The document provides information needed to prepare consolidated financial statements for the Roby Group as of May 31, 2012. It includes details on Roby's acquisitions of investments in Hai and Zinc, including percentages acquired and consideration paid. It also provides information on a joint operation, impairment of property, plant and equipment, factoring of receivables, sale and repurchase of land, and intercompany transactions that need to be eliminated. The required task is to prepare a consolidated statement of financial position for the Roby Group based on the information given.

1. FINANCIAL ACCOUNTING
Time Allowed – 2½ hours
Maximum Marks – 100
[N.B - Questions must be answered in English. Figures in the margin indicate full marks. Examiner will
take account of the quality of language and of the manner in which the answers are presented.
Different parts, if any, of the same question must be answered in one place in order of sequence.]
Marks
1. (a) The IASB’s Framework for the Preparation and Presentation of Financial Statements requires
financial statements to be prepared on the basis that they comply with certain accounting
concepts, underlying assumptions and qualitative characteristics. Four of these are:
i. Matching/accruals ii. Prudence iii. Comparability iv. Materiality
Required:
(a) Briefly explain the meaning of each of the above concepts/assumptions. 6
(b) Illustrate with examples how each of the concepts/assumptions in (a) may be applied to
accounting for inventory. 8
(b) There are issues about the presentation of financial instruments in the balance sheet of an
entity in relation to their classification as liabilities and equity and to the related interest,
dividends, losses and gains.
The objective of BAS 32 Financial instruments: Presentation is to address this problem by
establishing principles for presenting financial instruments as liabilities or equity and for
offsetting financial assets and financial liabilities.
On 01 January 2011, ABC Company had only ordinary shares in issue. During the year ended
31 December 2011 ABC Company entered into the following financing transactions:
i. On 01 January 2011, ABC Company issued 20 million 8% Tk. 1 preference shares at par. The
preference shares are redeemable at par on 30 June 2016. The appropriate dividend in
respect of these shares was paid on 31 December 2011.
ii. On 30 June 2011, ABC Company issued 10 million 12% Tk. 1 irredeemable preference shares
at par. The appropriate dividend in respect of these shares was paid on 31 December 2011.
On 31 December 2011, ABC Company decided to change its accounting policy in respect of the
capitalization of interest. Previously, ABC Company had capitalized interest within property,
plant and equipment and amortized those costs. It has now decided to write off such costs to
cost of sales as incurred. The net book value of such interest included in the draft balance
sheet was as follows:
Tk.m
At 1 January 2011 4.5
Costs incurred 2.0
Amortization charge (0.5)
At 31 December 2011 6.0
As per the draft accounts, profit for 2011 before adjusting for capitalized interest, was Tk. 15
million. Retained earnings at 1 January 2011 were Tk.75 million
Required:
(i) Describe the concept of 'substance over form' and its application to the presentation of
financials under BAS 32 Financial instruments: Presentation. 3
(ii) Prepare extracts from the financial statements of ABC Company for the year ended 31
December 2011 to the extent the information is available showing how the above would be
reflected in those financial statements. Ignore taxation. 12
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2. MTC company, a public limited company, operates in the fashion sector and had undertaken a
group re-organization during the current financial year to 31 October 2011. As a result, the
following events occurred:
(a) MTC Company identified two manufacturing units, Cee and Gee, which it had decided to
dispose off in a single transaction. These units comprised non-current assets only. One of the
units, Cee, had been impaired prior to the financial year end on 30 September 2011 and it had
been written down to its recoverable amount of Tk.35 million. The criteria in IFRS 5, ‘Non-
current Assets Held for Sale and Discontinued Operations’, for classification as held for sale,
had been met for Cee and Gee at 30 September 2011. The following information related to
the assets of the cash generating units at 30 September 2011:
Depreciated
historical cost
Tk. m
Fair value less costs to
sell and recoverable
amount Tk.m
Carrying value
under BFRS
Tk. m
Cee 50 35 35
Gee 70 90 70
120 125 105
The fair value less costs to sell had risen at the year end to Tk.40 million for Cee and Tk.95
million for Gee. The increase in the fair value less costs to sell had not been taken into account
by MTC Company.
(b) A subsidiary company had purchased computerized equipment for Tk.4 million on 31 October
2010 to improve the manufacturing process. Whilst re-organizing the group, MTC company
had discovered that the manufacturer of the computerized equipment was now selling the
same system for Tk.2·5 million. The projected cash flows from the equipment are:
Year ended 31 October Cash flows (Tk.m)
2012 1·3
2013 2·2
2014 2·3
The residual value of the equipment is assumed to be zero. The company uses a discount rate
of 10%. The directors think that the fair value less costs to sell of the equipment is Tk.2 million.
