales.
579
How the cow is measured initially?
Fair value less cost to sell = [120,000 –(120,000 x 2%) –(120,000 x 3%)] = 114,000
Accounting entry is:
Biological Asset(Cow) 114,000
Loss on initial recognition 6,000
Cash 120,000
Carriage expense 2,000
Cash 2,000
We have paid a cost of 120,000 against an asset having FV less CTS of 114,000 therefore there is a lossof
6,000 on initial recognition.
Rs. 2,000 carriage inwards is not capitalized it is recognized as an expense immediately (included within
loss).
2. Example:
The entity’s cow has given birth to a baby calf today.
Estimated fair value of the baby calf is 10,000. In order to sell the calf entity will have to pay 200 in
transfertax and sale commission of Rs. 1,500.
How the new born calf is initially measured?
Answer:
Fair value less cost to sell: [10,000 – 200 – 1,500] = 8,300
Accounting entry is:
Biological Asset 8,300
Gain on initial measurement 8,300
(As we have not paid anything)
Measurement of Agricultural Produce: [Para 13]
At the point of harvest (means detachment from biological asset) agricultural produce is measured at Fair
value less costs to sell.
In all cases, an entity measures agricultural produce at the point of harvest at its fair value less cost to sell.
The standard is of the view that fair value can always be measured. [Para 32]
Any gain or loss on initial recognition is presented in profit or loss for the period in which it arises. [Para 28]
After initial measurement, agricultural produce is transferred to inventory (and therefore IAS-2 is applied
from there on). It means FV less costs to sell will be deemed as cost when transferred to inventory. [Para
13]
At the end of reporting period, this agricultural produce should be measured by applying IAS-2 (i.e. lower
of cost and NRV) rather than IAS-41 (i.e at FV less cost to sell).
Example: Accounting treatment
Using the earlier example of a sheep farmer, lambs should initially be measured when they are born at
their fair value less costs to sell.
As they grow and their value changes, this gain or loss should be reflected in the biological asset value
and also in profit and loss.
The sheep may be used for obtaining wool. Once the wool has been sheared from the sheep, as an
agricultural produce the wool should be valued at fair value less costs to sell.
If the wool still in inventory at the end of the reporting period, then apply IAS 2 for measurement.
Bearer Plants: [para 5 to
5C]A living plant that:
i) Is used in production or supply of agricultural produce;
ii) Is expected to bear produce for more than one year; and
iii) is unlikely (means no intention) that entity will (e.g. cut down the plant and) sell it as agricultural
produce, except for scrap sale (at the end of its useful life when they are no longer used to bear
produce).
580
Some Plants such as tea bushes, grape yards, oil palms and rubber trees, usually meet the definition of a
bearer plant and are within the scope of IAS 16 Property, Plant and equipment. However, the produce
growing on bearer plants, for example, tea leaves, grapes, oil palm fruit and latex, is within the scope of
IAS 41.
“Produce growing on bearer plants is an Agricultural produce e.g Mangoes on a Mango tree. It means
mangoes (which is agricultural produce) must be measured separately from the mango tree (which is bearer
plant). [Para 5C]
Note that there is no “animal” equivalent of a bearer plant (means there is no concept of bearer
animal). Thus, cows kept for milk are within the scope of IAS 41.
The followings are not bearer plants: [Para 5A]
a) Plants cultivated to be harvested as agricultural produce (e.g trees grown for use as lumber (wood).
b) Plants cultivated for agricultural produce but there is a likelihood that the entity will also harvest
e.g cut and sell the plant as agricultural produce, other than scrap sale (at the end of useful life)
[e.g trees that are cultivated for both the fruit and their lumber(wood)].
c) Annual crops (e.g maize, wheat, rice, potatoes etc).
Measuring bearer plant:
Bearer plants are very similar to machinery in a manufacturing business and are therefore measured by
using requirements of IAS-16 just like properly, plant and equipment (PPE).
A bearer plant is initially measured at cost.
The cost based measurement is continued till plant grows to maturity. (Means it is considered to be matured
if it is capable of sustaining regular harvest means e.g tree is capable of producing fruit every season
onwards)
As per IAS-16 Para 22A, Bearer plants are accounted for in the same way as self-constructed items of
property, plant and equipment before they are in the location and condition necessary to be capable of
operating in a manner intended by management.
Consequently, references to “Construction” in this standard should be read as bearer plants before they are
in the location and condition necessary to be capable of operating in a manner intended by management
(therefore depreciation should start when they are available for use)
Subsequently it is measured by using:
a) Cost less accumulated depreciation and impairment; or
b) Revaluation model.
Government grants related to biological asset [IAS 41: 34 to 38]
Unconditional grant
It shall be recognised in profit or loss when, and only when, the government grant
becomes receivable.
Biological assetsConditional grant
measured at fair value
Such grant shall be recognised in profit or loss when, and only when, the conditions
less cost to sell
attaching to the government grant are met.
Partial recognition for conditional grants
(IAS 41 is applicable) Terms and conditions of government grants vary. For example, a grant may require an entity
to farm in a particular location for five years and require the entity to return all of the grant
if it farms for a period shorter than five years. In this case, the grant is not recognised in
profit or loss until the five years have passed. However, if the terms of the grant allow part
of it to be retained according to the time that has elapsed, the entity recognises that part in
profit or loss as time passes.
Biological assets
measured at cost or
bearer plants The grant shall be recognised in accordance with IAS 20.
581
► Example: Multan Limited (ML) operates a large cow and buffalo dairy farm. On 1 January 2022, ML
received a government grant of Rs. 15 million on the condition that ML adopts organic cattle feed system
and continues to do so for five years. If ML discontinues organic cattle feed system any time during five
years, it will have to repay the whole amount of grant.
ML has already implemented organic feed system and it is reasonably certain that ML will meet the
conditions of grant. ML year end is 31 December.
Required: Briefly discuss the recognition of government grant in the financial statements of ML.
Answer: ML shall recognise the grant of Rs. 15 million in profit or loss on 31st December 2026 only
when the conditions attaching to the government grant are met.
► Example: Peshawar Limited (PL) operates a large cow and buffalo dairy farm. On 1 Jan 2022, PL
received a government grant of Rs. 15 million on the condition that PL adopts organic cattle feed system
and continues to do so for next five years. If PL discontinues organic cattle feed system any time during
five years, it will have to repay the proportionate amount of grant.
PL has already implemented organic feed system and it is reasonably certain that PL will meet the
conditions of grant. PL year end is 31 December.
Required: Briefly discuss the recognition of government grant in the financial statements of PL.
Answer: PL shall recognise the grant of Rs. 3 million (i.e. Rs. 15 million / 5 years) in profit or loss each
year on 31st December from 2022 to 2027 as the time passes provided that PL is complying the conditions
of the government grant.
Presentation and Classification:

Biological assets are presented separately from other non-current assets. (before property plant and
equipment)
Biological assets should also be sub-classified (either on face of statement of financial position or in
notes to financial statements)
i) Animal or Plant
ii) Bearer Plant
iii) Mature or Immature.
Agricultural produce after harvest is presented in inventory.
Disclosure requirements
The IAS 41 disclosure requirements include the following:
The aggregate gain or loss arising during the current period on initial recognition of biological assets
and agricultural produce and from the change in fair value less costs to sell of biological assets. [para
40]
A description of each group of biological assets; [para 41]
Information about biological assets whose title is restricted or that are pledged as security. [para 49 (a)]
Commitments for development or acquisition of biological assets. [para 49 (b)]
Financial risk management strategies. [para 49 (c)]
Reconciliation of changes in the carrying amount of biological assets, showing separately changes in
value, purchases, sales, harvesting, business combinations, and foreign exchange differences; [para
50]
If fair value cannot be measured reliably, additional required disclosures include: [Para 54]
Description of the biological assets
An explanation of the circumstances why fair value cannot be measured reliably.
If possible, a range within which fair value is highly likely to lie
Depreciation method
Useful lives or depreciation rates
Gross carrying amount and the accumulated depreciation, at the beginning and end of the period.
If the fair value of biological assets previously measured at cost now becomes available, certain additional
disclosures are required. [Para 55]
Disclosures relating to government grants include the
 nature and extent of grants,
582
 unfulfilled conditions, and
 significant decreases expected in the level of grants. [Para 57]
Scope Paragraph:
IAS 41 Agriculture covers the following agricultural activities: [Para 1]
Biological assets, except for bearer plants;
Agricultural produce at the point of harvest; and
Government grants for agriculture (in certain situations).
IAS 41 does not apply to: [Para 2]
The harvested agricultural product (IAS 2 Inventory applies);
Land relating to the agricultural activity (IAS 16 or IAS 40 applies);
Bearer plants related to agricultural activity (however, IAS 41 does apply to the produce on those bearer
plants) (IAS 16)
Intangible assets related to agricultural activity (IAS 38 Intangible assets applies).
Important disclosure:
Changes to fair value can arise due to both physical changes in asset and price changes in market. Entities
are encouraged to make separate disclosure of these two elements in order to facilitate performance
evaluation.
Question 1
Zahid started running a farm that is involved in Dairy farming whereby it buys dairy (milk) producing
cows. The objective is not to slaughter them and sell the meat rather production and sale of milk. At the
start of the financial year, Zahid purchased 1,000 dairy cows, with an average age of 2 years old, for
150,000,000which is equal to FV less cost to sell at that date.
Zahid has the following data of fair values.
FV less CTS
Start of the period End of the period
Two years old Cows 150,000,000 155,000,000
Three year old Cows 159,000,000 165,000,000
Required:
Explain the accounting treatment of the above in the financial statements.
Answer 1
At the beginning of the period:
We measure cows at 150,000,000 (At FV less CTS) which was equal to the purchase cost.
At the end of the period:

The cows are now not two years old instead three years old.
Therefore, fair value less CTS will be: 165,000,000
Double entry will be

Biological Assets 15,000,000
Gain on remeasurement(PL) 15,000,000
(165,000,000 – 150,000,000)
Gain due to physical change Gain due to price change

(165,000,000 – 155,000,000) (155,000,000 – 150,000,000)
10,000,000 5,000,000
Calculation of price change: requires comparison of same asset’s prices (without physical change) which
were at initial date and reporting date.
Calculation of physical change: requires comparison of prices of asset after physical change on reporting
date.
Question 2
The following example illustrates how to separate physical change and price change. Separating the
583
change in fair value less costs to sell between the portion attributable to physical changes and the portion
attributable to price change is encouraged by this Standard.
A herd of 10, 2-year-old animals was held at 1 January 2011. One animal aged 2.5 years was purchased
on 1 July 2011 for 108,000, and one animal was born on 1 July 2011. No animal was sold or disposed of
during the period
Per-unit fair values less costs to sell were as follows: Rs.000
2 year old animal at 1 January 2011 100
New born animal at 1 July 2011 70
2.5 year old animal at 1 July 2011 108
New born animal at 31 December 2011 72
0.5 year old animal at 31 December 2011 80
2 year old animal at 31 December 2011 105
2.5 year old animal at 31 December 2011 111
3 year old animal at 31 December 2011 120
Answer 2
Fair value less costs to sell of herd at 1 January2011 (10 x 100) 1,000
Fair value less costs to sell of herd at 31 December2011 1,200
From Opening (10 x 120) [3 years old] 120
Purchased (1 x 120) [3 years old] 80
New born (1 x 80) [0.5 years old 1,400
Total increase 400
Reconciliation
Fair value less costs to sell of herd at 1 January2011 (10 x 100)
Purchased on 01.07.2011(1 x 108)
New born (1 x 70)
Increase in fair value less cost to sell due to price change:
Opening 10 x (105 – 100 50
purchased 1 x (111 – 108) 3
New born 1 x (72 – 70) 2
55
Increase in fair value less costs to sell due to physical change:
Opening 10 x (120 – 105) 150
Purchase 1 x (120 – 111) 9
New born 1 x (80 – 72) 8
167
Fair value less cost to sell of herd at 31 December 2011 1,400
584
IAS 41 other related issues:
Question #1: Is it agriculture?
The first and primary question when dealing with living plants and animals is – what is agricultural
activity?
It is the management of the biological transformation (e.g. growth) of biological assets for (IAS 41.5):
Sale, or
into agricultural produce, or
into additional biological assets.
You have to make your best effort to answer that question correctly, because the accounting and reporting
depends on it.
Why?
Imagine you have a dog.
Logically, it is a living animal, and therefore it is a biological asset. You might think: “well, biological
assetsare governed by IAS 41, so I need to measure the dog at fair value at the end of each year”.
Not so fast.
Why do you have that dog?
Is it a guard dog, protecting your property and barking at everyone passing by?
If yes, then you should NOT apply IAS 41, but IAS 16 Property, plant and equipment and measure the dog
at cost less accumulated depreciation.
The reason is that protecting the property is NOT an agricultural activity and IAS 41 does NOT apply.
Or, do you have that dog in order to produce and raise puppies and sell the puppies?
In this case, IAS 41 applies, because breeding and selling puppies is an agricultural activity.
So, if you think that OK, I’m not a farmer, so I don’t need to bother with IAS 41, you might be
surprisedwhere the agriculture can hide.
Just a few examples:
Pharmaceutical companies
Some pharma companies grow their own plants in order to produce drugs. Yes, this is an agricultural
activity and IAS 41 applies.
Dairy producers
If a company grows its own bacteria and cultures and then adds them to its yoghurts, well – this is an
agricultural activity and IAS 41 applies.
Jewelry producers
Some big jewelry producers produce their own pearls by planting foreign objects (such as pieces of
shells or parasites) into the soft bodies of living oysters. Then, the oyster produces a pearl by secreting
crystalline substance around the object to protect itself. Yes, this is an agricultural activity and IAS 41
applies.
On the other hand, not everything involving living plants or animals is agricultural activity.
Again, few examples:
ZOO
The main purpose of the ZOO (and safari, recreational park etc.) is to make money from showing the
animals off to the public – this is NOT an agricultural activity and IAS 41 does NOT apply (IAS 16
does). Yes, animals living in the ZOO sometimes pair and produce a baby – but if it’s a natural
process, not managed by the ZOO, it is NOT an agricultural activity.
The situation would be different when the ZOO would implement an active program of reproduction
and managed that program. In this case, breeding animals would NOT be an incident and ZOO would
haveto apply IAS 41.
Fishing
All fishermen catching fish in the ocean can breathe with relief. If you are NOT actively farming fish,
butyou’re merely harvesting the fish from the ocean, it’s NOT an agricultural activity.
The reason is that fish grew naturally in the ocean, which was NOT an agricultural activity.
“Working animals”
When you hold an animal primarily to do some work, such as cart-horses, guard dogs, elephant taxis,
etc., then you do NOT apply IAS 41, because all these activities do NOT represent biological
transformation.
Instead, IAS 16 is the right way to go.
585
Question #2: Is it a biological asset?
Very common misconception in the agriculture accounting is the belief that everything coming out
ofagriculture is a biological asset.
Not true.
Biological assets are only living plants and animals.
The harvested products of biological assets are agricultural produce.
Apples, palm oil, pearls, milk, coffee beans, tea leaves – all this is agricultural produce.
Why do we bother?
Well, once you detach the agricultural produce from a biological asset, in other words – once you harvest
the produce, it becomes your inventories and you apply IAS 2 Inventories.
At the moment of harvest, you should measure your new inventories at their fair value less costs to sell and
subsequently, you measure them under IAS 2 at lower of cost and net realizable value.
You do NOT remeasure agricultural produce to fair value less cost to sell.
Question #3: Are biological assets always measured at fair value less costs to sell?
No, they are not.
It is true that the general rule in IAS 41 Agriculture is to measure all biological assets at fair value less
costs to sell.
However, there are few exceptions:
1. The biological asset is NOT a part of agricultural activity.

I’ve explained it above – guard dogs, fish caught in the ocean, etc.
2. The biological asset is a bearer plant.

A bearer plant is a living plant used in production or supply of agricultural produce that is expected to
produce for more than 1 period.
The examples are fruit trees, tea bushes etc.

you can keep these assets at cost less accumulated depreciation under IAS 16.
Careful – this is only about plants, not animals. So, if you own cows and use them to breed new
cows, then sorry, it’s NOT a bearer plant and therefore IAS 41 will apply.
3. The fair value is not reliably measurable

When the fair value cannot be measurable, you can measure the asset at its cost less accumulated depreciation
and impairment. (IAS 16)
This exemption is available ONLY at initial recognition, never later.

Question bank
MISHALL LIMITED
Mishall Limited a public limited company, Dairy, produces milk on its farms. It produces 30% of the country’s
milk that is consumed. Dairy owns 450 farms and has a stock of 210,000 cows and 105,000 heifers. At
December 31, 2018, the herds are:
210,000 cows (3 years old), all purchased before January 1, 2018

75,000 heifers, average age 1.5 years, purchased on July 1, 2018
30,000 heifers, average age 2 years, all purchased before January 1, 2018
No animals were born or sold in the year.
The unit values less estimated point-of-sale costs were Rs.000
1-year-old animal at December 31, 2018: 32
1.5-year-old animal at December 31, 2018: 36
586
1-year-old animal at January 1, 2018 and July 1, 2018: 30
2-year-old animal at January 1, 2018: 40
Required:
Advise the directors on how the biological assets should be accounted for under IAS 41 for the year ended
31.12.2018 and present the figures including reconciliation by segregating price and physical change..
Answers:
MISHALL LIMITED
Biological assets should be measured at each reporting date at fair value less estimated point-of-sale costs unless
fair value cannot be measured reliably. The Standard encourages companies to separate the change in fair value
less estimated point-of-sale costs between those changes due to physical reasons and those due to price.
Rs. millions
Fair value less costs to sell at 1 January 2018
Cows (210,000 × 40) [two years old] 8,400
Heifers (30,000 × 30) [1 year old] 900
9,300
Fair value less costs to sell at 31 December 2018
Cows (210,000 × 50) [three years old] 10,500
Heifer (30,000 × 45) [two years old] 1,350
Purchased Heifers (75,000 × 36) [1.5 years old] 2,700
14,550
Total increase (14,550 – 9,300) 5,250
Reconciliation:
Fair value at January 1, 2018 (as above) 9,300
Purchase (75,000 heifers × 30) [one year old] 2,250
Increase due to price change
From opening
Cows 210,000 × (45 – 40) 1,050
Heifer 30,000 × (32 – 30) 60
Purchased:
Heifers 75,000 × (32 – 30) 150
1,260
Increase due to physical change
From opening
Cows 210,000 × (50 – 45) 1,050
Heifer
30,000 × (45 – 32) 390
Purchased:
Heifers 75,000 × (36 – 32) 300
1,740
Fair value less estimated point-of-sale costs at 31.12.2018 14,550
587
Extra practice question
Example: F Limited
Question: F Limited on adoption of IAS 41 has reclassified certain assets as biological assets. The total
value of the group’s forest assets is Rs. 3,400 million comprising:
Rs. in million
Freestanding trees 2,500
Land under trees 500
Roads in forests 400
3,400
Required:
Show how the forests would be classified in the financial statements.
Answer:
F Limited
Extracts of Statement of Financial Position as at 31 December 2018
Rs. in million
Non-current assets:
Biological assets: Freestanding trees 2,500
Property, plant and equipment: Land under trees 500
Forest roads 400
3,400
Example: M Limited
Question: M Limited has provided following information from its financial records:
Rs. million
Initial recognition of biological assets (on acquisition at start of 2018) 600
Fair value of biological assets as at 31 December 2018 700
Increase in fair value of biological assets due to physical growth during 2019 100
Increase in fair value of biological assets due to price fluctuations during 2019 80
Decrease in fair value of biological assets due to harvest of agriculture produce (The fair
value of harvested agriculture produce at point of harvest was Rs. 60 million) 56
The costs to sell are negligible. No agriculture produce was harvested in 2018 and the agriculture produce
harvested during 2019 has not been sold yet.
Required:
Show how these values would be incorporated into the statement of financial position and statement of
comprehensive income at December 31, 2019 (including comparative).
Answer:
M Limited
Statement of financial position (Extracts) 2019 2018
As at 31 December 2019 Rs. in million
Non-current asset: Biological assets [700+100+80–56] 824 700
Current assets: Inventory 60
Statement of comprehensive income (Extracts)
Fair value gain on biological assets [824 – 700] and [700 – 600] 124 100
Fair value gain on initial recognition of agricultural produce 60 -
588
AGRICULTURE
► Example:
Discuss whether IAS 41 shall be applied in each of the following circumstances:
(i) A zoo has bought two lions and one tiger for exhibition in zoo cages for earning ticket revenue.
(ii) Peacock kept by a restaurant in their open dining area to attract more customers.
(iii) Mules kept for transportation of luggage of tourists by a company which provides camping and
hiking services to foreign tourists.
(iv) A small business using horses in horse-wagons for tourists to travel around historical places.
(v) Parrots kept for breeding by a bird shop so that their offspring can be sold.
(vi) Horses kept in stable for breeding and to be trained and sold later.
► ANSWER:
Although all circumstances indicate the existence of biological assets i.e. living animals, the item
(i) to (iv) do not fall under the scope of IAS 41 as those biological assets are not for agricultural activity.
IAS 41 shall be applied on item (v) and (vi) since these biological assets relate to agricultural activity (i.e.
for sale or for having additional biological assets by breeding).
Agricultural activity covers a diverse range of activities; for example, raising livestock, forestry, annual or
perennial cropping, cultivating orchards and plantations, floriculture and aquaculture (including fish
farming).
Certain common features exist within this diversity
a) Capability to change. Living animals & plants are capable of biological transformation;
b) Management of change. Management facilitates biological transformation by enhancing, or at
least stabilizing, conditions necessary for the process to take place (for example, nutrient levels, moisture,
temperature, fertility, and light). Such management distinguishes agricultural activity from other
activities. For example, harvesting from unmanaged sources (such as ocean fishing and deforestation) is
not agricultural activity; and
c) Measurement of change. The change in quality (for example, genetic merit, density, ripeness, fat
cover, protein content, and fibre strength) or quantity (for example, progeny, weight, cubic metres, fibre
length or diameter, and number of buds) brought about by biological transformation or harvest is
measured and monitored as a routine management function.
Note that there is no animal-equivalent of bearer plant. Thus, cows kept for milk only are within the scopeof
IAS 41.
► Example:
XYZ Limited owns a large area of farmland nearby a wild forest. Employees of XYZ Limited have
noticed that a herd (or a parade) of wild elephants is living permanently on the farmland of XYZ Limited.
If sold in international market, the whole herd can fetch a fair value less costs to sell of Rs. 58 million.
Required: How should XYZ Limited recognise the herd of elephants in its financial statements?
► ANSWER:
It is unlikely that XYZ Limited controls these wild animals and/or able to sell them and obtain the future
economic benefits. Therefore, XYZ Limited should not recognise the herd of elephants in its financial
statements.
Measurement [IAS 41: 12 to 25]
Biological asset
A biological asset shall be measured on initial recognition and at the end of each reporting period at its
fair value less costs to sell, except where the fair value cannot be measured reliably.
► Example:
Adeel Limited (AL) operates a goat breeding farm. AL sells goats to local meat businesses and goats-milk
to cosmetics companies. They also use goat milk for making premium cheese for sale. On 1 March 2022,
589
AL bought 10 goats for Rs. 25,000 each (i.e. fair value) from a nearby market. The market broker charges
2% commission from buyer and 3% from seller on each transaction.
On 15 June 2022, two kids were born having fair value of Rs. 7,000 each.
On 30 June 2022, the year-end of AL, each goat has a fair value of Rs. 33,000 and each kid has a fair value
of Rs. 9,000.
Required: Calculate the cost of purchase and the amount at which the above biological assets should be
measured at initial recognition and on 30th June 20Y2.
► ANSWER:
The cost of 10 goats purchased:
[10 goat’s x Rs. 25,000 x 102%] = Rs. 255,000
Measurement at initial recognition (at fair value less costs to sell): [10 goats x Rs. 25,000 x 97%]= Rs. 242,500
[2 goats’ kids x Rs. 7,000 x 97%] = Rs. 13,580 Measurement at year-end (at fair value less costs to sell):
[10 goats x Rs. 33,000 x 97%] = Rs. 320,100

[2 goat kids x Rs. 9,000 x 97%] = Rs. 17,460
Agricultural produce
Agricultural produce harvested from an entity’s biological assets shall be measured at its fair value less
costs to sell at the point of harvest. Such measurement is the cost at that date when applying IAS 2
Inventories or another applicable Standard.
► Example:
Kashif Limited (KL) operates a goat breeding farm. KL sells goats to local meat businesses and goats-
milk to cosmetics companies. They also use goat milk for making premium cheese for sale.
During the year ended 30 June 20Y2, KL could get 980 litre of milk which had fair value less costs to sell
of Rs. 170 per litre on the day goats were milked.
The 900 litre of milk was sold to cosmetics companies for Rs. 160,000 and remaining 80 litre was converted
into making cheese which was later sold for Rs. 24,000. KL had to incur a cost of Rs. 5,000 to convert the
milk into cheese.
Required: Briefly discuss the accounting treatment of (milk) obtained from goats. IAS 41 →IAS 2
► ANSWER:
The harvested milk shall be recognised at Rs. 166,600 (980 litres x Rs. 170 per litre) at the point of harvest.
This amount will be deemed cost of inventory of milk subsequently. The excess of sale price over this cost
of inventory shall result in profit in the statement of comprehensive income of KL.
Biological assets attached to land

Biological assets are often physically attached to land (for example, trees in a plantation forest).
There may be no separate market for biological assets that are attached to the land, but an active market
may exist for the combined assets, that is, the biological assets, raw land, and land improvements, as a
package. An entity may use information regarding the combined assets to measure the fair value of the
biological assets. The fair value of raw land and land improvements may be deducted from the fair value
of the combined assets to arrive at the fair value of biological assets.
► Example:
ABC Limited has a fruit orchard over fifteen acres’ area of land. The separate value of orchard from the
land could not be determined, however, combined value of land and orchard has been determined to be Rs.
336 million. The similar agricultural land (but without any crop or orchard) in the area is valued at Rs. 10
million per acre.
Required: Advise ABC Limited as to how they may value their fruit orchard.
► ANSWER:
Use the combined fair value of the land and orchard, less the estimated fair value of land. So the orchard’s
fair value might be determined at Rs. 186 million (i.e. Rs. 336 million – Rs. 10 million x 15 acres).
590
Grouping of assets
The fair value measurement may be facilitated by grouping biological assets or agricultural produce
according to significant attributes; for example, by age or quality as used in the market as a basis for
pricing.
Future contract prices
Future contract prices are not necessarily relevant in measuring fair value because fair value reflects the
current market conditions in which market participant buyers and sellers would enter into a transaction.
The fair value is not adjusted because of existence of such contract. IAS 37 is applied if such contract is
onerous.
Gains and losses [IAS 41: 26 to 29]
Biological assets:
A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell and from a change in
fair value less costs to sell of a biological asset shall be included in profit or loss for the period in which it arises.
A loss may arise on initial recognition of a biological asset, because costs to sell are deducted in
determining fair value less costs to sell of a biological asset. A gain may arise on initial recognition of a
biological asset, such as when a calf is born.
► Example:
Adeel Limited (AL) operates a goat breeding farm. AL sells goats to local meat businesses and goats-milk
to cosmetics companies. They also use goat milk for making premium cheese for sale. On 1 March 2022,
AL bought 10 goats for Rs. 25,000 each (i.e. fair value) from a nearby market. The market broker charges
2% commission from buyer and 3% from seller on each transaction.
On 15 June 2022, two goat kids were born having fair value of Rs. 7,000 each.
On 30 June 2022, the year-end of AL, each mature goat has now fair value of Rs. 33,000 and each goat kid
has fair value of Rs. 9,000.
Required: Journal entries.
► ANSWER:
1 Mar 2022 Biological assets [10 goats x Rs. 25,000 x 97%] 242,500
Loss on initial recognition (PL) 12,500
Bank [10 goats x Rs. 25,000 x 102%] 255,000
15 Jun 2022 Biological assets [2 goats kids x Rs. 7,000 x 97%] 13,580
Gain on initial recognition (PL) 13,580
30 Jun 2022 Biological assets W1 81,480
Gain on re-measurement (PL) 81,480
W1: Gain on re-measurement of Biological assets Rs.

At year end
[10 goats × Rs. 33,000 × 97%] 320,100
[2 goat kids x Rs. 9,000 x 97%] 17,460
337,560
Already measured at [Rs. 242,500 + 13,580] (256,080)
81,480
Agricultural Produce
A gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell shall be
included in profit or loss for the period in which it arises.
A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.
► Example:
Kashif Limited (KL) operates a goat breeding farm. KL sells goats to local meat businesses and goats-
milkto cosmetics companies. They also use goat milk for making premium cheese for sale.
During the year ended 30 June 2022, KL could get 980 litre of milk which had fair value less costs to sell
591
of Rs. 170 per litre on the day goats were milked.
The 900 litre of milk was sold to cosmetics companies for Rs. 160,000 and remaining 80 litre was converted
into making cheese which was later sold for Rs. 24,000. KL had to incur a cost of Rs. 5,000 to convert the
milk into cheese.
Required: Journal entries (perpetual inventory system).
► ANSWER:
Sr. # Particulars Debit Rs. Credit Rs.
(i) Milk (agricultural produce) [980 litres x Rs. 170] 166,600
Gain on harvest (PL) 166,600
(ii) Milk inventory 166,600
Milk (agricultural produce) 166,600
(iii) Cash/Receivables 160,000
Revenue: Milk 160,000
Cost of sales 153,000
Milk inventory [900 litres x Rs. 170] 153,000
(iv) Cheese inventory [5,000 + 13,600] [Note 1] 18,600
Cash/Bank (conversion cost) 5,000
Milk inventory [80 litres x Rs. 170] 13,600
(v) Cash/Receivables 24,000
Revenue: cheese 24,000
Cost of sales 18,600
Cheese inventory 18,600
Note 1: it is neither agriculture produce nor biological asset.
DISCLOSURE
An entity discloses the basis for making any such distinctions.
Group Type Explanation
Consumable biological assets Consumable biological assets are those that are to be harvested as agricultural
produce or sold as biological assets. Examples include livestock intended for the
production of meat, livestock held for sale, fish in farms, crops such as maize
and wheat, produce on a bearer plant and trees beinggrown for lumber.
Bearer biological assets Bearer biological assets are those other than consumable biological assets; for
example, livestock from which milk is produced and fruit trees from which
fruit is harvested.
Mature biological assets Mature biological assets are those that have attained harvestable specifications
(for consumable biological assets) or are able to sustain regular harvests (for
bearer biological assets).
► Example: [on page 212]
Nawabpur Farming Limited (NFL) owned a dairy herd. On 1st January 2022, the herd had 100 animals that were two
years old and 50 newly born calves. On 31 December 2022 (year-end), a further 30 calves were born. None of the
herd died during the period. NFL incurred total farm maintenance cost of Rs. 1.2 million.
Relevant fair value less costs to sell per calf were:
1st January 2022 31 December 2022
Rupees
Newly born calves 30,000 50,000
One year old animals 45,000 60,000
Two year old animals 65,000 75,000
Three year old animals 75,000 80,000
Required: Prepare reconciliation of change in fair value (price change and physical change) and extracts of
financial statements for the year ended 31st December 2022.
► ANSWER:
592
Reconciliation
Rs. 000 Rs. 000
On 1st January 2022
2-year-old [100 x Rs. 65] 6,500
Newly born [50 x Rs. 30] 1,500 8,000
Addition due to new borne (30 x 50) 1500
Increase due to price change*
2-year-old [100 x (Rs. 75 - 65)] 1,000
Newly born [50 x (Rs. 50 - 30)] 1,000 2,000
Increase due to physical change**
2-year-old to 3-year-old [100 x (Rs. 80 - 75)] 500
Newly born to 1-year-old [50 x (Rs. 60 - 50)] 500 1,000
On 31 December 2022
3-year-old [100 x Rs. 80] 8,000
1-year-old [50 x Rs. 60] 3,000
Newly born [30 x Rs. 50] 150
12,500
*age at beginning of period or on initial recognition
** prices at year-end
Statement of financial position (extracts) as at 31 December 2022
Rs. 000
Non-current assets
Biological assets 12,500
Statement of profit or loss (extracts ) for the year ended 31 December 2022
Rs. 000
Income
Gain on measurement of biological assets [2,000 + 1,000 + 1,500] 4,500
Expenses:
Maintenance cost of herd (1,200)
► Example: [on page 212]
The Dairy Company (TDC) owns three farms and has a stock of 3,200 cows. During the year ended 30 June 2015, 300
animals were born, all of which survived and were still owned by TDC at year-end.
Of those, 225 are infants whereas 75 are nine-month old having market values of Rs. 26,000 and Rs. 53,000 per animal
respectively. The incidental costs are 2% of the transaction price.
Required:
Discuss how the gain in respect of the new born cows should be recognized in TDC’s financial statements for the
year ended 30 June 2015. (Show all necessary computations)
Answer:
The new born cows are biological assets and should be measured at fair value less costs to sell both on initial
recognition and at each reporting date.
The gains on initial recognition and the gains from change in this value should be recognized in profit or loss for the
period in which it arises. The total gains in respect of new born cows to be recognized in the year ended 30 June
2015 is as follows:
New born [26,000 × 225 × 98 %] 5,733,000
9 month old [53,000 × 75 × 98 % ] 3,895,500
9,628,500
593
Lease Part 2
Exception to the Previous discussion of lease [Para 6]:
A lessee may elect (it is an option not a compulsion) not to apply the above requirements to a lease contract if:
(a) A lease is a short term lease*; or
*Short term lease; means a lease that at the commencement date, has a lease term of 12 months or less
(including extension period if any). A lease that contains a purchase option is not a short term lease. (even if
it is for 12 months or less).
(b) A lease of low value assets*.
Low value asset lease does not only means price is low but also includes that asset is not significant for
business operation (means main business activities are not dependent on it)
An asset can be of low value if:
(a) The lessee can obtain benefit from use of asset with own resources available to the lessee (means can
be purchased by lessee itself); and
(b) The underlying asset is not highly dependent on, or highly interrelated with, other asset.
Examples of low-value assets can include tablets, personal computers, small items of office furniture, and
telephones.
IFRS -16 however specifically prescribes that lease of vehicles is not a lease low value asset.
The lessee shall assess the value of the asset based on the value of the asset when it is new, regardless of the age of
asset being leased.
Accounting Treatment [Para 6]:
No recording of right of use asset and lease liability.
No segregation of rental into principal and interest by preparing the finance charge allocation table.
If there is a short term lease or lease for which the asset is of low value, the lessee shall recognise the lease
payments as an expense on a straight line basis in statement of profit or loss; unless there is any other method
available in question.
Example:
A lease is entered into on January 1, 2001 for a period of 12 months. There is no purchase option.Therefore, it
is a short term lease. Payments are structured as follows:
o The first 6 instalments will be Rs 2,000 per month and the next 6 instalments will be Rs 3,000 permonth.
o Fair value of asset is Rs 500,000.
o Lease payments are made at the end of each month.
Required:
a) Prepare journal entries in the books of lessee for the year ended 30-06-2001 and 30-06-2002
Solution
a) Journal entries: (In the books of Lessee)
30-06-2001 Rental Expense (2,500 x 6) 15,000
Cash 12,000
Rentals Payable 3,000
(this entry is the sum of six months, however in practice monthly entries will be made)
30-06-2002 Rental Expense 15,000
Rental Payable 3,000
Cash 18,000
(this entry is the sum of six months, however in practice monthly entries will be made)
594
Working 1 Rental Expense
2,000 x 6 = 12,000
3,000 x 6 = 18,000
MLP 30,000 ÷12
Per month expense = 2,500
Further examples:
Example -1
Short term lease (Less than 1 year)
Lessee acquired a car for 9 months on a lease at a monthly rental of Rs. 10,000. There is no purchaseoption.
Pass the journal entry.
Solution:
Journal entries: Dr. Cr.
Rent expense 10,000
Cash 10,000
This entry will be pass every month
Example -2
Low value assets (computers and furniture and laptops)
Lessee acquired a laptop on a lease for 3 years on 1st January 2012.Rent
payments to be made on 31 December each year as follows:
2012 10,000
2013 12,000
2014 15,000
Solution:
Lessee will record expense on straight line basis or another reasonable basis
Lease payments
31-12-2012 10,000
31-12-2013 12,000
31-12-2014 15,000
37,000
Expense (37,000 / 3) 12,333
Journal entries: Dr. Cr.
Date Particulars
Rent expense 12,333
31-12-2012 Cash 10,000
Rent payable 2,333
Rent expense 12,333
31-12-2013 Cash 12,000
Rent payable 333
Rent expense 12,333
31-12-2014 Rent payable 2666
Cash 15,000
595
Example -3
Entity A leases office equipment for 5 years. The total value of the equipment when new is Rs. 5,000 (determined
by Entity A to be low value). Entity A elects to apply the low-value asset exemption.
Lease payments are payable as follows:
Year 1 Rs. Nil (rent-free period)
Year 2 and 3 Rs. 1,750 per year at the end of year
Year 4 and 5 Rs. 1,500 per year at the end of year
Required:
1. Calculate rent expense per year
2. prepare the journal entries for first three years of lease
Solution:
Total payments = 0+ (1,750 x 2) + (1,500 x 2) = Rs. 6,500
Lease term: 5 years
Rental expense per year: Rs. 1,300 (6,500 / 5)
Dr. Cr.
Journal entries:
Date Particulars
Lease rent expense 1,300
31-12 year1 Lease rent payable 1,300
(recording of rent expense for first year)
Lease rent payable 450
31-12 year2 Cash 1,750
(recording of payment and rent expense)

Lease rent payable 450
31-12 year3
Cash 1,750
(recording of payment and rent expense)
In the case of a short term lease, the choice of applying the simplified approach must be made by class of asset.
(means for all vehicles or machinery etc)
In the case of a low value asset lease, the choice of applying the simplified approach must be made on lease by lease
basis rather than by class of asset.
Disclosure:
(1) A lessee that accounts for short term leases or leases of low value assets applying the above accounting
treatment shall disclose this fact in notes to financial statements [Para 60].
(2) A lessee shall disclose the amount of its lease commitments for short term leases (and for lease of low value
asset). (A disclosure in notes related to maturity analysis of future lease payments)
(3) In statement of cash flow; short term lease payments and payment for leases of low-value assets should be
classified within operating activities.
Treatment of lease in the books of Lessor:
A lessor shall classify each of its leases as either an operating lease or a finance lease. [Para 61]
Finance Lease:
596
A lease that transfers substantially all risks and rewards incidental to ownership of an asset. [Para 62].
Operating Lease:
A lease that does not transfers substantially all risks and rewards incidental to ownership of an asset [Para 62].
[means a lease which is not a finance lease].
Examples of situations that individually or in combination lead to a lease being classified as a finance lease are
[Para 63]:
(a) The lease transfers ownership of the asset to the lessee by the end of the lease term.
(b) The lessee has an option to purchase the asset at a price that is expected to be sufficiently lower than the fair
value of the asset at the end of lease term and it is reasonably certain at the inception of lease that lessee will
exercise the option to purchase the asset.
(c) The lease term is for the major part of the economic life of the asset (major part means lease term covers at least
75% or more of economic life).
Economic Life; means total period over which asset is expected to be used (means total life of asset)
Useful life; Period over which asset is expected to be used by the entity to obtain benefits (means
lessee in case of lease)
The above lives can be same or different depending upon the circumstances. Assuming no other condition is met we
are only checking (c) condition.
Lease Lease Term Economic Life Classification

A 4 10 O
B 3 5 O
C 8 10 F
D 5 5 F
(d) At the inception of lease, present value of lease payments is substantially equal to fair value of asset
(substantially equal means at least PV of lease payments is 90% or more of fair value of asset).
(e) The asset is of such a specialized nature that only lessee can use it without major modification.
There are three more indicators of finance lease as given in para 64 of IFRS 16.[at the end ofChapter]
Residual Value:
The value of an asset at the end of the lease term.
There is a concept of residual value if ownership of asset is not expected to be transferred to lessee atthe
end of lease term.
Residual value can be of two types:
Guaranteed Residual Value (GRV): A residual value (may or may not be equal to full residual value) guaranteed
to a lessor by a party (may be lessee or an independent third party unrelated to lessor) that asset will be at least a
specific amount at the end of the lease term.
Unguaranteed Residual Value (URV): A portion of residual value of asset, the realization of which bylessor is not
assured (means not guaranteed) or guaranteed by a party related to lessor.
e.g
a) RV= Rs 10,000 (nothing is assured) it became URV
b) RV= Rs 10,000
Rs 8,000 is guaranteed by lessee
597
Remaining Rs 2,000 is URV
Finance Lease (in the books of lessor)
Calculation of lease payment:
(A) Calculation of lease payment to be received by lessor (if ownership is expected to betransferred to
lessee at the end of lease term)
a) Ownership will be transferred without any additional amount at the end of lease term. Lease payments (LP) =
Down payment + Rentals + zero.
b) Ownership will be transferred by paying an additional lump sum amount at the end of lease term: (means a
purchase option which is reasonable certain at the inception).
Lease payments (LP) = Down payment + Rentals + Amount to obtain ownership In these cases lessee will also
calculate its lease payments as mentioned above.
(B) Calculation of lease payments to be received by lessor: (if ownership is not expected to betransferred to
lessee at the end of lease term).
a) If lessee or a party related to lessee [Para 70 (c)] has provided a guarantee of residualvalue to lessor:
Lease payments (LP) = Down payment + Rentals + GRV
b) If an independent third party has provided a guarantee of residual value to lessor: Lease payments (LP) =
Down payment + Rentals + GRV
Point to remember: URV is not included in calculation of lease payments by lessor. It is included in
calculation of Gross Investment by lessor.
Terminologies Used by lessor:
Gross Investment = Lease payments + URV
Net Investment = PV of lease payments + PV of URV
Unearned Finance Income = Gross Investment – Net Investment
Q.7 Following information is available for you.
Fair Value 68,000
Down Payment 10,000
Interest rate implicit in lease 10.65% p.a.
Annual installment Rs 20,000 payable in arrears
Lease term 3 Years
Residual value 12,000
GRV(Lessee) 10,000
Calculate the following
a) Gross investment
b) Net investment
c) Unearned finance Income
[Para 67] At the commencement date; A lessor shall recognise a receivable at an amount equal to net investment
in lease.
Subsequent Measurement:
A lessor shall recognise finance income over the lease term using a constant period rate of return.
Q.8 M Corporation is a company involved in the manufacturing industry. It recently decided to import a range of new
equipment costing Rs 400,000. Once the equipment had arrived at their premises (1 January 2006), it became
evident that M Corporation did not have the expertise necessary to operate the sophisticated equipment.
The CEO then made a few calls and found a company (D Manufacturing) that wanted to acquire the equipment'.
Unfortunately, however, D Manufacturing did not have adequate funds to purchase the equipment immediately.
598
The CEO was reluctant to leave the equipment lying around, and therefore came up with the following
agreement:
1) He would lease the equipment to D Manufacturing, immediately (1 January 20X6).
2) The equipment would be leased to D Manufacturing for a period of 3 years.
3) At the end of 3 years D Manufacturing would have to pay an amount of Rs 20,000 and ownership would then
transfer.
4) The lease rentals are Rs 150,000 paid annually in advance.
Other information includes:
A fair market interest rate for agreements of the above nature is 17.082%.
Required:
a) Provide the journal entries required to account for the above information in the records of M
Corporation from the start of the lease up to 31-12-2008.
b) Prepare extracts from statement of Financial Position of M Corporation as on 31-12-2006.
Q.9 Shoaib Leasing Limited (the lessor) has entered into a three year agreement with Sarfaraz Limited (the lessee) to
lease a machine with an expected useful life of 4 years. The cost of machine is Rs. 2,100,000.
The following information relating to lease transaction is available:
1) Date of commencement of lease is July 1, 2007.
2) The lease contains a purchase option at Rs. 100,000. At the end of the lease term, the value of the machine will
be Rs. 300,000.
3) Lease installments of Rs. 860,000 are payable annually, in arrears, on June 30.
4) The implicit interest rate is 12.9972%.
Required:
a) Prepare the journal entries for the years ending June 30, 2008, 2009 and 2010 in the books of lessor.
b) Produce extracts from the statement of financial position including relevant notes as at June 30, 2008 to show
how the transactions carried out in 2008 would be reflected in the financial statementsof the lessor.
Note:
1. If a note / disclosure is required in case of finance lease (lessor) then prepare a maturity analysis of undiscounted
contractual future lease payments receivable for a minimum of each of the first five years plus a total amount for
the remaining years. In addition, a lessor shall reconcile the undiscounted lease payments to net investment in
lease. In addition, immediatelyafter the disclosure a narrative information about lease is also to be prepared.
2. If there is a purchase option in question, then always assume that it is reasonably certain unless otherwise specified.
Q.9a 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)
599
Types of Lessor (in case of finance lease):
Lessor
Simple Lessor Manufacturer lessor/

E.g Dealer Lessor
Banks
Leasing Companies
Manufacturer lessor
E .g Honda Limited Starts
leasing business
Dealer Lessor
E.g Car Dealer starts leasing
business.
For example:
Simple Lessor:
Purchase cost 2,500,000
Interest 300,000
Total Amount of which installments are to be made 2,800,000
Dealer Lessor:
Cost of Purchase 800,000
Profit 200,000
Selling Price 1,000,000
Interest 150,000
Manufacturer Lessor:
Cost of manufacturing 1,400,000
Profit 300,000
Selling Price 1,700,000
Interest 200,000
600
Nature of Income
Simple Lessor Manufacturer/ Dealer Lessor
Interest Income Interest Income

Normal Profit
(Sale – Cost of sales)
Recognized Recognized on
on time basis time basis
Recognized when the asset
is sold
601
Q.10 Applebee Limited is a manufacturer of harvesting equipment. Applebee Limited sells the equipment to
farmers all around the country. Some customers purchase the equipment for cash and others purchase under
Applebee Limited's finance lease arrangement.
Mr. Hatfield purchased a harvester from Applebee Limited and made use of their finance lease
agreement. The details of the lease are as follows:
1) The lease period is 5 years (signed on 1 January 2015)
2) Lease installments of Rs 200,000 are payable annually in arrears on 31 December.
A fair market interest rate for this type of lease is 16.9911%.
The cost to Applebee Limited to manufacture this harvester was Rs 500,000. Applebee Limited
implements a mark-up of cost plus 28% on their cash sales.
Required:
Journalize the entries required to account for the abovementioned transaction for each of the years
ended 31 December 2015 to 2019 in the books of Applebee Limited.
Initial Entries of Manufacturer / Dealer Lessor
[In case of finance lease]
Lease receivable (Net Investment) xxx

