Accounting

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FINANCIAL ACCOUNTING
Time allowed – 3 hours
Total marks – 100
[N.B. – The figures in the margin indicate full marks. Questions must be answered in English. 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) (i) Briefly explain the concept of ‘substance over form’ and its application to the presentation
of financial liabilities under BAS 32 Financial Instruments: Presentation. 5
(ii) Explain how BAS 2 Inventories applies to the accrual and going concern basis of
accounting. 5
(b) Pharmaco Ltd. operates in the pharmaceutical business. The following information relates to
the company’s activities in research and development for the year ended 31 October 2014:
Commercial production started on 1 June 2010 for Formula A. By 31 October, 2013 Tk.43,000
had been capitalised in respect of development expenditure on this product. During the year a
further Tk.10,000 was spent on development of this product.
Pharmaco Ltd. has taken out a patent in respect of Formula A which will last for ten years.
Legal and administrative expenses in relation to this were Tk.2,000.
During the current year, sales of Formula A amounted to Tk.50,000. Sales over the next three
years are expected to be Tk.150,000, Tk.200,000 and Tk.100,000 respectively.
The development of Formula B is at an earlier stage. Although the company believes it has a
reasonable expectation of future benefits from this project it has not as yet been able to
demonstrate this with sufficient certainty. Expenditure on this project in the current year was
Tk.20,000.
Requirements:
(i) Calculate the total amount to be written off to the income statement in respect of the above
in the year ended 31 October, 2014. 4
(ii) Draft the table showing the movement on intangible assets which would appear in the notes
to the financial statements of Pharmaco Ltd. for the year ended 31 October, 2014. 6
2. (a) An assistant of yours has been criticized over a piece of assessed work that he produced for his
study course forgiving the definition of a non-current asset as ‘a physical asset of substantial
cost, owned by the company, whichwill last longer than one year’.
Requirement:
Provide an explanation to your assistant of the weaknesses in his definition of non-current
assets whencompared to the International Accounting Standards Board’s (IASB) view of assets.
5
(b) On 1 January, 2014 Snow Ltd. entered into the following finance lease arrangements.
a) Snow Machine
To lease a snow machine for five years from Slush Ltd. The snow machines
costTk.150,000 and is estimated to have a useful life of five years.
Snow Ltd has agreed to make five annual payments of Tk.35,000 payable in advance,
commencing on 1 January, 2014.The interest rate implicit in the lease is 8.36%.
b) Snowplough
To lease a snowplough for three years from Ice Ltd. The machine had cost Ice
Ltd.Tk35,000.
A deposit of Tk.2,000 was payable on 1 January, 2014 followed by six half yearly
payments of Tk.6,500 payable in arrears, commencing on 30 June, 2014. Finance charges
are to be allocated on a sum of digits basis.

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Requirement:
Calculate the amounts to be included in the financial statements of Snow Ltd. for the year
ended 31 December, 2014 and draft the reconciliation note for property, plant and equipment,
and the analysis of finance lease liabilities note required by BAS 17 Leases. 10
(c) Safwan Ltd. signed a contract (for an initial three years period) in August, 2014 with a
company called Media Today toinstall a satellite dish and cabling system to a newly built group
of residential apartments. Media Today willprovide telephone and television services to the
residents of the apartments via the satellite system and paySafwan Ltd. BDT50,000 per annum
commencing in December 2014. Work on the installation commenced on1 September, 2014
and the expenditure to 30 September, 2014 was BDT58,000. The installation is expectedto be
completed by 31 October, 2014. Previous experience with similar contracts indicates that
Safwan Ltd. willmake a total profit of BDT40,000 over the three years on this initial contract.
The accountant correctly recordedthe costs to 30 September, 2014 of BDT58,000 as a non-
current asset, but then wrote this amount down toBDT40,000 (the expected total profit) because
he believed the asset to be impaired.
The contract is not a finance lease. Ignore discounting.
Requirement:
Comment on the accountant’streatment of those in the financial statements for the year ended
30 September, 2014 and advise him how they should be treated under International Financial
Reporting Standards. 10
3. (a) IAS 37 includes the terms `Provisions’, `contingent liabilities’ and `contingent assets’and
prescribes the accounting and disclosure for thoseitems in the financial statements.
Requirement:
Define provisions and contingent liabilities and briefly explain how IAS 37 improves
consistency in financialreporting. 5
(b) The following items have arisen during the preparation of Sikder’s draft financial statements
for the year ended30 September 2014:
(i) On 1 October 2013, Sikder commenced the extraction of crude oil from a new well on the
seabed. Thecost of a 10-year licence to extract the oil was BDT50 million. At the end of the
extraction, although not legallybound to do so, Sikder intends to make good the damage the
extraction has caused to the seabedenvironment. This intention has been communicated to
parties external to Sikder. The cost of this will bein two parts: a fixed amount of BDT20
million and a variable amount of 2 cents per barrel extracted. Both these amounts are based
on their present values as at 1 October, 2013 (discounted at 8%) of the estimatedcosts in 10
years’ time. In the year to 30 September, 2014Sikder extracted 150 million barrels of oil.
(ii) Sikder owns the whole of the equity share capital of its subsidiary Hamlet. Hamlet’s
statement of financialposition includes a loan of BDT25 million that is repayable in five
years’ time. BDT15 million of this loan issecured on Hamlet’s property and the remaining
BDT10 million is guaranteed by Sikder in the event of adefault by Hamlet. Estimated
current net worth value of Hamlet is BDT 12 million. The economy in which Hamlet
operates is currently experiencing a deep recession, there are concernsover whether Hamlet
can survive the recession and therefore repay the loan.
Requirement:
Describe, and quantify where possible, how items (i) and (ii) above should be treated in
Sikder’s statementof financial position for the year ended 30 September, 2014. 6
In the case of item (ii) only, distinguish between Sikder’s entity and consolidated financial
statements andrefer to any disclosure notes. Your answer should only refer to the treatment of
the loan and should notconsider any impairment of Hamlet’s property or Sikder’s investment in
Hamlet. 4
(c) The following information relates to two share-based transactions that LM entered into in 2012.