The directors of MTC company propose to write down the non-current asset to the new selling
price of Tk.2·5 million. The company’s policy is to depreciate its computer equipment by 25%
per annum on the straight line basis.
(c) The manufacturing property of the group, other than the head office, was held on an
operating lease over 8 years. On re-organization on 31 October 2011, the lease has been
renegotiated and is held for 12 years at a rent of Tk.5 million per annum paid in arrears. The
fair value of the property is Tk.35 million and its remaining economic life is 13 years. The lease
relates to the buildings and not the land. The factor to be used for an annuity at 10% for 12
years is 6·8137.
The directors are worried about the impact that the above changes will have on the value of
its non-current assets and its key performance indicator which is ‘Return on Capital Employed’
(ROCE). ROCE is defined as operating profit before interest and tax divided by share capital,
other reserves and retained earnings. The directors have calculated ROCE as Tk.30 million
divided by Tk.220 million, i.e. 13·6% before any adjustments required by the above.
Required:
Discuss the accounting treatment of the above transactions and the impact that the resulting
adjustments to the financial statements would have on ROCE. 21
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3 Genetic Limited, a public limited company, is a developer of online computer games. Discuss the
validity of the following accounting treatments proposed by Genetic Limited in its financial statements
for the year ended 30 November 2011.
(a) At 30 November 2011, 65% of Genetic Limited’s total assets were mainly represented by
internally developed intangible assets comprising the capitalised costs of the development and
production of online computer games.
These games generate all of Genetic Limited’s revenue. The costs incurred in relation to
maintaining the games at the same standard of performance are expensed to the statement of
comprehensive income. The accounting policy note states that intangible assets are valued at
historical cost. Genetic Limited considers the games to have an indefinite useful life, which is
reconsidered annually when the intangible assets are tested for impairment. Genetic Limited
determines value in use using the estimated future cash flows which include maintenance
expenses, capital expenses incurred in developing different versions of the games and the
expected increase in revenue resulting from the above mentioned cash outflows. Genetic
Limited does not conduct an analysis or investigation of differences between expected and
actual cash flows. Tax effects were also taken into account.
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(b) Genetic Limited has two cash generating units (CGU) which hold 90% of the internally
developed intangible assets.
Genetic Limited reported a consolidated net loss for the period and an impairment charge in
respect of the two CGUs representing 63% of the consolidated profit before tax and 29% of the
total costs in the period. The recoverable amount of the CGUs is defined, in this case, as value
in use. Specific discount rates are not directly available from the market, and Genetic Limited
estimates the discount rates, using its weighted average cost of capital. In calculating the cost of
debt as an input to the determination of the discount rate, Genetic Limited used the risk-free rate
adjusted by the company specific average credit spread of its outstanding debt, which had been
raised two years previously. As Genetic Limited did not have any need for additional financing
and did not need to repay any of the existing loans before 2014, Genetic Limited did not see any
reason for using a different discount rate. Genetic Limited did not disclose either the events and
circumstances that led to the recognition of the impairment loss or the amount of the loss
recognised in respect of each cash-generating unit. Genetic Limited felt that the events and
circumstances that led to the recognition of a loss in respect of the first CGU were common
knowledge in the market and the events and the circumstances that led to the recognition loss
of the second CGU were not needed to be disclosed.
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(c) Genetic Limited wished to diversify its operations and purchased a professional football club,
Abahani Club. In Abahani Club’s financial statements for the year ended 30 November 2011, it
was proposed to include significant intangible assets which related to acquired players’
registration rights comprising registration and agents’ fees. The agents’ fees were paid by the
club to players’ agents either when a player is transferred to the club or when the contract of a
player is extended. Genetic Limited believes that the registration rights of the players are
intangible assets but that the agents fees do not meet the criteria to be recognised as intangible
assets as they are not directly attributable to the costs of players’ contracts. Additionally,
Abahani Club has purchased the rights to 25% of the revenue from ticket sales generated by
another football club, Santash, in a different league. Abahani does not sell these tickets nor has
any discretion over the pricing of the tickets. Abahani wishes to show these rights as intangible
assets in its financial statements.