Sales (Lower of FV & PV of LP) xxx
Cost of sales (Cost- PV of URV) xxx
Stock (cost) xxx
This lower of is an application of prudence concept, means revenue is not overstated.
Lease payment(LP) 100,000
Present value of LP 70,000
Cost of Purchase 60,000
URV 2,000
Present value of URV 1,200
Sale price 71,200
Required:
a) Cost of sales
b) Gross profit
c) Unearned Finance Income
d) Accounting entry in the book of dealer lessor
1. If there is a difference between cost and sale price it means there is profit which should be
recognized at the time of sale.
2. For simple lessor cost is Fair value
3. For Manufacturer/Dealer Lessor Sale price is Fair value
Q.12 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
receivea 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 is as follows:
1) The lease period is 4 years, extendable up to the expected useful life of the trucks i.e. 5 years.
2) 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
returnthe truck at the end of the lease term.
3) Lease rentals amount to Rs. 2,715,224 per annum and are payable in arrears i.e. on 30 June.
602
4) The cost of each truck is Rs. 900,000. Price in case of outright sale is Rs. 1,350,000 per truck.
5) 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.
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’.
Note: if question is silent regarding the entity in whose books entries and disclosure note is required
then prepare accounting entries in the books of the entity which is mainly discussed in question.
Q.12a D products deal in large office machine. It also offers such machines on lease. One such
machine was leased to a customer on 1-7-2004. The details of this machine are as follows
a) D product purchased the machine for Rs 150,000.
b) Outright sale price of machine is 188,535.
c) Useful life = 6 years.
d) Lease Term = 6 years.
e) Unguaranteed Residual value = 10,000.
f) Annual rental payable at the beginning of each year = 36,500.
g) Interest rate implicit in lease = 8% p.a.
Required:
a) Compute the following for D products as on 1-7-2004
i. Gross Investment
ii. Unearned Finance Income
b) Prepare journal entries for the year ended 30-6-2005.
c) Prepare extracts from Statement of comprehensive income, Statement of financial position as well
as a disclosure as at June 30, 2005 as per IFRS 16.
Summary of Finance Lease (lessor)
Simple Lessor Dealer/Manufacturer Lessor
Initial Entry
Leased Receivable (NI) Leased Receivable (at NI)
Asset (Cost) Sale(at lower of FV
(FV is cost) &PV of LP)
Cost of sale (cost – PV of
URV)Stock (cost)
(FV is sale price)
Depreciation is charged
Finance Charge Allocation Table:
Treatment of Interest
Interest is recognized as Interest is recognized as
income income
Operating lease in the books of lessor: [Para 81 to 85]
• The asset subjected to an operating lease shall continue to be in the books of lessor.
• Lessor shall depreciate the asset over its useful life as per IAS-16 and 38.
• For impairment testing of asset subjected to lease, consider requirements of IAS-36.
• No receivable is recorded.
603
• No finance charge allocation table is prepared.
• A lessor shall recognise the lease payments from operating leases as income on a straight linebasis. (unless
question requires another basis)
Disclosures:
A disclosure of future lease instalments receivable is prepared in notes. [maturity analysis]
Schedule of PPE.Note:
1. There is no difference in accounting treatment of simple lessor and dealer/manufacturer lessor in case of an
operating lease.
2. Before solving the question of lessor in examination, make a conclusion that whether the lease is a finance
lease or operating lease; and then start solving the question.
Q.13
Cost of asset Rs 15,000,000
Date of commencement of lease is 1-1-2009
Useful life is 6 years
Lease term is 3 years
Annual Rentals payable in advance Rs 4,000,000 (to be reduce by 5% annually)Year end is 31 December
Required:
a) Prepare journal entries in the books of lessor for 31-12-2009 and 31-12-2010.
b) Prepare a disclosure in notes to the financial statements of lessor for the year ended 31-12-2009 and 31-12-
2010.
Note: if asset is already purchased or manufactured by dealer or manufacturer lessor then first prepare the
entry to transfer the assets from the inventory to PPE.
Q.14
Cost of asset Rs 40,000,000
Date of commencement of lease is 1-7-2009
Useful life is 10 years
Lease term is 3 years
Semiannual Rentals payable in advance Rs 5,000,000 (to increase by 5% annually)
Required:
a) Prepare journal entries in the books of lessor for 31-12-2009 and 31-12-2010.
b) Prepare a disclosure in notes to the financial statements of lessor for the year ended 31-12-2009
and 31-12-2010.
Initial Direct Cost:
Incremental costs of obtaining a lease that would not have been incurred if the lease contract is not
made.
Initial direct costs include;
– Commissions
– Legal fees
– Costs of negotiating lease terms and conditions (legal advisors fee)
– Costs of arranging collateral
– Payments made to existing tenants to obtain the lease
Treatment of Initial Direct Cost (IDC)
Lessee  IDC is added to the amount recognized as an asset.
Illustration IDC:
ABC Limited paid Rs. 30,000 to a legal advisor to review and advise on lease agreement of a plant
leased by SRT Limited. Procurement Manager of ABC remained involved for a month for negotiating the
lease whose monthly salary paid at Rs. 150,000.
Debit Credit
Right-of-use 30,000
604
Bank 30,000
LessorOperating Lease: Initial direct cost shall be added to the amount of the asset and recognized as an
expense over the leased term. [because IDC is for this lease only]
Example:
The company at which you are employed as a finance manager entered into the following operating
lease agreement (as a lessor) to lease an item of property, plant & equipment.
Commencement Date 1-1-2006
Cost of Machine 1,000,000
Useful life 10 years
Machine purchased on 1-1-2006
Lease installments in arrears:
31-12-2006 54,270
31-12-2007 67,260
31-12-2008 29,640
Initial direct cost of lessor was Rs 3,000 paid in cash.
Required:
a) Calculate rental income for each year.
b) Journal entries for the year ended 31-12-2006.
Solution:
a) Rental Income
31-12-2006 54,270
31-12-2007 67,260
31-12-2008 29,640
151,170/3 = 50,390 per annum
Operating Rental Income in each of the three years will be Rs 50,390.
b) Journal Entries
1-1-2006 Machine 1,000,000
Cash 1,000,000
1-1-2006 Machine 3,000
Cash 3,000
31-12-2006 Depreciation 101,000
(1,000,000÷10 + 3,000/3)
31-12-2006 Bank 54,270
Lease Rental Income 50,390
Unearned rental Income 3,880
Lessee IDC is recognized as an expense in case of short term or low value asset lease.
Simple Lessor Finance Lease
Initial direct Costs paid by the Lessor are included in the initial measurement of the finance lease
receivable and reduce the amount of income recognized over the lease term.
The result will be that net Investment In lease will Include amount of initial direct cost (Instead of having
recognized the expense in the current period, It will result in reduced Income over the lease term). [as in
the debt instruments of IFRS 9]
The above discussion can be understood by the following question.
Calculation of interest rate implicit in lease:

As per IFRS 16 calculation of rate is responsibility of Lessor. Rate is calculated by solving the following
equation.
FV+ Initial Direct Cost of Lessor = PV of LP + PV of URV
Fair Value of asset 50,000
605
UGRV 2,000
Annual installment Rs 15,000 Payable in arrears
lease term 3 Years
initial direct cost of lessor 3,000
Down payment 10,000
Commencement of lease 01.01.2010
Requirement:
Calculate the interest rate implicit in the lease.
A.18 Solution
1  (1  i ) 3  3
50,000  3,000  10,000  15,000   2,000(1  i )
 i 
Interest rate implicit will be that rate, which will equate this equation. The method used for this
purposeis called as Hit & Trial Method.
Hit & Trial Method
Let assume rate = 8%
1  (1  0.08) 3  3
53,000  10,000  15,000   2,000(1  0.08)
 0 .08 
=10,000 + 38,656 + 1,588
53,000 ≠ 50,244
It means rate is not 8%.
Increase in rate will result into decrease in PV and vice versa. Therefore we should not use rate above
8% because we need higher present value.
Let assume rate =7%
=10,000+15,000
1  (1  1.07) 3  3
 10,000  15,000   2,000(1  1.07)
 0.07 
=10,000+39,365+1,633
53,000 ≠ 50,998
Let assume rate =5%
1  (1  .05) 3  3
 10,000  15,000   2,000(1  0.05)
 0 .05 
=10,000+ 40,849 + 1,729
53,000 ≠ 52,577
Let assume rate =4%

1 − (1.045)−3
= 10,000 + 15,000 [ ] + 2,000(1.04)−3
0.04
=10,000+41,626+1,778
53,000 ≠ 53,404
Let assume rate =4.5%

1 − (1.045)−3
= 10,000 + 15,000 [ ] + 2,000(1.045)−3
0.045
=10,000+41,234+1,753
= 52,987
It is therefore approximately equal to 4.5%
606
Note: in case of simple lessor finance lease, IDC is already included in net investment therefore simply ignore in
workings. (unless any missing figure to be calculated from equation)
Dealer/Manufacturer lessor Finance Lease

IDC should be recognized as an expense when incurred in the period of delivery of asset. Therefore in case of
dealer/manufacturer lessor equation to calculate implicit rate of return is
FV = PV of LP + PV of URV
Point to remember: URV means an amount which is not assured or guaranteed by party related tolessor
Calculation of Lease Rental
Fair value = 1,200,000
Lease term = 5years
URV=100,000
Rate = 8%
There are five annual rental in advance.
We can use the same previous equation to calculate rental as well if required.
FV+ Initial Direct Cost of Lessor = PV of LP + PV of URV
1  (1  .08) 4  5
1,200,000  0  R  R    100,000(1  0.8)
 0.08 
1,200,000 = R + R [3.31212684] + 68,058
R=262,502
Question No. 1
FV = 491,000
Lease term = 8 years
Annual rental of Rs. 82,487.75 payables in advance
URV = 10,000
Calculate Interest date implicit.
Answer No. 1
FV = PV of LP + PV of URV 491,000 = 82487.75 + 82487.75
1 − 1 + 𝑖)−7
𝑖
+ 10,000 (1 + i)–8
Interest rate implicit will be that rate, which will equate this equation. The method used for this purpose is called as
Hit and Trial Method.
Lets assume rate = 12% per annum
= 82,487.75 + 82487.75
1−1+0.12)−7
= 0.12
+ 10,000(1+0.12) –8
= 82,487.75 + 376,454 + 4,523

= 463,465
607
Lets assume rate = 10% per annum
= 82,487.75 + 82487.75
1 − 1 + 0.10)−7
= + 10,000(1 + 0.10)−8
0.10
= 82,487.75 + 401,585 + 5,132
= 489,205
It is therefore approximately equal to 10%
Question No. 2
FV = 45,556
IDC = 10,000
i = 10.65%
Lease term = 3 years Annual rentals are in arrearsURV = 10,000
Answer No. 2
FV + IDC = PV of LP + PV of URV
[1 (1 + 0.1065) 3 ]
45,556 + 10,000 =R
0.1065
55,556 = R (2.45866) + 7,382
10,000 (1 + 0.1065)–3
Rentals = (55,556 – 7,382) / 2.45866
= 19,594
Question No. 3
FV = 112,080
i = 8% p.a
Lease term = 2 years
Quarterly rentals are in advance
Calculate rental
Answer No. 3
FV = PV of LP
Interest rate will be adjusted due to quarterly rentals
[1 (1 + 0.02) 7 ]
112,080 =R+R
112,080 = R + 6.4 R
0.02
Rentals = 112,080/7.47
= 15,000 per quarter
608
Summary of rates:
• Calculation of the interest rate implicit in lease is the responsibility of the lessor. Lessor will
alwaysuse this rate in his calculations.
• If this rate is known to lessee then he will also use that rate.
• If implicit rate is not known to lessee then he can use its incremental borrowing rate (means assume
as if lessee has borrowed the funds instead of taken the asset on lease).
• Sometimes manufacturer or dealer lessor might quote artificially low rate of interest to attract the
customers. The use of such a rate would result into lessor recognizing excessive amount of total
income at the commencement of lease (which is against the prudence concept) [lower rate would
result into higher PV and vice versa]. In such cases, the selling profit is restricted to that which
would apply if a market rate of interest is charged (means if both the lower implicit rate and
market rate of interest are given then use market rate for the calculation of present value).[MCQ
Chapter 13 Q.17]
Defined periods
A lease may be split into a primary period followed by an option to extend the lease for a further
period(a secondary period).
In some cases, the lessee might be able to exercise such an option with a small rental or even for no
rental at all. If such an option exists and it is reasonably certain that the lessee will exercise the option,
the second period is part of the lease term.
Question in practice questions.

Lease accounting (Lessee) [summary]
At the commencement date, a lessee should recognise a right-of-use asset and a lease liability. It is the
date on which a lessor makes an underlying asset available for use by a lessee.
At the commencement date, a lessee should measure the right-of-use asset at cost. The cost of the
right-of-use asset should comprise:
(a) the present value of lease payments;
(b) less any lease incentives received;
(c) Add any initial direct costs incurred by the lessee;
(d) an estimate of costs to be incurred by the lessee in dismantling and removing the asset,
restoring the site on which it is located or restoring the underlying asset to the condition required
by the terms and conditions of the lease.
The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be
readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s
incremental borrowing rate.
Property companies: Many companies own properties which they lease out to others. These
companies will apply IAS 40 to their assets.
SOLUTIONS
A.7
a) Gross Investment = LP + URV
= 80,000 + 2,000
= Rs 82,000
b) Net Investment = PV of LP + PV of URV
= 66,554 + 1,476
= 68,030
609
c) Unearned finance Income = Gross investment - Net investment
= 82,000 – 68,030
= 13,970
A.8
M Corporation:
a) Journal Entries
1-1-2006 Equipment 400,000
Bank 400,000
1-1-2006 Lease Receivable (At net investment) 400,000
Equipment 400,000
Net Investment = 150,000 + 150,000 [ 1-(1+0.17082) ] + 20,000 (1 + 0.17082)-3 = 400,000
-2
0.17082
1-1-2006 Bank 150,000
Lease Receivable 150,000
31-12-2006 No depreciation in the books of lessor in case of finance lease
31-12-2006 Finance Income Receivable 42,705

Finance Income 42,705
1-1-2007 Bank 150,000

Finance income Receivable 42,705
31-12-2007 No Deprecation
31-12-2007 Finance Income Receivable 24,377

24,377
Finance Income
1-1-2008 Bank 150,000

Finance income Receivable 24,377
31-12-2008 Bank 20,000 17,082

Lease Receivable
31-12-2008 No depreciation
Working: Finance income table

1-1-2006 400,000
1-1-2006 150,000 150,000 - 250,000
1-1-2007 150,000 107,295 42,705 142,705
1-1-2008 150,000 125,623 24,377 17,082
31-12-2008 20,000 17,082 2,918 -
b)
M Corporation
610
As at 31-12-06
Non-current Asset
Current Asset
Lease Receivable (current portion) 107,297
Interest Receivable 42,705
A.9
Solution
Shoaib Leasing LTD
a) Journal Entries
1-7-2007 Lease Receivable 2,100,000

Machine 2,100,000
Net Investment
860,000 [1 – (1 + 0.129972 )-3 ]+ 100,000 ( 1 + 0.129972 )-3 = 2,100,000
0.129972
30-6-2008 Bank 860,000

30-6-2009 Bank 860,000

30-6-2010 Bank 960,000

b) Shoaib Leasing Company

(i) Statement of Financial Position (Extracts)
As on 30-6-2008
Non-Current Assets 2008
Current Assets
Current Portion of Lease Receivable 663,360
(i) Note to the financial statements

Maturity Analysis – contractual undiscounted lease payments
One to two years (860,000 + 100,000) 960,000
Total undiscounted lease receivable 1,820,000
611
Reconciliation:
Total lease receivable (860,000 x 2 + 100,000) 1,820,000
Add: unguaranteed residual value -
Gross investment in lease 1,820,000
Less: unearned finance income (196,640 + 110,419) (307,062)
Net investment in lease 1,512,938
The company has entered into a lease agreement with Sarfaraz Limited. The lease bearsinterest
@ 12.9972%. Rentals are payable annually in arrears.
Working
Finance Charge Allocation Table
1-7-2007 2,100,000
30-6-2008 860,000 587,059 272,941 1,512,991
30-6-2009 860,000 663,360 196,640 849,581
30-6-2010 960,000 849,581 110,419 -
(860,000+100,000)
A.9a
Solution Rs in millions
a) Galaxy Leasing Limited
1-7-2013 Lease Receivable 28.69
Equipment 28.69
1-7-2013 Bank 3
Lease Receivable 3
30-6-2014 Bank 7.8
Lease Receivable 4.21
Finance income 3.59
st
(To record receipt of 1 installment of the lease)
b) Galaxy Leasing Limited

Notes to the financial statements for the year ended 30-6-2014
Less than one year 7.8
One to two years 7.8
Two to three years (7.8 + 5) 12.8
Total undiscounted lease receivable 28.4
Reconciliation:
Total lease receivable (7.8 x 3 + 5) 28.4
Gross investment in lease 28.4
Less: unearned finance income (3.01 + 2.34 + 1.57) (6.92)
Net investment in lease 21.48
The company has entered into a finance lease agreement with Dairy products limited. The lease bears
interest @ 14% per annum. Rentals are payable in arrears. There is a guaranteed residual value of 5
612
million in the lease agreement.
Workings
Gross Investment = LP + URV
= 3 + 7.8 x 4 + 5 + 0
= 39.2m
Net Investment =PV of LP + PV of URV
=3+7.8 [1-(1+0.14)-4] + 5(1.14)-4 + 0
0.14
=3+22.73+2.96
=28.69m
Finance Income Table
Date Rentals Principal Interest Balance
1-7-13 - - - 28.69
1-7-13 3 3 - 25.69
30-6-14 7.8 4.21 3.59 21.48
30-6-15 7.8 4.79 3.01 16.69
30-6-16 7.8 5.46 2.34 11.23
30-6-17 12.8 11.23 1.57
(7.8+5)
39.2 28.69 10.51
A.10 Solution
Journal Entries
1-1-2005 Lease Receivable 640,000
Sales 640,000
1-1-2005 Cost of Sales 500,000
Inventory 500,000
31-12-2005 Bank 200,000
31-12-2006 Bank 200,000
31-12-2007 Bank 200,000
31-12-2008 Bank 200,000
31-12-2009 Bank 200,000
Workings
GI = LP + URV
= 1,000,000
Net Investment = 200,000 [1-(1+0.169911)-5] = 640,000
0.16991
UFI = GI-NI
=1,000,000 – 640,000
= 360,000
Rentals Principal Interest Balance
613
1-1-2005 640,000
31-12-2005 200,000 91,257 108,743 548,743
31-12-2006 200,000 106,763 93,237 441,981
31-12-2007 200,000 124,903 75,097 317,078
31-12-2008 200,000 146,125 53,875 170,953
31-12-2009 200,000 170,953 29,047 -
A.11 Solution
a) Cost of Sales: 60,000 – 1,200 = 58,800
b) Gross Profit
Sales (Lower of FV & PV 70,000
ofMLP)
FV = 71,200
PV of LP = 70,000
Cost of Sales (a) 58,800
11,200
c) UFI = GI – NI
= 102,000 – 71,200
= 30,800
GI =LP + URV
102,000 =100,000 + 2,000
NI = PV of LP + PV of
URV 71,200 = 70,000 + 1,200
d) Accounting entry in the books od dealer lessor

Sales 70,000
A.12
Solution
Cost of Sales 58,800
Stock 60,000
Quartz Auto Limited
a) Journal entries in the books of Quartz Limited
Gross Investment = 2,715,224 x 5 + 100,000 x 7 = 14,276,120
Net Investment = 2,715,224 [1-(1 + 0.15)-5] + 700,000 (1 +
0.15)-5
=9,101,852 + 348,024
=9,449,876
0.15
1-7-2010
Lease Receivable(N.I)
9,449,876
Cost of Sales** 5,951,976
Sales 9,101,852*
Stock (900,000 x 7) 6,300,000
*Lower of
FV (sale price) = (1,350,000 x 7) = 9,450,000
614
& PV of LP = 9,101,852
**6,300,000 – 348,024 = 5,951,974
30-6-2011
Bank 2,715,224
Lease Receivable 1,297,743
Interest Income 1,417,481
b) Disclosure
One to two years 2,715,224
Two to three years 2,715,224
Three to four years 2,715,224
Note: URV is not a part of lease payments.
Reconciliation:
Total lease receivable (2,715,224 x 4) 10,860,896
Add: unguaranteed residual value 700,000
Gross investment in lease 11,560,896
Less: unearned finance income (1,222,820 + 998,959 +741,520 (3,408,763)
+ 445,464 )
Net investment in lease 8,152,133
the company has entered into a finance lease agreement with Emeralds Goods Transport Company.The
lease bears interest @ 15% per annum. Rentals are payable annually in arrears.
W-1 Lease Amortization Schedule

1-7-2010 9,449,876
30-6-2011 2,715,224 1,297,743 1,417,481 8,152,133
30-6-2012 2,715,224 1,492,404 1,222,820 6,659,729
30-6-2013 2,715,224 1,716,265 998,959 4,943,464
30-6-2014 2,715,224 1,973,704 741,520 2,969,760
30-6-2015 3,415,224 2,969,760 445,464 -
(2,715,224+700,000)
A.12a Solution
a) Gross Investment
=
36500 x 6 + 10,000
=219000 + 10,000
=229,000
Net Investment = 36500 + 36500 [ 1- (1+0.08)-5] + 10,000 (1.08)-6
0.08
= 182,234 + 6302
= 188,536
Unearned Finance Income = 229,000 – 188,536

= 40,464
615
b) Accounting Entries
1-7-2004 Lease Receivable (N.I) 188,536
Sales* 182,234
Cost of Sales** 143,698
Inventory stock 150,000
* FV=188,535;PV of LP=182,234;Lower=182,234
**150,000 – 6,302=143,698
1-7-2004 Bank 36,500

30-6-2005 Interest Receivable 12,163

c) i)
Non-current asset
D Products
Statement of Financial Position (Extracts)As at 30-6-2005
Lease receivable 127,699
Non-current asset
Current Portion of lease receivable 24,337
Interest receivable 12,163
ii)
D Products
Income Statement Extracts
Sales 182,234
Cost of Sales (143,698)
Gross Profit 38,536
ii) D Products
One to two years 36,500
Three to four years 36,500
Four to five year 36,500
Total undiscounted lease receivable 182,500
Reconciliation:
Total lease receivable (36,500 x 5) 182,500
Add: unguaranteed residual value 10,000
Gross investment in lease 192,500
Less: unearned finance income (10,216 + 8,113 + 5,842 + 3,390 + 28,301
740 )
Net investment in lease (principal 152,036; interest 12,163) 164,199
The company has entered into a finance lease agreement as a lessor. The lease bears interest at therate
of 8% per annum. Rentals are receivable annually in advance.
Working
Finance charge allocation Table
616
1-7-04 188,536
1-7-04 36,500 36,500 - 152,036
1-7-05 36,500 24,337 12,163 127,699
1-7-06 36,500 36,284 10,216 101,415
1-7-07 36,500 28,387 8,113 73,028
1-7-08 36,500 30,658 5,842 42,370
1-7-09 36,500 33,110 3,390 9,260
30-6-10 10,000 9260 740 -
A.13
a ) Journal Entries:
Classification of Lease
• No indication of transfer of ownership
• No indication of purchase option.
• Lease term does not cover major portion of useful.
• As LP is already 76% (W-1) of fair value of asset therefore if we calculate PV of LP it will
belower than LP. It means this criteria is also not met.
• As there is no indication of specialized asset therefore assume that asset is not a specialized
asset.
Conclusion: As all the conditions are not met therefore lease is an operating lease.
1-1-2009 4,000,000
1-1-2010 3,800,000
1-1-2011 3,610,000
Lease payments 11,410,000
W-1 = 11,410,000 x 100 =76%
15,000,000
W-2 LP = 11,410,000 = 3,803,333
3 3
It is rental income per annum on straight line basis.
For the year ended 31-Dec-2009
Lessor
1-1-09 Asset 15,000,000
Cash 15,000,000
1-1-09 Cash 4,000,000
Advance from customer 4,000,000
31-12-09 Advance from customer 3,803,333
Rental Income 3,803,333
31-12-09 Depreciation 2,500,000
(15,000,000 ÷ 6)
For the Year ended 31-Dec-2010
Lessor
1-1-2010 Cash 3,800,000
Unearned Income 3,800,000
31-12-2010 Unearned Income 3,803,333
31-12-2010 Depreciation 2,500,000
Accumulated Depreciation 2,500,000
617
Notes to the Financial Statements (Lessor)
Disclosure of Operating Lease
Year ended 31-12-2009
The company entered into an operating lease agreement as a lessor. Rentals are receivable annuallyin
advance of Rs 4,000,000 (to be reduced by 5% annually).
Disclosure of Operating Lease

Year ended 31-12-2010
One to two years -
The company entered into an operating lease agreement as a lessor. Rentals are receivable annuallyin
advance of Rs 4,000,000 (to be reduced by 5% annually).
Fixed assets schedule missing
A.14
• No indication of transfer of ownership
• No indication of purchase option.
• Lease term does not cover major portion of useful.
• As LP is already 79% (W-1) of fair value of asset , so there is no need to calculate PV of LP.
• As there is no indication of specialized asset therefore assume that asset is not a specialized
asset.
LP
1-7-09 5,000,000
1-1-10 5,000,000
1-7-10 5,250,000
1-1-11 5,250,000
1-7-11 5,512,500
1-1-12 5,512,500
31,525,000
W-1
31,525,000 x 100 =79%
40,000,000
W-2
LP = 31,525,000
6 6
=5,254,167/ semi-annual (it is rental income or expense on a straight line basis.
a) Journal Entries
Year ended 31-Dec-2009
618
Lessor
1-7-09 Asset 40,000,000
Cash 40,000,000
1-7-09 Cash 5,000,000
31-12-09 Rental Receivable 254,167

Rental income 5,254,167
31-12-09 Depreciation 2,000,000
(40,000,000÷ 10 x 6/12)
Year ended 31-Dec-2010

Lessor
1-1-10 Cash 5,000,000
Rental receivable 254,167
1-7-10 Cash 5,250,000
Rental Receivable508,334
Unearned Income4,741,666
Unearned Income 4,741,666Rental Income
5,254,167
31-12-10 Depreciation 4,000,000
Notes to Financial Statements (Lessor)

Disclosure of operating lease for the year ended 31-12-09
Less than one year (5,000,000 + 5,250,000) 10,250,000
One to two years (5,250,000 + 5,512,500) 10,762,500
Two to three years 5,512,500
The company entered into an operating lease agreement as a lessor. Rentals are receivable amountingRs
5 million semi annually in advance (to be increased by 5% annually).

Less than one year (5,250,000 + 5,512,500) 10,762,500
The company entered into an operating lease agreement as a lessor. Rentals are receivable amountingRs
5 million semi annually in advance (to be increased by 5% annually).
Fixed assets schedule missing
619
Additional Practice Questions
1 SHER KHAN LIMITED

Consider the following independent scenarios:
Sher Khan Limited (lessee) enters in to lease over a plant
Scenario 1.
The lease is non-cancellable for a period of 3 years from commencement date after which Sher
Khan Limited then has the option to extend the lease for a further 2 years. Sher Khan Limited is
reasonably certain that it will exercise the renewal option.
Scenario 2.
The lease is non-cancellable for a period of 3 years from commencement date after which Sher
Khan Limited then has the option to extend the lease for a further 2 years. Sher Khan Limited is
reasonably certain that it will not exercise the renewal option.
Scenario 3.
The lease is for a 10-year period during which the first 7 years is non-cancellable. At the end of
the 7-year period, Sher Khan Limited has the option to terminate the lease. Sher Khan Limited is
reasonably certain that it will exercise the termination option.
Scenario 4.
the 7-year period, Sher Khan Limited has the option to terminate the lease. Sher Khan Limited is
reasonably certain that it will not exercise the termination option.
Scenario 5.
the 7-year period, both Sher Khan Limited and the lessor have the option to terminate the lease.
Sher Khan Limited is reasonably certain that it will not exercise the termination option.
Required
Calculate lease term for each of the scenarios above along with explanation.
2 T LIMITED
T limited leased a plant from P limited on 1st January 2018.
Following are the details pertaining to plant leased by T Limited:
1. Asset was originally purchased at a cost of Rs. 700,000 on 1st January 2013 with a useful
life of 10 years by P limited.
2. Lease term is 3 years.
3. Residual Value was Rs. 50,000 which was unguaranteed.
4. T Limited has an option to purchase the asset at the end of lease term at a Price of
Rs. 30,000
5. Fair value of asset at the time of commencement of lease was Rs. 290,000
6. T limited was reimbursed 50% of the initial direct cost paid by him, by P limited.
7. T Limited Immediately paid Rs. 50,000 on 1st January 2018.
620
Other relevant information of lease agreement is as follows:
1. Initial direct cost paid by T limited 100,000
2. Dismantling cost of plant at the end of lease term Rs. 50,000
Required
a. Calculate Rental which should be charged by P Limited to achieve a return of 10%. Rentals are
payable annually in arrears.
b. Prepare journal entries in the books of P limited and T Limited for the year ended 31.12.2018..
c. Prepare relevant financial position extracts of both companies as on 31.12.2018..
d. Disclose the lease related information in both companies in notes to financial statements for the
year ended 31.12.2018.
Q.3 Qaseem Ahmed & Company and Ebad Company signed a lease agreement dated January 1,
2001that calls for Qaseem Ahmad & Company to lease equipment to Ebad and company
beginning January1, 2001. The terms and provisions of the lease agreement and other
pertinent data are as follows:
a) The term of the lease is 5 years, and the lease agreement is non-cancelable, requiring
equal rental payments of Rs 47,963 at the beginning of each year (annuity due basis).
b) The equipment has a fair value at the inception of the lease of Rs. 200,000, an estimated
economic life of 5 years, and no residual value.
c) The lease contains no renewal options, and the equipment reverts to Lessor Company at
the termination of the lease.
d) Ebad Company s incremental borrowing rate is 11% per year.
e) Ebad Company depreciates on a straight line basis similar equipment that it owns.
f) Qaseem Ahmad & Company sets the annual rental to earn a rate of return on its investment
of 10% per year; this fact is known to Ebad & Company.
Required:
In light of IFRS 16, state with the reasons:
(I) Which interest rate would be used for capitalization of lease, in the books of Ebad &
Companyin accordance with IFRS 16?
(II) Calculate the amount to be capitalized in the books of lessee.
(III) Prepare a Lease Amortization Schedule in the Books of Ebad & Company, showing amount of
profit and reduction in principal. (Round-off the figures in nearest Rupees)
Q.4 Munir Niazi Corporation, a lessor, purchased a new machine for Rs. 1,200,000 on December
31, 2001. This was delivered the same day to Ahmad Nadeem & Company (the lessee).
Following information relating to lease transaction is available:
(I) The Lease Asset has an estimated useful life of 5 years which coincides with the Lease term.
(II) At the end of lease term, machine will revert to Munir Niazi Corporation, at which time it is
expected to have a residual value of Rs. 100,000. (None of which is guaranteed by Ahmad
Nadeem & Company).
(III) Munir Niazi Corporation’s implicit interest rate is 8% which is known to Ahmad Nadeem &
Company.
(IV) Ahmad Nadeem & Company's incremental borrowing rate is 10% at December 31, 2001.
(V) Lease rentals consist of five equal annual payments, the first of which was paid on December
31, 2001.
(VI) Both the lessor and the lessee use calendar year as their accounts period and depreciate all
fixed assets on straight line basis.
Required:
a) Compute the annual rental under the lease.
b) Compute the amounts of Gross investment and unearned finance income that Munir Niazi
Corporation should disclose at the inception of the lease i.e 31-12-2001.
c) What expense should Ahmad Nadeem & Company record for the year ended 31, 2002?
621
ANSWERS
1 SHER KHAN LIMITED

Scenario 1: Lease term = 5 years
Explanation: The optional extension period is included because Entity A (lessee) is reasonably
certain that it will exercise the option to extend the lease.
Explanation: The optional extension period is excluded because Entity A (lessee) is not
reasonably certain that it will exercise the option to extend the lease.
Explanation: The optional cancellable period is excluded since it is only included if there is
reasonable certainty that the option to cancel (terminate) the lease would not be exercised.
However, in this case, Entity A (lessee) is reasonably certain that it will exercise its option to
cancel.
Explanation: The optional cancellable period is included because we include it if we are
reasonably certain that we would not exercise our option to cancel (terminate) the lease. In this
case, Entity A (lessee) is reasonably certain that it will not wish to cancel the lease.
Explanation: The optional cancellable period is excluded. Although we normally include the
cancellable periods if we are reasonably certain that the option to cancel (terminate) will not be
exercised, and in this case, Entity A (lessee) is reasonably certain that it will not wish to cancel
the lease, the cancellable period is excluded because the lessor also has the option to cancel the
lease during this period.
2.
(i) Calculation of rentals
Fair value + IDC = PV of LP + PV of URV
290,000 + 50,000** = 50,000 + R [1- (1+0.1)-3 + 30,000* (1+0.1)-3
0.1
*as there is a purchase option, therefore URV will not be applicable as ownership is expected to be
transferred at the end of the lease term because of purchase option.
** 100,000 x 50% = 50,000
R= 107,550 (approx) Rupees
Cost 700,000 Purchase on 1st Jan 2013
Life 10 Years
Accumulated depreciation as on 31.12.2018
(700,000/10 x 5)
350,000
Carrying amount 350,000
(b)
Journal Entries in the books of P limited for the year ended 31-12-2018
1-1-2018 Lease Receivable (net 340,000
622
investment) 350,000
Acc. depreciation 60,000
Loss (WDV 350,000; FV
290,000)
Plant 700,000
Cash (IDC) 50,000
1-1-2018 Bank 50,000
31-12-2018 Bank 107,550
(To record receipt of 1st installment of the lease)
Payment Rentals Principal Interest @ 15% Closing
Date Repayment Principal
01-01-18 340,000
01-01-18 50,000 50,000 - 290,000
31-12-18 107,550 78,550 29,000 211,450
31-12-19 107,550 86,405 21,145 125,045
31-12-20 137,550 125,045 12,505 -
(107,550+30,000)
P limited
As at 31-12-2018
Non-current Asset
Current Asset 86,405

Lease Receivable (current portion)
Notes to the financial statements for the year ended 31-12-2018
One to two years (107,750 + 30,000) 137,550
Total undiscounted lease receivable 245,100
Reconciliation:
Total lease receivable (107,550+137,550) 245,100
Gross investment in lease 245,100
Less: unearned finance income (21,145+12,506) (33,650)
Net investment in lease 211,450
Journal Entries in the books of T limited:
PV of LP = 50,000 + 107,550[ 1-
(1+0.1)-3
+30,000 (1+0.15)-3 0.1
1-1-2018 Right to use Asset 50.000
Cash 50,000
[IDC (100,000 x
50%)]
623
Provision for dismantling 37,566
50,000 (1+0.1)-3
Cash 50,000
Cash 107,550
Acc Depreciation(340,000+50,000+37,566)/5
10-5 (already passed up to the date of lease)=5 (take useful life
85,513
31-12-2018
[unwinding ofdiscount] (37,566 x
10%)
as base as there is purchaseoption)
Provision 3,757
T limited
As at 31.12. 2018
ASSETS Rupees
Non-current assets
Property, plant and equipment (Right of use) 341,053
[340,000+50,000+37,566=427,566-85,513]
LIABILITIES
Lease liability 125,045
Provision for dismantling (37,566+3,757) 41,323
Current liabilities
Current portion of obligation under lease 86,405
Notes to the financial statements (Extracts)

As at 31 Dec 2019
Right of use Rupees
Cost
Opening balance -
Addition during the year 427,566
Opening balance -
Depreciation for the year 85,513
Carrying Amount 341,053
624
One to two year (107,750 + 30,000) 137,550
The Company has entered into a lease agreement in respect of a plant. The lease liability bears interest at
the rate of 10% per annum. There is a purchase option at 30,000. The lease rentals are payable in arrears.
There are no financial restriction in the lease agreement.
A.3 Solution:
Qaseem Ahmad
Rate to be used
Ebid Company should use 10% as implicit rate. This rate is being charged by lessor and is known to the
lessee.
Incremental borrowing rate is used by lessee when implicit rate is not available.
Amount to be capitalized
Present value of LP = Rental x Annuity Factor
=47,963 x 4.16986
= 200,000 approximately
Lease Amortization Schedule
Date Rental Principal Finance Charge Balance
Jan 0 ,2001 - - - 200,000
Jan 1,2001 47,963 47,963 - 152,037
Jan 1,2002 47,963 32,759 15,204 119,278
Jan 1,2003 47,963 36,035 11,928 83,243
Jan 1,2004 47,963 39,639 8,324 43,604
Jan 1,2005 47,963 43,604 4,359 Nil
239,815 200,000 39,815
A.4 Solution:
Munir Niazi
a) Computation of Annual Rental
According to IFRS 16, by using interest rate implicit in the lease
FV of Asset + IDC = PV of LP + PV of URV
1,200,000 + 0 = R + R[1-(1+i)-n] + URV
(1+n)-n
i
=R+ R [1-(1+0.08)-4] + 100,000 (1 + 0.08)-5
0.08
R = 262,502
b) Computation of Gross Investment
Gross investment = 262,502 x 5 + 100,000
= 1,412,510
Unearned Finance Income
UFI = GI – NI
= 1,412,510 – 1,200,000
= 212,510
Net Investment = 262,502 + 262,502 [1- (1+ 0.08)-4] + 100,000 (1+0.08)-5
0.08
625
= 1,131,942 + 6,8058
= 1,200,000
c) Books of Ahmad Nadeem & Co
For the year ended Dec 31, 2002
*Depreciation [ 1,131,940]
5
226,388
**Finance Charge 69,555
*Lessee records the asset at PV of LP. In this case PV of LP is 1,131,940
and FV = 1,200,000
W-1 PV of LP = 262,502 + 262,502 [ 1- (1 + 0.08)-4]
0.08
**Finance Charge
=
= 1,131,940
(1,131,941 – 262,502) x 8%
=69,555
Extra Practice Question
Q1. Coal Limited (cl) is preparing its financial statements for the year ended 30 June 2019. Following
information is available:
On 1 January 2019, CL acquired a machine on lease from a bank. Fair value of machine on acquisition was
Rs. 70 million. CL incurred initial direct cost of Rs. 5 million and received lease incentives of Rs. 2 million.
The terms agreed with the bank are as follows:
 The lease term and useful life are 4 years and 10 years respectively.
 Instalment of Rs. 17 million is to be paid annually in advance on 1 January.
 The rate implicit in the lease is 15.096% per annum.
 At the end of the lease term, CL has an option to purchase the machine at its estimated fair value of Rs.
25 million. It is not reasonably certain that CL will exercise this option.
Required: Prepare extracts from CL’s statement of financial position and related notes to the financial statements
forthe year ended 30 June 2019. (Note on Property, plant and equipment is not required) (07)
A. Coal Limited
As on 30 June 2019
2019
Rs. In
millions
Non-current assets:
Right of use asset (W-1) 51.41
Non current liabilities:

Lease liabilities (W-2) 27.60
Current portion of lease liabilities (W-2) 11.15
Interest payable [5.85(W-2)÷2] 2.93
626
Coal Limited
Notes to the financial statementsFor the year ended 30
June2019
Maturity analysis of lease liabilities: 2019
Less than one year 17
One to two years 17
Two to three years 17
Total undiscounted cash flow 51
The Company has entered into a lease agreement with a bank. The lease liability bears interest at the rateof
15.096% per annum. Ownership is not expected to be transferred at the end of lease term. The lease
rentals are payable in annually in advance. There are no financial restriction in the lease agreement.
W-1 Right of use asset Rs. in million
–3
Present value of lease payment 17+17×{(1–1.15096 )÷0.15096}] 55.75
Initial direct cost 5.00
Lease incentive (2.00)
58.75
Depreciation *shorter of lease term and useful life(58.75÷4*)×(6÷12 (7.34)
51.41
W-2 lease schedule

Installment Principal Interest Balance
1-1-2019 55.75
1-1-2019 17 17 38.75
1-1-2020 17 11.15 5.85 27.6
Q.2
Guava Limited (GL), had acquired a machinery from Honeyberry Limited (HL) on 1 July 2017 on the following
terms: The non-cancellable lease period is 3.5 years. Each semi-annual lease instalment of Rs. 48 million is payable
in arrears. The lease contains an option to extend the lease term by 1.5 years. Each semiannual lease installment inthe
extended period will be of Rs. 15 million, payable in arrears. It is reasonably certain that GL will exercisethis option.
The rate implicit in the lease is 10% per annum. The useful life of machinery is 6 years. The un guaranteed residual
value at the end of lease term is estimated at Rs. 20 million.
Required:
Prepare extracts from GL’s statement of financial position and related notes to the financial statements for the year
ended 30 June 2018. (Note on Property, plant and equipment is not required)
A.2
Guava Limited
Statement of financial position For the year ended 30 June 2018
Rs. in million
Non-Current Assets
Right of use asset (w-3) 245.424
Noncurrent liabilities
Lease liabilities (w-1) 166.01
Current liabilities
Current portion of lease liabilities (36.0+37.81) 73.82
Guava Limited
627
Maturity analysis - contractual undiscounted cash flows Rs. in million
Less than one year (48×2) 96.00
One to two years (48×2) 96.00
Two to three years (48+15) 63.00
Three to four years [(15×2)] 30.00
285.00
The Company has entered into a lease agreement. The lease liability bears interest at the rate of 10% per
annum. Ownership is not expected to be transferred at the end of lease term. The lease rentals are payable in
semiannually in arrears. There is no financial restriction in the lease agreement.
W-1: Lease schedule
Date Instalment Principal Interest @ 10%per annum Balance
--------------------------------- Rs. in million ----------------------
1-Jul-17 306.78
31-Dec-17 48.00 32.66 15.34 274.12
30-Jun-18 48.00 34.29 13.71 239.83
31-Dec-18 48.00 36.01 11.99 203.82
30-Jun-19 48.00 37.81 10.19 166.01
W-2: present value of lease payments
Rs. in million
PV of Rs. 48 million over 7 installment [48×{(1–1.05–7)÷0.05}] 277.75
PV of Rs. 15 million over 3 installment [15×{(1+.05–8)+ 15×{(1+.05–
9)+15×{(1+.05–10)] 29.03
306.78
W-3: Right of use asset Rs. in million
Present value of lease rental 306.78
Depreciation (306.78÷5) (61.356)
245.424
Lease (Lessor)
Q. GUAVA LEASING LIMITED (GLL)
Guava Leasing Limited (GLL), had leased a machinery to Honeyberry Limited (HL) on 1 July 2017 on the
following terms:
The non-cancellable lease period is 3.5 years. Each semi-annual lease instalment of Rs. 48 million is
receivable in arrears.
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.
The rate implicit in the lease is 10% per annum. The useful life of machinery is 6 years.
The unguaranteed residual value at the end of lease term is estimated at Rs. 20 million. GLL incurred a direct
cost of 10 million and general overheads of 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.
A.
Guava Limited
Rs. in million
628
Reconciliation:
Lease payments [(48×5)+(15×3)] 285.00
Residual value of machinery 20.00
Gross investment in lease 305.00
Unearned lease income (Bal.) (51.65)
Net investment in lease (W-1) 253.36
Current portion of net investment in lease (Bal.) (72.43)
(W-1) 180.92
Maturity analysis - contractual undiscounted lease payments:
Less than one year (48×2) 96.00
One to two years (48×2) 96.00
Two to three years (48+15) 63.00
Three to four years [(15×2)] 30.00
285.00
Note: URV is not a part of lease payments.
W-1: Amortization Schedule
Installment Interest Closing
Date --------------------- Rs. in million ---------------------
1-Jul-17 319.06
31-Dec-17 48.00 (15.95) (287.01)
30-Jun-18 48.00 (14.35) (253.36)
31-Dec-18 48.00 (12.67) (218.03)
30-Jun-19 48.00 (10.90) (180.92)
W-2: Net investment in lease on 1 July 2017
Rs. in million
PV of Rs. 48 million over 7 installment [48×{(1–1.05–7)÷0.05}] 277.75
PV of Rs. 15 million over 3 installment [15×{(1+.05–8)+ 15×{(1+.05–9)+
15×{(1+.05–10)] 29.03
PV of Rs. 20 million of UGRV [20×1.05–10] 12.28
319.06
629
DEFINITIONS AND CONCEPTS
Recognition requirement for lessee [IFRS 16: 22]
A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a
lease liability representing its obligation to make lease payments.
Recognition Exemptions [IFRS 16: 5, 6 & 8]
A lessee may avail exemption from above recognition requirements in following cases:
a) Short term leases: A lease that, at commencement date, has a lease term of 12 months or less (including
extension option etc.). A lease that contains a purchase option is not a short-term lease. This exemption is
available to lessee by class of assets.
b) Leases of low value items (whether or not material to lessee): The leases for which the underlying asset is
of low value (e.g. telephones, laptop computers, and office furniture). If a lessee subleases an asset, or
expects to sublease an asset, the head lease does not qualify as a lease of a low-value asset. A lease of an
underlying asset does not qualify as a lease of a low-value asset if the nature of the asset is such that, when
new, the asset is typically not of low value. This exemption is available to lessee on lease by lease basis.
The lease payments associated with short term and low value item leases are charged as an expense on either a
straight-line basis over the lease term or another systematic basis (only if more representative).
Inception date & commencement date [IFRS 16: Appendix A] Inception date of the lease
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. The type of lease is identified on this date.
Commencement date of the lease
The date on which a lessor makes an underlying asset available for use by a lessee. The accounting treatment is
applied from this date.
Example:
J Limited enters into a contract for the lease of a car with K Leasing Limited on January 18th. K Leasing Limited
agrees to transfer the car in the name of J Limited on February 3rd. However, J Limited would have the right to use
the car as at February 22nd.
Required: Identify the inception date and commencement date of lease.
ANSWER:
Inception date: January 18th Commencement date of lease: February 22nd
Lease Term [IFRS 16: 18]
Lease term is the non-cancellable period for which a lessee has the right to use an underlying asset, together with
both:
• periods covered by an option to extend the lease if the lessee is reasonably certain to exercise
that option; and
• periods covered by an option to terminate the lease if the lessee is reasonably certain not to
exercise that option.
Example:
S Limited acquired a plant on lease for a non-cancellable period of 6 years. S Limited has right to extend the period
of lease further 4 years at the end of first 6 years.
Required:
Determine the lease term assuming that:
(a) It is reasonably certain that S Limited will not exercise extension option.
(b) It is reasonably certain that S Limited will exercise extension option.
ANSWER:
(a) 6 years
(b) 10 years
Economic life and useful life [IFRS 16: Appendix A]
630
Economic life is either:
• The period over which an asset is expected to be economically usable by one or more users; or
• The number of production or similar units expected to be obtained from the asset by one or
more users.
Useful life is either:
• The period over which an asset is expected to be available for use by an entity; or
• The number of production or similar units expected to be obtained from an asset by an entity.
Notice that useful life is entity specific concept and economic life is not. Useful life is relevant to calculation of
depreciation while economic life is one of the factors considered while classifying the lease contract.
Example B Limited acquired a second hand plant. The total maximum use of such plant is expected to be
12 years by one or more users. The plant has already been used for 4 years by previous owners. B Limited
intends to use the plant for 5 years and then wants to sell it to someone else.
Required: Determine economic life and useful life.
ANSWER:
Total economic life is 12 years (remaining 8 years). Total useful life for B Limited is 5 years.
Lease payments (including residual value guarantee) [IFRS 16: Appendix A]
Lease payments are payments made by a lessee to a lessor relating to the right to use an underlying asset
during the lease term, comprising the following:
• Fixed payments less any lease incentives;
• Variable lease payments that depend on an index or a rate;[e.g. if certain profit level is achieved]
• The exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
• 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:
• For the lessee, amounts expected to be payable by the lessee under residual value guarantees.
• For the lessor, any residual value guarantees provided to the lessor by the lessee, a party related
to the lessee or a third party unrelated to the lessor that is financially capable of discharging the
obligations under the guarantee.
“Residual value guarantee” 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.
Example
Adeel Limited (AL) acquired a machine on lease from Kashif Limited (KL) on following terms:
Down Payment Rs. 5 million
Annual Payments (in arrears) Rs. 8
million Lease Term 5 years
In addition to above information consider the following three independent scenarios:
Scenario 1: AL has guaranteed residual value of Rs. 10 million, although it expects to pay Rs. Nil as machine has
expected residual value of Rs. 15 million.
Scenario 2: AL has guaranteed residual value of Rs. 10 million, although it expects to pay only Rs. 3 million as
machine has expected to have market value of Rs. 7 million at end of lease term.
Scenario 3: AL has not guaranteed any residual value, however, M Limited (manufacturer of machine) has
guaranteed KL to purchase the machine at the end of lease term at Rs. 13 million if KL so desire.
631
Required: Calculate total lease payments for AL and KL for each of the above scenarios.
ANSWER:
Scenario 1:
For AL (Lessee): [5m + (8m x 5 years) + Nil] = Rs. 45 m
For KL (Lessor): [5m + (8m x 5 years) + 10m] = Rs. 55m
Scenario 2:
For AL (Lessee): [5m + (8m x 5 years) + 3m] = Rs. 48
m For KL (Lessor): [5m + (8m x 5 years) + 10m] = Rs.
55m Scenario 3:
For AL (Lessee): [5m + (8m x 5 years) + Nil] = Rs. 45
m For KL (Lessor): [5m + (8m x 5 years) + 13m] = Rs.
58m
Definitions relating to finance lease calculation [IFRS 16: Appendix
A] Example:
M Leasing Limited (MLL) leased an asset (fair value Rs. 285,000) to XYZ Limited for use at annual
rental (in arrears) of Rs. 80,000 for five years. MLL incurred initial direct costs of Rs. 5,227 on inception
of lease. MLL estimated the residual value of Rs. 30,000 at the end of lease term, however, only Rs.
20,000 is guaranteed by XYZ Limited. Interest rate implicit in lease is 14%.
Required: Calculate amounts relevant to finance lease from the above information for MLL.
ANSWER:
Residual value guarantee = Rs. 20,000
Lease payments [(80,000 x 5) + 20,000] = Rs. 420,000
Unguaranteed residual value [30,000 – 20,000] = Rs. 10,000
Gross investment in lease [420,000 + 10,000] = Rs. 430,000
PV of rentals [80,000 x (1-1.14-5) / 0.14] = Rs. 274,646

