Pakistan Institute of Public Finance Accountants

Summer Exam-2019
Corporate Sector
Financial Reporting
[06.05.2019] [02:00 – 05:15 pm]
Marks-100 D u r a t i o n : 3 hrs
Additional time – 15 min for Paper Reading
[Instructions]
 Ensure that the question paper delivered to you is the same, in which you intend to appear.
 Read the instructions given on the title page of Answer Script.
 Start each question from fresh page.
 Book Allowed – International Financial Reporting Standards
Attempt all Questions

Q.1. a) A company has recognized a revaluation surplus on its PPE for Rs. 10.5 million at the start
of current year. The remaining useful life of the asset is 5 years. The tax and accounting
WDV of the asset was Rs. 5 million and 7 million respectively. Tax laws allow 25%
depreciation on reducing balance basis while company charges depreciation on straight line
basis.
b) A development expense of Rs. 2.5 million incurred on an incomplete intangible asset
however, tax authorities allowed 100% allowance in the current year.
c) A research expense full recognized as an expense in the current year will be allowed as an
expense over five years of Rs. 1 million.
d) The company made an investment of Rs. 2.3 million and re-measured to its fair value of
Rs. 2.5 million at the year end. The fair value gain has been recognized in other
Comprehensive Income.
Note: Take tax rate at 30% for normal income and 25% for capital gains.

Required:
Discuss the deferred tax implications of the above and provide calculations where necessary. .
20

Q.2. The entity has taken an office on lease for 10 years and incurred leasehold improvement
expenses of Rs. 0.45 million. The entity is under obligation to restore the building to its original
condition at the end of lease term. The estimated cost of restoration is Rs. 0.140 million after
ten years. The discount rate entity uses for present value calculation is 12% per annum. The
annual lease payment in arrear is Rs. 100,000 if annual sale is Rs. 15 million.
However, if the annual sales exceed Rs. 15 million, every Rs. 100,000 sales will result in extra
lease rental of Rs. 5,000. The annual sales of first year are Rs. 15.5 million. The company also
made a non-refundable advance of Rs. 40,000 at the time of entering into the contract.

Required:
Prepare extract to Statement of Financial Position and Statement of Comprehensive Income for 15
the first year.

Q.3. A company has come across the following while preparing its Financial Statements for the year
ended June 30th, 2018.
a) The entity normally sells goods and issue loyalty points to be redeemed against future
shopping. At the end of the year points worth Rs. 1.5 million are outstanding which can
be used against future shopping. Normally 80% of the customer avail the points and
20% points lapsed. The entity has currently booked the revenue at full amount.
Contd. on back
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b) The entity has been sued for providing faulty goods and legal advisor is of the opinion
that it is reasonably certain that claims worth Rs. 5 million has to be paid in the coming
years. The entity can demand 120% of the claims against it from its suppliers of goods.
c) The entity’s one of plant got damaged after the reporting date but before the
authorization date of Financial Statements without effecting its ability to continue as
going concern. The insurance company will compensate up to 85% of the carrying value
of the plant.
d) The replacement cost of entity’s raw material has declined significantly after the
reporting date but net realizable value of the finished goods it produces is still higher
than their respective costs.

Required:
Discuss the implications of above on the Annual Financial Statements of the entity. 14

Q.4. The following are the extracts of Financial Statements of Faisal Limited (FL) and its Subsidiary
Saqib Limited (SL) for the year ended December 31st, 2018.
Statement of Financial Position
Faisal Ltd. Saqib Ltd.
Rs. (000) Rs. (000)
Assets
Non-current assets 25,750 10,270
Current assets 12,450 3,630
38,200 13,900
Equity and liabilities
Share capital Rs. 10 each 10,000 5,000
Reserves 8,525 2,740
18,525 7,740
Non-current liabilities 12,000 2,400
Current liabilities 7,675 3,760
38,200 13,900

Statement of Comprehensive Income

Operating profit 8,260 2,320
Finance cost (1,200) (600)
Dividend income 600 --
Profit before tax 7,660 1,720
Tax expense (2,260) (520)
Profit after tax 5,400 1,200

The following further information is available:

a) FL acquired 0.3 million shares in SL limited on January 1st, 2017 when SL’s reserves were
Rs. 1.2 million. The fair value adjustments identified at the date of acquisition were as
under: -
(i) There was an internally generated brand not recognized by SL was valued at
Rs. 0.5 million having remaining useful life of 4 years.

Contd.….
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(ii) There was a contingent liability having fair value of Rs.0.125 million not
recognized by SL, was paid by SL during the current year at Rs.0.150 million.
(iii) The fair value gain on item of noncurrent assets was Rs.0.1 million having
remaining useful life of 5 years at the date of acquisition.
b) At the start of current year an inventory costing Rs.0.5 million sold by SL to FL at
Rs.0.6 million, treated by FL as item of noncurrent assets and still held by the reporting
date. The useful life assigned to it at time of purchase was 4 years.
c) Both the companies declared and paid 20% dividend during the year. FL contributed 50%
of the loan issued by SL carrying interest rate @ 10% pa at the start of current year.

Required:
Prepare Consolidated Financial Statements of FL group except Statement of Cash Flows and 25
Notes to Financial Statements.

Q.5. During the finalization of Annual Accounts, you came across the following issues: -
a) The company has developed a computer software internally and capitalized it by
assigning a hypothetical cost however, after detail analysis you came across that cost
incurred during the different phases of research and development could not be
identified separately.
b) The company has disclosed a contingent liability in the previous Financial Statements
regarding decommissioning and site restoration which may become payable after ten
years from the date of passing of law by the parliament. At the start of current year, the
legislation has been done by the parliament but nothing has been done till now by the
management. The estimated amount to be paid is Rs. 20 million at the time of passing
of law and discount rate has 10% at the start and end of the year.
c) A contingent liability has been disclosed in the Financial Statements for a court case
however, it has been decided in the company’s favor after the reporting date but before
the authorization date of Financial Statements.
d) The company has entered into negotiations with the bank to delay the payment of loan
due currently by five years and the agreement was reached after the year end. The loan
has been classified from current liabilities to non-current liabilities.
e) An operating segment previously satisfying the criteria of reporting segment has not
failed to satisfy but still appearing in the comparative year. Alternatively, an operating
segment satisfied the criteria of reportable segment is only appearing in the current year
Financial Statements.
Required:
Discuss and calculate the impact of above adjustments to be made to the current Financial 15
Statements.
Q.6. A company has issued 10 million, nominal value Rs. 100 each, TFC’s (Term Finance
Certificates) at coupon rate of 10% pa on January 01st, 2015 for ten years at discount of Rs. 5 to
be redeemed at a premium of Rs. 3 each. The issuance cost paid to arrangers/bankers was
Rs. 5,000,000. The effective rate calculated was 11.23% pa.
Required:
Pass necessary double entries for the year ended December 31st, 2017 and 2018. 11

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