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4. The following draft statements of financial position relate to Roby, Hai and Zinc, all public limited
companies, as at 31 May 2012:
Roby Hai Zinc
Tk.m Tk.m Tk.m
Assets
Non-current assets:
Property, plant and equipment 112 60 26
Investment in Hai 55
Investment in Zinc 19
Financial assets 9 6 14
Jointly controlled operation 6
Current assets 5 7 12
Total assets 206 73 52
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Equity and Liabilities
Ordinary shares 25 20 10
Other components of equity 11 – –
Retained earnings 70 27 19
Total equity 106 47 29
Non-current liabilities 53 20 21
Current liabilities 47 6 2
Total equity and liabilities 206 73 52
The following information needs to be taken into account in the preparation of the group financial
statements of Roby:
i. On 1 June 2010, Roby acquired 80% of the equity interests of Hai. The purchase
consideration comprised cash of Tk.50 million. Roby has treated the investment in Hai at fair
value through other comprehensive income (OCI).
A dividend received from Hai on 1 January 2012 of Tk.2 million has similarly been
credited to OCI. It is Roby’s policy to measure the non-controlling interest at fair value
and this was Tk.15 million on 1 June 2010.
On 1 June 2010, the fair value of the identifiable net assets of Hai was Tk.60 million and the
retained earnings of Hai were Tk.16 million. The excess of the fair value of the net assets is
due to an increase in the value of non-depreciable land.
ii. On 1 June 2009, Roby acquired 5% of the ordinary shares of Zinc. Roby had treated this
investment at fair value through profit or loss in the financial statements to 31 May 2011.
On 1 December 2011, Roby acquired a further 55% of the ordinary shares of Zinc and
gained control of the company.
The consideration for the acquisitions was as follows:
Shareholding Consideration
Tk.m
1 June 2009 5% 2
1 December 2011 55% 16
–––– –––
60% 18
–––– –––
At 1 December 2011, the fair value of the equity interest in Zinc held by Roby before the
business combination was Tk.5 million.
It is Roby’s policy to measure the non-controlling interest at fair value and this was Tk.9
million on 1 December 2011.
The fair value of the identifiable net assets at 1 December 2011 of Zinc was Tk.26 million,
and the retained earnings were Tk.15 million. The excess of the fair value of the net assets
is due to an increase in the value of property, plant and equipment (PPE), which was
provisional pending receipt of the final valuations. These valuations were received on 1
March 2012 and resulted in an additional increase of Tk.3 million in the fair value of PPE at
the date of acquisition. This increase does not affect the fair value of the non-controlling
interest at acquisition. PPE is to be depreciated on the straight-line basis over a remaining
period of five years.
iii. Roby has 40% share of a joint operation, a natural gas station. Assets, liabilities, revenue
and costs are apportioned on the basis of shareholding.
The following information relates to the joint arrangement activities:
• The natural gas station costs Tk.15 million to construct and was completed on 1 June 2011
and is to be dismantled at the end of its life of 10 years. The present value of this
dismantling cost to the joint arrangement at 1 June 2011, using a discount rate of 5%, was
Tk.2 million.
• During the year, gas with a direct cost of Tk.16 million was sold for Tk.20 million.
Additionally, the joint arrangement incurred operating costs of Tk.0·5 million during the year.
Roby has only contributed and accounted for its share of the construction cost, paying Tk.6
million. The revenue and costs are receivable and payable by the other joint operator who
settles amounts outstanding with Roby after the year end.
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iv. Roby purchased PPE for Tk.10 million on 1 June 2009. It has an expected useful life of 20
years and is depreciated on the straight-line method. On 31 May 2011, the PPE was
revalued to Tk.11 million. At 31 May 2012, impairment indicators triggered an impairment
review of the PPE. The recoverable amount of the PPE was Tk.7·8 million. The only
accounting entry posted for the year to 31 May 2012 was to account for the depreciation
based on the re-valued amount as at 31 May 2011. Roby’s accounting policy is to make a
transfer of the excess depreciation arising on the revaluation of PPE.
v. Roby held a portfolio of trade receivables with a carrying amount of Tk.4 million at 31 May
2012. At that date, the entity entered into a factoring agreement with a bank, whereby it
transfers the receivables in exchange for Tk.3·6 million in cash. Roby has agreed to
reimburse the factor for any shortfall between the amount collected and Tk.3·6 million. Once
the receivables have been collected, any amounts above Tk.3·6 million, less interest on this
amount, will be repaid to Roby. Roby has derecognised the receivables and charged Tk.0·4
million as a loss to profit or loss.
vi. Immediately prior to the year end, Roby sold land to a third party at a price of Tk.16 million
with an option to purchase the land back on 1 July 2012 for Tk.16 million plus a premium of
3%. The market value of the land is Tk.25 million on 31 May 2012 and the carrying amount
was Tk.12 million. Roby accounted for the sale, consequently eliminating the bank overdraft
at 31 May 2012.
Required:
Prepare a consolidated statement of financial position of the Roby Group at 31 May 2012 in
accordance with Bangladesh Financial Reporting Standards. 30