PV of RV guarantee [20,000 x 1.14-5] = Rs. 10,387
PV of URV [10,000 x 1.14-5] = Rs. 5,194
Net investment in lease [274,646 + 10,387 + 5,194] = Rs. 290,227
Unearned finance income
[430,000 – 290,227] = Rs. 139,773
Example [To calculate lease rental]

Sani Limited (SL) leased an asset having fair value of Rs. 3,500,000 from Khan Limited (KL) for a lease
term of 5 years. SL incurred initial direct costs of Rs. 60,000 and KL incurred initial direct costs of Rs.
40,000 separately.
KL estimates the residual value of the asset at the end of lease term to be Rs. 500,000 out of which 200,000 is
guaranteed by SL.
KL incorporates interest rate implicit in the lease of 15% while incremental borrowing rate of SL is 14%.
Required: Calculate annual rentals (equal) to be paid in arrears in the above lease arrangement.
Answer
Using the equations (from lessor’s perspective):
1–(1+0.015)—5
3500000 + 40000 = [𝑅 [ ] + 200,000(1.15)–5] + 300,000(1.15)–5
0.15
3,540,000= 3.35 R + 99,435 + 149,153
R = 3,540,000–9
3.35
,435–1 ,153
= 982511.
632
ACCOUNTING BY LESSEE
Example
On 1 January 2020, Multan Limited (ML) acquired a machine on lease from Vehari Leasing Limited
(VLL) for 3 years. The first annual instalment amounting to Rs. 35 million was paid on 1 January 2020
and two more subsequent annual instalments of Rs. 35 million are payable on 1 January each year.
ML incurred initial direct cost of Rs. 5 million. ML uses similar owned machines for 7 years and
depreciates them on straight line basis.
Interest rate implicit in the lease is not known to ML. However, ML’s incremental borrowing rate is 12%.
The machine shall be returned to VLL at the end of lease term. The estimated residual value of the
machine at the end of 3 years is estimated at Rs. 30 million, out of which ML has guaranteed Rs. 20
million.
ML is also obliged to incur decommissioning cost of Rs. 4 million at the end of the lease term. The pre‑
tax rate that reflects current market assessments of the time value of money and the risks specific to such
obligation is 10%.
Required: Prepare the journal entry at commencement date of lease in the books of ML.
Answer:
Date Particulars Debit Rs. m Credit Rs.
m
1 Jan 2020 Right of use asset 102.16
Bank (first instalment) 35
Bank (initial direct cost) 5
Lease liability (35 x (1-1.12-2)/0.12 59.15
Provision for decommissioning (Rs. 4m x 1.10- 3) 3.01
Note: Nothing is expected to be paid for residual value guarantee as expected residual value is
more than the amount guaranteed.
Example:
Use the data from previous example on Multan Limited (ML).
Required: Prepare journal entries reflecting subsequent measurement of right of use asset and provision for
decommissioning (assuming that provision was settled as estimated).
Date Particulars Debit Rs. m Credit

Rs. m
31 Dec 2020 Depreciation (Rs. 102.16m / 3 years) 34.05
Accumulated depreciation (ROU) 34.05
31 Dec 2020 Finance cost (Rs. 3.01m x 10%) 0.30
31 Dec 2022 Accumulated depreciation (ROU) 102.16
Right of use asset 102.16
31 Dec 2022 Provision for decommissioning 4
Bank 4
633
Subsequent measurement – lease liability [IFRS 16: 36 to 38]
After the commencement date, a lessee re-measures the lease liability by:
Increasing the carrying amount to reflect interest on the Dr. Interest expense
lease liability.
Cr. Lease liability
Reducing the carrying amount to reflect the lease Dr. Lease liability
payments made.
Cr. Bank
Variable lease payments that have not been included in the Dr. Expense
initial measurement of the lease liability are recognised in
the period in which the event or condition that triggers the (PL) Cr. Bank /
payments occurs. Accrual
Example
Use the data from previous examples on Multan Limited (ML).
Required: Prepare journal entries reflecting subsequent measurement of lease liability (assuming that
no payment was required to be paid at the end of lease term for residual value guarantee as expected
earlier).
634
ANSWER:
Date Particulars Debit Rs. m Credit Rs. m
31 Dec 2020 Interest expense 7.10
Lease liability 7.10
1 Jan 2021 Lease liability 35
Bank 35
31 Dec 2021 Interest expense 3.75
Lease liability 3.75
1 Jan 2022 Lease liability 35
Bank 35
W1 - Lease schedule (Payment in advance)
Opening balance Payment Net Balance Interest @ 12% Closing Balance
Payment Date Rs. m

01-Jan-20 94.15 (35) 59.15 7.10 66.25
01-Jan-21 66.25 (35) 31.25 3.75 35
01-Jan-22 35 (35) 0 0 0
Accounting for short term and low value item leases [IFRS 16: 6]
The lease payments associated with short term and low value item leases are charged as an expense on
either a straight-line basis over the lease term or another systematic basis (only if more representative).
Example
An entity leased a car under a ten months lease at Rs. 40,000 per month for first five months and Rs.
30,000 for next five months. The asset had fair value of Rs. 3,000,000. The ownership will not transfer
to the lessee. Required: Briefly explain the accounting treatment assuming that the entity wants to
apply recognition exemption under IFRS 16.
ANSWER:
The above lease meets short term lease definition as lease term is less than 12 months and ownership
will not be transferred at the end of lease term. The monthly expense on straight line basis would be:
[(Rs. 40,000 x 5 months) + (Rs. 30,000 x 5 months )] / 10 months = Rs. 35,000 per month
Date Particulars Debit Rs. Credit Rs

For each of first lease
Five months Rental Expense 35,000
Prepayment 5,000
Cash/Bank 40,000
For each of next five months Lease rental expense 35,00
Cash/Bank 30,000
Prepayments 5,000
Example
S Limited (SL) leased a laptop computer under a 24 months lease at Rs. 2,500 per month. A sum of Rs.
4,800 was also deposited as non-refundable down payment. The fair value of the laptop computer is Rs.
95,000. SL determines that it is low value asset.
Required: Briefly discuss the accounting treatment assuming that SL want to apply recognition
exemption under IFRS 16.
ANSWER:
When the lessee makes payments to lessor over 24 months, the lessee shall account for the payments in
635
equal instalments (straight line basis). The monthly expense on straight line basis would be:
[Rs. 4,800 + (Rs. 2,500 x 24 months )] / 24 months = Rs. 2,700 per month
On down Prepaid lease rental 4,800
payment Cash/Bank 4,800
For each Lease rental expense 2,700
monthly Cash/Bank 2,500
payment and
expense Prepaid lease rental 200
Disclosure [IFRS 16: 52 to 58 &

60] Requirement
A lessee shall disclose information about its leases for which it is a lessee in a single note or separate
section in its financial statements. However, a lessee need not duplicate information that is already
presented elsewhere in the financial statements, provided that the information is incorporated by cross-
reference in the single note or separate section about leases.
Specific amounts to be disclosed
A lessee shall disclose the following amounts for the reporting period:
a) depreciation charge for right-of-use assets by class of underlying asset;
b) interest expense on lease liabilities;
c) the expense relating to short-term leases. This expense need not include the expense relating
to leases with a lease term of one month or less;
d) the expense relating to leases of low-value assets. This expense shall not include the expense
relating to short-term leases of low-value assets;
e) the expense relating to variable lease payments not included in the measurement of lease liabilities;
f) income from subleasing right-of-use assets;

g) total cash outflow for leases;
h) additions to right-of-use assets;
i) gains or losses arising from sale and leaseback transactions; and

j) the carrying amount of right-of-use assets at the end of the reporting period by class of
underlying asset
Requirements of other Standards
If right-of-use assets meet the definition of investment property, a lessee shall apply the disclosure
requirements in IAS 40.
If a lessee measures right-of-use assets at revalued amounts applying IAS 16, the lessee shall disclose
the information specified in relevant disclosure of IAS 16 for those right of use assets.
Example:
On 1 April 2015 Acacia Ltd entered into the following lease agreement.
I. Plant with a fair value of Rs. 275,000 was leased under an agreement which requires Acacia Ltd to make
annual payments of Rs. 78,250 on 1 April each year, commencing on 1 April 2015, for four years. After
the four years Acacia Ltd has the option to continue to lease the plant at a nominal rent for a further three
636
years and is likely to do so as the asset has an estimated useful life of seven years. The present value of
the lease payments is Rs. 272,850. Acacia Ltd is responsible for insuring and maintaining the plant during
the period of the lease.
II. Office equipment with a fair value of Rs. 24,000 was leased under a non-cancellable agreement which
requires Acacia Ltd to make annual payments of Rs. 6,000 on 1 April each year, commencing on 1 April
2015, for three years. The lessor remains responsible for insuring and maintaining the equipment during
the period of the lease. The equipment has an estimated useful life of ten years. The present value of the
lease payments is Rs. 16,415. This lease is considered low value item lease by Acacia Ltd.
Acacia Ltd allocates finance charges on an actuarial basis. The interest rate implicit in the lease is 10%.
Required: Prepare all relevant extracts from Acacia Ltd.’s financial statements for the year ended 31
March 2016.
ACACIA Limited
Statement of Comprehensive Income
For the year ended 31 March 2016 Rs.
Depreciation [272,850 / 6 years] 45,475
Interest expense W1 19,460
Lease rental expense (low value item lease) 6,000
ACACIA Limited
As at 31 March 2016 Rs.
Non-current assets
Right of use [272,850 - 45,475] 227,375
Lease liability W1 135,810
Current liabilities
Lease liability W1 78,250

Maturity Analysis Rs.
234,750
W1 - Lease schedule (Payment in advance)

Opening balance Payment Net Balance Interest @ Closing Balance
Payment Date 10%
Rs.
01-Apr-15 272,850 (78,250) 194,600 19,460 214,060
01-Apr-16 214,060 (78,250) 135,810
e[include in Additional practice questions on page 330]
Example
Progress Limited acquired a machine from Fine Rentals Limited on January 3, 2016 under a lease
agreement extending over three years.
The agreement required them to make an initial deposit of Rs. 1,280,000 to be followed by three annual
payments of Rs.800,000 on 31 December each year starting from 2016.
The cash price of the machinery was Rs. 3,200,000 and Fine Rentals Limited added 12% interest which
was duly communicated to Progress Limited.
Required:
637
a) Compute the interest element and the capital portion of the annual repayments; and
b) Show the journal entries that will record the transaction resulting from the lease
agreement (excluding depreciation entries).
ANSWER
—3
PV of lease payments = 1,280,000+800,0001–(1+0.12) 0.12
= 3,201,465
Part (a)
Lease schedule (Payment in arrears)
Payment Date Opening Interest @ Rental Closing Capital
balance 12% payment Balance repayment
Rs. Rs.
03-Jan-16 3,201,465 (1,280,000) 1,921,465 1,280,000
31-Dec-16 1,921,465 230,576 (800,000) 1,352,041 569,424
31-Dec-17 1,352,041 162,245 (800,000) 714,286 637,755
31-Dec-18 714,286 85,714 (800,000) 0 714,286
478,535 (3,680,000) 3,201,465
Part (b) Journal entries

Date Particulars Dr. Rs. Cr. Rs.
03-Jan-16 Right of use (Plant & Machinery) 3,201,465
Bank 1,280,000
Lease liability 1,921,465
31-Dec-16 Interest expense 230,576
31-Dec-16 Lease liability 800,000
Bank 800,000
31-Dec-17 Interest expense 162,245
[include on page 285] Indicators of situations that individually or in combination could also lead to a
lease being classified as a finance lease (not always conclusive) are:
• Lessor’s losses associated with the cancellation of lease are borne by the lessee;
• Gain or losses from the fluctuation in fair value accrue to the lessee as discussed above that risks
and rewards are of lessee (as discussed above that risks and rewards are of lessee); and/or
• The lessee has the ability to continue the lease for secondary period at a rent that is
substantially lower than market rent.
Classification is not changed due to: [include at the end of Chapter]
• change in estimates (economic life, residual value etc.); and/or
• change in circumstances (e.g. default by lessee).
Example
Consider the following independent scenarios:
I. E Limited acquired a special customized engine on lease. The engine can only be used by E
Limited unless substantial modifications are made to the engine.
638
II. P Limited acquired an asset on lease with fair value of Rs. 10 million and present value of
lease payments is Rs. 9.7 million.
III. M Limited acquired an asset on lease economic life of 20 years while M Limited wants to use
the asset only for 17 years. The company has no intention to purchase the asset at the end of
its lease term.
IV. T Limited acquired an asset on lease with an option to buy the asset at the end of lease term for
Rs. 12 million. The fair value of the asset at the end of lease term is expected to be at least Rs. 55
million.
Required: Identify the above leases as either finance or operating leases from the perspective of lessor.
ANSWER:
All of the above leases are likely to be classified as finance lease because:
i. The underlying assets is of such specialised nature that only lessee can use it without
major modifications.
ii. The present value of lease payments amounts to substantially all of the fair value of underlying asset.
iii. The lease term is for the major part of the economic life of the underlying asset.
iv. As purchase options is sufficiently lower than the fair value at the date of option, it is
reasonably certain that this option will be exercised by the lessee.
Example
Jhang Construction has leased a cement lorry. The cash price of the lorry would be Rs.3,000,000. The
lease is for 6 years at an annual rental (in arrears) of Rs.600,000. The asset is believed to have an
economic life of 7 years. The interest rate implicit in the lease is 7%.
Jhang Construction is responsible for maintaining and insuring the asset.
Required: Identify the type of lease Jhang Construction has entered into and state the reasons.
ANSWER:
The lease is a finance lease. The reasons are:
• The lease is for a major part of the life of the asset (6 out of 7 years).
• Jhang Construction must insure the asset. It is exposed to one of the major risks of ownership of
the asset (its loss).
• The present value of the lease payments is 95.3% [(600,000 x (1-1.07-6/0.07))/3,000,000] of the
fair value of the asset at the inception of the lease.
Accounting for finance lease (manufacturer or dealer lessor) [IFRS 16: 71 to 75]
A manufacturer or dealer lessor shall account for the finance lease as follows:
Initial recognition – at commencement date of lease. Dr. Net Investment in lease
Dr. Cost of Sales [Cost – PV of URV] (Note 1)
Cr. Sales [Lower of fair value & PV
of lease payments] (Note 2) Cr.
Inventory [at Cost]
639
Note 1: Selling profit or loss [Revenue – Cost of Sales] is recognised in PL regardless of whether the lessor transfers the
underlying asset as described in IFRS 15
Note 2: Manufacturer or dealer lessors sometimes quote artificially low rates of interest in order to attract customers. The
use of such a rate would result in a lessor recognising an excessive portion of the total income from the transaction at the
commencement date(which is against the prudence concept)(the use oflower rate results into higher present value and vice
versa) If artificially low rates of interest are quoted, a manufacturer or dealer lessor shall restrict selling profit to that which
would apply if a market rate of interest were charged.
Example:
Multan Motors (MM) is a car dealer. It sells cars on cash and also offers a certain model for sale by lease.
MM sold a car on lease on 1 January 2022.The following information is relevant:
Price of the car in a cash sale Rs. 2,000,000

Cost of the car to MM Rs.
1,500,000
Lease option:
Annual rental Rs. 764,018
Lease term 3 years
Interest rate implicit in the lease 10%
Estimated residual value (unguaranteed) Rs. 133,100
Costs incurred by MM in setting up the lease (IDC) Rs.20,000
The market rate of interest is also 10%.
Required: Prepare journal entries at commencement date of lease term forMM.
ANSWER:
Dr. Cr.
Date Particulars
Rs. Rs.
1 Jan 2022 Net investment in lease 2,000,000
Cost of sales [1,500,000 – 100,000] 1,400,000
Revenue 1,900,000
Inventory 1,500,000
1 Jan 2022 Selling expenses 20,000
Bank 20,000
Workings Rs.
Present value of lease payments [Rs. 764,018 x (1-1.10-3)/0.10] 1,900,000
Revenue shall be recognised at lower of fair value (Rs. 2,000,000) and PV of leasepayments(Rs. 1,900,000).
Present value of unguaranteed residual value [Rs. 133,100 x 1.10-3] 100,000
Net investment in lease (Rs. 1,900,000 + 100,000) 2,000,000
Note: The lease schedule shall be made using 10% rate.
Example:
640
ANSWER:
Karachi Motors (KM) is a car dealer. It sells cars on cash and also offers a certain model for sale by lease. KM
sold a car on lease on 1 January 2022.The following information is relevant:
Price of the car in a cash sale Rs. 2,000,000

Cost of the car to KM Rs. 1,500,000
Lease option:
Annual rental Rs. 764,018
Lease term 3 years
Interest rate implicit in the lease 10%
Estimated residual value (unguaranteed) Rs. 133,100
Costs incurred by KM in setting up the lease (IDC) Rs.20,000
Date Particulars Dr. Cr.

Rs. Rs.
1 Jan 2022 Net investment in lease 1,831,940
Cost of sales [1,500,000 – 87,515] 1,412,485
Revenue 1,744,425
Inventory 1,500,000
1 Jan 2022 Selling expenses 20,000
Bank 20,000
Disclosure – Additional Information

This additional information (qualitative & quantitative) includes, but is not limited to, information that
helps users of financial statements to assess:
• the nature of the lessor’s leasing activities; and
• how the lessor manages the risk associated with any rights it retains in underlying assets,
in particular, its risk management strategy for its rights in underlying assets.
The above additional disclosure are applicable to both, finance lease and operating lease.
Accounting for operating lease [IFRS 16: 81 to 86 & 88]
Lease Income Lease income from operating lease shall be recognized on a straight-line basis over the lease term
unless another systematic basis is more representative of benefit derived from the leased asset
Related costs A lessor shall recognise costs, including depreciation, incurred in earning the lease
income as an expense.
Depreciation The deprecation is to be charged as per normal depreciation policy as per IAS 16 or IAS
and impairment 38. Similarly, IAS 36 shall be applied for impairment.
Initial direct costs A lessor shall add initial direct costs incurred in obtaining an operating lease to the
carrying amount of the underlying asset and recognise those costs as an expense over
the lease term on the same basis as the lease income.
Presentation in SFP A lessor shall present underlying assets subject to operating leases in its statement of
financial position according to the nature of the underlying asset.
Manufacturer A manufacturer or dealer lessor does not recognise any selling profit on entering into an
or dealer lessor operating lease because it is not the equivalent of a sale.
Example
641
Jay Limited entered into an operating lease agreement with Mojo Limited on 1 January 2021 incurring
the initial direct cost of Rs. 30,000.
The lease was over a plant (which Jay Limited had bought on 1 January 2020 for Rs. 1,600,000). The
terms of the lease are as follows:
Commencement date: 1 January 2021
Lease term 3 years
Fixed lease instalments, payable as follows:
- 31 December 2021 Rs. 200,000
- 31 December 2022 Rs. 220,000
- 31 December 2023 Rs. 300,000
Plant has total useful life of 8 years and is being depreciated using straight line method.
Required: Prepare the journal entries in the books of Jay Limited from the start to end of lease term.
Jay Limited year-end is 31 December.
ANSWER:
01-Jan-21 Plant 30,000
Bank (initial direct costs) 30,000
31-Dec-21 Depreciation W2 210,000
31-Dec-21 Bank 200,000
Lease rental receivable 40,000
Lease rental income (PL) W1 240,000
31-Dec-22 Bank 220,000

31-Dec-23 Bank 300,000
W1 - Annual lease income (straight line basis) Rs.

First rental 200,000
Second rental 220,000
Third rental 300,000
720,000
Lease term 3 years
240,000
W2 - Depreciation Rs.
On initial direct costs capitalised [Rs. 30,000 / 3 years] 10,000
On cost of plant [Rs. 1,600,000 / 8 years] 200,000
210,000
Example
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.
642
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.
Note: Rentals will be calculated by 10% implicit rate . However lease calculation will be by using rate of
14%. ANSWER:
JOURNAL ENTRIES
01-Jan-18 Net investment in lease 3,483,079
Cost of sales [300,000 x 85% x 12 units] 3,060,000
Sales revenue 3,483,079
Inventory 3,060,000
01-Jan-18 Bank 1,316,028
Net Investment in lease 1,316,028
31-Dec-18 Net Investment in lease 303,387

Finance income (PL) 303,387
FV = PV of LP + PV of URV
1–(1+0.1)—2
3,600,000 = 𝑥 + 𝑥 [ ]
0.1
X= 13,160,28
Net investment in lease [Rs. 1,316,028 x (1 – 1.14-3+1) / 0.14) + 1] Rs. 3,483,079

Revenue shall be measured at lower of fair value Rs. 3,600,000 (i.e. Rs. 300,000 x 12 units) and present
value of lease payments Rs. 3,483,079.
Since market rate of interest is 14% and SL has quoted lower interest rate. The present value shall be
calculated using market rate of interest.
W2: Lease schedule (Payment in advance)
Opening Payment Net Interest @ Closing Balance
Payment Date balance Balance 14%
Rs.
01-Jan-18 3,483,079 (1,316,028) 2,167,051 303,387 2,470,439
01-Jan-19 2,470,439 (1,316,028) 1,154,411 161,617 1,316,028
01-Jan-19 1,316,028 (1,316,028) (0)
Disclosure [IFRS 16: 89 to 97]
Disclosure – Finance Lease

• The following amounts are to be disclosed (preferably in tabular format):
selling profit or loss;

• finance income on the net investment in the lease; and
• income relating to variable lease payments not included in the measurement of the
net investment in the lease.
Changes in net investment in lease
A lessor shall provide a qualitative (means whether an amount is still considered good) and quantitative
explanation (any change in rental because of e.g modifies caption) of the significant changes in the carrying
amount of the net investment in finance leases.
643
PAST PAPERS
Alluring Limited (AL) is considering to enter into an arrangement with Charming Limited (CL) for the use of a photocopy machine
for a period of five years. The initial draft contract fulfils all conditions to be classified as a lease contract. However, the following
additionalterms are under consideration between the parties for inclusion in the contract:
(i) Instead of fixed rentals, the lease rental would be based on the number of photocopiesproduced.
(ii) The machine will be placed in a common area where neighbouring office can also utilize it, by paying
charges to CL.
(iii) AL will have the right to terminate the contract after three years.
(iv) CL will have the right to replace the machine with another machine.
Required:
For each additional term under consideration, evaluate whether its inclusion would affect the classification of the
contract as a lease. (08)
644
Lease Part 3:
Lease Classification
Identifying whether entity has a lease
At inception of a contract, an entity shall assess whether the contract is, or contains, a lease.
Definition of lease contract:
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified
asset for a period of time in exchange for consideration.
Is the asset identified
a. Identification can be explicit or implicit: the contract might name a specific asset (e.g specific serial
numbers of asset (explicit identification) or a specific asset could simply be implied through it being made
available to the entity (implicit identification) e.g supplier has only one asset i.e.factory or generator which
can be given away) that is capable of being used to meet the contract terms.
b. Portions of asset can be identified: An identified asset could be just a portion of an asset if the portionis
physically distinct (eg floor of a plaza). An identified asset cannot, however, simply be a portion of asset’s
capacity, unless the portion of asset’s capacity is physically distinct or if the portion of the capacity is
substantially all of the asset’s capacity (e.g capacity portion of a fiber optic cable is unlikely to be an
identified asset.)
c. Assets are not considered as ‘identified’ if supplier has substantive right of substitution:
A supplier’s right to substitute assets is considered substantive if the supplier has both :
 Practical ability to substitute (for example, asset with specialized nature cannot be substituted) ; and
 Would benefit economically if it substituted the asset (i.e. benefits of substitution exceeds cost of
substitution)
Example 1:
A plaza has 8 floors. First 2 floors are given on rent. However, owner (supplier) has right to substitute these
two floors if a new customer provides higher rent and then transfer first customer to other floors of the plaza
(or supplier has more than one vehicles and he can substitute them if he gets higher rent from another
customer)
Example 2:
If an asset is located at customer premises then it is very difficult and costly to substitute the asset by the
supplier (it could be an example that substitution rights are not substantive)
If the right of supplier is considered to be substantive based on above criteria, the asset is not identified
and thus there is no lease.
Important note: If it is difficult to determine whether a supplier’s right to substitute is substantive or not,
wemust assume that the “substitution right is not substantive”
Does the customer (lessee) has the right to “control the use’ of the asset?
The customer (lessee) shall be deemed to have the right to “control the use of asset” if:
i. He has a right to obtain substantially all the benefits from the use of the asset; and
ii. He has a right to direct the use of asset
i. The right to substantially all of the benefits
When assessing whether the customer (lessee) has the right to obtain substantially all the economic
benefits, it does not matter whether it can obtain these benefits directly or indirectly. This means that the
entity could obtain the benefits from using the leased asset (direct usage) or, for example, sub-leasing the
asset (indirect usage). The phrase ‘all of economic benefits’ refers to the benefits from both the primary
output and also any secondary output (i.e. it includes the inflows expected from, for example, the sale of
by-products).
645
e.g. If there is a factory of a supplier and customer has only contracted for a specific output and the
remaining output belongs to other customers then one specified customer do not have a right to
substantially all the benefits (which means asset is not in control of customer and therefore there is no
lease, it is simply a service contract)
Important Note:
The fact that the contract may require the customer (lessee) to pay the supplier (lessor) some of the benefits
earned from using the asset does not mean that the customer has not obtained substantially all the
economic benefits from using the asset. Instead, when assessing whether the customer has the “right to
receive substantially all the benefits’. the gross benefits received by the lessee (not the benefits net of any
portion thereof that must be paid over to the lessor or any third party) are considered. If any portion of the
benefits are to be paid to the supplier or some other third party, this portion is simply accounted for as part
of the consideration paid for the lease (means consider it as lease payments.)
ii. The right to direct the use: The customer (lessee) is deemed to have a right to direct the use of
an asset
a. if customer (lessee) has the right to direct how and for what purpose the asset is used; or
b. if the ‘how and for what purpose’ is already pre-determined, then:
i. if the customer has the right to operate the asset (or direct others in this regard)
ii. if customer designed the asset and its design predetermines the ‘how and for what
purpose”
Example: Substantive substitution right

ABC Ltd enters into a 5 year contract with a freight carrier (XYZ Ltd.) to transport a specified quantity of
goods. XYZ Ltd. uses rail cars of a particular specification, and has a large pool of similar rail cars that can
be used to fulfil the requirements of the contract. The rail cars and engines are stored at XYZ Ltd. premises
when they are not being used to transport goods. Costs associated with substituting the rail cars are minimal
for XYZ Ltd.
Required: whether the contract contains a lease.
Answer:In this case, because the rail cars are stored at XYZ Ltd. premises, it has a large pool of similar rail
cars and substitution costs are minimal, the benefits to XYZ Ltd. of substituting the rail cars would exceed
the costs of substituting the cars.
Therefore, XYZ Ltd. substitution rights are substantive and the arrangement does not contain a lease.
Low Value asset:

The underlying asset is not highly dependent on, or highly interrelated with other assets.
(Means we cannot break the aero plane into seats , engines etc and say these are individually low value
assets.)
Example 1:
Lease commencement date 01-01-2018.
There are following lease payments in the contract:60,000 in first year in arrears.
72,000 in second year in arrears.84,000 in fourth year in arrears.
Rate = 10%
Lease is not for an asset considered as low value.
Required:
Prepare amortization table with respect to lessee.
Answer 1:
646
PV of lease payment = 60,000 (1+0.1)-1 + 72,000 (1+0.1)-2 +84,000 (1+0.1)-4
=171,422
Date Rentals Principle Interest Balance

1.1.2018 171,422
31.12.2018 60,000 42,858 17,142 128,564
31.12.2019 72,000 59,144 12,856 69,420
76,362
31.12.2020 - - 6,942 (69,420+6,942)
31.12.2021 84,000 76,364 7,636 2
Entries of last two years:31-12-2020

Interest payable 6,942
31-12-2021
Interest payable 6,942
Lease liability (76,364-6.942) 6,9420
Cash 84,000
Example 2:
Lease commencement date 01-01-2019.
There are seven annual lease rentals of Rs. 60,000 in arrears to be payable under the lease contract.
However, no rentals are payable in fourth and fifth year of lease.

Rate = 10%
Required:
Answer 2:
PV of lease payments: = 60,000 [1-(1+0.1)-3]+ 60,000 [1-(1+0.1)-4] x (1+0.1)-5
0.1 0.1
=267,305

1.1.2019 - - - 267,305
31.12.2019 60,000 33,269 26,731 234,036
31.12.2020 60,000 36,596 23,404 197,440
31.12.2021 60,000 40,256 19,744 157,184
31.12.2022 172,902
- - 15,718 (157,184+15,718)
31.12.2023 190,192
- - 17,290 (172,902+17,290)
31.12.2024 60,000 40,981 19,019 149,192
31.12.2025 60,000 45,079 14,921 104,132
31.12.2026 60,000 49,587 10,413 54,545
31.12.2027 60,000 54,545 5,455 -
Entry on 31.12.2024:
Interest payable(15,718+17,290) 33,008
Lease liability (40,981-33,008) 7,973
647
Cash 60,000
Example 3
On 1 Feb 2019, CCL entered into a lease agreement for non-cancelable period of 2.5 year with effect from
01-03-2019. Under the agreement 8 installments of 12 million are to be paid quarterly in arrears
commencing from end of 3rd quarter i.e 30-11-2019.
Interest rate implicit is 15% p.a which is not known to lessee (CCL). Incremental borrowing rate of CCL
is 16% p.a. On 1 April 2019, CCL completed installation of machine at a cost of 4 million and put it into
use.
Required:
Answer 3:
PV of lease payment = 12 [1-(1+0.04)-8]
0.04
= 80.79 (1 + 0.04)-2
= 74.70

Rs. In million
1-3-2019 - - - 74.70
31-5-2019 - - 2.99 77.69
31-8-2019 - - 3.11 80.80
30-11-2019 12 8.77 3.23 72.03
28-2-2020 12 9.12 2.88 62.91
31-5-2020 12 9.48 2.52 53.43
31-8-2020 12 9.86 2.14 43.57
30-11-2020 12 10.26 1.74 33.31
28-2-2021 12 10.67 1.33 22.64
31-5-2021 12 11.09 0.91 11.55
31-8-2021 12 11.54 0.46 -
Example 4 ;
Lease commencement date =1-1-2018Lease term =3 years
10 quarterly instalments of Rs. 10,000 each in advance starting from 1-7-2018.Rate = 12%
Required:
Answer 4:
PV of lease payment = 10,000+10,000 [1-(1+0.03)-9]
0.03
= 87,861 (1 + 0.03) -2
= 82,818

1-1-2018 - - - 82,818
1-4-2018 - - 2,485 85,303 (82,818 + 2,485)
1-7-2018 10,000 7,441 2,559 77,862
1-10-2018 10,000 7,664 2,336 70,198
1-1-2019 10,000 7,894 2,106 62,304
648
1-4-2019 10,000 8,131 1,869 54,173
1-7-2019 10,000 8,375 1,625 45,798
1-10-2019 10,000 8,626 1,374 37,172
1-1-2020 10,000 8,885 1,115 28,287
1-4-2020 10,000 9,151 848 19,136
1-7-2020 10,000 9,426 574 9,710
1-10-2020 10,000 9,709 291 -
Example 5:
Lease commencement date =1-4-2019
Lease term =4 years
7 semiannual instalments of Rs. 8,000 each in advance starting from 1-10-2019.
Lessee’s incremental borrowing rate = 13.731%
Required:
Answer 5:
PV of lease payment = 8,000+8,000 [1-(1+0.068655)-6] [13.731 / 2 = 6.8655]
0.068655
= 46,291 (1 + 0.068655)-1
= 43,317

1-4-2019 43,317
1-10-2019 8,000 5,026 2,974 38,291
1-4-2020 8,000 5,371 2,692 32,920
1-10-2020 8,000 5,740 2,260 27,180
1-4-2021 8,000 6,134 1,866 21,046
1-10-2021 8,000 6,555 1,445 14,491
1-4-2022 8,000 7,005 995 7,486
1-10-2022 8,000 7,486 514 -
Q. (a) Customer enters into a 15-year contract with supplier for the right to use a specified amount of
capacity within a cable connecting Hong Kong to Tokyo. The specified amount is equivalent to customer
having the use of the full capacity of three fibre strands within the cable (the cable contains 15 fibres with
similar capacities). Supplier makes decisions about the transmission of data (i.e. supplier lights the fibres,
makes decisions about which fibres are used to transmit customers traffic and makes decisions about the
electronic equipment that supplier owns and connects to the fibres).
Required: Identify whether the contract is or contains a lease. (5)
(b) Customer enters into a contract with supplier for the use of a truck for one week to transport cargo
from Narowal to Sahiwal. Supplier does not have substitution rights. Only cargo specified in the contract
is permitted to be transported on this truck for the period of the contract. The contract specifies a
maximum distance that the truck can be driven. Customer is able to choose the details of the journey
(speed, route, rest, stops, etc.) within the parameters of the contract. Customer does not have the right to
continue using the truck after the specified trip is complete.
The cargo to be transported, and the timing and location of pick up in Narowal and delivery in Sahiwal are
specified in the contract.
Customer is responsible for driving the truck from Narowal to Sahiwal.
Required: Identify whether the contract is or contains a lease. (5)
649
A. (a) Supplier makes all decisions about the transmission of its customers’ data, which requires the use of
only a portion of the capacity of the cable for each customer. The capacity portion that will be provided to
customer is not physically distinct from the remaining capacity of the cable and does not represent
substantially all of the capacity of the cable. Consequently, customer does not have the right to use an
identified asset.
The contract does not contain a lease.
(b) Customer has the right to use the truck for the duration of the specified trip.
There is an identified asset. The truck is explicitly specified in the contract and supplier does not have
the right to substitute the truck.
Customer has the right to control the use of truck throughout the period of use because:
a) Customer has the right to obtain substantially all of the economic benefits from use of the truck
over the period of use. Customer has exclusive use of the truck throughout the period of use.
b) Customer has the right to direct the use of the truck because the condition exists How and for
what purpose the truck will be used (i.e. the transportation of specified cargo from Narowal to
Sahiwal within a specified timeframe) is predetermined in the contract. Customer directs the use
of the truck because it has the right to operate the truck (for example speed, route, rest stops)
throughout the period of use. Customer makes all of the decisions about the use of the truck that
can be made during the period of use through its control of the operations of the truck.
The contract contains a lease of a truck.
Because the duration of the contract is one week, this lease meets the definition of a short term lease.(i.e.
It is lease but definitely short term lease )
650
REVENUE FROM CONTRACTS WITH CUSTOMERS (IFRS 15)
IFRS replaced IAS 18 and IAS 11.
Revenue: Income arising in the course of an entity’s ordinary activities.
Customer: is a party that has contracted with an entity to obtain the goods or services that are an output of the
entity’s ordinary activities.
Core Principle of IFRS 15: is that an entity recognizes revenue to reflect the transfer of goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services.
Transfer of goods or services occur when the customer obtains control of goods.
Control is obtained when the customers has the ability to direct the use of and obtain substantially all remaining
benefits from the asset (asset in this IFRS 15 covers both goods and services). (Goods may be tangible or
intangible).
Performance obligation: is a promise in a contract with customer to transfer to customer either:
 A good or service (or a bundle of goods or services) that are distinct; or
 A series of distinct goods or services that are substantially the same and that has the same pattern of
transfer to customer (e.g electricity and internet services)
Five step model [Para 2 of IFRS Part A1]
Applying the above core principle involves following a five step model as follows:
Step 1: Identify the Contract with a Customer:
Step 2: Identify the separate performance Obligations in the
Contract:Step 3: Determine the Transaction Price:
Step 4: Allocate the transaction price to each performance obligation
Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation.
Example: On 1 Dec. 2001, Wasim receives an order from a customer for a computer as well as 12 months’
technical support. Wasim delivers the computer (and thus control) to the customer on same date. The computer
sells for 30,000 and technical support for 12,000 per annum. The customer paid 42,000 upfront. Discuss how
revenue should be recognized for this transaction during the year ended 31.12.2001.
Solution:
Below is how five steps to be applied in this transaction:
Step 1: Identify the Contract with a Customer: there is an agreement between Wasim and its customer for goods
and services.
Step 2: Identify the performance Obligations in the Contract: there are two performance obligations in the
contract;
 Computer; and
 Technical support
Step 3: Determine the Transaction Price: it is 42,000
Step 4: Allocate the transaction price to each performance obligation based on standalone prices:
no need for any allocation as the transaction price and standalone price is same (will be discussed later).
Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation: control over the
computer has passed to the customer on 1 December 2001, therefore revenue of 30,000 should be recognized on
that date. The technical support is provided over time so revenue should be recognized over time. During the year
ended 31 December 2001, revenue of 1,000 (12,000 x 1/12) should be recognized related to technical support.
Example:
651
On 01.01.2016 UFONE gives a bundle offer to a customer as follows:
 A free hand set on 01.01.2016; plus
 12 months’ network services for Rs. 100 per month (means total revenue is 100 x 12 = 1200) Let’s assume
standalone prices if goods and services are sold separately, are:
Handset = 300
Network services (80 x 12) = 960
Total =1,260
Transaction date is 1.01.2016
Required: Explain how to account for the revenue in the above scenario.
Solution:
There are two performance obligations; hand set and network services.
Transaction price is 1,200. This transaction price is to be allocated between both performances obligations
based on their respective standalone prices as follows:
Performance Standalone Allocated transaction revenue Billings
obligations price price
Hand set 300 285.7 (300/1,260 x 1,200) 285.7* -
Network services 960 (80 x 12) 914.3 76.2 / month** 100 / month
1,260 1,200
*recognize when handset is delivered.
**recognize as the services are delivered.
Further explanation of five step model

(1) Step 1: Identify the Contract with a Customer:
A contract is an agreement between two or more parties that creates enforceable rights and
obligations. Contract may be written or oral (or as per business practices; e.g. an invoice).
(2) Step 2: Identify the performance Obligations in the Contract:
A contract includes promises to transfer goods or services to a customer. E.g. a promise to deliver a good
or service.
(3) Step 3: Determine the Transaction Price:
The transaction price is the amount of consideration in a contract to which an entity expects to be entitled
in exchange for transferring promised goods or services to a customer.
Transaction price is also adjusted for the effects of time value of money if the contract includes a significant
financing component. In addition, transaction price is also adjusted for any consideration payable to the customer
(further discussion later on)
Time value of money:
Revenue is the market price less any trade discount allowed.
If a sale is a cash sale, the revenue is the immediate proceeds of the sale. If a sale is a normal credit sale, the
revenue is the expected future receipt.
However, in some cases when the payment is deferred, the cash sale price might be less than theamount of
cash that will eventually be received.
The difference between the total sale value and the cash price of the consideration is recognised as interest
income. However, this adjustment is only required if the period between transfer of goods and receipt of cash is
equal to or more than one year.
652
Example: Deferred consideration
An enterprise sells a machine on 1 January 2015. The terms of sale are that the enterprise will receive Rs. 5
million on 31 December 2016 (2 years later).
An appropriate discount rate is 6%.
Solution:
1 January 2015 – Initial recognition
5,000,000 x (1 + 0.06)-2 = 4,449,982

Revenue 4,449,982
31 December 2015
Recognition of interest revenue Rs. 4,449,982 @ 6% = 266,999
Receivables 266,999
Balance on the receivable
Rs.
Balance brought forward 4,449,982
Interest revenue recognised in the period 266,999
Carried forward 4,716,981
31December 2016
Recognition of interest revenue Rs. 4,716,981 @ 6% = 283,019
Receivables 283,019
Balance on the receivable
Rs.
Balance brought forward 4,716,981
Interest revenue recognised in the period 283,019
Consideration received (5,000,000)
Carried forward Nil
Example: Sale on extended credit terms
On 30 June 20X1 Hashim Limited sells goods to a customer on extended credit terms. The customer is required to
pay Rs. 1 000, in full and final settlement, on 30 June 20X2. The cash sales price is Rs. 909 (present value using a
discount rate of 10%).
The financial year-end is 31 December.
Required:
Provide all related journal entries in Hashim Limited’s general journal
Solution
20X1 Journals 30 June 20X1 Debit Credit
Accounts receivable 909
Sales income 909
31 December 20X1
Interest income 45
(909 x 10% x 6/12)
20X2 Journals 30 June 20X2
Interest income 46
(909 x 10% x 6/12)
Bank 1,000
Accounts receivable 1,000
Example: sale on extended credit terms over 2 years
653
Shahid Limited sold a plant to a customer on 1 October 20X1 for Rs 300,000 payable at the end of 30 September
20X3. A market related interest rate is 10%.
Required:
Provide all journal entries in Shahid Limited’s general journal for each year ended 31 December.
Solution
W1. Calculation of the amount outstanding on date of sale (present value offuture instalments)
300,000 (1+0.1)-2 = 247,934
W2. Effective interest rate table
Year Amount outstandingat Interest revenue Receipt due atthe Amount outstanding
the beginning of the year per12 months end of the year atthe end of the year
1 247 934 W1 24 793 (0) 272 727
2 272 727 27 273 (300 000) 0
52 066 (300 000)
Debit Credit
1 October 20X1
Accounts receivable W1 247 934
Sales revenue 247 934
Recording the sale of goods (extended credit terms material)
31 December 20X1
Accounts receivable 6 198
Interest revenue(W2: 24 793 x 3/12) 6 198
Recording the interest earned on sale on extended terms:
20X2 Journals
31 December 20X2
Interest revenue(W2: 24 793 x 9/12 + W2: 27 273 x 3/12) 25 413
Recording the interest earned on sale on extended terms:
20X3 Journals
30 September 20X3
Interest revenue(W2: 27 273 x 9/12) 20 455
Recording the interest earned on sale on extended terms
Bank (Instalment received) 300 000
Accountsreceivable 300 000
Instalment received in full and final settlement
Example:
A customer purchases an item, on 1 January 20X1, to be paid for over a period of 3 years:
End of year 20X1 40 000
The present value of these payments (using a discount rate of 10%) amounts to100 000.
The year end is 31 December.
Required:
Show the related journal entries for the year ended 31 December 20X1, 20X2 and 20X3.
Solution to example: sales income and interest income (calculations)
20X1 Journals Debit Credit

1 January 20X1
Debtors (A) 100 000
654
Sales (I) 100 000
Sales revenue recognised at the beginning of 20X1
31 December 20X1
Debtors (A) 100 000
Interest (I) 100 000
Interest revenue recognised over the period of 20X1
Bank 40 000
Debtors (A) 40 000
Receipt of first instalment in 20X1
20X2 Journals
31 December 20X2
Debtors (A) 7 000
Interest (I) 7 000
Bank 50 000
Debtors (A) 50 000
Receipt of instalment in 20X2
20X3 Journals
31 December 20X3
Debtors (A) 2 700
Interest (I) 2 700
Bank 29 700
Debtors (A) 29 700
Receipt of instalment in 20X3
(4) Step 4: If there are more than one performance obligations in the contract; then allocate the
transaction price to each performance obligation on the basis of relative stand-alone selling prices of each
distinct good or services, promised in the contract.
Stand Alone Price means a price at which an entity would sell a promised good or service separately to a
customer (means market price if a product is sold separately) (without bulkdiscount).
Transaction Price means amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer; excluding amount collected on behalf of third parties
e.g. amount collected for owner (with bulk discount if any) or sales tax collected on behalf of government.
Transaction price may be equal to stand-alone price or may be different (normally less if there are more than
one distinct goods or services in a contract).
Collection of Revenue by Agent

