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Suggested Solution Model Paper

S1 ANSWER – 1 Part (a) (i) Significant influence is the power to participate in the financial and operating policy decisions

of the investee but is not control or joint control of those policies. Part (a) (ii)

The existence of significant influence by an entity is usually evidenced in one or more of the following ways: (a) representation on the board of directors or equivalent governing body of the investee; (b) participation in policy-making processes, including participation in decisions about

dividends or other distributions; (c) material transactions between the entity and its investee; (d) interchange of managerial personnel; or (e) provision of essential technical information. Part (b) Part 1 (i) Complete disposal at year end

Masoor Limited Group Statement of Financial Position as at December 31, 2018

Assets Rs. 000 Non-current assets 3,600 + 2,700 – 2,700 J1 3,600 Goodwill W3 0 Current assets 3,700 + 3,700 – 3,700 J1 + 6,500 J1 10,200

13,800

Equity and liabilities Ordinary shares 5,400 Reserves W6 7,400 NCI W5 0 Current liabilities 1,000 + 1,000 – 1,000 J1 1,000

13,800

Masoor Limited Group Statement of Profit or loss (extracts) for the year ended December 31, 2018

P S Adj Rs. 000

Profit before tax 1,530 + 1,820 J1 1,260 4,610 Tax (450) (360) (810)

Profit after tax 900 3,800

NCI share 900 x 20% (180)

Profit for parent 3,620 W1 GROUP STRUCTURE AKhter Limited Acquisition: Jan 01, 2016 Group 80 % NCI 20% Rs. 000 W2 NET ASSETS (of subsidiaries) AT ACQUISITION S

Equity share capital 1,800 Retained earnings (pre) 1,800

3,600

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W3 GOODWILL S

Investment 3,240 Less: 3,600 W2 x 80% (2,880)

360 J1 (360)

0

W4 POST ACQUISITION RESERVES (of subsidiaries) RE

Balance 1,800

1,800

W5 NON CONTROLLING INTEREST S [3,600 W2 x 20%] 720 [1,800 W4 x 20%] 360

1,080 J1 (1,080)

0

W6 GROUP RESERVES RE

Parent reserves 4,140 J1 1,820

5,960 1,800 W4 x 80% 1,440

7,400

JOURNAL ENTRIES WITH WORKINGS Rs. 000

Dr. Cr.

1

Current liabilities 1,000

NCI 5,400 x 20% 1,080

Cash 6,500

Non-current assets 2,700

Current assets 3,700

Goodwill 360 Gain on disposal PL 1,820

At 31 December 2018 Net assets at year end are Rs. 5,400 excluding goodwill

Part 1 (ii) 25% of holdings i.e. 20% shares – Control not lost

Masoor Limited Group Statement of Financial Position as at December 31, 2018

Assets Rs. 000 Non-current assets 3,600 + 2,700 6,300 Goodwill W3 360 Current assets 3,700 + 3,700 + 1,600 J1 9,000

15,660

Equity and liabilities Ordinary shares 5,400 Reserves W6 6,100 NCI W5 2,160 Current liabilities 1,000 + 1,000 2,000

15,660

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Masoor Limited Group Statement of Profit or loss (extracts) for the year ended December 31, 2018

P S Adj Rs. 000

Profit before tax 1,530 1,260 2,790 Tax (450) (360) (810)

Profit after tax 900 1,980

NCI share 900 x 20% (180)

Profit for parent 1,800

W1 GROUP STRUCTURE AKhter Limited Acquisition: Jan 01, 2016 Group 80 % NCI 20% Rs. 000

W2 NET ASSETS (of subsidiaries) AT ACQUISITION S

Equity share capital 1,800 Retained earnings (pre) 1,800

3,600

W3 GOODWILL S

Investment 3,240 Less: 3,600 W2 x 80% (2,880)

360

W4 POST ACQUISITION RESERVES (of subsidiaries) RE

Balance 1,800

1,800

W5 NON CONTROLLING INTEREST S [3,600 W2 x 20%] 720 [1,800 W4 x 20%] 360

1,080 J1 1,080 x 20 / 20 1,080

2,160

W6 GROUP RESERVES RE

Parent reserves 4,140 J1 520

4,660 1,800 W4 x 80% 1,440

6,100

JOURNAL ENTRIES WITH WORKINGS Rs. 000

Dr. Cr.