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(i) LM granted share options to its 200 employees on 1 January, 2012. Each employee will
receive 500 share options if they continue to work for LM for the next three years. The fair
value of the options at the grant date was Tk.2.00 each.
(ii) LM operates an incentive for its employees which it set up during 2012. Under the terms of
the scheme the workforce will be offered 80% of the share price increase on 10,000 of the
entity’s shares. Payment will be made on 31 March, 2015. Again the scheme is only open
to those who remain employed with LM for a period of three years. The fair value of the
shares at the end of each of the three years is:
2012 – Tk 1.60
2013 – Tk 1.80
2014 – Tk 2.10
During 2012 20 employees left and another 45 were expected to leave over the next two years.
During 2013 15 employees left and another 20 were expected to leave in 2014.
During 2014 10 employees left.
Requirement:
Briefly describe the accounting treatment to be adopted for these transactions, in accordance
with IFRS 2 Share-based payment and calculate the amount to be recorded in the income
statement for staff costs in respect of each of the three years. 10
4. On 1 January, 2014, Pran acquired 80% of the equity share capital of Ruchi. The consideration was
settled by a share exchange of two shares in Pran for every three acquired shares in Ruchi. At the
date of acquisition, shares in Pran and Ruchihad a market value of Tk.3 and Tk.2.50 each
respectively. Pran will also pay cash consideration of Tk.0.275 on 1 January 2015 for each acquired
share in Ruchi. Pran has a cost of capital of 10% per annum. None of the consideration has been
recorded by Pran.
Below are the summarised draft financial statements of both the companies.
Statements of profit or loss and other comprehensive income for the year ended 30 September
2014.
Pran Ruchi
Tk’000 Tk’000
Revenue 62,600 30,000
Cost of sales (45,800) (24,000)
Gross profit 16,800 6,000
Distribution costs (2,000) (1,200)
Administrative expenses (3,500) (1,800)
Finance costs (200) (nil)
Profit before tax 11,100 3,000
Income tax expense (3,100) (1,000)
Profit for the year 8,000 2,000
Other comprehensive income:
Gain on revaluation of property (note i) 1,500 nil
Total comprehensive income 9,500 2,000
Statements of financial position as at 30 September 2014
Assets
Non-current assets
Property, plant and equipment 18,700 13,900
Investments: 10% loan note fromRuchi (note ii) 1,000 nil
19,700 13,900
Current assets
Inventory (note iii) 4,300 1,200

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Trade receivables (note iv) 4,700 2,500
Bank nil 300
9,000 4,000
Total assets 28,700 17,900
Equity and liabilities
Equity
Equity shares of Tk1 each 10,000 9,000
Revaluation surplus (note i) 2,000 nil
Retained earnings 6,300 3,500
18,300 12,500
Non-current liabilities
10% loan notes (note ii) 2,500 1,000
Current liabilities
Trade payables (note iv) 3,400 3,600
Bank 1,700 nil
Current tax payable 2,800 800
7,900 4,400
Total equity and liabilities 28,700 17,900
The following information are relevant:
i) At the date of acquisition, the fair value of Ruchi’s assets and liabilities were equal to their
carrying amounts with the exception of Ruchi’s property which had a fair value of Tk.4
million above its carrying amount.For consolidation purposes, this led to an increase in
depreciation charges (in cost of sales) of Tk.100,000 in the post-acquisition period to 30
September, 2014. Ruchi has not incorporated the fair value property increase into its entity
financial statements.
The policy of the Pran group is to revalue all properties to fair value at each year end. On 30
September, 2014, the increase in Pran’s property has already been recorded; however, a
further increaseof Tk.600,000was made in the value of Ruchi’s property since its value at
acquisition and 30 September, 2014 has not been recorded.
ii) On 30 September, 2014, Pran accepted a Tk.1 million 10% loan note from Ruchi.
iii) Sales from Pran to Ruchi throughout the year ended 30 September, 2014 had consistently
been Tk.300,000 per month. Pran made a mark-up on cost of 25% on all these sales.
Tk.600,000 (at cost to Ruchi) of Ruchi’s inventory at 30 September, 2014 had been supplied
by Pran in the post-acquisition period.
iv) Pran had a trade receivable balance owing from Ruchi of Tk 1.2 million as at 30 September,
2014. This differed with the equivalent trade payable of Ruchi due to a payment by Ruchi of
Tk.400,000 made in September, 2014 which was not reflectedin Pran’s bank account until 4
October, 2014. Pran’s policy for cash timing differences is to adjust the parent’s financial
statements.
v) Pran’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose Ruchi’s share price at that date can be deemed to be representative of the fair
value of the shares held by the non-controlling interest.
vi) Due to recent adverse publicity concerning one of Ruchi’s major product lines, the goodwill
which arose on the acquisition of Ruchi has been impaired by Tk.500,000 as at 30 September,
2014. Goodwill impairment should be treated as an administrative expense.
Assume, except where indicated otherwise, that all items of income and expenditure accrue evenly
throughout the year.
Requirements:
a) Prepare the consolidated statement of profit and loss and other comprehensiveincome for Pran
for the year ended 30 September, 2014. 15
b) Prepare the consolidated statement of financial position for Pran as at 30 September, 2014. 15
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