Estate Agent Limited provides a service to a client whereby it collects monthly rentals of 15,000 on thelast day
of each month. The agent is entitled to a commission calculated at 10% of the rental and the remainder is paid
over to the property owner on the first day of the next month.
Required:
Provide the journal entries to show the collection of the rental and the revenue earned in the accounting records of
Estate Agent Limited.
Solution:
Collection of Revenue by Agents
Debit Credit
Bank Given 15,000
Revenue 15,000 × 10% 1,500
Rental payable to property owners 15,000 – 1,500 13,500
655
(Recording the collection of rentals and the portion of revenue)
Rental payable to property owners 13,500
Bank 13,500
(Recording the payment of the amount due to the owners)
(5) Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation.
An entity recognises revenue when (or as) it satisfies a performance obligation by transferring a promised good
or service to a customer (which is when the customer obtains control of that good or service). The amount of
revenue recognised is the amount allocated to the satisfied performance obligation; as a result of allocation of
transaction price in step 4.
 A performance obligation may be satisfied at a point in time (typically for transfer of goods) or
 A performance obligation may be satisfied over a period of time (typically for transfer of services).
Detailed discussion of IFRS 15:
(A) Identify the Contract [Para 9 of IFRS Part A1]
An entity shall account for a contract with customer only when all of the following criteria are met:
(a) The parties to the contract have approved the contract (in writing or orally etc) and are committed to
perform their respective obligations under the contract.
(b) Entity can identify each party’s rights (e.g goods and cash)
(c) Entity can identify the payment terms (e.g payment is to be made in 15 days)
(d) Contract has commercial substance. [An exchange of goods lack commercial substance when non-
monetary exchange occurs between entities in the same line of business to facilitate sales to customers e.g.
a contract between two oil companies that agree to an exchange of oil to fulfil demand from their
customers in different specified locations on a timely basis][it means contract will have commercial
substance if risks, timing or amount of the entity’s future cash flows is expected to change as a result of
contract]; and
Example 1
Two shopkeepers are independently operating mobile shops in different cities of Pakistan i.e. Lahore and Karachi.
The mobile orders are placed by customers online and shopkeepers than deliver the mobile using courier service.
The shopkeeper in Lahore has received an online order from a customer in Karachi. The mobile ordered is not
there in stock at Lahore therefore he requested the shopkeeper in Karachi to deliver mobile to his customer in
Karachi and in exchange in future he will deliver same mobile for Karachi shopkeeper for his customer in Lahore.
The exchange transaction has no commercial substance because amount of entity's future cash flows is not
expected, to change as a result of the contract.
(e) It is probable that 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.
Question from above can be: criteria to be fulfilled before general IFRS 15 model is applied
Treatment of consideration received; if contract does not meet the criteria for the identification of the
contract:
When a contract does not meet the above criteria and entity receives a consideration from the customer, the entity
shall recognise the consideration received as revenue only when either of the following events has occurred:
(a) The entity has no remaining obligation to transfer goods or services and all or substantially all of
consideration has been received and is non-refundable; or
(b) The contract has been terminated and consideration is non-refundable.
Example 2
Mr. Anjum agreed on March 1, 2016 to sell 5 cutting machines to Dawlance. Due to some deficiency in drafting
656
the agreement each party's rights cannot be identified. On March 31, 2016 Mr. Anjum delivered the goods and
these were accepted Dawlance. After 10 days of delivery i.e. April 10, 2016 Dawlance made the full payment and
the payment is non-refundable.
When should Anjum record the revenue?
Answer:
As Mr. Anjum cannot identify each party's rights .so revenue recognition should be delayed until the entity's
(Anjum's) performance is complete and substantially all of the consideration (cash) in the arrangement has been
collected and is non-refundable.
Therefore Mr. Anjum should record the revenue on April 10, 2016, as it is the date on which performance is
complete and non-refundable payment is received.
Example 3:
A CA firm agreed to supply consultancy services to a leading school. A non-refundable advance of Rs. 50,000 is
received at the time of agreement on January 1, 2012. The final payment terms were not clear as per agreement.
On 15 January 201 2 the contract was terminated.
When should CA firm record the revenue?
Answer
If a contract does not meet these criteria, revenue is recorded when the contract has been terminated and the
consideration received is nonrefundable.
Therefore, revenue should be recorded on 15 January 2012.
An entity shall recognise the consideration received as a liability until one of the events above occurs.
Does the contract exist if either of the party can terminate it? [Para 12 of IFRS Part A1]
A contract does not exist if each party (either seller or buyer) has the unilateral enforceable right to terminate a
wholly unperformed contract without compensating the other party.
A Contract will be wholly unperformed if the following criteria is met:
(a) Entity has not yet transferred any good or services, and
(b) Entity has not yet received or entitle to receive any consideration.
Example 3A
A shopkeeper agreed to deliver 30 computers to Mr. Umer within 3 months’ time. As per the agreement
shopkeeper can cancel the contract any time before delivering the computers. In case of cancellation shopkeeper
is not required to pay any penalty to Umer. Does the contract exist?
Solution:
A contract does not exist if each party (either buyer or seller) has an enforceable right to terminate a wholly
unperformed contract without compensating the other party.
As shopkeeper can cancel contract without compensating Umer so contract does not exist.
Combination of contracts (what are the situations in which two or more contracts can be combined as a
single contract) [Para 17 of IFRS Part A1]
The entity must combine two or more contracts entered into at or near the same time with the same customer and
treat them as a single contract if one or more of the following conditions are present:
1. The contracts are negotiated as a package with a single commercial objective.
2. The amount of consideration to be paid in one contract depends on the price or performance of the other
contract; or
3. The goods or services promised in the contracts are a single performance obligation.
Example 4:
657
Builder Co. enters into 2 separate agreements with customer X.
 Agreement 1: Deliver bricks to Customer X for Rs. 100,000
 Agreement 2: Build a wall for customer X for Rs. 7,000Normal price of constructing wall is Rs. 30,000.
Analysis
The two agreements should be combined and considered as a one contract because contracts are negotiated with a
single commercial objective of building a wall. The price of two agreements is interdependent. Builder Co. is
probably charging high price for bricks to compensate for the discounted (lower) price for building the wall.
Example 5:
X Limited enters into two separate contracts to transfer Products A and B to Y Limited. However, payment for the
delivery of Product A is conditional on the delivery of Product B.
Analysis
As the consideration to be paid in one contract depends on the performance of the other contract so both contracts
will be combined.
Example 6:
Combination of contracts for related services
Software Company A enters into a contract to sell software to Customer B. Three days later, in a separatecontract,
Software Company A agrees to provide consulting services to significantly customize the software to function in
Customer B's IT environment. Customer B is unable to use the software until the customization services are
complete.
Analysis
Software Company A determines that the two contracts are combined because they were entered into at or nearly
the same time with the same customer, and the goods or services in the contracts are a "single performance
obligation". Software Company A is providing a significant service of integrating the software and consulting
services into the combined item for which the customer has contracted. In addition, the software will be
significantly customized by the consulting services.
Examples of contracts which can be combined are as follows:
 Supply and installation of a machine
 Design and building of a house
 Supply of a software and then update the same.
 Supply of goods and services
[Even if contracts are combined we may identify more than 1 performance obligations]
{The significance of combining the contracts is that all contracts will have a single combined transaction price}
(Which will then be allocated if required).
Contract Modification [Para 18 of IFRS Part A1]
A contract modification is a change in scope or price (or both) of a contract that is approved by parties to the
contract. E.g. changes in design, quantity, timing or method of performance.
Examples include:
 Adding a swimming pool to a building
 Increase in number of items to be supplied
 Extending an IT service contract (e.g providing software and afterwards its installation)
When a contract modification be considered as a separate contract: [Para 20 of IFRS Part A1]
An entity shall account for a contract modification as a separate contract if both the following conditions are
present:
658
(a) Scope of contract increases because of addition of goods or services; and
(b) The price of the contract increases by an amount of consideration that reflects the entities standalone
selling prices (market price) of additional goods or services.
Example:
ABC Ltd 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
(means at delivery). 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. The price of the additional 30 products is 95
per product.
Required:
Compute the amount to be recognized as Revenue assuming as if the price of additional products reflects the
stand-alone selling?
Solution: 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.
Example 7:
Data Co enters into a 2 year data processing service contract with a customer for Rs. 200,000 (Rs. 100,000 per
year)
 At end of Year 1, the parties agree to extend the contract for another year for Rs. 80,000 per yearwhich is
also the stand alone selling price.
Required:
How should Data Co account for the contract extension?
Answer:
 Are the additional goods /services provided? - YES
 Does the price reflect the stand-alone selling price? - YES
Conclusion: Account for the additional service as a new separate contract.
Following revenue should be recorded in the relevant years.
Year 1 Rs. 100,000
Year 2 Rs. 100,000
Year 3 Rs. 80,000
Total Rs. 230,000
Example 8:
 On 1 September 2017 Anjum tyres enters into contract with Honda to sell 1,200 tyres for R. 12,000 (Rs. 10
per tyre).
 The tyres are to be supplied evenly over a 12 month period (100 tyres per month) at each month end
 On 1 November 2017, after 200 tyres have been delivered, the contract is modified to require the delivery
of an additional 50 tyres per month for Rs. 8 per tyre
 The stand-alone selling price of one tyre has declined to Rs. 8 per tyre.
Assuming year end of organization is December 31, calculate the revenue for 2017 and 2018.
659
Answer:
Are the additional goods/services provided? YES
Does the price reflect the stand-alone selling price? – YES
Anjum tyres Co accounts for the additional tyres as being sold under a new and separate contract:
Revenue 2017 2018 Total

Original contract 4,000 8,000
(4 months × 100 units × Rs. 10) (8 months × 100 units × Rs. 10) Rs. 12,000
Additional tyres 800 3,200
(2 months × 50 units × Rs. 8) (8 months × 50 units × Rs. 8) Rs. 4,000
Total Rs. 4,800 Rs. 11,200 Rs. 16,000
If contract modification is not treated as a separate contract [Para 21 of IFRS Part A1]
If contract modification is not treated as a separate contract because both the above conditions are not met;
then;
(a) If remaining goods or services are distinct from previous goods or services transferred; then an entity
shall account for the contract modification as if it were a termination of existing contract and creation of a
new contract.
Example: [Additional products for a price that does not reflect the stand alone selling price]
ABC Ltd 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
(means at delivery). 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
During the process of negotiating the purchase of an additional 30 products, the parties agree on a price of Rs.80
per product.
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.
Consequently, the contract modification is not accounted for as a separate contract. 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}.
(b) If remaining goods or services are not distinct; then an entity shall account for the contract
modification as if it were part of the existing contract.
Example: A contract to construct a house for a customer, considered to be a single performance
obligation. At the inception the entity expects the following:
Transaction price: 1,000,000
Expected costs: 800,000
Expected profit: 200,000
By the end of the first year, the entity has satisfied 50 percent of its performance obligation on the basis of cost
incurred i.e 400,000. Therefore, the amounts recognized for the first year would be:
Revenue: 500,000
Costs: 400,000
Profit: 100,000
660
At the end of the first year, parties agree to change the floor plan of the house. As a result, the contract revenue
and the expected costs increase by 100,000 and 75,000 respectively. This 100,000 does not reflect standalone
price.
The entity concludes that the remaining goods and services to be provided under the modified contract are not
distinct (because no new asset)
Consequently, the entity accounts for the contract modification as if it were part of the original contract. How to
account for the revenue for the first year?
Solution:
The entity will update its measure of progress.400,000 / 875,000 x 1,100,000 = 502,857
The entity would recognize additional revenue of 2,857 (502,857 - 500,000) at the end of first year.
[B] Identifying the Performance Obligations: [Para 22 of IFRS Part A1]
At the inception of contract, an entity shall assess the goods or services promised in a contract with customer and
shall identify as a performance obligation each promise to transfer to the customer either:
(a) a good or service that is distinct; or
(b) A series of goods or services that are substantially the same and have the same pattern of transfer to
customers (described by reference to promises satisfied over time)
Definition of distinct good or service:
A good or service is distinct if both the following criteria are met:
(a) Customer can benefit from the good or service either on its own or together with other resourcesthat are
readily available to customer; and
(b) Entity’s promise to transfer the good or service to the customer is separately identifiable from other
promises in the contract.
If a good or service is regularly sold separately; this would indicate that customers generally can benefit from the
good or service on its own or in combination with other available resources.
If promised good or service is not distinct, an entity must combine that good or service with other promised good
or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. In
some cases this would result in entity accounting for all goods or services as a single performance obligation.
Example 10:
Retailer Co sells a washing machine for Rs, 1,000. Retailer Co also provides the following free 'gifts':
 Free service and maintenance for 3 years
 1kg of washing powder every month for the next 18 months
 A discount voucher for a 50% discount if next purchase is made in the next 6 months.
Required: How many performance obligations are in the contract?

Solution:
There are 4 performance obligations as all, of the goods or services are distinct because the customer can benefit
from the good or service on its own and the entity's promise to transfer the good or service is separately
identifiable from other promises in the contract:
Following are the performance obligations:
 Washing machine
 Service and maintenance over the next 3 years means 36 months
 18kg washing powder over the next 18 months
 Discount voucher
Example 11:
A software house has agreed with Dawlance appliances that it will deliver a software and will also providesupport
661
service and software updates.
Analysis
There are 3 performance obligations as customer can benefit from each service independently and promises of
entity are separately identifiable. (i.e. 1) software; 2) support service; and 3) softwareupdates)
Example 12:
Mr. Y subscribes to a 12 months magazine subscription and receives a free watch. How many performance
obligations are in the contract?
Solution
There are two performance obligations
 12 months magazine subscription, and
 A watch
Revenue will be allocated to each of performance obligation based on their standalone selling price.
Example 13:
A property consultant agreed with Mr. Asif that "he will deliver a house to Mr. Asif within 1 year". If we godeep
down the contract we see that consultant is promising to:
 Create map
 Prepare foundation
 Construct walls
 Construct roof
 Paint the house
Analysis
Though customer can take benefit from each good or service on its own but promises are not separately
identifiable in the contract, so all of the above services are not distinct and the delivery of house will be
considered as single performance" obligation, (various inputs produce a combined output.)
Revenue recognition from sales of goods with after sale service agreement:
When the selling price of a product includes an identifiable amount for subsequent servicing, that amount is
deferred and recognised as revenue over the period during which the service is performed. The amount deferred
should be sufficient to cover both the cost of servicing and a reasonable profit.
Example: Servicing in selling price

X Plc sells a new system to a client and invoices Rs.800, 000.
This price includes after-sales support for the next 2 years with an estimated cost Rs. 35,000 each year.The normal
gross profit margin for such support is 17.5%. How should the revenue be recognised?
Analysis:
The Rs. 800,000 must be split between the amount received for the system and the amount received for providing
the service.
The amount for the system would be recognised in the usual way (on delivery or acceptance by the client).
The revenue for providing the service is deferred and recognised over the period of service.
he revenue for providing the service is calculated to cover the costs and provide a margin of 17.5%.
Rs.
Revenue deferred (after sales support)
2 years xRs.35,000/0.825 84,848
Revenue for sale of system 715,152
Total revenue 800,000
Examples of promised Goods and Services Include: [Para 26 of IFRS Part A1]
662
(a) Sale of goods produced by an entity (e.g., inventory of a manufacturer);
(b) Resale of goods purchased by an entity (e.g. trading stock);
(c) Performing agreed – upon tasks for a customer (e.g. customization of software);
(d) Providing agency services to principal (agent providing services).
(e) Constructing, manufacturing or developing an asset on behalf of a customer (house or building);
(f) Granting licences (Franchises) etc.
(g) Granting options to purchase additional goods/services like giving discount vouchers (will be discussed in
examples)
Satisfaction of Performance Obligations [Para 31 of IFRS Part A1]
An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a good
or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of the
asset.
A customer obtains control of an asset when it can direct the use of and obtain substantially all the remaining
benefits from it. Control included the ability to prevent other entities from directing the use of and obtaining the
benefits from an asset.
Performance Obligation Satisfied at a Point in Time
It means entity is transferring control at the time of satisfying the performance obligation as the goods are
transferred.
Indicators of Transfer of Control Includes: [Para 38 of IFRS Part A1]
(1) The entity has right to payment for asset (means right to receive is established)
(2) The customer has the legal title. (If however, entity retains the legal title solely as a protection against
customers failure to pay; still it means control has been transferred by entity to customer at the time of
delivery of asset). [Example is sale on instalment basis].
(3) The entity has transferred physical possession of asset. However, physical transfer may not always
concide with control of an asset. For example; in some repurchase agreements and in some consignment
arrangements (sale or return basis), a customer or consignee may have physical asset that the entity
controls. Conversely, in some bill – and – hold arrangements, an entity may have physical possession of
an asset that a customer controls.
(4) The customer has the significant risks and rewards of ownership of an asset. However when evaluating
the risks and rewards of ownership of a promised asset; an entity shall exclude any risks that give rise to a
separate performance obligation in addition to the performance obligation to transfer the asset [means when
evaluating the transfer of significant risks and rewards of asset; do not consider any additional performance
obligation not yet satisfied e.g. related to any maintenance services (if any)].
(5) The customer has accepted the asset;
Sale on approval basis:
If entity delivers products to a customer for trial or evaluation purposes and the customer is not committed to pay
any consideration until the trial period lapses, control of the product is not transferred to a customer until
either the customer accepts the product or the trial period lapses (whichever is earlier).
Measuring progress towards complete satisfaction of a performance obligation [this discussion is applicable
when performance obligation is satisfied over time]. [Para 41 of IFRS Part A1]
An entity shall recognise revenue over time by measuring the progress towards complete satisfaction of that
performance obligation.
When goods or services are transferred continuously, a revenue recognition method that best depicts the entity’s
performance should be applied.
Methods for measuring progress
663
There are two types of Methods:
(a) Output Methods; and
(b) Input Methods
Output Methods: [Para B15 of IFRS Part A1]
These methods recognise revenue on the basis of direct measurement of the value to customer of goods or services
transferred to date relative to the remaining goods or services promised under the contract. e.g.:
(a) Surveys of Performance completed to date;
(b) Units produced as a percentage of total units to be produced; or
(c) Units delivered as a percentage of total units to be delivered
(d) Contract milestone reached.
Input Methods: [Para B18 of IFRS Part A1]
These methods recognise revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance
obligation relative to the total expected inputs to the satisfaction of that performance obligation. e.g.
(a) Resources consumed as a percentage of total resources to be used;
(b) Labour hours used as a percentage of total labour hours to be used;
(c) Machine hours used as a percentage of total machine hours to be used;
(d) Cost incurred as a percentage of total cost to be incurred.
Example: Providing a service
X Plc is engaged on a contract to develop new computer software for a customer. The contract has not been
completed by the reporting date (31 December 2015). X Plc is reasonably certain of its progress towards complete
satisfaction of performance obligation.
The total revenue from the contract will be Rs. 700,000 and total costs are expected to be Rs. 400,000. Costs of
Rs. 150,000 have been incurred to date.
X plc measure percentage completion by comparing costs incurred to date against total expected costs. What
revenue should be recognised for the year ended 31 December 2015?
Analysis:
Revenue in the current period should be recognised at Rs. 262,500 (Rs.700, 000 x 150,000/400,000)
Costs of Rs. 150,000 should also be recognised as cost of sales.
Measurement:
When a performance obligation is satisfied (rather than right to receive is established); an entity shall recognise as
revenue the amount of the transaction price that is allocated to that performance obligation.
Determining the Transaction Price: [Para 47 of IFRS Part A1]
Transaction price can be a fixed consideration, variable consideration or consideration other than cash (e.g. shares
or any other fixed asset)
The transaction price is not adjusted for the effects of customer’s credit risk, but is adjusted if the entity has
created a valid expectation that it will enforce its rights for only a portion of the contract price (means bad debts
are not adjusted; however, transaction price should be adjusted for the effect of any trade discount)
Factors to be considered while determining transaction price: [Para 48 of IFRS Part A1]
When determining the transaction price, an entity shall consider the effects of all of the followings:
(a) Variable consideration;
(b) Constraining estimates of Variable consideration;
664
(c) Existence of significant financing components;
(d) Non-Cash consideration; and
(e) Consideration payable to customers.
Variable Consideration:
Amount of consideration can vary because of discounts, refunds, incentives etc.
Methods of estimating the variable consideration: [Para 53 of IFRS Part A1]
An entity shall estimate an amount of variable consideration by using either of the following methods:
(a) Expected value method.
(b) Most likely method.
Example:
Tayyab Co. enters into a contract to build an oil rig for Rs. 100,000
If the oil rig is not completed on time there will be a Rs. 20,000 penalty
Tayyab Co. has built similar oil rigs before and there is 90% chance that the oil rig will be completed ontime
What is the transaction price?
Answer
Two possible outcomes:
Rs. 100,000 if completed on time Rs. 80,000 if not completed on time
The “most likely amount” method better predicts the amount of consideration
Therefore, transaction price is Rs. 100,000 as there is 90% chance that the oil rig will be completed on time.
Existence of Significant Financing Component:

In determining the transaction price, an entity shall adjust the promised amount of consideration for the effects of
time value of money if the timing of payments agreed to by the parties to the contract provides the customer or
entity with a significant benefit of financing.
Example:
An entity received an advance of 150,000 on 01.01.2015 against goods to be delivered on 31.12.2016. Interest
rate is 6% per annum.
Solution:
Recognize a contract liability for 150,000 payments at the contract inception.
Cash 150,000
Advance from customers 150,000
During two years from the contract inception until the transfer of product, recognise the interest expense on
150,000 at 6 percent for two years.
Advance from customers 9,000 (150,000 x 6% = 9,000)
Advance from customers 9,540(159,000 x 6% = 9,540
Recognize revenue on the transfer of goods
Revenue 168,540
665
Non-Cash consideration: [Para 66 of IFRS Part A1]
To determine the transaction price for the contracts in which a customer promises consideration in a form other
than cash, an entity shall measure the non-cash consideration at fair value which is at the time of earning of
revenue.(Non-cash considerations includes shares, vehicles, machine etc).
Example 15:
An Entity A decides to take a contract to perform consulting service that would normally be valued at Rs. 50,000.
Entity A determines that the service is a single performance obligation. Entity A agrees to receive 1,000 shares of
customer (Company B). Both accept the contract on Jan. 1, 2014, when shares are valued at Rs. 50 a share. On
Feb. 1, 2014, Entity A completes the services, when shares are valued at Rs. 52 a share.
Answer
We-will record the revenue of Rs. 52,000 (52 x 1,000).
Consideration Payable to a Customer [Para 70-72 of IFRS Part A1]
Consideration payable to a customer includes cash amounts that an entity paid or expected to pay to a customer.
 An entity shall account for consideration payable to a customer as a reduction of the transaction price
(means deduct from revenue).
 If however, payment to a customer is in exchange for goods or services that are transferred by
customer to entity then simply record the purchase of those goods or services (separately)
Example 16:
JJ enters into a contract with Metro cash n carry.
Metro Commits to buy at least Rs, 20m of items over the next 12 months. The terms of the contract require JJ to
make a payment of Rs. 1 m to compensate the Metro for changes that it will need to make to its retail stores to
accommodate the products.
How much revenue should be recognised by JJ?
Answer:
The Rs. 1 m paid to the Metro is a reduction of the transaction price and a revenue of Rs. 19m will be recorded on
satisfaction of performance obligation. (Means over the 12 months)
Example: Golden gates entered into a contract with a chain of retail stores. The customer commits to buyproducts
of 20,000,000 over the next 12 months. The terms of the contract requires Golden gates to make a payment of
1,000,000 to compensate the customer for change that it will need to make to its retail stores to accommodate the
products.
By 31.12.2001, Golden gates has transferred products with a sale value of 4,000,000 to the customer. How much
revenue should be recorded by golden gates in the year ended 31.12.2001.
Solution: The payment made to the customer is not in exchange for a distinct good or service that is transferred to
the entity. Therefore 1,000,000 paid to the customer is a reduction of transaction price. The total transaction price
is reduced by 5% (1,000,000/20,000,000 x 100). Therefore, Golden gates reduces the transaction price of each
good by 5% as it is transferred.
By 31.12.2001, Golden gates should have recognized a revenue of 3,800,000 (4,000,000 x 95%) Or [20,000,000 –
1,000,000] = 19,000,000 x 4M/20M = 3,800,000
Allocating transaction Price to performance obligations [Para 73-75 of IFRS Part A1]
(This problem will arise if more than one performance obligation in a contract)
An entity shall allocate the transaction price to each performance obligation identified in the contract on a relative
standalone selling prices.
Stand-alone Price; means a price at which an entity would sell a promised good or service separately to a
customer.
Example 17:
666
Entity enters into a contract for sale of new car and a 3 year service contract for Rs. 26,000. The
standalone selling price of car is Rs. 24,000 and that of services is Rs. 3,000.
Performance
Standalone price Allocated transaction price Revenue
obligations
23,111
Car 24,000 23,111
(24,000/27,000 × 26,000)
2,889
Service Contract 3,000 963/ year
(3,000/27,000 × 26,000)
27,000 26,000
Example 18:
A retailer sells a customer a computer-and-printer package for Rs. 900. The retailer has determined that there are
two separate performance obligations and regularly sells the printer for Rs. 300 and the computer for Rs. 700.
Required:
Allocate the price to separate performance obligations.
Solution:
There are two performance obligations in the given transaction.
Performance obligations Standalone price Allocated transaction price
Printer 300 270 (300/1,000 × 900)
Computer 700 630 (700/1,000 × 900)
1,000 900
In this transaction, there is an inherent discount of Rs. 100 which does not relate to specific performance
obligation and is therefore reallocated to all performance obligations on a relative stand-alone selling price basis.
Methods of estimating the stand alone price if it is not available: [Para 79 of IFRS Part A1]
If stand-alone selling price is not available (may be because entity do not sell the goods or services separately)
then estimate it by using any of the following method:
(a) Adjusted Market Assessment Approach: means price at which same goods or services are sold
separately by other competitors (suppliers) in the market.
(b) Expected Cost plus Approach: Estimate the cost and then add appropriate profit.
(c) Residual Approach: An entity may estimate the stand-alone selling price by reference to the total
transaction price less the sum of the observable standalone selling prices of other goods or services
promised in the contract.
Example 19 (Marketing assessment approach)
A manufacturer produced and sold to customer a table and a computer for Rs. 13,000. The standalone price of
table is Rs. 5,000 and standalone price of .our computer is not available. In most recent customer surveys our
computer has been given a rating of 3 out of 5 points as against 4 out of 5 points to competitor’s computer. The
standalone selling price of competitor computer is Rs. 12,000.
Analysis
There are two performance obligations in the given transaction.
Performance obligations Standalone price Allocated transaction price
Table 5,000 4,643 (5,000/14,000 × 13,000)
Computer 9,000* 8,357 (9,000/14,000 × 13,000)
14,000 13,000
x × 4/5 = 12,000
or
12,000/4 × 5 = 15,000 (price of that computer which has a rating of 5 out of 5, so our computer
has aprice of 15,000 × 3/5 = 9,000)
667
Example (Expected Cost plus Approach): Sohail sells a machine and one year free technical support for
100,000. It usually sells the machine for 95,000 but does not sell technical support for this machine as a
standalone product. Other support services offered by the Sohail attract mark up of 50%. It is expected that the
technical support would cost 20,000.
How much of the transaction price should be allocated to the machine and to the technical support?
Solution:
The selling price of the machine is 95,000 based on observable prices. There is no observable selling price of the
technical support. Therefore, the stand alone selling price needs to be estimated. One approach of doing this is the
expected cost plus margin approach. Based on this, the selling price of the service would be 30,000 (20,000 x
150%).
The total standalone selling prices of the machine and support are 125,000 (95,000 + 30,000). However, total
consideration receivable is only 100,000. This means customer is receiving a discount of 25,000.
IFRS 15 says that the entity must consider that whether the discount relates to the whole bundle or to a particular
performance obligation. In the absence of the information, it is assumed that it relates to the whole bundle.
The transaction price will be allocated as follows:
Performance obligation Standalone price Allocation of transaction price
Machine 95,000 76,000 (95,000/125,000x100,000)
Services 30,000 24,000 (30,000/125,000x 100,000)
Total 125,000 100,000
The revenue will be recognized when (or as) the performance obligation is satisfied.
Example 20 (Residual approach)
A manufacturer produced and sold a customer a computer, printer and a scanner package for Rs. 1,250. He has
determined that these are three separate performance obligations and regularly sells the printer for Rs. 300; the
computer for Rs. 700. This is the first time: manufacturer is going to sell scanner, hence there is no sale price
identified for scanner as stand-alone price.
Required:
Allocate the price to separate performance obligations.
Solution:
There are three performance obligations in the given transaction.
Performance obligation Transaction Price
Printer 300
Computer 700
Scanner (Balancing) 250
1,250
OTHER ASPECTS OF IFRS 15
Contract costs
Costs might be incurred in obtaining a contract and in fulfilling that contract.
Incremental costs of obtaining a contract [Para 91-94 of IFRS Part A1]
The incremental costs of obtaining a contract are those costs that would not have been incurred if the contract
had not been obtained (or that are incurred as a direct consequence of obtaining the contract)
The incremental costs of obtaining a contract with a customer are recognised as an asset if the entity expects
to recover those costs.
Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained are
expensed as incurred (unless they can be recovered from the customer regardless of whether the contract is
obtained).
668
Example: Incremental costs of obtaining a contract
X Limited wins a competitive bid to provide consulting services to a customer.
new
X Limited incurred the following costs to obtain the contract:
Commissions to sales employees for winning the contract 10,000
External legal fees for due diligence 15,000
(consultancy services of bid preparation)
25,000
Travel costs to deliver proposal
Total costs incurred 50,000
Analysis
The commission to sales employees is incremental to obtaining the contract and should be capitalised as a
contract asset.
The external legal fees and the travelling cost are not incremental to obtaining the contract because they have been
incurred regardless of whether X Plc obtained the contract or not.
An entity may recognise the incremental costs of obtaining a contract as an expense when incurred if the
amortisation period of the asset is one year or less.
Example 23: Incremental costs of obtaining a contract when contract life is up to 1 year
A salesperson earns a 5% commission on winning a contract that was signed during January 20X1. The products
will be delivered in the current year only. How should the entity account for the commission paid to its employee?
Analysis
The commission will be expensed as incurred since the commission relates to a contract that is upto 1 year.
Costs to fulfil a contract [Para 95 of IFRS Part A1]
Costs incurred in fulfilling a contract might be within the scope of another standard (for example, IAS 2:
Inventories, IAS 16: Property, Plant and Equipment or IAS 38: Intangible Assets). If this is not the case, the costs
are recognised as an asset only if they meet all of the following criteria:
1. The costs relate directly to a contract or to an anticipated contract that the entity can specificallyidentify;
2. The costs generate or enhance resources of the entity that will be used in satisfying performance
obligations in the future; and
3. The costs are expected to be recovered.
Costs that relate directly to contract might include: [Para 97 of IFRS Part A1]
 Direct labour and direct materials;
 Allocations of costs that relate directly to the contract or to contract activities (e.g accountant salary);
 Costs that are explicitly chargeable to the customer under the contract (e.g. Designing cost of
architect); and
 Other costs that are incurred only because an entity entered into the contract (e.g. Payments to
subcontractors).
The following costs must be recognised as expenses when incurred: [Para 98 of IFRS Part A1]
 General and administrative costs (unless those costs are explicitly chargeable to the customer under the
contract);
 Costs of wasted materials, labour or other resources to fulfil the contract that were not reflected in theprice of
the contract;
 Costs that relate to satisfied performance obligations (or partially satisfied performance obligations) in the
contract (i.e. costs that relate to past performance).
Example 24:
Momin Limited, a construction company entered into a contract with Ahmed Limited to build a building for
Ahmed's new branch office.
669
Momin agrees to complete the project-in 8 months' period. Project Manager has provided following dataof cost:
 Material cost Rs. 400,000. (out of this Rs. 80,000 was destroyed in flood)
 Labour cost Rs. 640,000. (out of this Rs, 40,000 was paid when labour was on strike)
 other land preparation costs will cost Rs. 265,000
 Rs. 120,000 will be paid to govt. to get the building design approved
 Annual depreciation of machine is Rs. 120,000. It is used 2 months in project.
 General and admin costs amount to Rs. 10,000.
Required:
Calculate Momin's cost of fulfilling the contract.
Solution:
Cost of fulfilling the contract Rs.
Material (400,000 – 80,000) 320,000
Labour (640,000 – 40,000) 600,000
Land preparation 265,000
Govt. charges 120,000
Allocated depreciation (120,000/12 × 2) 20,000
Total 1,700,000
Amortisation: [Para 99 of IFRS Part A1]
An asset for contract costs must be amortised on a systematic basis consistent with the transfer to the customer
of the goods or services to which the asset relates.
The amortisation method must be updated to reflect a significant change in the entity’s expected timing of transfer
to the customer of the goods or services to which the asset relates.
Impairment loss (related to contract in progress): [Para 101 of IFRS Part A1]
An impairment loss must be recognised in profit or loss to the extent that the carrying amount of an asset
recognised exceeds:
1. The remaining amount of consideration that the entity expects to receive in exchange for the goods or services to
which the asset relates (means total remaining amount receivable under the contract); less
2. The costs that relate directly to providing those goods or services and that have not been recognised as
expenses (total remaining cost to be incurred under the contract).
Example 26:
Carrying value of a contract cost (which is yet not expensed out) as at December 31, 2015 is Rs. 10,000.
Future recovery expected from customer is Rs. 12,000 and remaining costs to fulfil contract are Rs.3,000.
Book value 10,000
Less: Recoverable amount (12,000 – 3,000) (9,000)
Impairment loss 1,000
Reversal of impairment loss: [Para 103 of IFRS Part A1]
When the impairment conditions no longer exist or have improved a reversal of the impairment loss is recognised.
This will reinstate the asset but the increased carrying amount of the asset must not exceed the amount that would
have been determined (net of Amortisation) if no impairment loss had been recognised previously.
Example: amortization of contract costs
X limited wins a 5-year contract to provide a service to a customer.
The contract contains a single performance obligation satisfied over time. X limited recognizes revenueon time
basis. Cost incurred by the end of year 1 and forecast future costs are as follows:
Costs to date 10,000
Estimate of future costs 18,000
670
Total expected costs 28,000
Analysis
Costs must be recognised in the P&L on the same basis as that used to recognise revenue.
X Limited recognizes revenue on a time basis, therefore 1/5 of the total expected cost should be
recognised = Rs. 5,600 per annum (remaining 4,400 [10,000 – 5,600]
Example: Amortisation of contract costs
X Limited wins a 5- y e a r contract to provide a service to a customer. The contract is renewable for
subsequent one-year periods.
The average customer term is seven years.
The contract contains a single performance obligation satisfied over time. X Limited recognizes revenue on a
time basis.
Costs incurred by the end of year 1 and forecast future costs are as follows:
Analysis
X Limited recognizes revenue on a time basis. The asset relates to the services transferred to the customer during
the contract term of five years and X Limited anticipates that the contract will be renewed for two subsequent one-
year periods (7 - 5).
Therefore 1/7 of the total expected cost should be recognised = Rs. 4,000 per annum.
Example: Amortisation of contract costs

X Limited wins a contract to build an asset for a customer. It is anticipated that the asset will take 2 years to
complete
The contract contains a single performance obligation. Progress to completion is measured on an outputbasis.
At the end of year 1 the assets is 60% complete (e.g. because of survey) Costs incurred by the end of year 1 and
forecast future costs are as follows:
Therefore 60% of the total expected cost should be recognised (28,000 x 60% = 16,800) at the end of year 1.
Presentation
This section explains how contracts are presented in the statement of financial position. In order to do
this, it explains the double entries that might result from the recognition of revenue. The double entries
dependon circumstances.
An unconditional right to consideration is presented as a receivable.
Example:
X Limited enters into a contract to transfer Products A and B to Y Limited in exchange for Rs. 1,000.
Product A is to be delivered on 28 February.
Product B is to be delivered on 31 March.
The promises to transfer Products A and B are identified as separate performance obligations. Rs.400 is
allocated to Product A and Rs.600 to Product B.
X Limited recognizes revenue and recognizes its unconditional right to the consideration when control of
each product transfers to Y Limited (control is normally transferred when the goods are delivered).
671
Solution:
The following entries would be required to reflect the progress of the contract.
Contract progress
28 February: X Limited transfers Product A to Y Limited.
At 28 February Dr (Rs.) Cr (Rs.)
Receivables 400
Revenue 400
31 March: X Limited transfers Product B to Y Limited
31 March
Receivables 600
Revenue 600
Contract assets
A supplier might transfer goods or services to a customer before the customer pays consideration or before
payment is due.
A contract asset is a supplier’s right to consideration in exchange for goods or services that it has transferred to a
customer [in other words, an amount for which an entity has recognized the revenue because performance
obligation is satisfied but for which right to receive is not yet unconditional]
A contract asset is reclassified as a receivable when the supplier’s right to consideration becomes
unconditional.
Example: Double entry – Recognition of a contract asset 1 January 20X8
X Limited enters into a contract to transfer Products A and B to Y Limited in exchange for Rs. 1,000. Product A is
to be delivered on 28 February.
Product B is to be delivered on 31 March.
The promises to transfer Products A and B are identified as separate performance obligations. Rs.400 isallocated
to Product A and Rs.600 to Product B (based on relative standalone prices)
Revenue is recognised when control of each product transfers to Y Plc.
Payment for the delivery of Product A is conditional on the delivery of Product B. (i.e. the consideration of Rs.
1,000 is due only after X Limited has transferred both Products A and B to Y Limited). This means that X
Limited does not have a right to consideration that is unconditional (a receivable) until both Products A and B are
transferred to Y Limited.
Solution:
Contract progress
The following accounting entries would be necessary:
28 February: X Limited transfers Product A to Y Limited
X Plc does not have an unconditional right to receive the Rs.400 so the amount is recognised as a contract asset.
At 28 February
Contract asset 400

Revenue 400
31 March: X Limited transfers Product B to Y Limited
X Limited now has an unconditional right to receive the full Rs. 1,000. The Rs.400 previously recognised as a
contract asset is reclassified as a receivable and the Rs.600 for the transfer of product B is also recognised as
receivable.
31 March Dr (Rs.) Cr (Rs.)
Receivable / Cash 1,000
Contract asset 400
Revenue 600
672
Contract liabilities (advance from customers)
A contract might require payment in advance or allow the supplier a right to an amount of consideration that is
unconditional (i.e. a receivable), before it transfers a good or service to the customer.
In these cases, the supplier presents the contract as a contract liability when the payment is made or the payment
is due (whichever is earlier).
The contract liability is a supplier’s obligation to transfer goods or services to a customer for which it has received
consideration from the customer.
Example:
1 January 20X8
X Limited enters into a contract to transfer Products A and B to Y Limited in exchange for Rs. 1,000. X Limited
can invoice this full amount on 31 January.
Product A is to be delivered on 28 February.Product B is to be delivered on 31 March.

The promises to transfer Products A and B are identified as separate performance obligations. Rs.400 isallocated
to Product A and Rs.600 to Product B.
Revenue is recognised when control of each product transfers to Y Limited. The following entries would be
required to reflect the progress of the contract
Solution:
Contract progress
The following accounting entries would be necessary:
At 31 January
Cash 1,000
Contract liability 1,000
28 February:
X Limited transfers Product A to Y Limited
At 28 February
Contract liability 400
Revenue 400
31 March:
X Limited transfers Product B to Y Limited
Revenue 600
Other Aspects of IFRS 15
Consignment Arrangements [sale or return basis] [Para B77 of IFRS Part A1]
When an entity delivers a product to another party (such as a dealer or a distributor) for sale to end customers, the
entity shall evaluate whether that other party has obtained control of the product at that point in time. In
consignment sales, an entity shall not recognise revenue upon delivery of a product because control is not
normally transferred at that date.
In such a situation, revenue is recognised by the entity when the goods are sold by dealer to customer, or time
period of return is expired (if any) whichever is earlier [Para B78 (a)]
Bill & Hold Arrangements: [Para 81 of IFRS Part A1]
It means a contract under which an entity bills a customer for a product but the entity retains the physical
possession of the product until it is transferred to a customer at a point in time in future.
For example; a customer may request an entity to enter into such a contract because of a customer’s lack of
available space for the product or because of delays in the customer’s production schedules.
In such cases, customer is considered to have obtained the control of a product, even though product remains in
the entity’s physical possession. Consequently, entity is only providing custodial services over the customer’s
asset. If entity is charging some fee for custodial services, then transaction price needs be allocated to two
performance obligations; i.e.
673
(a) Control of goods; and
(b) Custodial services.
Revenue from goods is recognised when control of goods is transferred. Revenue from custodial services is
recognised as the services are rendered.
Example:
Clearance entered into following sale transaction during the year:
On 31.12.2001, clearance sells the machine plus spare parts to Ehsan for 500,000. The value of the machine was
480,000, with the value of the spare parts being 20,000. Clarence delivered the machines on 31 December, but
was asked to hold the spare parts by Ehsan, due to Clarence‘s warehouse being in close proximity to Ehsan’s
factory. Clarence expects to hold spare parts for 2-4 years. The parts are kept separately in a warehouse, cannot be
used or sold by the Clarence, and are ready for immediate shipment at Ehsan’s request. Clarence agreed to the
transaction as holding costs would be insignificant.
Discuss how the above transactions should be accounted for.
Solution:
This is a bill and hold arrangement. Even though Clarence retains physical possession of goods, Ehsan retains
control. This can be seen in the fact that Clarence cannot use or sell the goods, and must ship them upon the
Ehsan’s request.
In the above arrangement, there are probably three performance obligations. These will be the promise to provide
the machine, the spare parts and the custodial services over holding the spare parts.
The performance obligation over promising to provide the machine and spare parts appear to be met on
31.12.2001, so the full 500,000 revenue should be recorded. If the custodial service of holding the spare parts is
deemed to be part of the transaction price, this would be split out and recognized over the expected period of
holding the spare parts.
674
Extra Practice Question
Question 1
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 dateof 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. Thesmart
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 unlimiteduse
of mobile network.
Required:
Prepare adjusting entry for the year ended 31 December 2017 in accordance with IFRS 15 ‘Revenue (04)
Ans:
Entry already made:
Cash 693,000
Advance from customer 693,000
Adjusting entry Debit Credit
------ Rupees ------
Revenue (Smart phones) (18,000 ÷ 39,600 × 34,650)×20 315,000
Revenue (Network-usage) (21,600 ÷ 39,600 × 34,650) × {20 × (2÷ 12)} 63,000
Full price 18,000+1,800×12=39,600
Allocation Revenue
Smart phone 18,000 15,750 15,750 on delivery
Network services (1,800 x 12) 21,600 18,900 1,575 per month
39,600 34,650
Revenue:
Smart phone 15,750 x 20 315,000
Network services 1,575 x 20 x 2 63,000
Total revenue 378,000
Remaining advance from customer [693,000 – 378,000 = 315,000]
Question 2
(a) List the five steps involved in recognizing revenue under IFRS 15 ‘Revenue from Contracts with
Customers’ (03)
(b) 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)
Answer: 2
a) Five steps involved in recognizing revenue under IFRS 15:
i. Identify the contract with a customer.
ii. Identify the separate performance obligation.
iii. Determine the transaction price.
iv. Allocate the transaction price.
v. Recognize the revenue when or as an entity satisfies performance obligations.
675
b) Ravi Limited
i)
1-6-2018 Cash/Bank(500x200) 100,000
Sales (475x200) 95,000
Refund liability(Payable)(25x200) 5,000
1-6-2018 Cost of sales(475x150) 71,250
Stock with customer(25x150) 3,750
Stock in hand 75,000
30-6-2018 Payable(Refund liability) 5,000
Sales(5x200) 1,000
Cash(20x200) 4,000
Cost of sales(5x150) 750
Stock in hand(20x150) 3,000
Stock with customer 3,750
ii)
1-6-2018 Cash/Bank(500x200) 100,000
Contract liability(Advance) 100,000
1-6-2018 Stock with customer(500x150) 75,000
Stock in hand 75,000
30-6-2018 Contract liability(Advance) 100,000
Sales(480x200) 96,000
Cash/Payable(20x200) 4,000
30-6-2018 Cost of sales(480x150) 72,000
Stock in hand(20x150) 3,000
Stock with customer(500x150) 75,000
Question 3
(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 (rather than 110,000 at the end of eachyear).
Option 2: Payment of Rs. 110,000 at the end of each year.
The applicable discount rate is 6.596%.
Required:
a) Prepare journal entries to be recorded in the books of JL under each option over the period of
contract.
b) Pluto Limited (PL) sells industrial chemicals at following standalone prices:
Products Rupees (Per cartoon)
C-1 100,000
C-2 90,000
C-3 110,000
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
eachproduct for a total price of Rs. 260,000. (05)
Ans.3
(a) Option 1: Lump sum payment (means we are getting fewer amounts today we are losing on
someincome)
Debit Credit
Date Description ---------- Rupees ----------
01-01-17 Cash 200,000
676
Contract liability (200,000×6.596%) 13,193
31-12-17 Contract liability 110,000
Revenue 110,000
If goods were to be delivered after two years then revenue should be recorded at the end.
(200,000+13,192–110,000)×6.596%
31-12-18 Contract liability 110,000
Revenue 110,000
Option 2: Normal payment terms
---------- Rupees ----------
31-12-17 Cash 110,000
Revenue 110,000
31-12-18 Cash 110,000
Revenue 110,000
2) If suppose goods were transferred on 1-1-2017 then:
1-1-2017 Receivable 200,000
Revenue 200,000
31-12-2017 Receivable 13,193
(200,000 x 6.596%)
31-12-2017 Cash 110,000
Receivable 110,000
31-12-2018 Receivable 6,806
(200,000 + 13,193 – 110,000 x 6.596
31-12-2018 Cash 110,000
Receivable 110,000
(b) ALLOCATION
Chemical Standalone price Price after 1st discount Price after 2nd discount
C-1 100,000 100,000 96,296
100,000/270,000 x 260,000
C-2 90,000 76,500 73,667
(90,000/200,000×170,000) 76,500/270,000 x 260,000
C-3 110,000 93,500 90,037
(110,000/200,000×170,000) 93,500/270,000 x260,000
Total 300,000 270,000 260,000
(c) Indicators of transfer of control include the following:
 The entity has a present right to payment for the asset
 The customer has legal title
 The customer has physical possession (except in case of bill and hold, consignment sales
andrepos)
 The customer has significant risks and rewards of ownership of the asset
 The customer has accepted the asset
Question 4
BRILLIANT LIMITED
Brilliant Limited (BL) manufactures and sells plastic card printing machines with laminators. A machine-
specific card printing software is provided as a must part of the printing machine. BL also sells plastic
cards imported from Thailand.
677
BL agreed to supply the following to, Proud Learners (PL), a country-wide school network:
 15 Card printing machines – Available in ready stock
 8 Laminators – Would require 30 days to deliver
 100,000 Plastic cards – Available in ready stock
A lump sum price of Rs.9.2 million for the total contract has been agreed between BL and school network.
Cost and list prices of the goods are:
Item List Price (Rs.) Cost (Rs.)
Card printing machines 800,000 400,000
Laminators (combined) 200,000
Plastic cards 12 5
BL does not sell printing machine without laminator. However, in order to get this order x`BL went
against its policy. There is another supplier of imported card printing machine of almost similar
specification. This supplier sells the machine at Rs. 750,000.
In most recent customers’ surveys printing machine of BL has been given 7 out of 10 points as against 9
outof 10 given to competitors’ imported machine. There is no supplier of laminator in the market.
Required
Identify performance obligations and allocate the transaction price to the identified performance obligations.
A. 4 BRILLIANT LIMITED
Identification of performance obligations there are three performance obligations:
1. Transfer of 15 Plastic card printing machines and its software
2. Transfer of 8 Laminators
3. Transfer of 100,000 plastic cards
Although the software is distinct from printing machine, but both are highly dependable to each other
and inter-related. In the context of this contract, these are providing a combined output to PL.
Therefore, software is not a separate performance obligation.
The total transaction price as per the contract is Rs.9.2 million.
On the basis of available information, the stand-alone prices of each item will be estimated using the
following approaches:
1) Plastic card printing machines and its software:
In the absence of observable stand-alone price, we may use ‘adjusted market assessment’ approach.
The competitor’s machine is sold at Rs. 750,000 which is similar (not identical) to BL’s machine. As
per given information, we may use customers’ rating for adjustment of competitors’ price that worked
out as follows:
Rupees
Competitors’ price 750,000
Adjusted price of BL machine (7/9*750,000) 583,333
(750,000/9 x 10 =8,33000 x 7/10)
Total price (15*583,000) 8,745,000
2) Laminators:
There is neither observable stand-alone price nor any comparable competitors’ product available in
the market in which BL operates. In this case, we may use ‘expected cost plus a margin approach’.
The estimated stand-alone priceis worked out as follows:
Rupees
Expected cost to BL 200,000
Margin estimated (800,000 - 600,000)/800,000 = 25% (400 + 200) 66,667 (200/75 x 25)
266,667
Total price (8 x 266,667) 2,133,336
3)Plastic cards:
Observable stand-alone price is available Total price(100,000*12)
1,200,000
678
Total of stand-alone prices is:
8,745,000
Plastic card printing machines and its software
Laminators 2,133,336
Plastic cards 1,200,000
Total 12,078,336
Allocation of Rs.9.2 million (transaction price) will be based on relative stand-alone prices, as the
difference of Rs.2.873 million between stand-alone price and transaction price is not specific to any
performance obligation, so no additional problem.
Std. Alone Price Transaction price
Plastic card printing machines and its software 8,745,000 6,661,017
Laminators 2,133,336 1,624,950
Plastic cards 1,200,000 914,033
Total 12,078,336 9,200,000
Question 5
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 beretrospectively reduced to Rs. 215 per unit.
 TE’s unconditional right to receive consideration would be established upon:
1. Completion of quality control procedures by Alpha for the first order. The procedure would take a
week after receiving the goods.
2. 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:
Delivery date
Order date Units Payment date
(Transfer of control)
10 August 2018 3,000 28 August 2018 12 September 2018
25 December 2018 4,000 15 January 2019 10 January 2019 (10)
(b) On 1 February 2019, TE entered into a six months’ contract with another customer Beta for sale
of Zee for Rs. 250per 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 beretrospectively 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:
Delivery date
Order date Units Payment date
(Transfer of control)
14 February 2019 10,000 28 February 2019 20 March 2019
1 June 2019 8,000 15 July 2019 18 July 2019
Required:
In respect of the above contracts, prepare journal entries to be recorded in the books of TE for the
years ended 31December 2018 and 2019. (05)
(Entries without date will not be awarded any marks)
A.5 Thursday Enterprise
(a) General Journal
679
Debit Credit
Date Description
---------- Rupees ----------
28-08-18 Contract asset from Alpha (3,000×250) 750,000
Revenues 750,000
(No expectation of meeting the threshold)
03-09-18 Receivable from Alpha 750,000
Contract asset from Alpha 750,000
(right to receive becomes unconditional)
12-09-18 Cash/Bank 750,000
Receivable - Alpha 750,000
(receipt of payment)
25-12-18 Revenue (3,000×35) 105,000
Contract liability / Refund liability – Alpha 105,000
(reversal of extra revenue on exceeding the threshold of
5,000 units)
25-12-18 Receivable (4,000×215) 860,000
Contract liability / Refund liability – Alpha 860,000
(right to receive becomes unconditional)
25-12-18 Contract liability / Refund liability – Alpha 105,000
Receivable 105,000
(adjustment of payable against receivable)
10-01-19 Cash/Bank (860,000 – 105,000) 755,000
Receivable–Alpha 755,000
(net receivable is received)
15-01-19 Contract liability / Refund liability – Alpha 860,000
Revenue (4,000 x 215) 860,000
(transfer of control on delivery date)
(b) General Journal