1

Cash 1,600

RE β 520

NCI W5 1,080

At 31 December 2018

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Part 2 (i) 50% of holding 40% of shares

1

Investment in associate 2,500

NCI 1,035

Cash 3,400

Net Assets 5,400 – [900 x 3/12] 5,175

Goodwill 360

Gain on disposal PL 1,400

At 30 September 2018

2 Investment in associate 90

Share of profit in associate 90

900 x 40% x 3/12 = Rs. W6 GROUP RESERVES RE

Parent reserves 4,140 J1 1,400 J2 90

5,630 [1,800 – (900 x 3/12)] W4 x 80% 1,260

6,890

Investment in Associate 2,500 J1 + 90 J2 = 2,590 Part 2 (ii) 50% of holding 40% of shares

1

Investment FVTOCI 2,500

NCI 1,035

Cash 3,400

Net Assets 5,400 – [900 x 3/12] 5,175

Goodwill 360

Gain on disposal PL 1,400

At 30 September 2018

W6 GROUP RESERVES RE

Parent reserves 4,140 J1 1,400

5,540 [1,800 – (900 x 3/12)] W4 x 80% 1,260

6,800

Investment FVTOVI 2,500 J1 = 2,500 ANSWER – 2 Part (a) Plant I is defined benefits plan while Plan II is defined contribution plan

Statement of Financial Position 2019 Rs. m

Present value of Plan obligation 1,200 Fair value of Plan assets (1,125)

Net liability of defined benefit 75

Contribution payable 0

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Statement of profit and loss

Current Service cost 100 Net interest costs 60 - 57 3 Contribution expenses (defined contribution) 50 Other comprehensive Income Net re measurement component 135 loss – 128 gain 7

Rs. m PV of obligation at beginning of Year 1,000 Interest Cost (6%) 60 Current Service cost 100 Benefits paid (95)

1,065 Actuarial loss 135

PV of Obligation at Year end 1,200

Fair Value of Plan Assets at start of year 950 Interest on Plan assets (6%) 57 Benefits paid (95) Contribution 85

997 Actuarial gain 128

Fair Value of Plan Assets at end of year 1.125

Part (b)

At amortised cost Original borrowing will be recognised at Rs. 45 million on January 01, 2017. On 31 December, 2017 interest expense of Rs. 2.25 million (Rs. 45m x 5% effective rate) shall be recognised. No other adjustment is necessary.

Additional borrowing shall be recognised at Rs. 40 million on 31 December 2017.

At Fair Value Original borrowing will be recognised at Rs. 45 million on January 01, 2017. On 31 December, 2017 interest expense of Rs. 2.25 million (Rs. 45m x 5% effective rate) shall be recognised. At year end, the borrowing will be restated to fair value (if available or by calculating PV of future cash flows using market interest rate of 7%), the change in fair value shall be recognised in profit or loss. This is only done if liability is held for trading.

Additional borrowing shall be recognised at Rs. 40 million on 31 December 2017.

Note: PV of future cash flows cannot be calculated in absence of information about redemption period.

ANSWER – 3 Part (a) (i) A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction

Part (a)(ii)

At the end of each reporting period: (a) foreign currency monetary items shall be translated using the closing rate; (b) non-monetary items that are measured in terms of historical cost in a foreign

currency shall be translated using the exchange rate at the date of the transaction; and

(c) non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was measured.

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Part (b) Mughal Limited

Consolidated statement of cash flows For the year ended June 30, 2018

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ANSWER – 4 Part (a) Analysis of profit and loss statement

June 2018 June 2017

Cost of sales as % to sales 62% 63% GP% 38% 37% Operating expenses % 22% 20% Net profit % 10% 12% Effective tax rate 35% 30% Growth rate over previous years 2015-16 20% 2016-17 25% 2017-18 20% 2017-18 (as compared to budget) -5% Inventory in days (365 days) 86 58 Or Inventory in days (360 days) 84 57

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Part (b)

To: Director From: Finance Controller Date: 22 Sep 2018

With reference to subject mentioned above, I am here with the summarized report on queries raised by you; Sales and Profit

During the last three years our sales growth rate remained around 20% to 25% and on the other hand our cost increased significantly.

Our operating expenses increased by 33% (50/150x100) over last year and our gross profit ration also increased by 1 % as compared to last year.

Due to above mentioned reason our net profit reduced to 10% as compared to 12% of last year.

Inventory

During the year inventory increased by 55 million and holding period from 58 days to 86 days, this is another reason of increase in holding cost of inventory.

Another reason of holding excess inventory may be to achieve sales target of 950 million, but said target have not been achieved.

Actual vs Budget

The budgeted sales and profit for the year were Rs. 950 million and Rs. 114 million showing expected profit of 12% same as last year, but due to above reason i.e. increase in cost of sales, operating expenses, tax rate and low achievement ratio resulted decrease in profit as compared to budget. I hope the above report would clear the reason of decrease in profit.

Regards Finance Controller ANSWER – 5

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