Debit Credit
Date Description
---------- Rupees ---------
-
28-02-19 Receivable – Beta (10,000×250) 2,500,000
Revenue (10,000×215) 2,150,000
Contract liability / Refund liability – Beta(10,000 x 35) 350,000
20-03-19 Cash/Bank 2,500,000
Receivable – Beta 2,500,000
15-07-19 Receivable – Beta 1,720,000
Revenue (8,000 x 215) 1,720,000
15-07-19 Contract liability / Refund liability – Beta 350,000
Receivable – Beta 350,000
(now confirm that we are to repay as the threshold
is actually met)
18-07-19 Cash/Bank 1,370,000
Receivable – Beta (1,720,000 – 350,000) 1,370,000
680
FURTHER PRACTICE QUESTIONS
Question 1PARVEZ UNITED
The following transactions took place at Parvez Limited (PL).
(1) On 5 March 2017 PL sold goods to a bank for Rs.18m cash and agreed to repurchase the goods for
Rs.19m cash on 5 July 2017. The goods will be shifted to a storage facility under bank's control and
security.
(2) On 31 March PL's car manufacturing division consigned several vehicles to independent dealers for sale
to third parties. The sales price to the dealer is PL's list price at the date of sale to third parties. If a vehicle
is unsold after six months, the dealer has a right to return the vehicle to PL within next fifteen days.
Required
Discuss how the above transactions should be accounted for in the books of accounts of Parvez Limited.
Question 2 SACHAL LIMITED

(a) Sells standard computer software package meant for small and medium sized restaurant management.
This software package is sold:
 at price of Rs.1. 5 million payables before delivery,
 with thirty days’ trial time, and
 without any maintenance support after trial time
As per practice, it takes around six months for the customers to use the package independent of any
support from SL. Practically, SL has to provide on-site support service for at least six months to almost all
customers free-of-cost. However, in case of customer's request for support beyond six months, SL provides
services under a formal paid service contract.
(b) Provides maintenance and support for the above standard software package at a price of Rs.0.3 million per
annum.
(c) Provides designing and development of customized software to customers. Payment is made monthly by
customers on the basis of chargeable hours of developers of SL. First year maintenance service is provided
free-of-cost. Subsequent maintenance service is provided at the rate of 10% of the total contract price.
Thereafter, for next three years’ maintenance service is provided at 5% of the contract price per annum.
Required Explain the considerations to be taken into account in determining accounting for revenue by
Sachal Limited.
Question 3 Car World

Car World sells new cars on deferred payment basis whereby 40% deposit is received on sale and the balance
payment is received at the end of two years. The appropriate discount rate is10%.
On 1 July 20X4 a car was sold to a customer for Rs. 2,000,000.
Required: Prepare necessary journal entries to record the above transaction in the books of Car World for
theyears ended 30 June 2015 and 30 June 2016.
Question 4 Saleem Engineering (SE)
Saleem Engineering (SE) is a supplier of various types of industrial machines. It also provides servicesfor
the maintenance of these machines.
Following transactions were carried out by SE during the year ended 30 June 2016:
i. Five machines were sold on a lay away basis to one of its frequent customers. Three out of a
total of fiveinstallments had been received till the year end.
ii. A service contract for maintenance of a machine for a period of one year was signed and SE
received a non-refundable annual fee amounting to Rs. 45,000 as advance on 15 April2016.
Required: Discuss when it will be appropriate for SE to recognise revenue in each of the above situations.
Question 5 RECOGNITION OF REVENUE
681
(i) Karim Industries Limited (KIL) has sold a machine on credit to Yawar Engineering (YE). The machine
would beused by YE if it is able to secure a contract for providing services to AMZ & Company. KIL has
agreed that the machine may be returned at 90% of the price, if he fail to secure the contract.
(ii) Asif Electronics (AE) is about to sell a new type of food factory. Since customer demand is high, AE is
taking advance against orders. The selling price has been fixed at Rs. 7,000 per unit and so far 175
customers have paid the initial 25% deposit which is non-refundable.
(iii) Nazir Engineering Limited (NEL) entered into a contract for the provision of services over a period of
twoyears. The total contract price was Rs. 25 million and NEL had initially expected to earn a profit
of Rs. 5 million on the contract. However, the contract had not progressed as expected. In the first year,
costs of Rs. 12 million were incurred. Management is not sure of the ultimate outcome but believes that at
least the costs on the contract would be recovered from the customer.
Required: State how revenue should be recognised in the above cases.
682
“ALLAH makes the impossible, Possible”
ANSWERS
1 PARVEZ LIMTED
(1) Sale and repurchase agreement
The economic phenomenon of the transaction is that of a loan for which the goods have
been given assecurity. Therefore no contract of sale of goods or services is identified.
The difference between the sale price of Rs.18m and the repurchase price of Rs.19m
represents theinterest on the loan for a period of four months.
To account for the transaction in accordance with its substance:
 The goods should remain in inventories at the lower of cost and net realisable value.
 No sale should be recorded.
 The amount once received from bank should be treated as a current loan liability of
Rs.18m.
 Interest should be charged applying interest rate to income statement for each
reporting period.(means on time basis) [19 – 18]
(2) Consignment inventories
There is a contract for sale of cars between Pervez Limited (PL) and dealer containing
confirmation of respective rights and obligations, payment terms, commercial substance
and probability of collection of price.
There is only one performance obligation, namely, the transfer of cars to the dealer.
As per contract, the transaction price, would be list price on the date of sale during the
six month period. Thereafter, though not specifically mentioned, after the lapse of fifteen
days the list price applicable on sixteenth day would be the transaction price of the
unsold cars not returned.
Since there is only one performance obligation, the question of allocation of transaction
price does not arise.
PL will recognize revenue upon satisfaction of performance obligation. Performance
obligation would be satisfied once the dealer has sold any cars to third parties during the
six month period. Thereafter, if the dealer does not return the unsold cars within fifteen
days, the performance obligation would be considered as satisfied on sixteenth day.
On 31 March 2017 the vehicles should remain in inventories in PL books of accounts.
(until sold by dealer).
2.
General considerations, for revenue recognition
International Financial Reporting Standard (IFRS 15) provides that the revenue is recognized:
(i) When the performance obligation is satisfied by transferring a promised good or service (i.e.
an asset) to thecustomer; and
(ii) The asset is transferred when the customer obtains the control of that asset.
Based on this principle, the following is the considerations to be taken into account in determining
accounting forrevenue.
(a) Restaurant management software:
Identification of contract:
There exists a contract for sale restaurant management software between SL and customers
containing confirmation of respective obligations and rights, payment terms, commercial
substance and price is collected inadvance.
683
Identify performance obligation
There are two performance obligations, namely:
 Explicit: delivery of software and
 Implicit: six month on-site support
Determine the transaction price
As per contract, the transaction price is Rs. 1.5 million for both performance obligations. Allocate
the transaction price
Transaction price is 1.5 million and standalone selling price of on-site support service is Rs.0.15
million (from
(b) part 0.3 x 6/12). Therefore based on residual approach the software will be priced at Rs. 1.35
(bal) million.Recognition of revenue on satisfaction of performance obligations
PL will recognize revenue from sale of software upon delivery if SL can conclude that the software
meets the requirements of the customer. The agreed 30 days trial time will be considered as a
formality of the contract. (as there is no information of any return)
PL will recognize revenue from on-site support service over six month’s period on straight-line
basis.
(b) Maintenance support/or the standard software package
Identification of contract
Such service is provided under a written contract that contains confirmation of respective
obligations and rights, payment terms, commercial substance. SL will assess the collectability of the
price if not received in advance.
Identify performance obligation
The performance obligation is to provide maintenance and support services.

The price of the service is Rs. 0.3 million for one-year term
.Allocate the transaction price
Since there is only one performance obligation, the question of allocation of transaction price does
not arise.
Recognition of revenue on satisfaction of performance obligations
PL will recognize revenue over one year period on straight-line basis, as in this case input method
isappropriate. The pattern of resources consumed by SL is evenly spread over the period of
contract.
(c) Customized software
Identification of contract
Such service is provided under a 'written contract that contains confirmation of respective
obligations and rights, payment terms, commercial substance. SL will assess the collect ability of
the price.
Identify, performance obligation The performance obligations are:
 Designing and development of customized software, and
 Maintenance and support services of the said software
684
The total price of the software and maintenance service will be determined on the basis of terms of
contract.
Allocate the transaction price
1st year
The price will be allocated between the two performance obligations. Price of maintenance services
for the first year is included in the total contract price (free of cost). The allocated price of the first
year would be 10% of the contract price, which is the stand-alone price of the said services for the
second year.
[We have not taken the stand alone price of service from (b) point because it was not for
standardize software].The price of design and development will be 90% of the contract price [100 -
10 (first year)].
2nd year
For second year maintenance service revenue would be recorded at 10% of the contract price.
3rd, 4th and 5th year
For 3rd, 4th and 5th year the maintenance and support services will be priced at 5% of the contract
price.Recognition of revenue on satisfaction of performance obligations
Revenue from design and development
Revenue from design and development should be recognized overtime. As the amount is charged
from the customers on hourly basis, therefore revenue should be recognized at the end of each
month on the basis of number of hours worked by developers of SL.
Revenue from Maintenance and support services – PL will recognize revenue over five year’s
period on straight-line basis, as in this case, input method is appropriate. The pattern of resources
consumed by SL is evenly spread over the period of contract.
3.
Date Particulars --------- Rupees ---------
1/7/2014 Cash (40%×2,000,000) 800,000
Accounts receivable (bal) 991,735
Revenue (W-1) 1,791,736
30/6/15 Accounts receivable (10% × 991,736) 99,174
30/6/16 Accounts receivable (991375+99174) x 10% 109,091
30/6/16 Cash 1,200,000
Account Receivables 1,200,000
W-1: Present value of future payments Rupees

PV=800,000+1,200,000 (1+0.1)-2 1,791,736
4.
Part (i)
Revenue from lay away sales is recognised when the goods are delivered against full payment.
However, if the SE’s historical experience (i.e. one of its frequent customers) shows that most lay
away transactions are converted into sales, then it can recognise revenue when it receives a
685
significant deposit, provided that the goods are on hand, identified and ready for delivery. Since the
customer has paid significant part of instalments (3 out of 5 instalments), the five industrial machines
are on hand, identifiable and ready for delivery, the revenue is recognized in full.
Part (ii)
Even though non-refundable annual fee amounting to Rs.45, 000 in advance relates to the
maintenance service of machinery that the SE is required to undertake to fulfil the contract, the
advance payment does not result in the transfer of a promised maintenance service to the customer.
Instead, it is an administrative task. Therefore, the non- refundable annual fee is an advance payment
for performance obligations to be satisfied in the future and isrecognised as revenue when those future
maintenance services are provided.
5.
(i) The completion of the sale transaction is uncertain because it is contingent upon purchaser
(YE) securing the contract with another company (AMZ & Company). Therefore, KIL should
not recognize any revenue since YE has not obtained the control of machine.
(ii) Revenue should be recognized when the food factory is delivered to the customer. Until then
no revenue should be recognized and the 25% deposit should be treated as a contract
liability.
(iii) If the outcome of a service transaction cannot be estimated reliably, revenue should only
be recognized to the extent that expenses incurred are recoverable from the customer. Thus
revenue to the extent of Rs. 12 million may be recognized in the first year.
686
Example: PERFORMANCE OBLIGATION
Question:
(i) ECL has entered into a contract with Kashif Builders for construction of a residential project,
including supply of construction material, architectural services, engineering and site clearance.
ECL and its competitors provide such services separately also.
(ii) eSolutions Limited, a software developer, entered into a two-year contract with a customer to
provide software license including future software updates and post implementation support
services. The software license would remain functional even if the updates and post
implementation support services are discontinued.
Required:
(a) Define the term ‘performance obligation’ and state the criteria which should be met if goods
or services promised to a customer are to be considered as distinct.
(b) In view of the requirements of IFRS 15 ‘Revenue from Contracts with Customers’, discuss
whether goods and
services provided in each of the above contracts represent a single performance obligation.
Answer:
Part (a)
Performance obligation is a promise in a contract with a customer to transfer to the customer either:
 a good or service (or a bundle of goods or services) that is distinct; or
 A series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
A good or service is distinct if both of the following criteria are met:
 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; and
 the entity’s promise to transfer the good or service is separately identifiable from other
promises in the contract Part (b)
(i) The different services being performed under the contract are separately identifiable
but the customer cannot benefit from services separately from the other. Based on this, ECL
should account for services in the contract as a single performance obligation.
(ii) Transfer of software license, software updates and support services are distinct. However, the
software license is delivered before the other services and remains functional without updates
and technical support. Further, the customer can benefit from each of the services either on
their own or together with other services that are readily available. Thus, the entity’s promise
to transfer the good or service is separately identifiable from other promises in the contract.
Based on the above, the contract should not be accounted for as a single performance
obligation.
Existence of a significant financing component in the contract
In determining the transaction price, an entity shall adjust the promised amount of consideration for
the effects of the time value of money if the timing of payments agreed to by the parties to the
contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit
of financing the transfer of goods or services to the customer.
The objective when adjusting the promised amount of consideration for a significant financing
component is for an entity to recognise revenue at an amount that reflects the price that a customer
would have paid for the promised goods or services if the customer had paid cash for those goods or
services when (or as) they transfer to the customer (i.e. the cash selling price).
687
An entity shall consider all relevant facts and circumstances in assessing whether a contract contains a
financing component and whether that financing component is significant to the contract, including
both of the following:
(a) the difference between the amount of promised consideration and the cash selling price
of thepromised goods or services;
(b) the combined effect of both of the following:
(i) the expected length of time between when the entity transfers the promised goods or
servicesto the customer and when the customer pays for those goods or services; and
(ii) the prevailing interest rates in the relevant market.
An entity shall present the effects of financing (interest revenue or interest expense) separately from
revenue from contracts with customers in the statement of comprehensive income. Interest revenue or
interest expense is recognised only to the extent that a contract asset (or receivable) or a contract
liability is recognised in accounting for a contract with a customer.
For each performance obligation identified, an entity shall determine at contract inception whether
it:
 satisfies the performance obligation over time; or
 satisfies the performance obligation at a point in time.
An entity transfers control of a good or service over time and, therefore, satisfies a performance
obligation andrecognizes revenue over time, if one of the following criteria is met:
 the customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs;
 the entity’s performance creates or enhances an asset that the customer controls as the asset is
created or enhanced; or
 the entity’s performance does not create an asset with an alternative use to the entity and the entity
has an enforceable right to payment for performance completed to date.
When goods or services are transferred continuously, a revenue recognition method that best depicts
the entity’s performance should be applied (and updated as circumstances change).
Acceptable methods include:
 Output methods: units produced, units delivered, contract milestones or surveys of work
performed;
 Input methods: costs incurred, labour hours expended, machine hours used.
If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a
point in time. To determine the point in time at which a customer obtains control of a promised asset and
the entity satisfies a performance obligation, the entity shall consider the requirements for control as
discussed earlier. In addition, an entity shall consider indicators of the transfer of control, which include,
but are not limited to, the following:
 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.
Accounting for settlement discounts
Settlement discounts (also known as prompt payment discounts or cash discounts) are offered to credit
customers to encourage early payment of their account. It is not guaranteed that customers will take
advantage of settlement discounts at the point of sale as it is dependent upon whether or not credit customer
688
pays within the timeframe allowed for settlement discount.
While applying IFRS 15 five step approach, the third step requires an entity to 'Determine the transaction
price', which is the amount to which an entity expects to be entitled in exchange for the transfer of goods and
services. An entity is required to consider the terms of the contract and its customary business practices to
determine the transaction price. IFRS 15 does not distinguish between trade discount and settlement discount.
When settlement discounts are offered, the expected consideration is variable as the amount the entity will
actuallyreceive is dependent upon the customer choice as to whether it will take advantage of the discount.
Where a contract contains elements of variable consideration, the entity should estimate the amount of
variableconsideration to which it will be entitled under the contract.
The variable consideration is only included in the transaction price if, and to the extent that, it is highly
probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty
has been subsequently resolved.
When a business makes a sale, it does not know whether the customer will take advantage of the settlement
discountor not, therefore, this is dealt in following ways:
(a) Record the revenue for the full amount if the customer is not expected to pay early:
(i) If customer does not pay early as expected, the full amount is due as recorded already.
(ii) If customer pays early and is entitled to discount, recognise the reduction in revenue by the
amount of discount. Reduction in revenue may be recorded by debiting the ‘revenue’ account
directly or by debiting ‘discount allowed’ account which is eventually deducted from sales
revenue (similar to sales returns).
(b) Record the revenue for reduced (net of discount) amount if the customer is expected to pay early:
(i) If customer pays early as expected, the net amount is due as recorded already.
(ii) If customer does not pay early as expected, treat the additional amount received as revenue from
original sales transaction.
Example: M Limited
Question: M Limited (ML) sold goods of Rs. 10,000 to Z Traders (ZT) on 8th August 2021 to be paid on
31st August 2021. However, if ZT pays within 10 days, it will be entitled to 4% cash discount and will
have to pay only Rs. 9,600.
Required:
How the above transactions along with following independent scenarios will be treated in the books
of ML on 8th August and on the date of payment:
(a) ML expected that ZT will not pay within 10 days and ZT actually paid on 31st August.
(b) ML expected that ZT will not pay within 10 days but ZT actually paid on 17th August.
(c) ML expected that ZT will pay within 10 days and ZT actually paid on 17th August.
(d) ML expected that ZT will pay within 10 days but ZT actually paid on 31st August.
Answer
Part (a)
8th August ZT: Receivables 10,000
Revenue 10,000
31st August Cash/bank 10,000
ZT: Receivables 10,000
Part (b)
Revenue 10,000
17th August Cash/Bank 9,600
Revenue/Discount Allowed 400
689
*Discount allowed account will be deducted from revenue is statement of comprehensive income
Part (c)
Revenue 9,600
th
31 August Cash/Bank 10,000
Revenue 400
As the above example highlights, applying IFRS 15 has a significant impact on the reported revenue.
Offering settlement discounts will result in lower revenue being recognised, when the discount is
accepted. This will result in lower gross profit margins and net profit margins. Before IFRS 15,
entities used to report discount allowed in operating expenses which did not affect gross profit
margins.
Buyers’ Perspective
IAS 2 Inventories requires that: ‘trade discounts, rebates and other similar items are deducted in
determining the cost of purchase’. Therefore, the treatment of trade discounts is clear and straight-
forward.
However, the treatment of settlement discounts is not specified by IAS 2. In November 2004 the IFRS
Interpretations Committee (IFRIC) considered this and issued an ‘agenda decision’ and tentatively
agreed that settlement discounts received should be deducted from the cost of the inventories.
In light of above and in order to achieve consistency of accounting treatment with IFRS 15, our
preferred view is to record the purchase and related liability (trade payables) at full cost of the goods.
This is in line with prudence concept, which requires that expenses and liabilities must not be
understated.
Then, the purchaser will decide whether or not to take advantage of settlement discount considering
his cash flow position. The subsequent treatment is as follows:
 If advantage of settlement discount is not taken, the gross amount is payable to supplier as already
recorded.
 If advantage of settlement discount is taken, the differential is recognised as reduction of cost of
purchases. Alternatively, ‘discount received’ may be credited. The ‘discount received’ is netted
off against the cost of purchase of inventory (in accordance with IAS 2).
Question: M Enterprises (ME) sold goods of Rs. 10,000 to Zahra Limited (ZL) on 8th August 2021
to be paid on 31st August 2021. However, if ZL pays within 10 days, it will be entitled to 4% cash
discount and will have to pay only Rs. 9,600.
Required:
How the above transactions along with following independent scenarios will be treated in the books
of ZL on 8th August and on the date of payment:
(a) ZL did not take advantage of settlement discount terms and paid on 31st August.
(b) ZL took advantage of settlement discount and paid on 17th August.
Answer:Part (a)
8th August Purchases 10,000
ME: Trade payables 10,000
31st August ME: Trade payables 10,000
Cash / Bank 10,000
Part (b)
8th August ZT Receivables 10,000
revenue 10,000
17th August Cash 9,600
690
Revenue/discount allowed 400
ZT: receivables 10,000
*Discount allowed account will be deducted from Revenue in statement of comprehensive income.
However, the above treatment of recording purchases or inventory at full cost of the goods shall not be
appropriate when an entity purchases inventories on deferred settlement terms. When the arrangement
effectively contains a financing element, that element, for example a difference between the purchase
price for normal credit terms and the amount paid, is recognised as interest expense over the period of the
financing.
Example: A Limited and S Limited

Question: A Limited (AL) bought and obtained control of goods from S Limited (SL) on 1 st July 2021.
The parties have agreed to fixed contract price of Rs. 880,000 to be paid on 30th June 2022. The normal
credit period is 15 to 30 days in the relevant industry. SL offers same goods for Rs. 800,000 if paid within
normal credit period. AL and SL have year-end of 30th June.
Required:
Pass journal entries to record the above transaction in the books of AL and SL.
01-Jul-2021 Purchases 800,000
SL: Trade payables 800,000
30-Jun-2022 SL: Trade payables 800,000
Cash / Bank 880,000

01-Jul-2021 AL: Trade receivables 800,000
Revenue (sale of goods) 800,000
30-Jun-2022 Cash /Bank 880,000
AL: Trade receivables 800,000
The same approaches (relating to prompt payment discount and deferred settlement terms) are
applicable when anentity acquires non-current assets.
691
Past Paper Questions
Question 1. (Spring 2020)
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 ‘Revenue
from Contracts with Customers’. (14)
Answer 1
Trich Mir Limited
Correcting entries for the year
ended 31 December 2019
Debit Credit
S.No. Description ---- 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 paid to employees is correctly capitalized
(ii) Cost of goods sold 15.00
Inventories 15.00
Receivable (30×60%)–11 7.00
Construction revenues 7.00
(iii) Contract Asset 9.6
Revenue 2.4
Receivable 12.00
Allocation:
Stand Alone Allocatio
Price n
A 12 9.6
B 8 6.4
20 16
692
(a) Stupa Limited (SL) sells electrical products at following standalone prices:
Product Rupees
E-1 30,000
E-2 30,000
E-3 50,000
Required: Calculate transaction price to be allocated to each product under each of thefollowing independent
situations:
i. SL offered to sell one unit of each of the above products for Rs. 90,000.
SL regularly sells one unit each of E-2 and E-3 together for Rs. 70,000. (04)
ii. SL offered to sell one unit of E-1 and two units of E-3 for Rs. 104,000. (02)
(b) On 1 October 2018, Kushan Construction Limited (KCL) entered into a contract to construct a
commercial building for a customer for Rs. 50 million and a bonus of Rs. 10 million if the building is
completed on or before 31 December 2019.
Till 30 June 2019, KCL expected that the building will be completed within time at a total cost of Rs.
40 million. However, due to bad weather and time involved in regulatory approvals, the building was
completed on 28 February 2020 at a total cost of Rs. 42 million of which Rs. 26 million was incurred
till 30 June 2019.
Required:
Compute profit to be recognized for the years ended 30 June 2019 and 2020, if:
(i) Performance obligation under the contract is satisfied over time. (04)
(ii) Performance obligation under the contract is satisfied at a point in time. (01)
(c) The nature, timing and amount of consideration promised by a customer affect the estimate of
the transaction price.
Define the term ‘transaction price’ and list down the factors that may affect determination of the
transaction price.
(04)
Answer 2
a) (i) Allocation of transaction price
Standalone price First Allocation Final Allocated Transaction price
E-1 30,000 30,000 27,000
(30,000/100,000 x 90,000)
E-2 30,000 26,250 (w-1) 23,625
(26,250/100,000 x 90,000)
E-3 50,000 43,750 (w-1) 39,375
(43,750/100,000 x 90,000)
110,000 100,000 90,000
W-1) There is total discount of 20,000 [110,000 – 90,000] however as E-2 and E-3 are sold together for
70,000 and the sum of their standalone prices is 80,000 [30,000 + 50,000] therefore discount of
10,000 [80,000 -70,000] relates specifically o E-2 an E-3 only. Remaining discount will be allocated
toall products.
Standalone price Allocation
E-2 30,000 26,250
(30,000/80,000 x 70,000)
E-3 50,000 43,750
(50,000/80,000 x 70,000)
80,000 70,000
(ii)
Standalone price Allocated Transaction price
E-1 30,000 24,000
(30,000/130,000 x 104,000)
E-3 100,000 80,000
(50,000 x 2) (100,000/130,000 x 104,000)
130,000 104,000
(b) (i) Computation of profit – performance obligation satisfied ‘over time’:
693
2019 2020
Completion % 65% 100%
(26÷40×100)
----------------- Rs. -----------------
Revenue 39.0 11.0
(50+10)×65 (50–39)
%
Cost (26.0) (16.0)
(42–26)
Profit/(loss) 13.0 (5.0)
(ii) Computation of profit – performance obligation satisfied ‘at a point in time’:
2019 2020
----------------- Rs. -----------------
Revenue - 50.0
Cost - (42.0)
Profit - 8.0
(c) Transaction price:

The 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 to be collected
on behalf of third parties.
Factors affecting determination of the transaction price:
(i) Variable consideration
(ii) Constraints on variable consideration
(iii) Existence of a significant financing components (time value of money)
(iv) Non-cash consideration
(v) Consideration payable to a customer

On 1 January 2021, Covaxin Telecom (CT) announced a new annual promotional package for its customers.
The package comprises of a mobile phone, full year unlimited on-net calls and 1,000 minutes per month on other
networks. Package price is Rs. 11,550 per quarter payable in advance on the first day of each quarter. At the
end of the contract, the phone would not be returned to CT.
On the first day of the promotional announcement, CT sold 1,000 packages. Based on the data available with
CT, it is expected that each customer would utilize 10,000 minutes of other networks with quarterly break-up
as under:
Quarter ending Minutes
31 March 2021 2,700
30 June 2021 2,000
30 September 2021 2,900
31 December 2021 2,400
The mobile phone has a retail value of Rs. 34,000, if sold separately. A monthly subscription for unlimited on-
net calls is Rs. 500 while every call on other networks is charged at Rs. 1.5 per minute, if billed separately.
Required:
Compute the quarterly revenue to be recognized for the quarters ending 31 March 2021 and 30 June 2021. (08)
Answer 3:
QUARTER WISE REVENUE:
Standalone prices Transaction price Allocation
Mobile phone 34,000 28,560 per package (34,000/55,000 x
46,200)
On-net calls 6,000 5,040 per package (6,000/55,000 x
(12 x 500) 46,200)
Other network calls 15,000 12,600 per package (15,000/55,000 x
(10,000 x 1.5) 46,200)
Total 55,000 46,200
(11,550 x 4)
694
First Quarter revenue:
a) Mobile Phone:
100% revenue related to mobile phones should be recognize upon delivery in first quarter,
so:
28,560 x 1,000 packages = 28,560,000
b) On-net calls:
5,040 x 1,000 packages x 3/12 = 1,260,000 [As information of actual network usage is not
available so assumed as equal usage in each quarter]
c) Other Mobile calls:
12,600/10,000 x 2,700(minutes in first quarter) x 1,000 packages = 3,402,000
Total Revenue = 33,222,000 (28,560,000 + 1,260,000 + 3,402,000)
Second Quarter Revenue:
a) Mobile phone = NIL
b) 5,040 x 1,000 packages x 3/12 = 1,260,000
c) 12,600/10,000 x 2,000 x 1,000 = 2,520,000
Total revenue = 3,780,000 (1,260,000 + 2,520,000)

Financial statements of Parodia Motors Limited (PML) for the year ended 30 June 2021 are under
preparation. While reviewing revenues from contract with customers, following matters have been
identified:
(i) On 1 November 2020, PML sold Car-A to Alpha Limited (AL) for Rs. 5 million. As per the
contract, Rs. 1 million would be paid immediately and the balance would be paid after 2 years.
The accountant has recognized revenue to the extent of the cost of Car-A i.e. Rs. 3.5 million and
remaining revenue would be recognized upon receipt of balance from AL.
(ii) On 1 January 2021, PML entered into six months’ contract with Beta Limited (BL) to sell Car-B for
Rs. 3.5 million per unit. As per the contract, if BL purchases more than 10 units during the contract
period, the price will be retrospectively reduced to Rs. 3.4 million per unit. At the inception of the
contract, PML concluded that BL will meet the threshold for the discount. BL purchased 11th unit
of Car- B on 28 June 2021 for which no revenue has been recorded. BL has made payments of all
units except 11th unit which will be settled in July 2021.
(iii) On 1 February 2021, PML sold Car-C to Gamma Limited (GL) for Rs. 3 million and recognized the
entire amount as revenue. PML also provided GL a Rs. 0.2 million discount voucher for any future
purchases of spare parts within one year. There is 80% likelihood that GL will redeem the discount
voucher and will purchase spare parts within one year. By the end of the year, no spare parts were
purchased by GL. PML normally sells Car-C for Rs. 3 million with no discount voucher.
(iv) On 20 February 2021, PML sold Car-D to Delta Limited (DL) with one-year free maintenance
services at a lumpsum payment of Rs. 3.6 million. Payment was made on 1 March 2021 upon
delivery of Car-D to DL. The revenue of Rs. 1.2 million (i.e. 4/12 of Rs. 3.6 million) has been
recognized. PML normally sells Car-D and annual maintenance services separately for Rs. 3.5
million and Rs. 0.3 million respectively.
Discount rate of 12% per annum may be used wherever required.
Required:
Prepare correcting entries for the year ended 30 June 2021 in accordance with IFRS 15 ‘Revenue from
Contracts with Customers’. (16)
Answer 4
Parodia Motor Limited
Correcting entries for the year ended 30 June 2021
S. Description Debit Credit

------ Rs. in '000 ------
(i) Receivable - AL 4,189(W-1) ‒3,500 689
Revenue 689
695
Cost of sales 3,500
Inventory 3,500
Receivable – AL 3,189×12%× (8÷12) 255
Interest income 255
(ii) Receivable – BL 3,400‒ (100×10) 2,400
Contract / Refund liability- BL (100×10) 1,000
Revenue 3,400
Initially the entry of first 10 cars would have been recorded as follows during the year
Receivable (10x3,500) 35,000
Revenue(10x3,400) 34,000
Refund liability 1,000
(iv) Revenue (3,000-2,848) (W-2) 152
Contract / Refund liability- GL 152
There is Still time Left for Redemption of Discount Voucher
(v) Contract / Refund liability – DL 2,211
Revenue 3,411(W-4) ‒1,200 2,211
W-1: Revenue to be recognized - AL
Ax Rs. in '000
Amount received 1,000
Present value of remaining balance 4,000×(1.12) - 2 3,189
Total revenue 4,189
W-2: Price allocation – GL

Standalone price Price
Car-C 3,000 3,000/3,160x3,000 2,848
Discount voucher (80%×200) 160 160/3,160x3,000 152
3,160 3,000
W-3: Price allocation – DL
Car-D 3,500 3,500/3,800x3,600 3,316
Annual maintenance 300 300/3,800x3,600 284
3,600 3,600
W-4: Revenue to be recognized – DL
Car-D (W-3) 3,316
Annual maintenance 284×4/12 95
3,411

Rhombus Limited (RL), a supplier of high quality office equipment, has entered into following two contracts
during the year ended 31 August 2022:
(i) On 1 July 2022, RL entered into a contract with Trapezoid Limited (TL) to sell 50 laptops at a total
consideration of Rs. 10 million. 50% laptops would be delivered on 20 July 2022 and balance on 15
August 2022. RL was unconditionally entitled to receive full payment upon delivery of first lot of 25
laptops, however, TL paid full amount on 31 July 2022.
On 7 August 2022, the contract was modified as TL ordered additional 30 laptops of Rs. 190,000 each for
delivery on 25 August 2022. These 30 laptops are distinct but do not reflect the stand-alone selling price.
It was agreed that TL would pay for 29 laptops only instead of 30 laptops. This discount has been given
in compensation of minor defects identified in 25 laptops, delivered on 20 July 2022. TL settled the
balance in September 2022 as per the terms of the contract.
All laptops were delivered as agreed. (07)
(ii) On 1 January 2022, RL entered into a contract with Crescent Limited (CL) for sale of 10 units of its state
of the art 3D printers. The cost and stand-alone price of goods/services included in each unit of printer are
as follows:
696
Unit Cost Unit Price
--Rs. In Million---
Hardware 1,800
3,600
Printing Software 720
Software upgrade to next version 350 500
Maintenance support for 1 year 210 N/A
RL sells 3D printer hardware along with the software as hardware cannot be used without the printing
software. The 3D printer remains functional without the software upgrade and the maintenance support.
RL sells software upgrade upon release to all of its customers. However, RL does not provide
maintenance support but went against its policy to provide it to CL.
Each unit of printer was sold to CL at an overall discounted price of Rs. 4 million. As per payment terms,
CL paid 30% on 1 January 2022 while 50% was paid at the time of delivery of printers (hardware plus
printing software) on 1 March 2022 and remaining 20% will be paid in February 2023.
At year-end, 80% work has been completed on the new version of the printing software which is expected
to be released in October 2022. (09)
Required:
Prepare necessary accounting entries for the year ended 31 August 2022 in accordance with the IFRSs. (No
marks will be awarded on entries without dates)
Answer 5
Rhombus limited
Accounting entries for the year ended 31 August 2022
Debit Credit
Date Description ------ Rs. in '000 ------
(i) 20-Jul-22 Receivable 10,000
Revenue 10,000÷50×25 5,000
Contract Liability(bal) 5,000
31-Jul-22 Cash 10,000
Receivable 10,000
7-Aug-22 Revenue 190
Contract Liability 190
(Revenue reversed due to minor defects in 25 items
delivered on 20-7-2022)
15-Aug-22 Contract Liability 4,864
Revenue(W-1) 4,864
25-Aug-22 Contract Asset / Receivable 190×29 5,510
Contract Liability 5,000+190-4,864 326
Revenue(W-1 x30) 5,836
(ii) 1-Jan-22 Cash 40,000×30% 12,000
Contract Liability 12,000
1-Mar-22 Cash 40,000×50% 20,000
Contract Liability 12,000
Contract Asset / Receivable Bal. fig. 730
Revenue (W-1)3,273×10 32,730
31-Aug-22 Contract Asset / Receivable (273×10)2,730÷12×6 1,365
Revenue(Maintenance ) 1,365
No revenue will be recorded for software upgrade.
W-1 Modification of Contract
30 x 190 = 5,700.
(5,000 + 5,700)/55 = 194.55/unit.
194.55 x 25 = 4,864 (Revenue to be recorded on 15-8-2022)
(Laptops are considered distinct therefore termination of contract and creation of new contract using average
price)
697
W-2: Allocation of transaction price
Description Stand-alone price Price per unit
3D Printer and Software 3,600 3,273*
Software upgrade 500 454
Maintenance 300(W-1) 273
4,400 4,000
*3,600/4,400 x 4,000 = 3,273
W-1) Standalone sale price of maintenance service is estimated by using cost plus approach.
Margin: [ 3,600 – 1,800 – 720]/ 3,600 x 100 = 30% or by using figures of software upgrade.

Fluorine Limited (FL), a manufacturer of ships, has entered into the following contracts during the year
ended 31 December 2022:
(i) On 1 January 2022, FL entered into a contract with Alpha Limited (AL) to construct a cruise ship for
Rs. 400 million to be delivered on 31 December 2023 i.e. the date on which control of the ship would
be transferred to AL. As per the contract, 90% of agreed amount was paid immediately by AL and the
balance will be paid on delivery.
Till 31 December 2022, only 40% of the construction of the ship was completed at a cost of Rs. 150
million.
(ii) On 1 April 2022, FL entered into a contract with Beta Limited (BL) to sell three fishing boats for Rs.
50 million per boat. The amount was received on 1 April 2022 but the boats were delivered on 1 May
2022. As per the contract, if BL purchases more than six boats before 31 December 2022, FL will
retrospectively reduce the price to Rs. 48 million per boat. At the inception of the contract, FL
expected that BL would meet the threshold for the discount.
On 1 November 2022, BL purchased two additional boats on the same price of Rs. 50 million per boat
for which the payment was made in January 2023. Despite FL’s expectation, no further order was
placed by BL till 31 December 2022.
(iii) On 1 November 2022, FL sold a luxury yacht to Gamma Limited (GL) for Rs. 100 million on cash. FL
also provided GL with a Rs. 5 million discount voucher for any interior design work on yacht within
six months. There is 80% likelihood that GL will award the work of interior design within six months
and will avail the discount. However, no interior design work was awarded till 31 December 2022. FL
normally sells such luxury yachts for Rs. 100 million without any discount voucher for interior design
work.
Discount rate of 15% per annum may be used wherever required.
Required:
Prepare journal entries in FL’s books to record the above information for the year ended 31 December 2022
in accordance with IFRSs. (No marks will be awarded on entries without dates) (09)
Answer 6
Fluorine Limited
General Journal
Debit Credit
S.No. Date Description
(i) 1 Jan 22 Cash 400×90% 360.0
Contract liability - AL 360.0
31 Dec 22 Interest expense 360×15% 54.0
Contract liability - AL 54.0
Inventory 150.0
Cash 150.0
(ii) 1 Apr 22 Cash 50×3 150.0
Contract / Refund liability - BL 150.0
1 May 22 Contract / Refund liability - BL 48×3 144.0
Revenue 144.0
1 Nov 22 Receivable – BL 50×2 100.0
Revenue 48×2 96.0
698
Contract / Refund liability - BL 4.0
31 Dec 22 Contract / Refund liability - BL 6(150–144)+4 10.0
Revenue 10.0
(iii) 1 Nov 22 Cash 100.0
Contract / Refund liability - GL (W-1) 3.8
Revenue (W-1) 96.2
W-1: Price allocation

------- Rs. in million -------
Luxury yacht 100.0 96.2
(100×100÷104)
Discount 4.0 3.8
(5×80%) (4×100÷104)
104.0 100.0

The following information pertains to three independent contracts:
(i) Alpha entered into a contract with Beta to provide administrative support services to Beta for a period of
one year. These services encompass data entry, scheduling departmental meetings and tasks, and so on,
to help Beta focus on its core operations. Alpha is not entitled to any amount if the one-year period is not
completed.
(ii) Gamma is developing a residential society comprising identical villas. Delta entered into contract with
Gamma to buy one of the villas. The control of the villa will be transferred to Delta once the entire
society is complete.
The contract specifically mentions that no customized modification will be made during the
construction by Gamma. Delta is required to make payments in proportion to the work done. In case of
termination by Delta, Gamma is liable to return the amount paid by Delta once the villa is sold to
another party.
(iii) Eta entered into a contract with Theta to develop a software for Theta. The software will be designed
specifically to meet Theta's operational needs and will not be usable for any other customer. The contract
states that Theta will pay 50% of the total contract price upfront and the remaining 50% upon completion of
work. Theta does not have the right to terminate the contract unless Eta fails to perform.
Required:
Analyze whether the revenue should be recognized over time in each of the above contracts in accordance with
IFRS 15. (08)
Answer 7
As per para 35 of IFRS 15, an entity transfers control of a good or service over time and, therefore, satisfies
a performance obligation and recognises revenue over time, if one of the following criteria is met:
a) The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.
b) The entity’s performance creates or enhances an asset that the customer controls as the asset is created or
enhanced.
c) The entity’s performance does not create an asset with an alternative use to the entity and the entity has an
enforceable right to payment for performance completed to date.
(i) Beta would be simultaneously receiving and consuming the benefits of Alpha’s performance of
administrative support services so Alpha should recognize the revenue over time. The fact that another
entity would not need to re-perform the administrative support services already provided to date by
Alpha also demonstrates that Beta simultaneously receives and consumes the benefits of the services
performed by Alpha. As criterion (a) is fulfilled, payment terms have no effect on revenue recognition.
(ii) As control of villa will be transferred to Delta upon completion of entire society, criteria (a) or (b) have not
met. The villas do seem to have an alternative use for Gamma as they can be sold to another customer
699
in case of termination of contract. Hence, the revenue shall not be recognized by Gamma over time as
criterion (c) above is also not met. Revenue would be recognized when control is transferred to Delta
(iii) Theta will be able to consume the benefits of the software upon completion, so criteria (a) or (b) have not
been met. As per criterion (c) above, the development of software does not create an asset with an
alternative use for Theta, as the software will be designed specifically for Theta’s needs and will not be
applicable for other customers. Eta also has a right to payment for performance completed to date, as
Theta cannot terminate the contract. Therefore, Eta should recognize revenue over time in accordance
with criterion (c).

Exquisite Limited (EL) entered into the following two contracts during the year ended31 December 2023
(i) On 1 October 2023, EL entered into a contract with Alpha Limited (AL) to provide monthly payroll
processing service for two months. EL concluded that the service is a single performance obligation performed
over time and is measured on time basis
EL initially proposed a fee of Rs. 620,000 for each month in cash. However, due to liquidity problem, AL
declined this offer. Instead, AL agreed to compensate EL with its 5,000 ordinary shares per month of service,
totalling 10,000 shares for the entire contract. According to the terms of the contract, the shares are to be
delivered uponthe successful completion of each month of service.
As a result, EL received 5,000 shares on 31 October 2023 and another 5,000 shares on 30 November 2023. The
fair value of each AL’s share was Rs. 125 on 1 October 2023, Rs. 120 on 31 October 2023, Rs. 110 on
30 November 2023, and Rs. 108 on 31 December 2023 respectively
EL holds all shares received from AL on 31 December 2023.
(ii) On 1 November 2023, EL also entered into a six months’ contract to sell goods to Beta Limited (BL), a large
global chain of retail stores. BL committed to make purchases of at least Rs. 20 million during the contract
period.
The contract also required EL to make a non-refundable payment of Rs. 2 million toBL at the inception of the
contract for the necessary changes to shelving to prominently display EL’s products.
On 15 December 2023, EL sold goods having invoice value of Rs. 6 million to BL,which BL paid on 30
December 2023.
Required:
Prepare necessary accounting entries in EL’s books for the year ended 31 December 2023 in accordance with
the IFRSs. (No marks will be awarded for entries without dates) (08)
700
Examples of IFRS 15 Revenue from Contracts with Customers
Example 1 Modification of a contract for goods [Example 5 of IFRS Part B]
An entity promises to sell 120 products to a customer for 12,000 (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 product 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 2,850 or 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.
In accordance with IFRS 15, 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 recognises revenue of 100 per product for the 120 products in the original contract and 95 per
product for the 30 products in the new contracts (as and when the control is transferred)
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 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 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 900 (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 1,500 or 50 per product. That price comprises the agreed-upon
price for the additional 30 products of 2,400, or 80 per product, less the credit of 900.
At the time of modification, the entity recognises the 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 80 per product does not reflect
the stand-alone selling price of the additional products. Consequently, the contract modification does not
meet the conditions of IFRS 15 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 recognised as revenue for each of the remaining products is a blended price of
93.33 ([(100 × 60 products not yet transferred under the original contract) + (80 × 30 products to be
transferred under the contract modification)] ÷ 90 remaining products}.
Example 2 Customer simultaneously receives and consumes the benefits [Example 13 of IFRS PartB]
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 in accordance with IFRS 15 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 entity recognises revenue over time by
measuring its progress towards complete satisfaction of that performance obligation by using any of the
methods available in IFRS 15 (on monthly basis)
Example 3 – Assessing whether a performance obligation is satisfied at a point in time or overtime
[Example 17 of IFRS Part B]
701
An entity is developing a multi-unit residential complex. A customer enters into a binding sales contract
with the entity for a specified unit that is under construction. Each unit has similar floor plan and is of a
similar size, but other attributes of the units are different (for example, the location of the unit 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 completion of the contract when the customer obtains physical possession of
the unit. If the customer defaults on the contract before completion of the unit, the entity only has the
rightto retain the deposit.
At contract inception, the entity determines whether its promise to construct and transfer the unit to the
customer is a performance obligation satisfied over time. The entity determines that it does not have an
enforceable right to payment for performance completed 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 nothave
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 [means when performance obligation is satisfied and unit is
transferred]
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 substantive terms that precludes (restricts) the
entity from being able to direct the unit to 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 customer defaults on
its obligations by failing to make the promised progress payments as and when they are due, the
entity would have a right to all of the consideration promised in the contract if it completes the
construction of the unit. The courts have previously upheld similar rights that entitle developers to require
the customer toperform, subject to the entity meeting its obligations under the contract.
At contract inception, the entity determines whether its promise to construct and transfer the unit to the
customer is a performance obligation satisfied over time. The entity determines that the asset (unit)
created by the entity’s performance does not have an alternative use to the entity because the contract
precludes the entity from transferring the specified unit to another customer.
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 (as per previous court decisions).
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. To recognise revenue for that performance obligation satisfied over time, the
entity measures its progress towards complete satisfaction of its performance obligation by using any
relevant input/output method.
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 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’s obligation to the
entity would be limited to transferring control of the partially completed asset to the entity and paying the
702
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.
Example 4 Measuring progress when making goods or services available [Example 18 of IFRS Part B]
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
100 per month.
The entity determines that its promise to the customer is to provide a service of 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 th4e entity’s performance as it performs by making the health clubs available. Consequently,
the entity’s performance obligation is satisfied over time.
The entity also determines that the customer benefits from the entity’s service of making the health clubs
available evenly throughout the year. (That is, the customer benefits from having the health clubs
available, regardless of whether the customer uses it or not.) Consequently, the entity concludes that the
best measure of progress towards complete satisfaction of the performance obligation over time is a time-
based measure and it recognises revenue on a straight-line basis throughout the year at 100 per month.
Example 5 – Penalty gives rise to variable consideration [Example 20 of IFRS Part B]
An entity enters into a contract with a customer to build an asset for 1 million. In addition, the terms of
the contract include a penalty of 100,000 if the construction is not completed within three months of a
date specified in the contract.
The entity concludes that the consideration promised in the contract includes a fixed amount of 900,000
and a variable amount of 100,000 (which may or may be received because of charging penalty).
The entity estimates the variable consideration by using either of the following methods.
 Expected value method.
 Most likely method.
Example 6 – right of return [sale on approval basis] [Example 22 of IFRS Part B]
An entity enters into 100 contracts with customers. Each contract includes the sale of one product for 100
(100 total products × 100 = 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 60.
Because the contract allows a customer to return the products, the consideration received from the
customer is variable. To estimate the variable consideration to which the entity will be entitled, the entity
decides to use the expected value method because it is the method that the entity expects to better
predict the amount of consideration to which it will be entitled. Using the expected value method,
theentity estimates that 97 products will not be returned.
The entity concludes that it is highly probable that a significant reversal in the cumulative amount of
revenue recognised (ie 9,700) will not occur as the uncertainty is resolved (ie over the return period of 30
days).
The entity estimates that the costs of recovering the products will be immaterial and expects that the
returned products can be resold at a profit.
703
Upon transfer of control of the 100 products, the entity does not recognise revenue for the three products
that is expects to be returned. Consequently, the entity recognises the following:
(a) Revenue of 9,700 (100 × 97 products not expected to be returned);
(b) A refund liability of 300 (100 refund × 3 products expected to be returned); and
(c) An asset of 180 (60 × 3 products for its right to recover products from customers on settling the
refund liability).
Example 7 – Significant financing component and right of return [Example 26 of IFRS Part B]
An entity sells a product to a customer for 121 that is payable 2 years after right of return is expired. The
customer obtains control of the product at contract inception. 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 100, which represents the amount that the customer would pay
upon delivery for the same product sold under otherwise identical terms and conditions as at contract
inception. The entity’s cost of the product is 80.
The entity does not recognise revenue when control of the product transfers to the customer. 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 recognised will not occur. Consequently, revenue is recognised after three months when the
right of return lapses.
The contract includes a significant financing component. This is evident from the difference between the
amount of promised consideration of 121 and the cash selling price of 100 at the date that the goods are
transferred to the customer.
The contract includes an implicit interest rate of 10 per cent (ie the interest rate that over 2 years
discounts the promised consideration of 121 to the cash selling price of 100).
Accounting entries:
(a) When the product is transferred to the customer.
Stock with customer 80
Inventory 80
(b) When the right of return lapses (the product is not returned):
Receivable 100
Revenue 100
Cost of sales 80
Stock with customer 80
Until the entity receives the cash payment from the customer, interest revenue would be recognised on
time basis.
Example 8 – Advance payment and assessment of discount rate [Example 29 of IFRS Part B]
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 (ie the performance obligation will be satisfied at a point in time). The contract
includes two alternative payment options: payment of 5,000 in two years when the customer obtains
control of the asset or payment of 4,000 when the contract is signed. The customer elects to pay 4,000
when the contract is signed.
The entity concludes that the contract contains a significant financing component because of the length of
704
time between when the customer pays for the asset and when the entity transfers the asset to the customer,
as well as the prevailing interest rates in the market.
The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary to make
the two alternative payment options economically equivalent. However, the entity determines that the rate
that should be used in adjusting the promised consideration is six per cent, which is the entity’s
incremental borrowing rate.
The following journal entries illustrate how the entity would account for the significant financing
component:
(a) Recognise a contract liability for the 4,000 payment received at contract
inception:Cash 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 (increase) the contract liability by recognising
interest on 4,000 at six per cent for two years:
At the end of first year:
Interest expense 240
4,000 contract liability × (6 per cent interest) = 240
At the end of second year:
Interest expense 254
[4,000 + 240 contract liability] × (6 per cent interest) = 254
(c) Recognise revenue for the transfer of the asset (at the end of two years):
Revenue 4,494
Example 9 – Entitlement to non-cash consideration [Example 31 of IFRS Part B]
An entity enters into a contract with a customer to provide a weekly service for one year. The contract
issigned on 1 January 20X1 and work begins immediately. The entity concludes that the service is a
single
performance obligation This is because the entity is providing a series of distinct services that are
substantially the same and have the same pattern of transfer (the services transfer to the customer over
time and use the same method to measure progress – that is, a time-based measure of progress).
In exchange for the service, the customer promises 100 shares per week of service (a total of 5,200 shares
for the contract). The terms in the contract require that the shares must be paid upon the successful
completion of each week of service.
The entity measures its progress towards complete satisfaction of the performance obligation as each
week of service is complete. To determine the transaction price (and the amount of revenue to be
recognised), the entity measures the fair value of 100 shares that are received upon completion of each
weekly service (means at the end of each week as 100 x Fair value per share).
705
Example 10 – Consideration payable to a customer [Example 32 of IFRS Part B]
An entity that manufactures consumer goods enters into a one-year contract to 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 a accommodate the entity’s products.
The entity concludes that the payment to the customer is not in exchange for a distinct good or service
that transfers to the entity. This is because the entity does not obtain control of any rights to the
customer’s shelves. Consequently, the entity determines that the 1.5 million payment is a reduction of the
transaction price.
Suppose during the first month, the entity transferred goods amounting to sale value of 2 million
therefore, in the first month in which the entity transfers goods to the customer, the entity recognises
revenue of 1.8 million. (2 million ÷ 15 million x 13.5).
Example 11 – Allocation methodology [Example 33 of IFRS Part B]
An entity enters into a contract with a customer to sell Products A, B and C in exchange for 100. The
entity will satisfy the performance obligations for each of the products at different points in time. The
entity regularly sells 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 directly observable.
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 and the expected cost plus margin approach for Product C. The entity estimates
the stand-alone selling prices as follows:
Product Stand-aloneselling price Method
Product A 50 Directly observable
Product B 25 Adjusted market assessment approach
Product C 75 Expected cost plus a margin approach
Total 150
The customer receives a discount for purchasing the bundle of goods because the sum of the stand- alone
selling prices (150) exceeds the promised consideration (100). The entity considers whether it has
observable 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
Product A 33 (50 ÷ 150 × 100)

Product B 17 (25 ÷ 150 × 100)
Product C 50 (75 ÷ 150 × 100)
Total 100
Example 12 – Allocating a discount [Example 34 of IFRS Part B]

An entity regularly sells Products A, B and C individually, thereby establishing the following stand-alone
selling prices:
Product Stand-alone selling price
706
Product A 40
Product B 55
Product C 45
Total 140
In addition, the entity regularly sells Products B and C together for 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 100. The
entity will satisfy the performance obligations for each of the products at different points in time.
The contract includes a discount of 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, because the entity regularly sells Products B and C
together for 60 and Product A for 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 60 of the transaction price to the single performance obligation and recognise
revenue of 60 when Products B and C simultaneously transfer to the customer.
As the contract requires the entity to transfer control of Products B and C at different points in time, then
the allocated amount of 60 is individually allocated to the promises to transfer Product B (stand-alone
selling price of 55) and Product C (stand-alone selling price of 45) as follows:
Product B 33 (55 / 100 total stand-alone selling price × 60)

Product C 27 (45 / 100 total stand-alone selling price × 60)
Total 60
Case B – Residual approach is appropriate
The entity enters into a contract with a customer to sell Products A, B and C as described in Case A. The
contract also includes a promise to transfer product D. Total consideration in the contract is 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 (from 15 to 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 in the contract.
As in Case A, because the entity regularly sells Products B and C together for 60 and Product A for 40, it
has observable evidence that 100 should be allocated to those three products and a 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 30 as follows:
Product Stand-alone selling price Method
Product A 40 Directly observable

Products B and C [100 - 40] 60 Directly observable
withdiscount
Product D (bal) 30 Residual approach
707
Total 130
The entity observes that the resulting 30 allocated to Product D is within the range of its observable
selling prices (15 – 45). Therefore, the resulting allocation (see above table) is consistent with the
allocation objective.
Case C – Residual approach is inappropriate

The same facts as in Case B apply to Case C except the transaction price is 105 instead of 130.
Consequently, the application of the residual approach would result in a stand-alone selling price of 5 for
Product D (105 transaction price less 100 allocated to Products A, B and C). The entity concludes that 5
would not faithfully depict the amount of consideration to which the entity expects to be entitled in
exchange for satisfying its performance obligation to transfer Product D, because 5 does not approximate
the stand-alone selling price of Product D, which ranges from 15 – 45. In this case, entity should use any
other method to estimate standalone price of product D.
Example 13 – Incremental costs of obtaining a contract [Example 36 of IFRS Part B]

An entity, a provider of consulting services, wins a competitive bid to provide consulting services to a
newcustomer. The entity incurred the following costs to obtain the contract:
External legal fees for due diligence 15,000
Travel costs to deliver proposal 25,000
Commissions to sales employees as a result of obtaining the contract 10,000
Total costs incurred 50,000
The entity recognises an asset for the 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 observes that the external legal fees and travel costs would have been incurred regardless of
whether the contract was obtained. Therefore, those costs are recognised as expenses when incurred.
Example 14 – Contract liability and receivable [Example 38 of IFRS Part B]
Case A – Cancellable contract
On 1 January 20X9, an entity enters into a cancellable contract to transfer a product to a customer on 31
March 20X9. The contract requires the customer to pay consideration of 1,000 in advance on 31 January
20X9. The customer pays the consideration on 1 March 20X9. The entity transfers the product on 31
March 20X9. The following journal entries illustrate how the entity accounts for the contract:
(a) The entity receives cash of 1,000 on 1 March 20X9 (cash is received in advance of performance):
Cash 1,000
(b) The entity satisfies the performance obligation on 31 March
20X9:Contract liability 1,000
Revenue 1,000
Case B – Non-cancellable contract
The same facts as in Case A apply to Case B except that the contract is non-cancellable. The following
journal entries illustrate how the entity accounts for the contract:
(a) The amount of consideration is due on 31 January 20X9 (which is when the entity recognises a
receivable because it has an unconditional right to consideration):
Receivable 1,000
708
(b) The entity receives the cash on 1 March 20X9:
Cash 1,000
Receivable 1,000
(c) The entity satisfies the performance obligation on 31 March 20X9:
Revenue 1,000
Example 15 – Contract asset recognized for the entity’s performance [Example 39 of IFRS Part B]
On 1 January 20X8, and entity enters into a contract to transfer Products A and B to a customer in
exchange for 1,000. The contract requires Product A to be 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
1,000 is due only after the entity has transferred both Products A and B to the customer. Consequently,
the entity does not have a right to consideration that is unconditional (a receivable) until both Products A
and B are transferred to the customer.
The entity identifies the promises to transfer Products A and B as performance obligations and allocates
400 to the performance obligation to transfer product A and 600 to the performance obligation to transfer
Product B on the basis of their relative stand-alone selling prices. The entity recognises 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:
Contract asset 400
Revenue 400
The entity satisfies the performance obligation to transfer product B and to recognise the unconditional
right to consideration:
Receivable 1,000
Contract asset 400
Revenue 600
Example 16 – Receivable recognised for the entity’s performance [Example 40 of IFRS Part B]
An entity enters into a contract with a customer on 1 January 20X9 to transfer products to the customer
for 150 per product. If the customer purchases more than 1 million products in a calendar year, the
contract indicates that the price per unit is retrospectively reduced to 125 per product.
Consideration is due when control of the products transfer to the customer. Therefore, the entity has an
unconditional right to consideration (ie a receivable) for 150 per product until the retrospective price
reduction applies (ie after 1 million products are shipped).
In determining the transaction price, the entity concludes at contract inception that the customer will meet
the 1 million products threshold and therefore estimates that the transaction price is 125 per product.
Consequently, upon the first shipment to the customer of 100 products the entity recognises the following:
Receivable (150 x 100) 15,000

Revenue (125 x 100) 12,500
Payable to customer (25 x 100) 2,500
(a) 150 per product × 100 products.
709
(b) 125 transaction price per product × 100 products.
The refund liability (means payable to customer) represents a refund of 25 per product, which is expected
to be provided to the customer for the volume-based rebate (ie the difference between the 150 price stated
in the contract that the entity has an unconditional right to receive and the 125 estimated transaction
price).
Example 17 – Option that provides the customer with a material right to future products (discount
voucher) [Example 49 of IFRS Part B]
An entity enters into a contract for the sale of Product A for 100. As part of the contract, the entity gives
the customer a 40 per cent discount voucher for any future purchases up to 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 discount voucher. The
standalone price of product A is 100.
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 [means there
are two performance obligations; i.e Product A and goods against discount voucher]
To estimate the stand-alone selling price of the discount voucher, the entity estimates an 80 per cent
likelihood that a customer will redeem the voucher and that a customer will, on average, purchase
Rs.50 of additional products. Consequently, the entity’s estimated stand-alone selling price of the
discount voucher is 12 (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
andthe discount voucher and the resulting allocation of the 100 transaction price are as follows:
Performance obligation Stand-alone
selling price
Product A 100
Discount voucher 12
Total 112
Product A 89 (100 / 112 × 100)

Discount voucher 11 (12 / 112 × 100)
Total 100
The entity allocates 89 to Product A and recognises revenue for Product A when control transfers. The
entity allocates 11 to the discount voucher and recognises revenue for the voucher when the customer
redeems it for goods or services or when it expires [means suppose if customer does not take the goods
against the discount voucher within the agreed time period].
Example 18 – Customer loyalty programme [Example 52 of IFRS Part B]
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 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 100,000. The entity expects 9,500 points to be redeemed. The entity
710
estimates a stand-alone selling price (totalling Rs.9,500) on the basis of the likelihood of redemption
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 (100,000) to the product and the points
on a relative stand-alone selling price basis as follows:
Product 100,000 91,324 [100,000 × (100,000 stand-alone selling price / 109,500)]

Points 9,500 8,676 [100,000 × (9,500 stand-alone selling price / 109,500)]
109,500 100,000
At the end of the first reporting period, suppose 4,500 points have been redeemed and the entity continues
to expect 9,500 points to be redeemed in total. The entity recognises revenue for the loyalty points of
4,110 [(4,500 points / 9,500 points) × 8,676] and recognises a contract liability of 4,566 (8,676 – 4,110)
for the unredeemed points at the end of the first reporting period.
At the end of the second reporting period, suppose 8,500 points have been redeemed cumulatively. The
entity updates its estimate of the points that will be redeemed and now expects that 9,700 points will be
redeemed. The entity recognizes revenue for the loyalty points of 3,493 [(8,500 total points redeemed /
9,700 total points expected to be redeemed) × 8,676 initial allocations] – 4,110 recognised in the first
reporting period). The contract liability balance is 1,073 (8,676 initial allocations – 7,603 of cumulative
revenue recognised).
Example 19 – Bill-and-hold arrangement [Example 63 of IFRS Part B]
An entity enters into a contract with a customer on 1 January 2018 for the sale of a machine and spare
parts. The manufacturing lead time for the machine and spare parts is two years.
Upon completion of manufacturing, the entity 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 2019, the customer pays for the machine and spare parts, but only 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, the entity stores the spare parts in a separate section of is 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 the promise to provide custodial services as a performance 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 recognised when (or as) control transfers to the customer.
Control of the machine transfers to the customer on 31 December 2019 when the customer takes physical
possession. The entity assesses the indicators of transfer of control to determine the point in time at
which control of the spare parts transfers to the customer, noting that the entity has received payment, the
customer has legal title to the spare parts and the customer has inspected and accepted the spare parts. The
entity recognises revenue for the spare parts on 31.12.2019 when control transfers tothe customer.
Example 20—Volume discount incentive [Example 24 of IFRS Part B]

An entity enters into a contract with a customer on 1 January 2018 to sell Product A for 100 per unit. If
711
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 90 per unit. Consequently, the consideration in the
contract is variable.
For the first quarter ended 31 March 2018, the entity sells 75 units of Product A to the customer. 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 determines that it has significant experience with this product and with the purchasing pattern
of the entity. Thus, the entity concludes that it is highly probable that a significant reversal in the
cumulative amount of revenue recognised (i.e. 100 per unit) will not occur when the uncertainty is
resolved (ie when the total amount of purchases is known). Consequently, the entity recognises revenue
of 7,500 (75 units × 100 per unit) for the quarter ended 31 March 2018.
In May 2018, the entity’s customer acquires another company and in the second quarter ended 30 June
2018 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 90.
Consequently, the entity recognises revenue of 44,250 for the quarter ended 30 June 2018. That amount is
calculated from 45,000 for the sale of 500 units (500 units × 90 per unit) less the change in transaction
price of 750 (75 units × 10 price reduction) for the reduction of revenue relating to units sold for the
quarter ended 31 March 2018.
712
Final Accounts Part 2
COMPANIES ACT, 2017: FOURTH SCHEDULE
General Requirements
a) All listed companies and their subsidiaries shall follow the International Financial Reporting
Standards in regard to financial statements as notified by the Commission, under Section 225 of
the Companies Act, 2017 (Act);
b) The disclosure requirements, as provided in this schedule, are in addition to the disclosure
requirements prescribed in International Financial Reporting Standards notified by the Commission
unless specifically required otherwise;
c) In addition to the information expressly required to be disclosed under the Act and this schedule,
there shall be added such other information as may be considered necessary to ensure that
required disclosure is not misleading.
Example 1: Statement of Compliance

These financial statements have been prepared in accordance with the accounting and reporting
standards as applicable in Pakistan. The accounting and reporting standards as applicable in Pakistan
comprise of:
–International Financial Reporting Standards (IFRS Standards), issued by the International Accounting
Standards Board (IASB) as notified under the Companies Act, 2017; and
–Provisions of and directives issued under the Companies Act, 2017.
Where the provisions of and directives issued under the Companies Act, 2017 differ from IFRS
Standards, the provisions of and directives issued under the Companies Act, 2017 have been followed.
d) The following shall be disclosed in the financial statements, namely:
i. General information about the company comprising the following:
 Geographical location and address of all business units including mills/plant;
 Particulars of company’s immovable fixed assets, including location and area of land;
 The capacity of an industrial unit, actual production and the reasons for shortfall
(comparative as well);
 Number of persons employed as on the date of financial statements and average number
of employees during the year ([opening + closing]/2);
 Name of associated companies or related parties or undertakings along with the basis of
relationship describing common directorship and percentage of shareholding.
Example 2: Legal Status and nature of business

MT Limited (the Company) is a public limited company and was incorporated in Pakistan in 1995
under the Companies Ordinance, 1984 (now the Companies Act, 2017), and is listed on the Pakistan
Stock Exchange Limited. The registered office and factory of the Company is situated at Multan Road,
Lahore. The Company also has regional offices located in Karachi, Multan, Sukkur and Islamabad.
The Company is principally engaged in assembling and manufacturing of agricultural machinery and
applications.
Example 3: Property, plant and equipment (Disclosed in sub-note)
713
The freehold land and building on owned land of the company are as follows:
- 202,343 square meters of factory land situated at Multan Road, Lahore;
- 697 square meters of land in sector F-6/1 Islamabad;
- Corporate office floors in Corporate Centre Lahore.
Example 4: Property, plant and equipment (Disclosed in sub-note)

Following are particulars of the Company’s immovable fixed assets:
Location Usage Total area (in Acres)

Shahrah-e-Roomi, Lahore Plant site and administrative offices 34.02
Herdo Sehari, Kasur Administrative offices 34.84
Lakho Baryar, Kasur Administrative offices 50.63
Example 5: Production Capacity

(Urea manufacturing Company)
Design Capacity Production
2018 2017 2018 2017
Urea Tonnes ‘000 Tonnes ‘000
Lahore – Plant I 695 695 688 692
Faisalabad – Plant II 635 635 635 635
Peshawar – Plant III 718 718 714 703
2,048 2,048 2,037 2,030
The shortfall in actual production are insignificant and considered normal in the industry.
Example 6: Capacity and production

(Electricity Generation Company)
2018 2017
MWh
Installed capacity (based on 8,760 hours) 1,086,240 1,086,240

Actual energy delivered 387,435 645,395
Under-utilisation of available capacity is due to less demand by WAPDA
Example 7: Number of employees

2018 2017
Total number of employees at end of the year 3,357 3,364
Average number of employees for the year 3,369 3,384
714
Percentage of Common
Name shareholding Basis of relationship directorship
ABC Limited 58% Subsidiary Ms. S
Mr. A
Mr. B
XYZ Limited 25% More than 20% Mr. B
shareholding
KLM Limited 6% Common directors Mr. K
Mr. M
Example 9: Associated companies and undertakings

The names of related parties with whom the Company has entered into transactions or had agreements /
arrangements in place during the year and whose names have not been disclosed elsewhere in these financial
statements are as follows:
Percentage of
Name of the related party Basis of relationship
Shareholding %
Toyota Tsusho Corporation Associated company 20%
Tomen Power (Singapore) (Private) Limited Associated company 16%
Red Communication Arts (Private) Limited Common directorship -
Kohinoor Power Company Limited Common directorship -
Pak Elektron Limited Common directorship -
Pel Marketing (Private) Limited Common directorship -
Wartsila Pakistan (Private) Limited Common directorship -
Kohinoor Energy Limited Employees Gratuity
Common control 0.23%
Fund
All transactions with related parties are carried out on mutually agreed terms and conditions.
ii. In respect of associated companies, subsidiaries or holding companies incorporated outside

Pakistan, following shall be separately disclosed;
o Name of undertaking and country of incorporation;
o Basis of association; and
o Aggregate percentage of shareholding, including shareholding through other companies or
entities;
Example 10: Related party disclosure (Disclosed in sub note)

Following particulars relate to associated companies incorporated outside Pakistan with whom the
company had entered into transactions during the year:
Name of undertaking Pakistan Maroc Phosphore S.A.
Country of incorporation Morocco
Basis of association Joint venture of OCP Group and Fauji
Group
Aggregate %age of shareholding 12.5% Equity investment by the
715
company
Example 11: Related party disclosure (Disclosed in sub note)

Following particulars relate to associated companies incorporated outside Pakistan with whom the
company had entered into transactions during the year:
Name of company Toyota Tsusho Corporation
Country of incorporation Japan
Basis of association Associated undertaking
Aggregate %age of shareholding 20%
iii. General nature of any credit facilities available to the company, other than trade credit available in
the ordinary course of business, and not availed at the date of the statement of financial position;
Note: This is not required in fifth schedule.
Example 12: Facilities of letters of credit and letters of guarantee (Disclosed in sub note) Facilities
of letters of credit and letters of guarantee amounting to Rs 17,395,000 thousand and Rs 239,293
thousand (2017: Rs 13,580,000 thousand and Rs 101,655 thousand) respectively are available to
the company against lien on shipping / title documents, US $ Term Deposit Receipts and charge on
assets of the company.
Example 13: Credit facilities (Disclosed in sub note)

Of the aggregate facility of Rs. 875 million (2018: Rs. 476.85 million) for opening letters of credit and
Rs. 440 million (2018: Rs. 207.05 million) for guarantees, the amount utilized as at June 30, 2019 were
Rs. 4.44 million (2018: Rs. 151.4 million) and Rs. 274.43 million (2018: Rs. 207.05 million)
respectively.
iv. In cases where company has made export sales following disclosures are required to be made in
respect of outstanding trade debts;
o Name of company or undertaking in case of related party; and
o Name of defaulting parties, relationship if any, and the default amount.
Note: This is not required in fifth schedule.
Example 14: Trade debts (Disclosed in sub note)

Included in due from export customers is an amount of Rs. 2.021 million (2017: 1.765 million)
receivable from ABC Shoe Company, Peru against export sales made by the Company. During the
year, the Company made export sales amounting to Rs. 6.332 million (2017: Rs. 4.077 million) to
ABC Shoe Company, Peru through bank contracts.
Requirements as to Statement of Financial Position
1. Sundry Requirements
Following items shall be disclosed as separate line items on the face of the financial statements;
(i) Revaluation surplus on property, plant and equipment;
(ii) Long term deposits and prepayments;
(iii) Unpaid dividend;
716
(iv) Unclaimed dividend; and
(v) Cash and bank balances.
2. Fixed Assets
Where any property or asset acquired with the funds of the company and is not held in the name of the
company or is not in the possession and control of the company, this fact along with reasons for the
property or asset not being in the name of or possession or control of the company shall be stated; and
the description and value of the property or asset, the person in whose name and possession or control it
is held shall be disclosed;
Example 15: Property, plant and equipment (Disclosed in sub note)

Land measuring 2 kanals and 2 marlas in possession of the Company, acquired in 2014 at a cost of
Rs. 57,800 thousand is not in the name of the Company due to pending legal case.
Example 16: Property, plant and equipment (Disclosed in sub note)

Land measuring 10 kanals is neither in the name of the Company nor in possession of the Company.
The Company paid Rs. 75,000 thousand in July 2017 for land to be acquired from Pakistan Railways
through open auction. The auction was later challenged in Lahore High Court and legal case is stilling
pending.
Land and building shall be distinguished between free-hold and leasehold;

Forced sale value shall be disclosed separately in case of revaluation of Property, Plant and Equipment.
In the case of sale of fixed assets, if the aggregate book value of assets exceeds five million rupees,
following particulars of each asset, which has book value of five hundred thousand rupees or more,
shall be disclosed,
(i) Cost or revalued amount, as the case may be;
(ii) The book value;
(iii) The sale price and the mode of disposal (e.g. By tender or negotiation);
(iv) The particulars of the purchaser;
(v) Gain or loss; and
(vi) Relationship, if any of purchaser with Company or any of its directors.
Example 17: Disposal of operating fixed assets
Book Sale Gain /

Particulars Cost Mode of
value proceeds (loss)
of assets disposal
Sold to (Rupees in thousand)
Book value greater than Rs. 500,000
m
C
o
n
y
a
Vehicle Employee: Mr. Ayaz 1,973 524 524 -

Vehicle Employee: Mr. Sikandar 2,503 1,608 1,608 -
Vehicle Employee: Mr. Amir 1,124 884 884 -
Book value less than Rs. 500,000 29,952 9,366 12,948 3,582
Year ended: June 30, 2019 35,552 12,382 15,964 3,582
Year ended: June 30, 2018 31,532 17,128 17,128 -
717
3. Long term loans and advances
With regards to loans and advances to directors following shall be disclosed:
(i) the purposes for which loans or advances were made; and
(ii) reconciliation of the carrying amount at the beginning and end of the period, showing
disbursements and repayments;
In case of any loans or advances obtained/provided, at terms other than arm‘s length basis, reasons
thereof shall be disclosed
In respect of loans and advances to associates and related parties there shall be disclosed,
(i) the name of each associate and related party;
(i) the terms of loans and advances;
(ii) the particulars of collateral security held, if any;
(iii) the maximum aggregate amount outstanding at any time during the year calculated by
reference to month-end balances;
(iv) provisions for doubtful loans and advances; and
(v) loans and advances written off, if any.
Example 18: Long Term Loans and advances -

Secured
2018 2017
Rs‘000 Rs’000
Loans and advances – considered good, to:
Executives 763,000 691,000
Other employees 719,000 618,000
1,482,000 1,309,000
Less: Amount due within twelve months 368,000 343,000
1,114,000 966,000
Reconciliation Executive Other 2018 2017

Rs‘000 Rs‘000 Rs‘000 Rs‘000
Balance at January 1 691,000 618,000 1,309,000 1,269,000
Disbursement 339,000 308,000 647,000 570,000
1,030,000 926,000 1,956,000 1,839,000

Repayments (267,000) (207,000) (474,000) (530,000)
Balance at December 31 763,000 719,000 1,482,000 1,309,000
These subsidized and interest free loans and advances are granted to employees as per the
Company’s policy and are repayable within one to ten years. House building loans carry mark-up at
4% per annum and are secured against the underlying assets.
The maximum amount of loans and advances to executives outstanding at the end of any month
718
during the year was Rs 805,865 thousand (2017: Rs 772,548 thousand).
4. Current assets
In respect of debts/receivables from associates and related parties there shall be disclosed.
(ii) the maximum aggregate amount outstanding at any time during the year calculated by reference
to month-end balances;
(iii) receivables, that are either past due or impaired, along with age analysis distinguishing between
trade debts, loans, advances and other receivables;
(iv) debts written off as irrecoverable, distinguishing between trade debts and other receivables;
(v) provisions for doubtful or bad debts distinguishing between trade debts, loans, advances and
other receivables; and
(vi)justification for reversal of provisions of doubtful debts, if any;
Example 19: Trade debts - Unsecured
2018 2017
Considered good Rs‘000 Rs’000
Due from customers 2,165,093 1,561,668
Due from associated undertakings 2,021 1,765
2,167,114 1,563,433
Considered doubtful
Due from customers 30,362 30,527
Less: Provision for doubtful debts (30,362) (30,527)
- -
2,167,114 1,563,433
These customers have no recent history of default.
2018 2017
Due from associated undertaking Rs‘000 Rs’000
ABC Shoe Company, Peru 2,021 1,765
Maximum aggregate amount due from associated undertakings at the end of any month in the year was
Rs. 3.319 million (2017: Rs. 1.967 million). No interest has been charged on the amounts due from
associated undertakings.
In respect of loans and advances, other than those to employees as per company’s human resource
policy or to the suppliers of goods or services, the name of the borrower and terms of repayment if the
loan or advance exceeds rupees one million, together with the particulars of collateral security, if any,
shall be disclosed separately;
Note: The requirements in above para relate to fourth schedule only and not required in fifth schedule.
Provision, if any, made for bad or doubtful loans and advances or for diminution in the value of or loss in respect
of any asset shall be shown as a deduction from the gross amounts;
Example 20: Loans and advances
2018 2017
Rs‘000 Rs’000
Current portion of long term loans and advances 368,000 343,000
719
Loans and advances to employees - unsecured 27,000 17,000
Advance to suppliers – considered good 82,000 150,000
Advance to subsidiary company – interest bearing 582,000 1,122,000
1,059,000 1,632,000
Advance to subsidiary company
This represents aggregate unsecured advance to, ABCEL, subsidiary company under a revolving credit
facility upto an amount of Rs 1,500,000 thousand to meet debt servicing obligations and other working
capital requirements. This carries mark-up at 1 month KIBOR + 0.60%. The maximum outstanding
amount at the end of any month during the year was Rs 671,261 thousand (2017: Rs 1,336,386 thousand).
5. Share capital and reserves

Capital and Revenue reserves shall be clearly distinguished. Any reserve required to be maintained under
the Act shall be separately disclosed. Any legal or other restrictions, on the ability of the company to
distribute or otherwise, shall be disclosed for all kind of reserves maintained by the company;
Example 21: Reserves
Capital Reserves 2018 2017

Rs‘000 Rs’000
Share premium 5.1 40,000 40,000
Capital redemption reserve 5.2 120,000 120,000
160,000 160,000
5.1 This represents premium of Rs. 5 per share received on public issue of 8,000,000 ordinary
shares of Rs. 10 each in 1991.
5.2 This represents reserve set up on redemption of preference shares of Rs. 120,000
thousands in 1996.
Revenue Reserves 2018 2017

Rs‘000 Rs’000
General reserve 8,802,360 8,802,360
Unappropriated profit 11,720,153 7,374,114
20,522,513 16,176,474
In respect of issued share capital of a company following shall be disclosed separately:

(i) shares allotted for consideration paid in cash;
(ii) shares allotted for consideration other than cash, showing separately shares issued against property
and others (to be specified);
(iii) shares allotted as bonus shares; and
(iv) treasury shares;
Shareholders agreements for voting rights, board selection, right of first refusal and block voting shall be
disclosed.
Example 22: Share Capital
Authorised share capital
720
2018 2017 2018 2017
Number shares
of ‘000 Rs’000
10,000 10,000 Ordinary shares of Rs. 10 each 100,000 100,000
Issued, subscribed and paid up capital
2018 2017 2018 2017
Number shares
of ‘000 Rs’000
Fully paid in cash
300 300 Ordinary shares of Rs. 10 each 3,000 3,000
Issued for consideration other than
Cash
Issued as fully paid bonus shares
7,560 7,560 75,600 75,600
Shares issued for consideration other than cash were issued against plant and machinery.
All ordinary shares rank equally with regard to the Company’s residual assets. Holders of the shares are
entitled to dividends from time to time and are entitled to one vote per share at the general meetings of the
Company.
6. Non-current liabilities
Amount due to associated companies and related parties shall be disclosed separately
7. Current liabilities
Following items shall be disclosed as separate line items:

(i) Payable to provident fund;
(ii) Deposits, accrued liabilities and advances;
(iii) Loans from banking companies and other financial institutions, other than related parties;
(iv) Loans and advances from related parties including sponsors and directors along with purpose and
utilization of amounts; and
(v) Loans and advances shall be classified as secured and unsecured.
Example 23: Current liabilities
Note 2018 2017
Rs‘000 Rs’000
Trade and other payables 9 60,599,330 38,781,144

Mark-up and profit accrued 10 300,574 190,707
Short term borrowings - secured 11 28,526,484 11,539,083
Unclaimed dividend 638,783 437,291
Current portion of long term borrowings - secured 7 7,237,742 6,831,804
Taxation 2,641,779 1,229,780
721
99,944,692 59,009,809
Example 24: Current liabilities
Note 2019 2018

Rs‘000 Rs’000
Employee benefits 7 31,929 29,950
Short term finances - secured 8 5,354,474 5,285,780
Trade and other payables 9 53,867 84,120
Accrued finance costs 10 103,727 48,878
Unclaimed dividend 50,088 10,305
Provision for taxation – net 59,078 61,439
5,653,163 5,520,472
In respect of security deposit payable, following shall be disclosed:

(i) Bifurcation of amount received as security deposits for goods/services to be delivered / provided,
into amounts utilizable for company business and others;
(ii) Amount utilized for the purpose of the business from the security deposit in accordance with
requirements of written agreements, in terms of section 217 of the Act; and
Amount kept in separate bank account;
(iii)
Example 25: Long Term Deposits
2019 2018
Rs‘000 Rs’000
Long term deposits from dealers 12,731 12,691
These represent security deposits received from dealers which, by virtue of agreement, are interest free.
These are repayable on cancellation of dealership contract with dealers and cannot be utilized for the
purpose of the business. These have been kept in separate bank account in accordance with the
requirements of the section 217 of the Companies Act, 2017.
8. Contingencies and commitments

In describing legal proceedings, under any court, agency or government authority, whether local or foreign,
include name of the court, agency or authority in which the proceedings are pending, the date instituted,
the principal parties thereto, a description of the factual basis of the proceeding and the relief sought.
Example 26: Contingencies and Commitments

Penalty of Rs 5.5 billion imposed by the Competition Commission of Pakistan (CCP) in 2013, for
alleged unreasonable increase in urea prices, had been set aside by the Competition Appellate Tribunal
with directions to the CCP to decide the case under guidelines provided by the Tribunal. No petition was
filed by the CCP for review of the decision within the stipulated time, and this option has thus become
time barred for the CCP. However, the CCP can file fresh case under the guidelines provided by the
Tribunal, but the Company remains confident of successfully defending these unreasonable claims in
future as well.
722
2018 2017
Commitments in respect of: Rs‘000 Rs’000
Capital expenditure 1,919,124 2,498,658
Purchase of stores, spares and other items 1,528,517 2,821,573
Investment in an associated company – ABC Limited 500,000 640,000
Investment in a Joint Venture XYZ Energy Limited 3,685,374 -
Contracted out services 392,100 221,390
Rentals under lease agreements:
Premises 254,827 312,656
Vehicles 88,226 83,674
Example 27: Contingencies
The Company is defending a suit for Rs. 19,579 thousand, filed in previous years by an ex-vendor on
account of damages and inconvenience. Previously, the case was pending before the Civil Court, Lahore.
However, during the last year, it was held by the Civil Court that the damages of Rs. 15,000 thousand has
been awarded in favour of vendor for the aforementioned inconvenience. In addition to that the Company
is also required to pay the amount of parts already supplied by the vendor which amounts to Rs. 4,579
thousand along with mark-up @ 7% per annum till its realization. However, the Company has filed an
appeal in the Honourable High Court, Lahore against the aforesaid order of Civil Court. The management
and the legal advisor are confident that outcome of the case would be in the Company’s favour and no
payment in this regard would be required, hence no provision there against has been made in these
Example 28: Commitments
(i) Letters of credit / bank contracts other than capital expenditure are nil (June 30, 2018: Rs. 68.13
million).
(ii) Letters of credit / bank contracts for capital expenditure Rs. 4.44 million (June 30, 2018: Rs. 131.35
million)..
3.3 Requirements as to Statement of Profit or Loss Account

Following items shall be disclosed as deduction from turnover as separate line items:
(i) trade discount; and
(ii) sales and other taxes directly attributed to sales.
Example 29: Turnover
2018 2017
Rs‘000 Rs’000
Manufactured urea – local 74,462,673 67,095,578
Manufactured urea – export - 5,066,304
Purchased and packaged fertilizers 32,930,082 27,031,569
109,392,755 99,193,451
Sales tax (3,381,261) (5,101,021)
Trade discount (47,023) (3,378,316)
(3,428,284) (8,479,337)
105,964,471 90,714,114
723
The aggregate amount of auditors’ remuneration, showing separately fees, expenses and other
remuneration for services rendered as auditors and for services rendered in any other capacity and stating
the nature of such other services. In the case of joint auditors, the aforesaid information shall be shown
separately for each of the joint auditors;
Example 30: General
Auditors’ remuneration 2019 2018

Rs‘000 Rs’000
Audit fee 1,650 1,650
Fee for half yearly review, audit of consolidated financial
statements, review of Code of Corporate Governance and other 899 899
certifications in the capacity of external auditors
Out of pocket expenses 160 160
2,709 2,709
In case, donation to a single party exceeds 10 per cent of company’s total amount of donation or Rs. 1
million, whichever is higher, name of donee(s) shall be disclosed and where any director or his spouse has
interest in the donee(s), irrespective of the amount, names of such directors along with their interest shall
be disclosed;
Example 31: Donations

Other expenses include donations amounting to Rs 60,176 thousand (2017: Rs 64,125 thousand) and Rs
24,515 thousand (2017: Rs 25,289 thousand) respectively. These are disbursed through ABC Welfare
Foundation (associated undertaking). Interest of CEO Mr. Tariq in ABC Welfare Foundation is limited to
the extent of his involvement in ABC Welfare Foundation as Chairman.
Complete particulars of the aggregate amount charged by the company shall be disclosed separately for
the directors, chief executive and executives together with the number of such directors and executives
such as:
(i) fees;
(ii) managerial remuneration;
(iii) commission or bonus, indicating the nature thereof;
(iv) reimbursable expenses which are in the nature of a perquisite or benefit;

(v) pension, gratuities, company's contribution to provident, superannuation and other staff funds,
compensation for loss of office and in connection with retirement from office;
(vi) other perquisites and benefits in cash or in kind stating their nature and, where practicable, their
approximate money values; and
(vii) amount for any other services rendered.
Definition of executive: employee which has a basic salary of 1,200,000 in a financial year.
Example 32: Remuneration of Chief Executive, Directors and Executives

The aggregate amounts charged in these financial statements in respect of remuneration including
benefits applicable to the chief executive, directors and executives of the company are given below:
724
2018 2017
Chief Chief
Executives Executives
Executive Executive
Rs‘000 Rs‘000 Rs‘000 Rs‘000

Managerial remuneration 7,915 1,353,075 8,583 1,297,932
Contribution to provident fund 542 84,995 618 81,561
Bonus and other awards 2,783 - 3,703 561
Good performance awards - 1,458,366 - 1,394,652
Allowance and contribution to
retirement benefit plans 9,030 1,186,791 11,113 1,068,165
Total 20,270 4,083,227 24,017 3,842,871
Number of person(s) 1 339 1 336
The above were provided with medical facilities; the chief executive and certain executives were also
provided with some furnishing items and vehicles in accordance with the Company’s policy.
Gratuity is payable to the Chief Executive in accordance with the terms of employment while contributions
for executives in respect of gratuity and pension are based on actuarial valuations.
Leave encashment of Rs 4,431 thousand (2017: Nil) and Rs 57,380 thousand (2017: Rs 46,454 thousand)
were paid to chief executive and executives on separation, in accordance with the Company’s policy.
In addition, 18 (2017: 16) directors were paid aggregate meeting fee of Rs 6,075 thousand (2017: Rs
4,625 thousand).
Directors are not paid any remuneration except meeting fee.
In case of royalties paid to companies/entities/individuals, following shall be disclosed:

(i) Name and registered address; and
(ii) Relationship with company or directors, if any.
Example 33: Royalty payments
Distribution costs 2018 2017
Rs‘000 Rs’000
Salaries and benefits 840,000 813,000

Freight 270,000 239,000
Trademark license fee Note 635,000 388,000
Depreciation 165,000 146,000
Miscellaneous 1,000 500
1,911,000 1,586,500
725
The trademark license fee represents the royalty fee of ABC Brands S.A.R.L., Switzerland, an associated
company situated in Avenue d’Ouchy 6, 1006 Lausanne, Switzerland.
726
COMPANIES ACT, 2017: FIFTH SCHEDULE
General Requirements
a) The companies other than listed companies and their subsidiaries shall follow the applicable Financial
Reporting Framework as defined in Third Schedule, in regards to financial statements as notified by
the Commission, under section 225 of the Companies Act, 2017;
b) The disclosure requirements, as provided in this schedule, are in addition to the disclosure
requirements prescribed in applicable Financial Reporting Framework notified by the Commission
unless specifically required otherwise;
c) In addition to the information expressly required to be disclosed under the Act and this schedule, there
shall be added such other information as may be necessary to ensure that required disclosure is not
misleading;
d) The following shall be disclosed in the financial statements namely:
i. General information about the company comprising the following:

 geographical location of all business units including mills/plant;
Note: Particulars of company’s immovable fixed assets, including location and area of land is required
in fourth schedule but not required in fifth schedule.
 the capacity of an industrial unit, actual production and the reasons for shortfall;
 number of persons employed as on the date of financial statements and average number of
employees during the year.
 name of associated companies or related parties or undertakings along with the basis of relationship
describing common directorship and/or percentage of shareholding;
 In respect of associated companies, subsidiaries or holding companies incorporated outside
Pakistan, name of undertaking, registered address and country of incorporation shall be
disclosed;
Note: In comparison, the Fourth schedule additionally requires basis of association and aggregate
percentage of shareholding and does not require registered address to be disclosed.
Requirements as to Statement of Financial Position

1. Sundry requirements (same)
Following items shall be disclosed as separate line items on the face of the financial statements;
(i) revaluation surplus on property, plant and equipment;
(ii) long term deposits and prepayment;
(iii) unpaid dividend;
(iv) unclaimed dividend; and
(v) cash and bank balances.
2. Fixed assets (same)
Where any property or asset acquired with the funds of the company, is not held in the name of the company
or is not in the possession and control of the company, this fact along with reasons for the property or asset
not being in the name of or possession or control of the company shall be stated; and the description and
value of the property or asset, the person in whose name and possession or control it is held shall be
disclosed;
727
Land and building shall be distinguished between freehold and leasehold.
Forced sale value shall be disclosed separately in case of revaluation of property, plant and equipment.
In the case of sale of fixed assets, if the aggregate book value of assets exceeds five million rupees,
following particulars of each asset, which has five hundred thousand rupees or more, shall be disclosed,
(i) cost or revalued amount, as the case may be;
(ii) the book value;
(iii) the sale price and the mode of disposal (e.g. by tender or negotiation);
(iv) the particulars of the purchaser;
(v) gain or loss; and
(vi) relationship, if any of purchaser with company or any of its directors.
3. Long term loans and advances (same)

With regards to loans and advances to directors, following shall be disclosed:
(i) the purposes for which loans or advances were made; and
(ii) reconciliation of the carrying amount at the beginning and end of the period, showing
disbursements and repayments;
In case of any loans or advances obtained/provided, at terms other than arm’s length basis, reasons
thereof shall be disclosed;
In respect of loans, advances to associates there shall be disclosed:
(i) the name of each associate and related parties;
(ii) the terms of loans and advances;
(iii) the particulars of collateral security held, if any;
(iv) the maximum aggregate amount outstanding at any time during the year calculated by reference to
month-end balances;
(v) provisions for doubtful loans and advances; and
(vi) loans or advances written off, if any.
4. Current assets (same)

In respect of debts/receivables from associates there shall be disclosed:
(ii) the maximum aggregate amount outstanding at any time during the year calculated by reference to
month-end balances;
(iii) receivables, that are either past due or impaired, along with age analysis distinguishing between
trade debts, loans, advances and other receivables;
(iv) debts written off as irrecoverable distinguishing between trade debts and other receivables;
(v) provisions for doubtful or bad debts distinguishing between trade debts, loans, advances and other
receivables; and
(vi) justification for reversal of provisions of doubtful debts, if any;
728
Provision, if any, made for bad or doubtful loans and advances or for diminution in the value of or loss in
respect of any asset shall be shown as a deduction from the gross amounts;
5. Share capital and reserves (same)

Capital and revenue reserves shall be clearly distinguished. Any reserve required to be maintained under
the Act shall be separately disclosed. Any legal or other restrictions on the ability of the company to
distribute or otherwise apply its reserves shall also be disclosed for all kind of reserves maintained by the
company;
In respect of issued share capital of a company following shall be disclosed separately;
(i) shares allotted for consideration paid in cash;
(ii) shares allotted for consideration other than cash, showing separately shares issued against property
and others (to be specified);
(iii) shares allotted as bonus shares; and
(iv) treasury shares;
Shareholder agreements for voting rights, board selection, rights of first refusal and block voting shall be
disclosed.
6. Non-current liabilities (same)

Amount due to associated company shall be disclosed separately.
Note: In comparison, the fourth schedule states ‘due to associated companies and related parties’.
7. Current liabilities (Same)
Following items shall be disclosed as separate line items;
(i) payable to provident fund;
(ii) deposits, accrued liabilities and advances;
(iii) loans from banking companies and other financial institutions other than associated company;
(iv) loans and advances from associated company, sponsors and directors along with purpose and
utilization of amounts; and
(v) loans and advances shall be classified as secured and unsecured.
In respect of security deposit payable, following shall be disclosed:

(i) bifurcation of amount received as security deposits for goods/services to be delivered/provided, into
amounts utilizable for company business and others;
(ii) amount utilized for the purpose of the business from the security deposit in accordance with
requirements of written agreements, in terms of section 217 of the Act; and
(iii) amount kept in separate bank account;
8. Contingencies and commitments (same)
In describing legal proceedings, under any court, agency or government authority, whether local or foreign
include name of the court, agency or authority in which the proceedings are pending, the date instituted,
the principal parties thereto, a description of the factual basis of the proceeding and the relief sought.
Requirements as to Profit and Loss Account (same)
729
Following items shall be disclosed as deduction from turnover as separate line items;
(i) Trade discount; and
(ii) Sales and other taxes directly attributable to sales.
The aggregate amount of auditors’ remuneration, showing separately fees, expenses and other
remuneration for services rendered as auditors and for services rendered in any other capacity and stating
the nature of such other services. In the case of joint auditors, the aforesaid information shall be shown
separately for each of the joint auditors;
In case, donation to a single party exceeds 10 per cent of company’s total amount of donation or Rs. 1
million, whichever is higher, name of donee(s) shall be disclosed and where any director or his spouse has
interest in the donee(s) irrespective of the amount, names of such directors along with their interest shall
be disclosed;
Management assessment of sufficiency of tax provision made in the company’s financial statements along
with comparisons of tax provision as per accounts viz a viz tax assessment for last three years;
Note: The requirements in above para now relate to fifth schedule only after exclusion from fourth schedule.
Example 34: Management’s assessment on sufficiency of provision for income taxes

A comparison of provision on account of income taxes with most recent tax assessment for last three tax
years is as follows:
2018 2017 2016

(Rupees in thousand)
Tax assessed as per most recent tax assessment
2,361,733 1,998,074 869,634
Provision in accounts for income tax 2,361,733 1,997,464 869,122
The tax assessed as per most recent tax assessment for the year 2018 is based on “deemed assessment” as
per income tax return filed for respective years.
As at June 30, 2019, as per the treatments adopted in tax returns filed that are based on the applicable tax
laws and decisions of appellate authorities on similar matters, the provision in accounts for income tax is
sufficient as there are strong grounds that the said treatments are likely to be accepted by the tax
authorities.
Complete particulars of the aggregate amount charged by the company shall be disclosed separately for
the directors, chief executive and executives together with the number of such directors and executives
such as:
(i) fees;
(ii) managerial remuneration;commission or bonus, indicating the nature thereof;
(iii) reimbursable expenses which are in the nature of a perquisite or benefit;
(iv) pension, gratuities, company's contribution to provident, superannuation and other staff funds,
compensation for loss of office and in connection with retirement from office;
(v) other perquisites and benefits in cash or in kind stating their nature and, where practicable, their
approximate money values; and
(vi) amount for any other services rendered.
730
In case of royalties paid to companies/entities/individuals following shall be disclosed:
(i) Name and registered address; and
Relationship with company or directors, if
any.
Post-closing trial balance means a trial balance in which all adjustments have been made correctly
including the adjustment of profit for the period in retained earnings. We will make an adjustment only if
there is a clear indication of whether any adjustment is still required or there is any indication of an error.
731
Q. BSZ LIMITED
The post-closing trial balance of BSZ Limited, a listed company, as at June 30, 2017 is given
below:
Debit Credit
Rs. in million
Cash at banks – current accounts 7
Cash at banks – in saving accounts 22
Stocks in trade – closing 90
Provision for bad debts 3
Advances to suppliers 16
Advances to staff 6
Short term deposits 11
Prepayments 4
Sales tax receivable 12
Freehold land – at revalued amount 375
Furniture and fixtures – cost 27
Accumulated depreciation – Furniture and fixtures 8
Machines – cost 85
Accumulated depreciation – Machines 27
Building on freehold land – cost 150
Accumulated depreciation – Building 26
Computer software – cost 10
Accumulated amortization – Computer software 2
Deferred taxation 40
Short term loan 85
Accounts payable 75
Accrued liabilities 7
Provision for taxation 17
Issued, subscribed and paid up capital (Rs. 10 each) 400
Surplus on revaluation of fixed assets 120
Accumulated profits 65
875 875
Additional Information
The first revaluation of freehold land was carried out in 2013 and resulted in a surplus of Rs. 120
million. The valuation was carried out under market value basis by an independent valuer, Mr. Dee,
Chartered Civil Engineer of M/s SSS Consultants (Pvt.) Ltd., Islamabad.
The details relating to additions, disposal and depreciation/amortization of fixed assets, during the year
2017 are given below:
732
 The company uses the straight line method for charging depreciation and amortization. The building
is depreciated at a rate of 5% whereas 10% is charged on machines, furniture and fixtures and
computer software.
 Construction on third floor of the building commenced on March 1, 2017 and is expected to be
completed on September 30, 2017. The cost incurred during the year i.e. Rs. 20 million was
capitalized on June 30, 2017.
 Furniture and fixtures worth Rs. 8 million were purchased on April 1, 2017.
 A machine was sold on February 28, 2017 to NJ Enterprise at a price of Rs. 13 million. At the time
of disposal, the cost and written down value of the machine was Rs. 15 million and Rs. 10 million
respectively.
50% of the accounts receivable were secured and considered good. 10% of the unsecured accounts
receivable were considered doubtful. Bad debts expenses for the year amounted to Rs. 1.0 million. An
amount of Rs. 1.4 million was written off during the year.
All advances given to suppliers are considered good and include an amount of Rs. 4.0 million paid for goods
which will be supplied on December 31, 2018.
Cash at banks in saving accounts carry interest / mark-up ranging from 3% to 7% per annum.
The authorised share capital of the company is Rs. 500 million.
Required
Prepare the statement of financial position as at June 30, 2017 along with the relevant notes showing all
possible disclosures as required under the International Accounting Standards and the Companies Act,
2017.
(Comparative figures and the note on accounting policies are not required.)
Sales Tax
According to sales tax act, every supplier has an obligation to collect 17% sales tax at time of sales.
Suppose a company purchases a raw material to convert it into finished goods for sale. Detail of a purchase
invoice is as follows:
Purchase price 100,000
+ 17% sales tax 17,000_
117,000
Suppose it is a credit purchase.
If sales tax is not refundable; then entry is

Purchases 117,000
Creditor 117,000
If sale tax is refundable/adjustable; then entry is:
Purchases 100,000
Sales tax receivable 17,000
Creditor 117,000
Now suppose the company converted the raw material into finished goods and sold it to a customer.
733
Detail of a sale invoice is as follows:
Sale price 200,000
+ 17% Sales Tax 34,000
234,000
Suppose it is a credit sale.
Debtor 234,000
Sales 200,000
Sale tax payable 34,000
As per sales tax act, sales tax receivables and sales tax payable can be adjusted against each other.
Therefore in the above scenario net Rs 17,000 is payable to sales tax department.
Alternative Entry
i) Cash 234,000
Sales 234,000
ii) Sales tax 34,000
Sales tax payable 34,000
The amount of sales tax is deducted from sales just like sales return.
If head of sales tax is appearing on debit side of trail balance then it is to be deducted from sales in
income statement.
734
Q. FIGS PAKISTAN LIMITED
Figs Pakistan Limited is a listed company engaged in the business of manufacturing and marketing of
personal care and food products. Following is an extract from its trial balance for the year ended 31
December 2017:
Debit Credit
Rs. in million
Sales - Manufactured goods 56,528
Sales - Imported goods 1,078
Scrap sales 16
Dividend income 12
Return on savings account 2
Sales tax - Imported goods 53
Sales tax - Manufactured goods 10,201
Sales discount 2,594
Raw material stock as on 1 January 2017 1,751
Work in process as on 1 January 2017 73
Finished goods (manufactured) as on 1 January 2017 1,210
Finished goods (imported) as on 1 January 2017 44
Purchases - Raw material 22,603

Purchases - Imported goods 658
Stores and spares consumed 180
Salaries, wages and benefits 2,367
Utilities 734
Depreciation and amortization 1,287
Stationery and office expenses 230
Repairs and maintenance 315
Advertisement and sales promotion 4,040
Outward freight and handling 1,279
Legal and professional charges 71
Auditor's remuneration 13
Donations 34
Workers Profit Participation Fund 257
Worker Welfare Fund 98
Loss on disposal of property, plant and equipment 10
Financial charges on short term borrowings 133
Exchange loss 22
Financial charges on lease 11
The position of inventories as at 31 December 2017 was as follows:
735
Rs. m
Raw material 2,125
Work in process 125
Finished goods (manufactured) 1,153
Finished goods (imported) 66
The basis of allocation of various expenses among cost of sales, distribution costs and administrative
expenses are as follows:
Cost of Distribution Administrative

sales costs expenses
% % %
Salaries, wages and benefits 55 30 15
Depreciation and amortization 70 20 10
Stationery and office expenses 25 40 35
Repairs and maintenance / Utilities 85 5 10
Salaries, wages and benefits include contributions to provident fund (defined contribution plan) and
gratuity fund (defined benefit plan) amounting to Rs. 54 million and Rs. 44 million respectively.
Auditor’s remuneration includes taxation services and out-of-pocket expenses amounting to Rs. 4 million
and Rs. 1 million respectively.
Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One of the company’s
directors, Mr. Peanut is a trustee of DCF.
The tax charge for the current year after making all related adjustments is estimated at Rs. 1,440 million.
Taxable temporary differences of Rs. 3,120 originated in the year million, over the last year. The applicable
income tax rate is 35%.
Required
Prepare the statement of profit or loss for the year ended 31 December 2017 along with the relevant notes
showing required disclosures as per the Companies Act, 2017 and International Financial Reporting
Standards. Comparatives are not required.
736
Answer:
BSZ LIMITED
Statement of financial position as at June 30, 2017
Note Rs. in
million
ASSETS
Non currentAssets
Property, plant & equipment 1 556
Capital work in process 20
Intangible assets 2 8
584
Long term advances – considered good 4
Current assets
Stocks in trade 90
Advances, deposits, prepayments and other receivables 4 45
Cash at banks 5 29
221
809
EQUITY AND LIABILITIES
Share capital and reserves Authorized share capital 50,000,000 shares of Rs. 10 each
Issued, subscribed and paid up capital 40,000,000 shares of Rs. 10 each Unappropriated profit
Note Rs. in
million
Surplus on revaluation of fixed assets 120
Deferred taxation 40
Current liabilities
Short term loan 85
Account and other payables 6 82
Provision for taxation 17
184
809
Notes
1. Property, plant and equipment
Operating assets 556
Capital work in progress – 20
building
576
1.1 Operating assets Rs. in million

Gross carrying amount Freehold land Building Machines Fixtures Total
As of July 01 2016 375.0 130.0 100.0 19.0 624.0
Additions - - - 8.0 8.0
737
Disposals - - (15.0) - (15.0)
As at June 30 2017 375.0 130.0 85.0 27.0 617.0
As of July 01 2016 - 19.5 22.5 5.9 47.9
For the year - 6.5 18.1
(105 × 85) + 10% × 15 × 8/12) 9.5
(105 × 19) + 10% × 8 × 3/12) 2.1
Disposals - - (5.0) - (5.0)
As at June 30 2017 - 26.0 27.0 8.0 61.0
Carrying amount 375.0 104.0 58.0 19.0 556.0
Depreciation rate - 5% 10% 10%

1.2 Revaluation
During the year 2013, the first revaluation of freehold land was carried out. The valuation was carried out
under market value basis by an independent valuer, Mr. Dee, Chartered Civil Engineer of M/s SSS
Consultants (Pvt.) Ltd., Islamabad. It resulted in a surplus of Rs. 120 million over book values which was
credited to surplus on revaluation of fixed assets. Had there been no revaluation, the value of freehold land
would be Rs. 255 million.
1.3 Disposal of machine
Rs. in
million
Proceeds 13.0
Cost 15.0
Accumulated depreciation (5.0)
Carrying amount (10.0)
Profit on disposal 3.0
Rs. in
million
2. Intangible Assets
Cost of computer software/license 10.0
Accumulated Amortization as of July 1, 2016 1.0
Amortization for the year 1.0
Accumulated Amortization as of June 30, 2016 2.0
Carrying value as at June 30, 2017 8.0
Amortization rate 10%
3. Accounts Receivable
Considered good
- Secured 30
- Unsecured 27
57
Considered doubtful 3
60
Less: Provision for bad debts 3.1 3
57
3.1 Provision for bad debts
Balance as at July 1, 2016 3.4
738
Provision made during the year 1.0
Amount written off during the year (1.4)
Balance as at June 30, 2017 (Rs. 30 million x10%) 3.0
Note 2017
Rs. In
Million
4 Advances, Deposits, Prepayments and Other Receivables
Advances
- suppliers - considered good 12
- staffs 6
18
Deposits 11
Prepayments 4
Sales tax receivable 12
45
5 Cash at banks
Cash at banks - current accounts 7
saving accounts 5.1 22
29
5.1: It carries interest / mark up ranging from 3% to 7% per annum.
6 Accounts and other payables
Accounts payable 75
Accrued liabilities 7
82
A. FIGS PAKISTAN LIMITED

Figs Pakistan Limited
Statement of profit or loss and other comprehensive income
2017
Note Rs. in million
Sales 1 44,758
Cost of sales 2 (26,203)
Gross profit 18,555
Distribution costs 3 (6,431)
Administrative expenses 4 (752)
Other operating expenses 5 (399)
Other operating income 6 30
Profit from operations 11,003
Finance costs 7 (166)
Taxation 8 (2,532)
Other comprehensive income -
Total comprehensive income for the year 8,305
739
Figs Pakistan Limited
Note Rs. in million
1) Sales
2) Manufactured goods
56,528
Gross sales (10,201)
Sales tax
46,327
Imported goods
Gross sales 1,078
Sales tax (53)
1,025
Sales discounts (2,594)
44,758
2 Cost of sales
Raw material consumed (1,751 + 22,603 - 2,125) 22,229
Stores and spares consumed 180
Salaries, wages and benefits (2,367 × 55%) 2.1 1,302
Utilities (734 × 85%) 624
Depreciation and amortizations (1.287 × 70%) 901
Stationery and office expenses (230 × 25%) 58
Repairs and maintenance (315 × 85%) 268
25,562
Opening work in process 73
Closing work in process (125)
25,510
Opening finished goods (manufactured) 1,210
Closing finished goods (manufactured) (1,153)
25,567
Finished goods (imported)
Opening stock 44
Purchases 658
702
Closing stock (66)
636
26,203
2.1Salaries, wages and benefits include Rs. 30 million (54 × 55%) and Rs. 24 million (44 × 55%) in respect of
defined contribution plan and defined benefit plan respectively.
3 Distribution costs Rs. in million

Advertisement and sales promotion 4,040
740
Outward freight and handling 1,279
Salaries, wages and benefits (2,367 × 30%) 3.2 710
Utilities (734 × 5%) 37
Depreciation and amortization (1,287 × 20%) 257
6,431
3.1 Salaries, wages and benefits include Rs. 16 million (54 × 30%) and Rs. 13 million (44×30%)
in respect of defined contribution plan and defined benefit plan respectively.
4 Administrative expenses Rs. in million

Salaries, wages and benefits (2,367 × 15%) 4.1 355
Utilities (734 × 10%) 73
Depreciation and amortization (1,287 × 10%) 129
Legal and professional charges 71
Auditor's remuneration 4.2 13
752
4.1 Salaries, wages and benefits include Rs. 8 million (54 × 15%) and Rs. 7 million (44×15%) in respect
of defined contribution plan and defined benefit plan respectively.
4.2 Auditor's remuneration Rs. in million

Audit fees 8
Taxation services 4
Out of pocket expenses 1
13
5 Other operating expenses

Donation 5.1 34
Worker's Profit Participation Fund 257
Worker Welfare Fund 98
Loss on disposal of property, plant and equipment 10
399
5.1 Donations
Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One of the company’s directors,
Mr. Peanut is a trustee of DCH.
Donations other than that mentioned above were not made to any donee in which a director or his spouse
had any interest at any time during the year.
6 Other operating income Rs. in million

Income from financial assets
Dividend income 12
Return on savings account 2
Income from non-financial assets
Scrap sales 16
741
30
7 Finance costs
Finance charges on short term borrowings 133
Exchange loss 22
Finance charges on lease 11
166
8 Taxation
Current - for the year 1,440
Deferred (3,120 × 35%) 1,092
2,532
742
Final accounts extra practice questions
Q.1 Banana Limited (BL) is listed on Pakistan Stock Exchange and has registered office in Karachi.
BL engages in manufacturing and marketing of fertilizers. It operates a manufacturing plant at
Nawabshah.
Summarized trial balance of BL as at 30 June 2018 is given below:

Description Rs. in million
Advance from customers 576
Intangible assets 444
Investment in 3 months term deposit 500
Land and building – revaluation model 2,000
Long term deposits with utility companies 10
Long term investments 1,500
Ordinary share capital 6,000
Plant and equipment – cost model 3,086
Provision for doubtful receivables 80
Revaluation surplus on land and building 468
Running finance 800
Share premium 500
Stock-in-trade 2,670
Trade and other receivables 1,470
Trade payables 1,150
Un-appropriated profit 2,885
Unclaimed dividend 52
a) Trade and other receivables include receivables from BL’s associate i.e. Strawberry Limited (SL) and
BL’s subsidiary i.e. Pear Limited (PL) amounting to Rs. 50 million and Rs. 20 million respectively.
Provision for doubtful receivables includes provision of Rs. 10 million against receivables from SL.
b) Bad debts of Rs. 35 million were written off during the year. These include an amount of Rs. 8
million receivable from SL.
c) Authorised share capital consists of 1 billion shares of Rs. 10 each.
d) 80 million shares were issued as bonus shares in the previous years whereas 20 million shares were
issued as a consideration for purchase of building at market price of Rs. 15 per share. Remaining
shares were allotted for consideration paid in cash.
e) Guarantees issued by BL to Cherry Bank Limited against loans granted to BL’s employees amounting
to Rs. 16 million.
f) During the year, BL produced 3 million tonnes of urea operating at 75% production capacity. The
shortfall was due to lower demand of product in the market.
g) Following decisions were taken by the board of directors in their meeting held on 16 August 2018:
Cash dividend of Rs. 3 per share for the year ended 30 June 2018 was proposed. Financial
statements for the year ended 30 June 2018 were approved.
Required:
Prepare BL's statement of financial position as at 30 June 2018 along with the relevant notes showing
possible disclosures as required under the IFRSs and the Companies Act, 2017.
(Comparative figures and note on accounting polices are not required)
Ans. 1 Banana Limited
743
Statement of financial position As on 30 June 2018
Rs. in million
Non-current Assets Note
Property, plant and equipment (2,000+3,086) 5,086
Intangible assets 444
Long term investments 1,500
Long term deposits 10
7,040
Current Assets
Stock-in-trade 2,670
Trade and other receivable 2 1,390
Short term investment 500
2 5,391
12,431
Share capital and reserves:
Share capital 3 6,000
Share premium 500
Unappropriated profit 2,885
Revaluation surplus on property plant & equipment 468
9,853
Current liabilities
Trade and other payables (1,150+576) 1,726
Unclaimed dividend 52
Running finance 800
2,578
Contingencies 4
12,431
Banana Limited
1. Legal status and nature of business
Banana Limited (BL) is listed on the Pakistan Stock Exchange having registered office in Karachi. BL
operates its plant located at Nawabshah. BL engages in manufacturing, and marketing of fertilizers.
2. Trade and other receivables Rs. in million
Gross amount 1,470
Provision for doubtful debts (80)
1,390
2.1 Trade receivables from related parties:

Name of related party Receivable Provision
Strawberry Limited (Associate) 50 10
Pearl Limited (Subsidiary) 20 -
70 10
2.2 During the year, trade receivable from Strawberry Limited amounting to Rs. 8 million were
written off.
744
3. Share capital Rs.
in million
Authorized share capital
1,000 million ordinary shares of Rs. 10 each 10,000
Issued, subscribed and paid up capital

500 million shares allotted for consideration paid in cash (bal.) 5,000
20 million shares allotted for consideration other than cash 200
80 million shares allotted as bonus shares 800
6,000
4. Contingencies
BL has issued guarantees to Cherry Bank Limited against loans granted to BL’s employees amounting to
Rs. 16 million.
5. Production capacity
Durign the year BL produced 3 million units operating at 75% production capacity. The shortfall was
due to lower demand of product in the market.
6. Subsequent event
The Board of Directors in its meeting held on 16 August 2018 proposed cash dividend of Rs. 3 per share
amounting to Rs. 1.8 billion (600 x 3), subject to the approval of the members in the forthcoming annual
general meeting of the company (IAS 10)
7. Date of authorization for issue

These financial statements were approved and authorised for issue by the Board of Directors of the
Company on 16 August 2018 (IAS 10).
Presentation of expenses in income statement.

Expenses should be presented in income statement by either:
 according to the function of the expense method; or
 according to the nature of expenses method
IAS 1 states that entities should choose the method that provides the more relevant or reliable
information. However, Companies’ Act 2017 requires classification by function with additional
information on nature in notes to the financial statements.
IAS 1 encourages entities to show the analysis of expenses by nature on the face of the statement of
comprehensive income rather than in notes to the financial statements.
Analysis of expenses by their function

When expenses are analyzed according to their function, the functions are commonly ‘cost of sales’,
‘distribution expenses’, ‘administrative expenses’ and ‘other expenses’. This method of analysis is also
called the ‘cost of sales method’.
Illustration: Statement of comprehensive income - Expenses

analyzed by function
Rs. m
Revenue 7,200
745
Cost of sales (2,700)
Gross profit 4,500
Other income 300
Distribution costs (2,100)
Administrative expenses (1,400)
Other expenses (390)
Finance costs (60)
Income tax expense (250)
Profit for the period 600
IAS 1 also requires that if the analysis by function method is used, additional information about nature of
expenses must be disclosed in notes.
Analysis of expenses by their nature

When expenses are analyzed according to their nature, the categories of expenses will vary according to
the nature of the business. In a manufacturing business, expenses would probably be classified as:
 raw materials and consumables used;
 staff costs (‘employee benefits costs’);
 Depreciation.
Items of expense that on their own are immaterial are presented as ‘other expenses’.
There will also be an adjustment for the increase or decrease in inventories of finished goods and work-in-
progress during the period.
Illustration: Statement of comprehensive income - Expenses analyzed by

nature
Rs. m Rs. m
Revenue 7,200
Other income 300
7,500
Changes in inventories of finished goods and 90
work-in-progress
Raw materials and consumables used 1,200
Staff costs (employee benefits expense) 2,000
Depreciation and amortization expense 1,000
Other expenses 2,300
Finance costs (interest cost) 60 6,650
Income tax expense 250
Profit for the period 600
Note: Remember that opening stock will decrease the amount of profit while closing stock will increase
the amount of profit.
Q. MINGORA IMPORTS LIMITED
The trial balance of Mingora Imports Limited at 31 December 2015 is as follows:
Rupees in million
Dr. Cr.
Patent rights 60
Work-in-progress, 1 January 2015 125
746
Leasehold buildings at cost 300
Ordinary share capital 600
Sales 1,740
Staff costs 260
Accumulated depreciation on buildings, 1 January 2015 60
Inventories of finished games, 1 January 2015 155
Consultancy fees 44
Directors’ salaries 360
Computers at cost 50
Accumulated depreciation on computers, 1 January 2015 20
Dividends paid 125
Cash 340
Receivables 420
Trade payables 92
Sundry expenses 294
Accumulated profits, 1 January 2015 121
Investments 100
2,633 2,633
The following information is also relevant.
(1) Closing inventories of finished games are valued at Rs. 180 million. Work in progress has increased
to Rs. 140 million.
(2) The patent rights relate to a computer program with a three year lifespan.
(3) On 1 January 2015 buildings were revalued to Rs. 360 million. This has not yet been reflected in the
accounts. Computers are depreciated over five year. Buildings are now to be depreciated over 30
years.
(4) An allowance for bad debts (irrecoverable debts) of 5% is to be created.
(5) There is an estimated bill for current tax of Rs. 120 million which has not yet been recognised.
(6) the company has made an investment in B limited during the year and irrevocably elected at initial
recognition as measured at fair value through other comprehensive income (OCI). The fair value of
invest,ent was 127 million at the year end.
Required:
Prepare an statement of comprehensive income (analysing expenses by nature) for the year ended 31 December
2015 and a statement of financial position as at that date.
A. MINGORA IMPORTS LIMITED
Statement of comprehensive income for the year ended 31 December 2015
Rs. in
million
Revenue 1,740
Change in inventories of finished goods and work-in-progress (W3) 40
Staff costs (W3) (620)
747
Depreciation and other amortisation expense (W3) (42)
Other expenses (W3) (359)
Income tax expense (120)
Profit After tax 639
Revaluation gain 120
Fair value gain on investment (127-100) 27
Total comprehensive income 786
Statement of financial position as at 31 December 2015
Assets Rs. in
million
Non-current assets
Property, plant and equipment (W1) 368
Intangible assets (W2) 40
Investment 127
Current assets
Inventories (180 + 140) 320
Trade and other receivables (420 × 95%) 399
Cash 340
1,059
Total assets 1,594
Equity
Share capital 600
Fair value reserve 27
1,382
Current liabilities
Trade and other payables 92
Current tax payable 120
212
Statement of changes in equity for the year ended 31 December 2015

Amounts in Rs. million
Share Fair
Revaluation Retained Total
capital value
on reserve earnings
reserves
748
Balance at 31 December 2014 600 121 - 721
Dividends paid (125) - (125)
Total comprehensive income 120 639 27 786
Transfer of surplus (4) 4 -
Balance at 31 December 2015 600 116 639 27 1,382
Workings
(1) Property, plant and equipment
Rs. in
million
Cost brought forward
Leasehold 300
Computers 50
Revaluation 60
Cost carried forward 410
Accumulated depreciation brought forward (60 + 20) 80
Revaluation (60)
Charge for the year
Leasehold (360 ÷ 30) 12
Computers (50 ÷ 5) 10
Accumulated depreciation carried forward 42
Carrying amount carried forward 368
(2) Intangible assets
Rs. in
million
Cost 60
Amortisation (60 ÷ 3) (20)
Carried forward 40
(3) Allocation of costs
Amounts in Rs. million
Change in Other
inventories Depreciation expenses
Staff costs
etc
Work-in-progress (140 – 125) (15)
Staff costs 260
Finished goods (180 – 155) (25)
Consultancy fees 44
Directors’ salaries 360
Doubtful receivables (420 × 5%) 21
Sundry expenses 294
Amortisation of patent (W2) 20
Depreciation (12 + 10) (W1) 22
(40) 620 42 359
749
Presentation of Financial Statements (IAS 1)
Legal Background to the Preparation of Financial Statements
1. Accounting regulation in Pakistan
The objective of financial statements is to provide information about the financial position (balance
sheet), financial performance (profit and loss) and cash flows of an entity that is useful to a wide range of
users in making economic decisions.
The Securities and Exchange Commission of Pakistan
The Securities and Exchange Commission of Pakistan (SECP) was established under the Securities and
Exchange Commission of Pakistan Act, 1997 and became operational in 1999.
It is the corporate and capital market regulatory authority in Pakistan. Its stated mission is “To develop a
fair, efficient and transparent regulatory framework, based on international legal standards and best
practices, for the protection of investors and mitigation of systemic risk aimed at fostering growth of a
robust corporate sector and broad based capital market in Pakistan” (SECP website).
One of the roles of the SECP is to decide on accounting rules that must be applied by companies in
Pakistan.
Companies must prepare financial statements in accordance with accounting standards approved as
applicable and notified in the official gazette by the Securities and Exchange Commission of Pakistan
(SECP) and in accordance with rules in the Companies’ Act 2017.
The Institute of Chartered Accountants in Pakistan (ICAP)
ICAP regulates the Chartered Accountancy profession. It is the body responsible for recommending
accounting standards for notification by the Securities and Exchange Commission of Pakistan.
2. Companies Act 2017: Introduction to the third, fourth and fifth schedules
The Companies Act 2017 contains a series of appendices called schedules which set out detailed
requirements in certain areas.
The third schedule
This schedule lists the classification criteria of the companies on the basis of company size and whether it
is commercial or non-profit. It also specifies which companies are required to follow requirements of
fourth and fifth schedule of the Act.
The fourth schedule
This schedule sets out the disclosure requirements that must be complied with in respect of the financial
statements of a listed company.
The schedule specifies that listed companies must follow International Financial Reporting Standards as
notified for this purpose in the Official Gazette.
The fifth schedule
This schedule applies to the balance sheets and profit and loss accounts of non-listed companies (including
large, medium and small sized entities) and their subsidiaries. It also applies to private and non-listed public
companies that are a subsidiary of a listed company.
3. International Financial Reporting Standards
The International Accounting Standards Committee (IASC) was established in 1973 to develop
international accounting standards with the aim of harmonising accounting procedures throughout the
750
world.
The first International Accounting Standards (IASs) were issued in 1975. The work of the IASC was
supported by another body called the Standing Interpretation Committee. This body issued
interpretations of rules in standards when there was divergence in practice. These interpretations were
called Standing Interpretation Committee Pronouncements or SICs.
In 2001 the constitution of the IASC was changed leading to the replacement of the IASC and the SIC by
new bodies called the International Accounting Standards Board (IASB) and the International
Financial Reporting Interpretations Committee (IFRIC).
The IASB adopted all IASs and SICs that were extant at the time but said that standards written from that
time were to be called International Financial Reporting Standards (IFRS). Interpretations are known as
IFRICs.
The term IFRS is also used to refer to the whole body of rules (i.e., IAS and IFRS in
total). Thus IFRS is made up as follows:
Published by IASC Published by the IASB

(Up to 2001) (from 2001)
Accounting standards IASs IFRSs
Interpretations SICs IFRICs
Note that many IASs and SICs have been replaced or amended by the IASB since 2001.
International accounting standards cannot be applied in any country without the approval of the national
regulators in that country (e.g. SECP in Pakistan). All jurisdictions have some kind of formal approval
process which is followed before IFRS can be applied in that jurisdiction.
Adoption process for IFRS in Pakistan

The previous sections refer to the approval of IFRS by the SECP and notification of that approval in the
Official Gazette
Adoption of an IFRS involves the following steps:

 As a first step the IFRS/IAS is considered by ICAP’s Accounting Standards Board, which identifies
any issues that may arise on adoption.
 The Board also determines how the adoption and implementation of the standard can be facilitated. It
considers issues like how long any transition period should be and whether adoption of the standard
would requires changes in regulations.
 If the Board also identifies the need for changes to regulations it refers the matter to the Securities
and Exchange Commission of Pakistan (SECP) (and/or the State Bank of Pakistan (SBP) for
matters affecting banks and other financial institutions). This process is managed by the Coordination
Committees of ICAP and SECP (SBP).
 After the satisfactory resolution of issues the Board and the Council reconsider the matter of adoption.
 ICAP recommends the adoption to the SECP by decision of the Council. The decision to adopt the
standard rests with the SECP.
Third schedule
Classification of Companies
751
Applicable schedule of
Classification criteria Accounting Companies
S. No. Framework Act 2017
1. Public Interest Company (PIC)

Sub-categories of PIC:
a) Listed Company International Fourth

Financial Reporting Schedule
Standards
b) Non-listed Company which is: International Fifth

Financial Reporting Schedule
(i) a public sector company as defined in
Standards
the Act; or
(ii) a public utility or similar company
carrying on the business of essential
public service; or
(iii) holding assets in a fiduciary capacity for
a broad group of outsiders, such as a
bank, insurance company, securities
broker/dealer, pension fund, mutual
fund or investment banking entity.
(iv) having such number of members
holding ordinary shares as may be
notified; or
(v) holding assets exceeding such value as
may be notified.
2. Large Sized Company LSC
Sub-categories of LSC
a) Non-listed Company with: International Fifth
(i) paid-up capital of Rs. 200 million or Financial Reporting Schedule
more; or Standards
752
Applicable schedule of
Classification criteria Accounting Companies
S. No. Framework Act 2017
(ii) turnover of Rs. 1 billion or more; or
(iii) employees more than 750.
b) Foreign Company with turnover of Rs. 1

billion or more.
c) Non-listed Company licensed / formed under International

Section 42 / Section 45 of the Act having Financial Reporting
annual gross revenue (grants / income / Standards and
subsidies / donations) including other income Accounting
/ revenue of Rs. 200 million and above. Standards for NPOs
3. Medium Sized Company (MSC)
Sub-categories of MSC:
753
a) Non-listed Public Company with: International Fifth
(i) paid-up capital less than Rs.200 million; Financial Reporting Schedule
Standards
(ii) turnover less than Rs1 billion; and
(iii) Employees more than 250 but less than
750.
b) Private Company with:
(i) paid-up capital of greater than Rs. 10
million but not exceeding Rs. 200 million;
(ii) turnover greater than Rs. 100 million but
not exceeding Rs. 1 billion; or
(iii) Employees more than 250 but less than
750.
c) A Foreign Company which has turnover less
than Rs. 1 billion.
d) Non-listed Company licensed / formed under Accounting
Section 42 or 45 of the Act which has annual Standards for NPOs
gross revenue
(grants/income/subsidies/donations)
including other income or revenue less than
Rs.200 million.
4. Small Sized Company (SSC)
A private company having: Revised AFRS for Fifth
(i) paid-up capital up to Rs. 10 million; SSEs Schedule
(ii) turnover not exceeding Rs.100 million;
(iii) Employees not more than 250.
NOTE:
1. The classification of a company shall be based on the previous year‘s audited financial statements.
2. The classification of a company can be changed where it does not fall under the previous criteria for
two consecutive years.
3. The number of employees means the average number of persons employed by a company in that
financial year calculated on monthly basis.
Refinancing of financial liabilities

Refinancing a financial liability means postponing the due date for repayment.
When a liability that was once non-current (e.g. a 10-year bank loan) falls due for repayment within12 months
after reporting period, it should now be classified as current.
There are, however, only two instances where the possibility of refinancing may be used to avoidhaving to
classify a financial liability as a current liability, being when:
1. The existing loan agreement includes an option to refinance or roll-over the obligation (i.e.to delay
repayment of) where:
754
 the option enables a delay until at least 12 months after the reporting period, and
 the option is at the discretion of the entity (as opposed to the lender, for example),and
 that classification is unaffected by expectations about whether an entity will exerciseits right to
defer settlement of a liability
2. An agreement is obtained before year-end that allows repayment of the loan to be delayedbeyond the
12-month period after the reporting period.
If an agreement allowing repayment to be delayed beyond 12 months from the reporting date is
obtained, but it is obtained after the reporting date but before approval of the financial statements,
this would be a non-adjusting post-reporting period and could not be used as a reason to continue
classifying the liability as non-current. Thus:
 details of agreement obtained after reporting date would be disclosed in the notes; but
 the liability would have to remain classified as current.
NOTES TO THE FINANCIAL STATEMENTS
Introduction
Notes contain information in addition to that presented in the statement of financial position, statement of
comprehensive income, statement of changes in equity and statement of cash flows.
Notes provide narrative descriptions of items in those statements and information about items thatdo not
qualify for recognition in those statements. They also explain how totals in those statementsare formed.
Structure
The notes to the financial statements of an entity must:

 Present information about the basis of preparation of the financial statements and the specific
accounting policies selected and applied for significant transactions and other significant events;
 Disclose the information required by ifrss that is not presented elsewhere in the financial statements;
and
 Provide additional information that is not presented on the face of the financial statements but is
relevant to an understanding of them.
Notes to the financial statements must be presented in a systematic manner. Each item on the face of the
statement of financial position, statement of comprehensive income, statement of changes in equity and
statement of cash flows must be cross-referenced to any related information in the notes.
Notes are normally presented in the following order:

1. a statement of compliance with IFRS;
2. a summary of significant accounting policies applied;
3. supporting information for items presented on the face of each financial statement in the order in which
each financial statement and each line item is presented; and
4. other disclosures, including:
 contingent liabilities;
 non-financial disclosures, e.g. number of employees, event occurring after thebalance sheet date
755
etc
Disclosure of accounting policies

An entity must disclose the following in the summary of significant accounting policies:
1. The measurement basis (or bases) used in preparing the financial statements; and
2. The other accounting policies used that are relevant to an understanding of the financial statements.
3. The judgements (apart from those involving estimations) made by management in applying the
accounting policies that have the most significant effect on the amounts of items recognised in the
financial statements. For example:
 When substantially all the significant risks and rewards of ownership of financial assetsand lease
assets are transferred to other entities;
 Whether, in substance, particular sales of goods are financing arrangements and therefore do not
give rise to revenue; and
 Whether the contractual terms of a financial asset give rise on specified dates to cashflows that are
solely payments of principal and interest on the principal amount outstanding.
Which policies?
Management must disclose those policies that would assist users in understanding how transactions, other
events and conditions are reflected in the reported financial performance and financial position.
If an IFRS allows a choice of policy, disclosure of the policy selected is especially useful.
Some standards specifically require disclosure of particular accounting policies. For example, IAS 16
requires disclosure of the measurement bases used for classes of property, plant and equipment.
It is also appropriate to disclose an accounting policy not specifically required by IFRSs, but selected and
applied in accordance with IAS 8. (See chapter 7).
Key measurement assumptions
An entity must disclose information regarding key assumptions about the future, and other key sources of
measurement uncertainty, that have a significant risk of causing a material adjustmentto the carrying
amounts of assets and liabilities within the next financial year.
In respect of those assets and liabilities, the notes must include details of:
 Their nature; and
 Their carrying amount as at the reporting date.
Examples of key assumptions disclosed are:

 Future interest rates;
 Future changes in salaries;
 Future changes in prices affecting other costs; and,
 Useful lives.
Examples of the types of disclosures made are:

 The nature of the assumption or other measurement uncertainty;
 The sensitivity of carrying amounts to the methods, assumptions and estimates underlying their
calculation, including the reasons for the sensitivity;
 The expected resolution of an uncertainty and the range of reasonably possible outcomes within the
next financial year in respect of the carrying amounts of the assets and liabilities affected; and
 An explanation of changes made to past assumptions concerning those assets andliabilities, if the
uncertainty remains unresolved.
756
Other disclosures
An entity must disclose in the notes:
 The amount of dividends proposed or declared before the financial statements were authorised for
issue but not recognised as a distribution to owners during the period, and therelated amount per share;
and
 The amount of any cumulative preference dividends not recognised.
An entity must disclose the following, if not disclosed elsewhere in information published with the
 The domicile and legal form of the entity;
 A description of the nature of the entity’s operations and its principal activities; and
 The name of the parent and the ultimate parent of the group.
IAS 1: Presentation of Financial Statements
General purpose financial statements
Definition
General purpose financial statements (referred to as ‘financial statements’) are those intended to meet
the needs of users who are not in a position to require an entity to prepare reports tailored to their particular
information needs.
The financial statements published by large companies as part of their annual reports are general purpose
Objective
The objective of general purpose financial statements is to provide information about the financial
position, financial performance and cash flows of a company that is useful to a wide range of users in
making economic decisions.
Financial statements also show the results of the management’s stewardship of the resources entrusted
to it.
To meet this objective, financial statements provide information about an entity’s:

 Assets;
 Liabilities;
 Equity;
 Income and expenses, including gains and losses;
 Contributions by and distributions to owners in their capacity as owners; and
 Cash flows.
This information, along with other information in the notes, assists users of financial statements in predicting
the entity’s future cash flows and, in particular, their timing and certainty.
Complete set of financial statements [para 10]

IAS 1 Presentation of Financial Statements specifies what published ‘general-purpose’ financial
statements should include, and provides a format for a statement of financial position, statement of
comprehensive income, and statement of changes in equity.
A complete set of financial statements consists of:

 A statement of financial position (balance sheet) as at the end of the period;
 A statement of comprehensive income for the period;
 A statement of changes in equity for the period;
 A statement of cash flows for the period (covered in earlier studies); and
 Notes to these statements, consisting of a summary of significant accounting policies used by the entity
757
and other explanatory information; and
 Comparative information.
A company can use other use titles for the above statements.
Identification of financial statements [para 51]
Listed companies usually publish financial statements as part of an annual report.
The financial statements must be clearly identified and distinguished from other information in the same
published document. This is very important as the financial statements are audited whereas other
information in the annual report is not. Users must be able to identify the information that has been audited.
Each component of the financial statements must be properly identified with the following information
displayed prominently:
 the name of the reporting entity;
 whether the financial statements cover an individual entity or a group (consolidated accounts for
groups are described in later chapters);
 the date of the end of the reporting period or the period covered by the statement, whichever is
appropriate;
 the currency in which the figures are reported;
 the level of rounding used in the figures (for example, whether the figures thousands of rupees or
millions of rupees).
Reporting period
Financial statements should be presented at least annually. If an entity changes the date of the end of its
reporting period, and a reporting period longer or shorter than one year is used, its financial statements
should disclose:
 the period covered by the financial statements
 the reason why the period is not one year, and
 the fact that the comparative figures for the previous year are not comparable.
Elements of financial statements

The objective of financial reporting is to provide useful information. In order to be useful information
must be understandable. A large company enters into thousands of transactions so in order for users to be
able to understand the impact of these they must be summarised in some way.
Financial statements group transactions into broad classes according to their economic characteristics.
These broad classes are called the elements of financial statements

 The elements directly related to the measurement of financial position in the statement of financial
position are assets, liabilities and equity.
 The elements directly related to the measurement of performance in the statement of comprehensive
income are income and expenses.
GENERAL FEATURES OF FINANCIAL STATEMENTS
Introduction
IAS 1 describes and provides guidance on the following general features of financial statements:
 Fair presentation and compliance with IFRSs
 Going concern
 Accrual basis of accounting
 Materiality and aggregation
 Offsetting
 Frequency of reporting
 Comparative information
 Consistency of presentation
758
Fair presentation and compliance with IFRSs
Disclosure of compliance [para 16]
An entity whose financial statements comply with IFRSs must disclose that fact.
Financial statements shall not be described as complying with IFRS unless they comply with all the
requirements of each applicable Standard and Interpretation.
Fair presentation [para 15]

Financial statements must present fairly the financial position, financial performance and cash flows of an
entity.
This means that they must be a faithful representation of the effects of transactions and other events in
accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out
in IFRS.
The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial
statements that achieve a fair presentation.
Fair presentation requires:
 The selection and application of accounting policies in accordance with IAS 8, Accounting Policies,
Changes in Accounting Estimates and Errors;
 The presentation of information, including accounting policies, in a manner that provides relevant,
reliable, comparable and understandable information; and,
 The provision of additional disclosures when the particular requirements in IFRSs are insufficient to
enable users to understand the impact of particular transactions or other events on the entity’s financial
position and financial performance.
True and fair override [para 20 and 23]

In extremely rare circumstances, management might conclude that compliance with a requirement in IFRS
would be so misleading that it would conflict with the objective of financial statements set out in IFRS.
In these cases the requirement should not be followed as longs as the relevant regulatory framework
requires or otherwise does not prohibit this.
When an entity departs from a requirement in IFRS it must disclose:
 that management has concluded that the financial statements present fairly the entity’s financial
position, financial performance and cash flows;
 that it has complied with applicable IFRS except that it has departed from a particular requirement
to achieve a fair presentation; and
 details of the departure:
 the Standard (or Interpretation) from which the entity has departed and:
 the nature of the departure (including the treatment that is required by IFRS);
 the reason why that treatment would be so misleading in the circumstances that it would conflict
with the objective of financial statements set out in the “Framework”;
 the treatment adopted; and,
 for each period presented, the financial impact of the departure on each item in the financial
statements that would have been reported in complying with the requirement.
If the relevant regulatory framework prohibits departure from a requirement the entity must make the
759
following disclosures to reduce the misleading aspects of compliance “to the maximum extent possible”:
 The Standard (or Interpretation) requiring the entity to report information concluded to be
misleading and:
 The nature of the requirement;
 The reason why management has concluded that complying with that requirement is so misleading
in the circumstances that it conflicts with the objective of financial statements; and,
 For each period presented, the adjustments to each item in the financial statements that
management has concluded would be necessary to achieve a fair presentation.
Going concern [para 25]

Financial statements must be prepared on a going concern basis unless management either;
 Intends to liquidate the entity; or,
 To cease trading; or
 Has no realistic alternative but to do so.
Management must assess an entity’s ability to continue as a going concern when preparing financial
statements.
In making this assessment management must take into account all available information about the future.
(This is for at least twelve months from the reporting date).
Disclosures
If management is aware, in making its assessment, of material uncertainties related to events or conditions
that may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties
must be disclosed.
If the financial statements are not prepared on a going concern basis, that fact must be disclosed, together
with:
 The basis on which the financial statements are prepared; and,
 The reason why the entity is not regarded as a going concern.
Example:
Healthy Oil Limited (HOL) was experiencing cash flow problems and had accumulated losses. It was
ready to declare bankruptcy and close operations all over Pakistan. The Federal government stepped in and
gave HOL a bailout as well as a guarantee. In normal circumstances, HOL would not be considered a
going concern, but since the Federal government stepped in, there is no reason to believe that HOL will
cease to operate.
Answer:
Results of management’s assessment of whether the entity is a going concern (GC): (see IAS 1.25)
If the entity is a going concern: If the entity is not a GC: If the entity is a GC but there is
significant doubt that it will be
continue operating as a GC:
The financial statements: The financial statements: The financial statements:
 are prepared on the GC  are not prepared on the GC basis:  are prepared on the GC
basis.  must include disclosure of the: basis;
o the fact that it is not a GC;  must include disclosure of
o the reason why the entity is not the;
760
considered to be a GC; o the material uncertainties
o the basis used to prepare the causing this doubt.
financial statements (e.g. the use
of liquidation values).
Accrual basis of accounting [para 27]

Financial statements (except for cash flow information) must be prepared under the accrual basis of
accounting.
Under the accrual basis of accounting, revenues are reported in the profit or loss account when they are
earned and expenses are matched with the related revenues and/or are reported when the expense occurs, not
when the cash is paid.
Materiality and aggregation [para 29]
Each material class of similar items must be presented separately in the financial statements.
Items of a dissimilar nature or function must be presented separately unless they are immaterial.
An item that is not sufficiently material to warrant separate presentation on the face of the financial
statements may nevertheless be sufficiently material for it to be presented separately in the notes.
Information is material if its non-disclosure could influence the economic decisions of users taken on the
basis of the financial statements.
Materiality depends on the size and nature of the item or aggregation of items judged in the particular
circumstances of its omission.
Example: Materiality - Due to size
Tez Ltd’s total sales for the financial year 2017 amounts to Rs.100 million and its total assets are Rs.50
million. The company’s external auditors have found out that Rs.5 million worth of sales should not be
recognized in financial year 2017 because the risks and rewards inherent in the sales have not been
transferred.
This amount of Rs.5 million is material in the context of total assets of Rs.50 million. The company should
adjust its financial statements.
Examples: Materiality - Nature of the event
Hasan Ltd. operates in a country which is about to enact a new legislation which would seriously impair
the company's operations in future. Although there are no figures involved, the disclosure of the
development is required in the financial statements for the period on account of materiality because the
new legislation can potentially end the revenues and profits earned from the country.
Examples: Materiality - Nature of the event (continued)
The remuneration paid to a company’s executives and directors is material due to qualitative reasons (even
it is not material quantitatively). It is because the investors would like to make sure that the management is
not overcompensating itself.
The accounting policies are material and cannot be omitted because they help the users understand how the
management arrived at the amounts presented in the financial statements.
Offsetting [para 32]
Assets and liabilities must not be offset except when offsetting is required by another Standard.
The reporting of assets net of valuation allowances—for example, obsolescence allowances on inventories
761
and doubtful debts allowances on receivables—is not offsetting.
Items of income and expense must be offset when, and only when IFRS requires or permits it.
For example:
 gains and losses on the disposal of non-current assets are reported by deducting from the proceeds
on disposal the carrying amount of the asset and related selling expenses; and,
 expenditure that is reimbursed under a contractual arrangement with a third party (for example, a
subletting agreement) is netted against the related reimbursement.
Also gains and losses arising from a group of similar transactions are reported on a net basis (for example,
foreign exchange gains and losses or gains and losses arising on financial instruments held for trading
purposes).
Such gains and losses must be reported separately if their size, nature or incidence is such that separate
disclosure is necessary for an understanding of financial performance.
Offsetting:
Illustration:
Offsetting is only allowed if permitted or required by an IFRS and ultimately results in reflecting the
substance of the transaction or event.
Required: Give an example of:
A. Offsetting of income and expenses that is required;
B. Offsetting of income and expenses that is allowed;
C. Offsetting of income and expenses that is not allowed;
D. Offsetting of assets and liabilities that is allowed; and
E. Offsetting of assets and liabilities that is not allowed.Solution
A. Setting-off of income and expenses that is required
When earning income from a sale in the ordinary activities (in which case the income is called revenue),
we are required to measure the revenue at the amount of consideration that the entity expects to receive.
This means that if we offer a discount or rebate (expense), then the revenue from the sale (income) must
be reflected net of the discount or rebate (expense). This is a requirement of IAS 15 Revenue from contracts
with customers.
B. Setting-off of income and expenses that is allowed:
If you sell a non-current asset (i.e. a sale that is incidental to the entity’s ordinary activities (i.e. an activity
that is not ordinary) and thus where the income is not called revenue), the amount of consideration from the
sale (income) may be set-off against the carrying amount of the asset (now expensed) to reflect the profit or
loss on the sale. Since this reflects the Substance of the transaction.
C. Setting-off of income and expenses that is not allowed:
When earning revenue from the sale of inventory (income), the related cost of the sale (expense) may not
be offset since, in terms of the relevant standard (IAS 1 Presentation of financial statements), revenue must
be disclosed separately.
D. Setting-off of assets and liabilities that is allowed:
If a person buys from us on credit (i.e. a debtor) and also sells to us on credit (i.e. a creditor), we could
offset the receivables (asset) and the payable (liability) if by offsetting these balances, we were showing
762
the substance of the transactions.
Offsetting of these balances would reflect the substance if, for example, we had an agreement that gives
us the legal right of set-off (i.e. only the net balance need be paid to or received from this person).
E. Setting-off of assets and liabilities that is not allowed:
If we owe the tax authorities an amount of VAT (i.e. VAT payable a liability) but the tax authorities owe
us a refund of income tax (i.e. Income tax receivable, an asset), we are not allowed to offset these liability
and asset balances unless the tax legislation allows VAT and Income Tax to be paid on a net basis. Since
this is not allowed in Pakistan, the offsetting of these balances is not allowed in Pakistan since it would
not reflect the substance of the transactions.
Frequency of reporting [para 36]

Financial statements must be presented at least annually.
When an entity’s reporting date changes its financial statements are presented for a period longer or shorter
than one year. In such cases an entity must disclose, in addition to the period covered by the financial
statements:
 The reason for using a period other than one year; and,
 The fact that amounts presented in the financial statements are not comparable.
Comparative information
Comparative information comes in following forms:
 Minimum comparative information; and
 Additional comparative information
Minimum comparative information
A company must disclose comparative information in respect of the previous period for all amounts
reported in the current period’s financial statements. An entity shall include comparative information for
narrative and descriptive information if it is relevant to understanding the current period’s financial
statements.
A company must present (as a minimum) two statements of financial position, two statement of profit or
loss and other comprehensive income, two statement of cash flows and two statement of changes in equity
and related notes. The minimum two statements comprise one for the current reporting period and one for
the previous period.
Additional comparative information
An entity may present comparative information in addition to the minimum comparative financial
statements required by IFRSs, as long as that information is prepared in accordance with IFRSs.
This comparative information may consist of one or more financial statements, but need not comprise a
complete set of financial statements. When this is the case, the entity shall present related note information
for those additional statements.
For example, an entity may present a third statement of profit or loss and other comprehensive income
(thereby presenting the current period, the preceding period and one additional comparative period).
However, the entity is not required to present a third statement of financial position, a third statement of
cash flows or a third statement of changes in equity (i.e. an additional financial statement comparative).
The entity is required to present, in the notes to the financial statements, the comparative information
related to that additional statement of profit or loss and other comprehensive income.
763
Consistency of presentation
The presentation and classification of items in the financial statements must be retained from one period to
the next unless:
 a significant change in the nature of the operations of the entity or a review of its financial statement
presentation demonstrates that a change in presentation results in a more appropriate presentation of
transactions or other events; or
 a change in presentation is required by an IFRS.
STRUCTURE AND CONTENT OF THE STATEMENT OF FINANCIAL POSITION

Introduction
IFRS uses terms which are incorporated into this study text. However, it does not forbid the use of other
terms and you might see other terms used in practice.
IAS 1 sets out the requirements for information that must be presented in the statement of financial position
or in notes to the financial statements, and it also provides implementation guidance. This guidance
includes an illustrative format for a statement of financial position. This format is not mandatory but you
should learn it and use it wherever possible.
Current and non-current assets and liabilities
Current and non-current items should normally be presented separately in the statement of financial
position, so that:

current and non-current assets are divided into separate classifications; and

current and non-current liabilities are also classified separately.
Deferred tax balances must not be classified as current assets or current liabilities.
Alternative
A company is allowed to use a presentation based on liquidity instead of current/non-current if this
provides information that is reliable and more relevant. Financial institutions often use this approach.
Whichever method of presentation is used, a company must disclose the amount expected to be recovered
or settled after more than twelve months for each asset and liability that combines amounts expected to be
recovered or settled:

No more than twelve months after the reporting period, and

More than twelve months after the reporting period.
Current assets
IAS 1 states that an asset should be classified as a current asset if it satisfies any of the following criteria:
 The entity expects to realise the asset, or sell or consume it, its normal operating cycle.
 The asset is held for trading purposes.
 The entity expects to realise the asset within 12 months after the reporting period.
 It is cash or a cash equivalent. (Note: An example of ‘cash’ is money in a current bank account. An
example of a ‘cash equivalent’ is money held in a term deposit account with a bank.)
Examples of current assets include accounts receivable, inventories, cash etc. All other assets should be
classified as non-current assets.
764
Operating cycle
The operating cycle is the time between the acquisition of assets for processing and their realisation in cash
or cash equivalents. When the entity's normal operating cycle is not clearly identifiable, it is assumed to be
twelve months.
Current assets include assets (such as inventories and trade receivables) that are sold, consumed or
realised as part of the normal operating cycle even when they are not expected to be realised within twelve
months after the reporting period.
Illustration:
X Limited uses small amounts of platinum in its production process.
Platinum price has fallen recently so just before its year-end X Limited bought an amount of platinum
sufficient to cover its production needs for the next two years.
This would be a current asset. The amount expected to be used after more than 12 months should be
disclosed.
Current assets also include assets held primarily for the purpose of trading and the current portion of non-
current financial assets.
Non-current assets
These are tangible, intangible and financial assets of a long-term nature.
Examples of non-current assets include property, plant and equipment, intangibles etc.
Current liabilities
IAS 1 also states that a liability should be classified as a current liability if it satisfies any of the following
criteria:
 The entity expects to settle the liability in its normal operating cycle.
 The liability is held primarily for the purpose of trading. This means that all trade payables are
current liabilities, even if settlement is not due for over 12 months after the end of the reporting
period.
 It is due to be settled within 12 months after the end of the reporting period.
 The entity does not have the unconditional right to defer settlement of the liability for at least 12
months after the end of the reporting period.
All other liabilities should be classified as non-current liabilities.

Examples of current liabilities include accounts payable, accruals etc.
Examples of non-current liabilities include deferred tax liability, employment benefits etc.
Changing from non-current liability to current liability

Liabilities that were originally non-current may become current in a subsequent year, when they become
repayable within 12 months.
Example:
A company has a financial year end of 31 December. On 31 October Year 1, it took out a bank loan of Rs.
50,000. The loan principal is repayable as follows:
 Rs. 20,000 on 31 October Year 3
 Rs. 30,000 on 31 October Year 4
765
As at 31 December Year 1
The full bank loan of Rs. 50,000 will be a non-current liability
A current liability of Rs. 20,000 repayable on 31 October Year 3 and a non-current liability of
Rs. 30,000 repayable on 31 October Year 4.
Current liability of Rs. 30,000
There is an exception to this rule. A liability can continue to be shown as a long-term liability, even if it is
repayable within 12 months, if the entity has the ‘discretion’ or right to refinance (or ‘roll over’) the loan
at maturity.
STRUCTURE AND CONTENT OF THE STATEMENT OF COMPREHENSIVE INCOME

A single statement or two statements
Total comprehensive income during a period is the sum of:
 The profit or loss for the period; and
 Other comprehensive income.
IAS 1 requires an entity to present all items of income and expense during a period in a statement of
comprehensive income. (now known as a statement of profit or loss and other comprehensive income).
This may be presented as a single statement with two parts:

 A statement of profit or loss which shows the components of profit or loss (beginning with Revenue and
ending with Profit (or Loss) for the year; and
 A statement of other comprehensive income.
Alternatively these two parts can be presented as two separate statements. Whichever
approach is used the following must be shown:
 Profit or loss;
 Total other comprehensive income;
 Comprehensive income for the period (the total of profit or loss and other comprehensive income).
766
Ethical Issues in Financial Reporting
Example:
Ibrahim is member of ICAP working as a unit accountant.
He is a member of a bonus scheme under which, staff receive a bonus of 10% of their annual salary
if profit for the year exceeds a trigger level.
Ibrahim has been reviewing working papers prepared to support this year’s financial statements. He
has found a logic error in a spreadsheet used as a measurement tool for provisions.
Correction of this error would lead to an increase in provisions. This would decrease profit below the
trigger level for the bonus.
Analysis:
Ibrahim faces a self-interest threat which might distort his objectivity.
Ibrahim has a professional responsibility to ensure that financial information is prepared and
presented fairly, honestly and in accordance with relevant professional standards. He has further
obligations to ensure that financial information is prepared in accordance with applicable accounting
standards and that records maintained represent the facts accurately and completely in all material
respects.
Ibrahim must make the necessary adjustment even though it would lead to a loss to himself.
ICAP CODE OF ETHICS

Introduction
Ethics can be difficult to define but it is principally concerned with moral principles, character and
conduct. Ethical behaviour is more than obeying laws, rules and regulations. It is about doing ‘the
right thing’. The accountancy profession is committed to acting ethically and in the public interest.
Professional accountants may find themselves in situations where values are in conflict with one
another due to responsibilities to employers, clients and the public.
ICAP has a code of conduct which members and student members must follow. The code provides
guidance in situations where ethical issues arise.
Comment
Most people are honest and have integrity and will always try to behave in the right way in a given set
of circumstances. However, accountants might face situations where it is not easy to see the most
ethical course of action. One of the main roles of the ICAP code is to provide guidance in these
situations.
Impact on members in practice

All members and student members of ICAP are required to comply with the code of ethics and it
applies to both accountants in practice and in business.
ICAP-Code of ethics has been bifurcated into following parts:
Part 1: Complying with the Code, Fundamental Principles and Conceptual Framework (All Chartered
Accountants)
Part 2: Chartered Accountants in Practice Part 3: Chartered Accountants in Business
Part 4A - Independence for Audit and Review Engagements

Part 4B - Independence for Assurance Engagements other than Audit and Review
This chapter explains ethical issues surrounding the preparation of financial statements and other
financial information.
The fundamental principles
ICAP’s Code of Ethics expresses its guidance in terms of five fundamental principles. . These are:
 integrity;
 objectivity;
 professional competence and due care;
 confidentiality; and
767
 professional behaviour
Integrity
Members should be straightforward and honest in all professional and business relationships. Integrity
implies not just honesty but also fair dealing and truthfulness.
A chartered accountant should not be associated with reports, returns, communications or other
information where they believe that the information:
Contains a materially false or misleading statement;
Contains statements or information furnished recklessly; or
Omits or obscures information required to be included where such omission or obscurity
would be misleading.
Objectivity
Members should not allow bias, conflicts of interest or undue influence of others to override their
professional or business judgements.
A chartered accountant may be exposed to situations that may impair objectivity. It is impracticable to
define and prescribe all such situations.
Relationships that bias or unduly influence the professional judgment of the chartered accountant
should be avoided.
Professional competence and due care

Practising as a chartered accountant involves a commitment to learning over one’s entire working
life. Members have a duty to maintain their professional knowledge and skill at such a level that a
client or employer receives a competent service, based on current developments in practice,
legislation and techniques. Members should act diligently and in accordance with applicable
technical and professional standards.
Continuing professional development develops and maintains the capabilities that enable a chartered
accountant to perform competently within the professional environments.
Confidentiality
Members must respect the confidentiality of information acquired as a result of professional and
business relationships and should not disclose such information to third parties without authority or
unless there is a legal or professional right or duty to disclose.
Confidential information acquired as a result of professional and business relationships should not be
used for the personal advantage of members or third parties.
Professional behaviour
Members must comply with relevant laws and regulations and should avoid any action which
discredits the profession. They should behave with courtesy and consideration towards all with whom
they come into contact in a professional capacity.
Threats to the fundamental principles

Compliance with the fundamental principles may potentially be threatened by a broad range of
circumstances. Many threats fall into the following categories:
Self-interest;
Self-review;
Advocacy;
Familiarity; and
Intimidation.
Members must identify, evaluate and respond to such threats. Unless any threat is clearly
insignificant, members must implement safeguards to eliminate the threats or reduce them to an
acceptable level so that compliance with the fundamental principles is not compromised.
Self- interest threats
Self-interest threats may occur as a result of the financial or other interests of members or their
immediate or close family members.
Such financial interests might cause members to be reluctant to take actions that would be against their
own interests.
Examples of circumstances that may create self-interest threats include, but are not limited to:
Incentive compensation arrangements.
Concern over employment security.
768
Commercial pressure from outside the employing organization.
Self-review threats
Self-review threats occur when a previous judgement needs to be re-evaluated by members
responsible for that judgement. For example, where a member has been involved in maintaining the
accounting records of a client he may be unwilling to find fault with the financial statements derived
from those records. Again, this would threaten the fundamental principle of objectivity.
Circumstances that may create self-review threats include, but are not limited to, business decisions or
data being subject to review and justification by the same chartered accountant in business responsible
for making those decisions or preparing that data.
Advocacy threats
A chartered accountant in business may often need to promote the organisations position by providing
financial information. As long as information provided is neither false nor misleading such actions
would not create an advocacy threat.
Familiarity threats
Familiarity threats occur when, because of a close relationship, members become too sympathetic to
the interests of others. Examples of circumstances that may create familiarity threats include:
A chartered accountant in business in a position to influence financial or non-financial
reporting or business decisions having an immediate or close family member who is in a
position to benefit from that influence.
Long association with business contacts influencing business decisions.
Acceptance of a gift or preferential treatment, unless the value is clearly insignificant.
Intimidation threats
Intimidation threats occur when a member’s conduct is influenced by fear or threats (for example,
when he encounters an aggressive and dominating individual at a client or at his employer).
Examples of circumstances that may create intimidation threats include:
Threat of dismissal or replacement over a disagreement about the application of an
accounting principle or the way in which financial information is to be reported.
A dominant personality attempting to influence decisions of the chartered
accountant.
PREPARATION AND REPORTING OF INFORMATION
Accountants in business
Accountants in business are often responsible for the preparation of accounting information.
Accountants in business need to ensure that they do not prepare financial information in a way that is
misleading or that does not show a true and fair view of the entity’s operations.
Accountants who are responsible for the preparation of financial information must ensure that the
information they prepare is technically correct, reports the substance of the transaction and is
adequately disclosed.
There is a danger of influence from senior managers to present figures that inflate profit or assets or
understate liabilities. This puts the accountant in a difficult position. On one hand, they wish to
prepare proper information and on the other hand, there is a possibility they might lose their job if
they do not comply with their managers wishes.
In this case, ethics starts with the individual preparing the information. They have a difficult
decision to make; whether to keep quiet or take the matter further. If they keep quiet, they will
certainly be aware that they are not complying with the ethics of the accounting body they belong to.
If they speak out, they may be bullied at work into changing the information or sacked.
Section 220 of the ICAP Code of Ethics
Users of information prepared and presented by a Chartered Accountant:
Chartered accountants in business at all levels are often involved in the preparation and presentation
of information that may either be made public or used by others inside or outside the employing
organisation including:
Management and those charged with governance(i.e board of directors including supervisory
board having non executive directors).
Investors and lenders or other creditors.
Regulatory bodies (SECP or SBP).

769
Types of information prepared and presented by a Chartered Accountant:
Such information may include financial or management information, for example:
Operating and performance reports.
Decision support analyses (like trend and ratio analysis in annual reports)
Forecasts and budgets;
Information provided to the internal and external auditors.
Risk analyses.
General and special purpose financial statements (e.g. forcasted financial statement to be
provided to financial institutions to obtain the financing).
Tax returns.
Reports filed with regulatory bodies for legal and compliance purposes.
Basic principals in preparing and presenting information:

When preparing or presenting information, a chartered accountant shall:
a. Prepare or present the information in accordance with a relevant reporting framework
(like IFRS and Companies Act 2017), where applicable (if budgets or ratio analysis is
prepared and presented then there is no such reporting frameworks);
b. Prepare or present the information in a manner that is intended neither to mislead nor to
influence contractual or regulatory outcomes inappropriately;
c. Exercise professional judgment to:
 Represent the facts accurately and completely in all material
respects;
 Describe clearly the true nature of business transactions or
activities;
 Classify and record information in a timely and proper manner; and
 Not omit anything with the intention of rendering the information
misleading or of influencing contractual or regulatory outcomes
inappropriately.
Use of Discretion in Preparing or Presenting Information
(Sometimes IFRS provide options e.g. FIFO or weighted average; cost model or revaluation
model etc.)
Preparing or presenting information might require the exercise of discretion in making professional
judgments. The chartered accountant shall not exercise such discretion with the intention of
misleading others or influencing contractual or regulatory outcomes inappropriately.
Examples of ways in which discretion might be misused to achieve inappropriate outcomes
include:
a. Determining estimates, for example, determining fair value estimates (different property
dealers are providing different fair values of property) in order to misrepresent profit or loss.
b. Selecting or changing an accounting policy or method among two or more alternatives
permitted under the applicable financial reporting framework, for example, selecting a policy
for accounting for inventories in order to misrepresent profit or loss.
c. Determining the timing of transactions, for example, timing the sale of an asset near the
end of the accounting year in order to mislead.(e.g. changing the revenue recognition policy
from delivery of goods to dispatch of goods)
770
d. Determining the structuring of transactions, for example, structuring financing
transactions in order to misrepresent assets and liabilities or classification of cash flows.(e.g
classifying the lease agreements as low value asset leases or vice versa or repurchase
agreements)
e. Selecting disclosures, for example, omitting or obscuring (conceal) information relating to
financial or operating risk in order to mislead.(e.g. non disclosure of possible contingencies and
commitments)
If in certain situations compliance with relevant reporting framework is not required then
chartered accountant should exercise his professional judgment:
When performing professional activities, especially those that do not require compliance with a
relevant reporting framework (e.g. when preparing budgets or forecasts), the chartered accountant
shall exercise professional judgment to identify and consider:
(a) The purpose for which the information is to be used (e.g. planning);
(b) The context within which it is given (e.g. organization as a whole or
departments); and
(c) The audience to whom it is addressed(e.g. departmental heads or BOD).
For example, when preparing or presenting budgets or forecasts, the inclusion of relevant estimates,
approximations and assumptions, where appropriate, would enable those who might rely on such
information to form their own judgments.
The chartered accountant might also consider clarifying the intended audience, context and purpose
of the information to be presented.
Relying on the Work of Others (revaluation report of valuers whether internal or external to
comply with IAS 16 or Actuaries in case of employee benefit plans like pension and
Gratuities or lawyers when applying IAS 37)
A chartered accountant who intends to rely on the work of others, either internal or external to the
employing organization, shall exercise professional judgment to determine what steps to take, if any,
in order to fulfill his responsibilities
Factors to consider in determining whether reliance on others is reasonable include:
The reputation and expertise of, and resources available to, the other individual or
organization.
Whether the other individual is subject to applicable professional and ethics standards.(means
whether his professional body has adopted any professional and ethical standards like ICAP)
From where a Chartered accountant can obtain above information [Actions to be taken in such
a situation]:
Such information might be gained from prior association with, or from consulting others about, the
other individual or organization.
Addressing Information that is or Might be Misleading
When the chartered accountant knows or has reason to believe that the information with which the
accountant is associated is misleading, the accountant shall take appropriate actions to seek to
resolve the matter including:
1. Discussing concerns that the information is misleading with the chartered accountant’s
superior and/or the appropriate level(s) of management within the accountant’s
employing organization or those charged with governance, and requesting such individuals
to take appropriate action to resolve the matter. Such action might include:
 Having the information corrected.
 If the information has already been disclosed to the intended users,
informing them of the correct information.
771
2. Consulting the policies and procedures of the employing organization (for example, an
ethics or whistle-blowing policy) regarding how to address such matters internally.
If employing organization has not taken appropriate action:
The chartered accountant might determine that the employing organization has not taken appropriate
action. If the accountant continues to have reason to believe that the information is misleading, the
following further actions might be appropriate provided that the accountant remains alert to the
principle of confidentiality:
Consulting with:
a. A relevant professional body (e.g. ICAP).
b. The internal or external auditor of the employing organization.
c. Legal counsel (legal Advisors).
d. Determining whether any requirements exist to communicate to:
 Third parties, including users of the information.
 Regulatory and oversight authorities (SECP and SBP to disclose
fraudulent practices).
After exhausting all options:
If after exhausting all feasible options, the chartered accountant determines that appropriate action
has not been taken and there is reason to believe that the information is still misleading then:
1. The accountant shall refuse to be or to remain associated with the information.
2. In such circumstances, it might be appropriate for a chartered accountant to resign from the
employing organization.
Documentation (Create an evidence)

The chartered accountant is encouraged to document:
a. The facts.
b. The accounting principles or other relevant professional standards involved.
c. The communications and parties with whom matters were discussed.
d. The courses of action considered.
e. How the accountant attempted to address the matter(s).
772
Practice questions
Q.1 Usman is a Chartered Accountant and has been working as Finance Director in Mehran Limited
(ML) for the past one year. He reports to the CEO who is also a Chartered Accountant.
Recently, Usman has received a bill issued by an advertising agency which is duly approved
for payment by the Director Marketing. Usman believes that the amounts agreed to be paid
under the contract far exceed the value of services to be provided by the advertising agency and
that the payment would be redirected to obtain a sales contract. He has discussed the matter
with CEO who has advised him to process the payment in ML’s business interest. The CEO
also informed Usman that if the said contract is secured, the management staff will be entitled
to a handsome bonus.
Required:
Briefly explain how CEO is in breach of the fundamental principles of ICAP’s code of ethics. Also
state the potential threats which Usman may face under the circumstances, along with available
safeguards (if
any). (08)
Q.2 Zia is a Chartered Accountant and works as a financial controller in Unique Engineering
Limited (UEL). UEL is currently considering the acquisition of Top Storage Limited (TSL) and Zia is
a member of the team which is currently negotiating the acquisition with the management of TSL.
After becoming aware of the prospective acquisition, Zia purchased 1,000,000 shares of TSL in the
name of his wife and son.
Required:
Briefly explain how Zia is in breach of the fundamental principles of ICAP’s code of ethics.
Also
explain the potential threats that may be involved in the above situation. (06)
Q.3 Baqir, ACA is working as Finance Manager at Kiwi Limited (KL), a listed company, and reports
to Shahid, FCA who is the Chief Financial Officer of the company.
Before the date of authorization for issuance of KL’s financial statements for the year ended 30 June
2018, Zahoor (a mutual friend of Baqir and Shahid) informed Baqir that Shahid has recommended
him to purchase KL’s shares as higher EPS is expected this year. Zahoor also sought Baqir’s advice
on this matter.
Required:
Briefly explain how Shahid may be in breach of the fundamental principles of ICAP’s code of
ethics. Also state the potential threats that Baqir may face in the above circumstances and how he
should respond. (08)
Q.4 Umer Sheikh, ACA is Manager Finance at Charming Limited (CL) and reports to Abid, FCA who
is the Chief Financial Officer of CL. Abid is also a close relative of the major shareholder of CL.
CL is negotiating an important financing arrangement with Union Standard Bank (USB) in order
to expand its business in foreign markets. The rate quoted by USB is comparatively higher than
existing rates being paid by CL.
During a meeting with the Executive Vice President (EVP) of USB, where Umer Sheikh was
also present, Abid revealed that his son has applied for a house financing in USB last month but
has not received any response from USB so far. Abid requested EVP to consider his application.
EVP agreed to look into the matter. On conclusion of the meeting, Abid asked Umer Sheikh to
prepare a note for the board of directors proposing the acceptance of the rate offered by USB.
Required:
Briefly explain how Abid may be in breach of the fundamental principles of ICAP’s code of
ethics. Also state the potential threats that Umer Sheikh may face in the above circumstances
and how he should respond. (08)
Q.5
773
Ali and Bashir are chartered accountants and have been working as Managing Director (MD) and
Chief Financial Officer (CFO) in a listed company. In a recent meeting of the Board, the directors
have decided to expand the business within six months by opening 20 retail outlets. This expansion
would require financing of Rs. 300 million which may be arranged through bank loan.
MD has advised the CFO to arrange the loan from MN Bank. He has also informed that the President of
the bank is his good friend and the loan can be arranged on a fast track basis at a mark-up of 15% per
annum, subject to the following conditions:
1. current ratio and quick ratio should be at least 2:1 and 1:1 respectively;
2. gearing ratio should not exceed 40%; and
3. interest cover should be at least 3.
CFO is not comfortable with this deal as the mark-up offered by the bank is much higher than the
rate on the existing loan and it is difficult for the company to meet the gearing requirements of the
bank. However, MD has asked him to make certain changes in the draft financial statements before
submission to the bank; which according to the CFO are not in accordance with the IFRSs.
Required: Briefly explain how the MD may be in breach of fundamental principles of ICAP’s code
of Ethics. Also state the potential threats that CFO may face along with available safeguards.
Q.6
On receiving the revised financial statements, the CEO called Faraz and briefed him in the following
manner:
“Since the position of the CFO is vacant, I intend to promote you as CFO. Company has been
through a rough year and has some disappointing results but a reasonable profit needs to be reported
for the mutual benefit of all stakeholders. Moreover, the financial statements would also be
scrutinized by the bank to ensure that the loan covenants are met which include maintaining total
assets at 1.5 times the total liabilities.
Therefore, I want you to confirm the draft financial statements without making any adjustment for
presentation before the Board and submission to the bank.”
Required: Identify the threats faced by Faraz along with available safeguards Q.7
Waheed is a chartered accountant, recently employed by AA Public limited Company as deputy to
the finance director, Arif (also a chartered accountant). AA Public limited Company is listed on the
Pakistan stock exchange.
On Waheed’s first day on the job he met with Arif who said ‘Look, keep it to yourself but I’m having
a second interview next week for a new job. The first thing that I need you to do is to review the
financial statements before the auditors arrive. I qualified a few years ago and am not up to date on all
of the little technicalities in IFRS. You should know these better than me and you’ll know more
about what the auditors might focus on. We must do our best to present the financial statements in the
most favourable light as the bonus paid to employees (including me) depends on profit being more
than 10% bigger than last year’s and remember that you qualify for this too. Keep this in mind when
you carry out the review as we do not really want to find anything. Do well at this and I might put in a
good word for you when I leave as I’m sure you’ll be a great replacement for me.”
Required:
Brief explain how Arif may be in breach of the fundamental principles of ICAP’s code of Ethics.
Also state the potential threats that Waheed may face in the above circumstances and how he should
respond.
Q.8
Atif is a chartered accountant and has been working as Manager – Accounts in an unlisted public
company MNZ Limited.
While preparing the financial statements for the year ended 31 December 2016, CFO of MNZ who is also
a chartered accountant informed Atif that the directors are considering to have the company listed on
Pakistan Stock Exchange.
774
Consequently, CFO wants to show higher profit and has asked Atif to identify areas where book
adjustments can be made. He has also informed that if MNZ is able to list the shares at a price of Rs.
35 or more, all managerial staff would be given an additional bonus this year.
Required:
Briefly explain how the CFO is in breach of the fundamental principles of ICAP’s code of ethics. Also
state the potential threats that Atif may face under the above circumstances and how he should
respond.
Ans.1 Chartered Accountants should be straight forward and honest in all professional and business
relationships. Since the CEO advised Usman to process the payment about which Usman believes
that the said payment is unreasonable and would be made to obtain a sales contract, therefore he is
in breach of principle of integrity and professional behavior.
In the given circumstances, the decision of CEO may also induce lack of objectivity due to the
expected bonuses to the management.
Self interest threat faced by Usman
Usman might get influenced by the CEO due to the expected bonus therefore he might process the
payment in his own self interest.
Intimidation threat faced by Usman
Usman may have to leave this job if the disagreement continues.
Available safeguards
Where it is not possible to reduce the threats to an acceptable level, Usman:
i. should refuse to sign the cheque / refuse to associate with the transaction.
ii. should consider informing appropriate authorities like Audit Committee.
iii. consult the policies and procedures of the company with respect to ethics or
whistle blowing policy to address the matter internally
iv. Consider consulting with the relevant professional body, internal or
external auditor, legal council or informing third parties or appropriate
authorities in line with the ICAP guidance on confidentiality.
v. should resign.
A.2 Mr. Zia breached the following fundamental principles of ICAP code of ethics:
(i) Confidentiality
Under the Code of Ethics, member must respect the confidentiality of information
acquired as a result of professional and business relationship. Confidential information
acquired should not be used for the personal advantage by a member.
In the above scenario, Mr Zia has breached the principle of confidentiality by using
the confidential information for the personal advantage since the information was not
publicly available.
(ii) Professional behaviour

Under the Code of Ethics, member must comply with relevant laws and regulations and
should avoid any action which discredits the profession.
Since it can be a non compliance of laws and regulation, he may be in breach of the
principle of professional behaviour.
Potential threats involved in the circumstances:
Self interest threat
Since Mr. Zia is part of a team which is negotiating the price of the shares and he has purchased
shares in the name of his wife and son, it creates self interest threat and he would be reluctant to take
any decision that would be against his own interest.(i.e. non-acquisiton of TSL).
Ans.3 In the given situation, CFO may be in breach of:

(i) Principle of Professional behavior:
775
This principle imposes an obligation on all chartered accountants to comply with
relevant laws and regulations and avoid any action that discredits the profession.
According to Zahoor, Shahid revealed inside information to him which is non-
compliance of regulations pertaining to inside information and his act may discredit
the profession as well. As a result Shahid has breached this principle.
(ii) Principle of confidentiality:
This principle imposes an obligation on all chartered accountants to refrain from using
confidential information acquired as a result of professional and business relationships
to their personal advantage or the advantage of third parties.
In given scenario, Shahid misused the confidential information for the advantage of his friend so
Shahid has breached this principle.
Threats faced by Baqir

i. Intimidation threat:
Baqir may face intimidation threat from his superior if he raises objection on non-
compliance of regulations by Shahid.
ii. Familiarity Threat:
Baqir may also face familiarity threat as his interest towards friendship with Zahoor
may be at stake if he refuses to disclose (confirm or deny) the confidential information
to him.
Available safeguards for Baqir:
a. He should refrain himself from disclosing any confidential information to his friend.
b. He should discuss the concerned issue with Shahid.
c. He should consider informing appropriate authorities like Audit Committee/CEO.
d. consult the policies and procedures of the company with respect to ethics or whistle blowing
policy to address the matter internally
e. Consider consulting with the relevant professional body, internal or external auditor, legal
council or informing third parties or appropriate authorities in line with the ICAP guidance
on confidentiality.
f. should resign.
Ans.4 In the given situation, CFO may be in breach of :

i. Principle of professional behavior:
This principle imposes an obligation on all chartered accountants to avoid any action
that the chartered accountant knows or should know may discredit the profession. CFO
should have avoided discussing his personal interest in official meeting.
ii. Principle of objectivity:
Chartered Accountant should not compromise their professional or business judgment
because of bias, conflict of interest or the undue influence of others. In this
circumstance, he has compromised his professional and business judgment due to his
personal interest as he requested the EVP to consider application of his son who has
applied for house financing in USB.
iii. Principle of integrity:
Chartered Accountant should be straight forward and honest in all professional and
business relationship. It seems that CFO may be inclined to accept higher mark-up rate
as compared to existing rate being paid by CL, resulting breach of integrity.
Intimidation threat faced by Mr. Umer
Umer may face intimidation threat from his superior if he would raise his objection on acceptance of
higher mark-up rate offered by the Bank specially where his superior i.e. Abid is a relative of
principal shareholder too.
776
In addition he may also face self interest threat regarding his job.
If this threat is significant Umer should consult with superiors within the organization in order to
eliminate or reduce it to an acceptable level.
Where it is not possible to reduce the threats to an acceptable level, Umer should refuse to associate
with this financing arrangement and take the following appropriate steps:
i. should consider informing appropriate authorities like Audit Committee /
CEO;
ii. consult the policies and procedures of the company with respect to ethics or
whistle blowing policy to address the matter internally;
iii. consider consulting with the relevant professional body, internal or external
auditor, legal council or informing third parties or appropriate authorities in
line with the ICAP guidance on confidentiality;
iv. should resign.
Answer 5:
In this situation, the existence of threats to fundamental principles will depend on following
factors:
 Whether financing from other banks is available at lower mark up;
 Whether it is feasible to borrow @15% for the expansion.
If financing from other banks is available or it may not be feasible to finance the project at the rate of
15%, and still MD is pressurizing the CFO to obtain financing at higher rate of mark-up the MD
may be in breach of:
Principle of objectivity
It can be a bias decision on part of MD, as he may be favoring his friend who is the president of the
bank or may have any other interest in taking loan from that particular bank.
Principle of integrity
MD may be in breach of principle of integrity because he is asking CFO to manipulate the financial
information.
Potential threat to CFO:
Preparation of financial information as per the instructions of MD, will result in intimidation
threat to integrity and objectivity.
Identified threat is significant as the CFO is being instructed from the highest level of management. In
order to reduce the threat to an acceptable level, the following safeguards should be applied:
 Consult with superiors such as audit committee or those charged with
governance.
 Consult the policies and procedures of the company with respect to ethics
or whistle blowing policy to address the matter internally.
 Consider consulting with the relevant professional body, internal or
external auditor, legal council or informing third parties or appropriate
authorities in line with the ICAP guidance on confidentiality.
 Where it is not possible to reduce the threat to an acceptable level, CFO
shall refuse to be remain associated with the financial information and
consider resigning from the post of CFO.
A.6
777
In the given situation, Faraz may face following threats:
i. Self-interest threat
Self-interest threat occurs as Faraz has been told by the CEO that he would be promoted to CFO.
ii. Intimidation threat
Faraz may have to quit this job if he would not confirm the draft financial statement as per CEO’s
instructions.
Available safeguards:
Where it is not possible to reduce the threats to an acceptable level, Faraz:
(i) should refuse to remain associated with information which is or may be
misleading;
(ii) should consider to consult with superiors such as audit committee or those
charged with governance;
(iii) consult the policies and procedures of the company with respect to ethics or
(iv) consider consulting with the relevant professional body, internal or external
auditor, legal council or informing third parties or appropriate authorities in line
with the ICAP guidance on confidentiality;
(v) may resign.
Ans.7
The range of comments made by Arif raises questions over his ethical behaviour and professional
standards.
A chartered accountant should be unbiased when involved in preparing and reviewing financial
information. A chartered accountant should prepare financial statements fairly, honestly, and in
accordance with relevant professional standards and must not be influenced by considerations of the
impact of reported results.
Arif’s breach of fundamental principles:
Principle of Integrity:
Arif appears to be influenced by the need to achieve a specified level of profit. This is not appropriate
and calls his integrity into question.
Principle of Professional competence
In addition, Arif’s professional competence seems to be suspect. His comment on not being up to
date on all of the little technicalities in IFRS s suggests that he has not maintained a level of
professional competence appropriate to his professional role.
ICAP members have a responsibility to engage in continuing professional development in order to
ensure that their technical knowledge and professional skills are kept up to date. Arif should seek
continuing professional development activities and improve his knowledge on ethical standards.
Furthermore, it might be expected that as Waheed’s superior he should set an example to Waheed
and guide him in his responsibilities. Clearly this is not happening.
Principle of Professional behavior:
As a member of ICAP Arif should be aware of the ICAP code of ethics. Arif should know of the
danger of self-interest threats and intimidation threats to himself and to others. His attempt to
influence the outcome of a fellow professional by applying such a threat to that individual is very
unprofessional.
Waheed’s Threats:
Self interest threat
778
Waheed faces a self-interest threat, in that there is the possibility of a bonus provided profit being
more than 10% bigger than last year’s. Arif has also suggested that he can influence the Board’s
decision over employing him as a replacement finance director – another self-interest threat to
Waheed. Both of these threats must be ignored.
Arif’s comments imply that his application of professional responsibility is lacking. This may extend
into the way in which the current financial statements have been prepared. Waheed must be very
careful (as always) to carry out the review with all due care.
Waheed should first discuss his recommendations with Arif and remind him of his professional
responsibilities to ensure that the accounting standards are correctly followed. If the financial
statements are found to contain errors or incorrect accounting treatment, then they must be amended.
If Arif refuses to amend the draft financial statements, if necessary, Waheed should take appropriate
actions to resolve the matter including:
 should report the matter to the audit committee or the other directors;
 -consult the policies and procedures of the company with respect to ethics
or whistle blowing policy to address the matter internally;
 consider consulting with the relevant professional body, internal or external
auditor, legal council or informing third parties or appropriate authorities in
line with the ICAP guidance on confidentiality.
 Should resign.
Ans.8
In given situation, CFO is in breach of:
1. Principle of integrity:
Chartered Accountant should be straight forward and honest in all professional and business
relationship. Since he asked Accounts manager to identify the areas where through
adjustments, profit may be reported on higher side, he has breached the principle of integrity.
2. Principle of professional behaviour:
This principle imposes an obligation on all chartered accountants to avoid any action that the
chartered accountant knows or should know may discredit the profession. Since CFO asked
Accounts Manager for booking the adjustments to increase the current year profit, which
have a negative effect on the reputation of the profession.
3. Principle of objectivity:
Chartered Accountant should not compromise their professional or business judgment

because of bias, conflict of interest or the undue influence of others. In this circumstance, he
has compromised his professional and business judgment due to biasness.
Self-interest threat faced by Mr. Atif
Self-interest threat occurs as a result of financial or other interest of members or their immediate
family member. In this case, he has been told by the CFO that he would be given an additional bonus
this year so he faces self-interest threat.Available safeguards
If this threat is significant Atif should consult with superiors within the organisation in order to
eliminate or reduce it to an acceptable level.
Where it is not possible to reduce the threats to an acceptable level, Atif:
ii. should refuse to remain associated with information which is or may be
misleading;
iii. should consider informing directors;
iv.consult the policies and procedures of the company with respect to ethics or
v. consider consulting with the relevant professional body, internal or external
779
auditor, legal council or informing third parties or appropriate authorities in line
with the ICAP guidance on confidentiality;
vi. should resign.
780
ETHICAL ISSUES IN FINANCIAL REPORTING
Serving employers with professional competence requires the exercise of sound judgment in
applying professional knowledge and skill when undertaking professional activities. Maintaining
professional competence requires a continuing awareness and an understanding of relevant technical,
professional and business developments. Continuing professional development enables a chartered
accountant to develop and maintain the capabilities to perform competently within the professional
environment.
Diligence encompasses the responsibility to act in accordance with the requirements of an
assignment, carefully, thoroughly and on a timely basis. A chartered accountant shall take reasonable
steps to ensure that those working in a professional capacity under the accountant’s authority have
appropriate training and supervision.
Where appropriate, a chartered accountant shall make employers or other users of the accountant’s
professional services or activities, aware of the limitations inherent in the services or activities.
When a chartered accountant becomes aware of having been associated with misleading or false
information, the accountant shall take steps to be disassociated from that information.
Confidentiality
The principle of confidentiality requires an accountant to respect the confidentiality of information
acquired as a result of professional and business relationships. Confidentiality serves the public
interest because it facilitates the free flow of information from the chartered accountant’s client or
employing organization to the accountant in the knowledge that the information will not be
disclosed to a third party.
A chartered accountant shall continue to comply with the principle of confidentiality even after the
end of the relationship between the accountant and a client or employing organization. An
accountant might use his experience while respecting the confidentiality of information.
An accountant shall:
 Be alert to the possibility of inadvertent disclosure, including in a social environment, and
particularly to a close business associate or an immediate or a close family member;
 Maintain confidentiality of information within the firm or employing organization or disclosed
by a prospective employing organization;
 Not disclose confidential information acquired as a result of professional and business
relationships outside employing organization (even after the relationship has ended).
 Not use confidential information acquired as a result of professional and business relationships
for the personal advantage of the accountant or for the advantage of a third party (even after the
relationship has ended).
 Take reasonable steps to ensure that personnel under the accountant’s control, and individuals
from whom advice and assistance are obtained, respect the accountant’s duty of confidentiality.
The following are circumstances where chartered accountants are or might be required to disclose
confidential information or when such disclosure might be appropriate:
 Disclosure is required by law.
 Disclosure is permitted by law and authorized by the client or employing organisation.

 Disclosure is not prohibited by law and there is professional duty or right to disclose.
Professional behavior
The principle of professional behavior requires an accountant to comply with relevant laws and
regulations and avoid any conduct that the accountant knows or should know might discredit the
profession. A chartered accountant shall not knowingly engage in any business, occupation or
activity that impairs or might impair the integrity, objectivity or good reputation of the profession,
and as a result would be incompatible with the fundamental principles.
Conduct that might discredit the profession includes conduct that a reasonable and informed third
party would be likely to conclude adversely affects the good reputation of the profession.
► Example
781
Ali is a chartered accountant recruited on a short-term contract to assist the finance director, Bashir
(who is not a chartered accountant) in finalising the draft financial statements.
The decision on whether to employ Ali on a permanent basis rests with Bashir.
Ali has been instructed to prepare information on leases to be included in the financial statements. He
has identified a number of large leases which are being accounted for as rental arrangements even
though the terms of the contract contain clear indicators that the risks and benefits have passed to the
company and applying IFRS 16, right of use asset and lease liability should have been recorded.
Changing the accounting treatment for the leases would have a material impact on asset and liability
figures.
Ali has explained this to Bashir. Bashir responded that Ali should ignore this information as the
company need to maintain a certain ratio between the assets and liabilities in the statement of
financial position.
Required: Discuss the responsibility of Ali and suggest course of action.
Answer:
Ali faces a self-interest threat which might distort his objectivity. The current accounting treatment is
incorrect.
Ali has a professional responsibility to ensure that financial information is prepared and presented
fairly, honestly and in accordance with relevant professional standards. He has further obligations to
ensure that financial information is prepared in accordance with applicable accounting standards and
that records maintained represent the facts accurately and completely in all material respects.
Example
Etishad is a chartered accountant who works in a team that reports to Fahad, the finance director of
Kohat Holdings. Fahad Is also a chartered accountant. He has a domineering personality.
Kohat Holdings revalue commercial properties as allowed by IAS 16. Valuation information
received last year showed that the fair value of the property portfolio was 2% less than the carrying
amount of the properties (with no single property being more than 4% different). A downward
revaluation was not recognised on the grounds that the carrying amount was not materially different
from the fair value.
This year’s valuation shows a continued decline in the fair value of the property portfolio. It is now
5% less than the carrying amount of the properties with some properties now being 15% below the
carrying amount.
Etishad submitted workings to Fahad in which he had recognised the downward revaluations in
accordance with IAS 16. Fahad has sent him an email in response in which he wrote “Stop bothering
me with this rubbish. There is no need to write the properties down. The fair value of the portfolio is
only 5% different from its carrying amount. Restate the numbers immediately”.
Required: Discuss the issue, responsibility and course of action from the perspective of Etishad.
Answer
Etishad faces an intimidation threat which might distort his objectivity.
The current accounting treatment might be incorrect. The value of the properties as a group is
irrelevant in applying IAS 16’s revaluation model. IAS 16 allows the use of a revaluation model but
requires that the carrying amount of a property should not be materially different from its fair value.
This applies to individual properties not the whole class taken together.
(It could be that Fahad is correct because there is insufficient information to judge materiality in this
circumstance. However, a 15% discrepancy does sound significant).
Etishad has a professional responsibility to ensure that financial information is prepared and
presented fairly, honestly and in accordance with relevant professional standards. He has further
obligations to ensure that financial information is prepared in accordance with applicable accounting
standards and that records maintained represent the facts accurately and completely in all material
respects.
► Example
Fortune Limited (FL) is quoted on the stock exchange, with revenue of over Rs. 5 billion per annum.
During the year ended 30 June 2015, FL has incurred a loss of Rs. 26 million.
The Chief Executive is of the view that declaration of loss may result in the bankers’ refusal to
renew the credit facility. Therefore, he wants to incorporate certain adjustments in the books of
account that will result in a net profit of Rs. 100 million. However, the Chief Financial Officer
782
(CFO), who is a chartered accountant, is of the view that all possible adjustments allowable under
the applicable accounting regulations have already been considered and incorporated.
Required: Identify the categories of threats to the fundamental principles of objectivity or
professional competence and due care, that may be created in the above situation and discuss the
safeguards available to the CFO in this respect, under the ICAP’s Code of Ethics.
Answer:
Threats to fundamental principles
The situation may create following threats to the fundamental principles of objectivity or
professional competence and due care:
• Self-interest (employment)
• Intimidation (actual or perceived pressure from CEO) Safeguards available to the CFO:
In order to reduce the threat to an acceptable level, the following safeguards should be applied:
• Consult with superiors such as audit committee.
• Consult the policies and procedures of the company with respect to ethics or whistle blowing
policy to address the matter internally.
• Consider consulting with the relevant professional body, internal or external auditor, legal
counsel or informing third parties or appropriate authorities in line with the ICAP guidance on
confidentiality.
• Where it is not possible to reduce the threat to an acceptable level, CFO shall refuse to be
remain associated with the financial information and consider resigning from the post of CFO.
► Example
Amir Ali, ACA is CFO at Circle Limited (CL) and reports to Junaid, FCA who is the CEO.
The financial year of CL ends on 30 April and its profit for the nine months ended 31 January 2019
was below target. In a management meeting held in February 2019, Junaid has proposed the
following measures to improve the results.
(i) Annual maintenance of the manufacturing plant which is due in March 2019 should be
deferred to May 2019. Production manager has warned that the deferral may affect the safety of the
plant. However, Junaid is of the view that the maintenance was delayed two years ago as well and
nothing adverse happened at that time.
(ii) Incorporation of the new revaluation report of CL’s buildings should be deferred to the next
year as the resulting increase in valuation is substantial and would result in increase in the
deprecation for the year. Amir had initiated the revaluation during the year since the fair values of
the buildings had increased materially. Junaid is of the view that the buildings were revalued last year
and there is no need of such frequent revaluations.
Due to the dominant nature of Junaid, none of the participants opposed his views. The summary to
implement the above actions has been received by Amir.
Amir has recently applied for an interest free car loan from CL which is expected to be approved in
few days. Required: Briefly explain how Junaid may be in breach of the fundamental principles of
Code of Ethics for Chartered Accountants. Also state the potential threats that Amir may face in the
above circumstances and how he should respond.
Answer:
Breach by CEO Mr. Junaid
In the given situation, Junaid may be in breach of the following fundamental principles of Code of
Ethics for Chartered Accountants:
Professional behaviour: This principle imposes an obligation on all chartered accountants to
comply with relevant laws and regulations and avoid any action that discredits the profession. Junaid
has breached this principle as his proposed suggestion in respect of incorporation of the new
revaluation report is not in accordance with IAS 16. Under IAS 16, carrying amount of property
carried at revaluation model should not be materially different from its fair value so his proposal is
against the requirement of IAS 16.
Integrity: Chartered Accountant should be straight forward and honest in all professional and
business relationship. It seems that Junaid’s decision to defer the maintenance of plant despite
warning of production manager in terms of safety of plant and non-incorporation of new annual
report in financial statement would make them misleading.
Objectivity: Chartered Accountant should not compromise his professional or business judgment
because of bias, conflict of interest or the undue influence of others. In this circumstance, he has
783
compromised his professional and business judgment by proposing unethical/unlawful measures to
just improve the falling profit of the company.
Potential threats faced by Amir:

Amir may face following threats:
Self-interest threat: Amir may face self-interest threat as the disbursement of his car loan may be at
stake if he refuses to obey the instructions.
Intimidation threat: Amir may face intimidation threat from Junaid as refusal to obey instruction
may risk his job. Identified threats are significant as the CFO is being instructed from the highest
level of management.
Response / Actions:
In order to reduce the threat to an acceptable level, Amir should:
• Discuss the matter with CEO and persuade him to follow code of ethics.
• Refuse to implement the given proposals.
If Junaid does not follow code of ethics and forces him to implement the proposal, Amir should
refuse to associate with these proposals and take the following appropriate steps:
• should consider informing superiors like Audit Committee / directors;
• consult the policies and procedures of the company with respect to ethics or whistle blowing
policy to address the matter internally;
• consider consulting with the relevant professional body, internal or external auditor, legal
counsel or informing third parties or appropriate authorities in line with the ICAP guidance on
confidentiality;
• should resign.
784

FAR-2 Complete Book by Sir Dawood

Uploaded by

Copyright:

Available Formats

FAR-2 Complete Book by Sir Dawood

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FAR-2 Complete Book by Sir Dawood

Uploaded by

Copyright:

Available Formats

CAF-05

Financial Accounting and

By Sir Dawood Shahid

Discounting a single payment Discounting of series of payments

Subsequent Measurement of Right to use Asset:

Cost Model: [Para 30]

c)i) Statement of Financial Position (Extracts)

ii) Statement of Comprehensive Income (Extracts)

Finance Charge Allocation table

Date Rentals Principal Interest Balance

b) Statement of Financial Position (Extracts)

d) Accounting Entries for the year ended 31-12-2006

31-12-2006 Depreciation 50,000

e) Statement of Comprehensive Income

f) Statement of Financial Position (Extracts)

g) Statement of Comprehensive Income

h) Statement of Financial Position (Extracts)

i) Statement of Comprehensive Income

Journal Entries for the year ended 30-6-2012

Journal Entries for the year ended 30-6-2013

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

What exchange rate(s) should be used for translation?

Solution to example: quoted exchange rates

Settlement deferred (credit transactions)

BS Limited has the Rupees as its functional currency. The

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

Non-Monetary items 1. property plant and equipment

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

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

Foreign creditor 600,000

Measurement at initial recognition

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

Determining the translation date:

Example: determining transaction, settlement and translation dates

December 15, 2017: Statement of profit or Loss:

(Recording of asset on the delivery date as risk

(Adjustment of exchange rate as of reporting

(Final payment to supplier. Exchange rate

2-Sep-18 Cost of sales 17,000.00

W-3) Payable recorded in books 6,750

B) Statement of Comprehensive Income(Extracts)

2- Maturity Analysis- contractual undiscounted lease payments 2015 2014

Property, plant and equipment Non-monetary

Intangible assets Non-monetary

Investment in associates Non-monetary

Equity investments (e.g. shares) Non-monetary (share prices fluctuate)

Investments in debt securities Monetary (except when amount to be received on

Biological assets Non-monetary

Deferred tax asset Monetary (IAS 12 Income Taxes indirectly indicates

Trade receivables Monetary

Other receivables Monetary

Lease liability Monetary

Deferred tax liability Monetary (see deferred tax assets above)

Loans and borrowings Monetary

Trade payables Monetary

Current tax liability Monetary

Example 06: Adeel Limited

Property, plant & Equipment 823,000

Current assets 820,000

Other comprehensive income