CFAP 1 – Advance Accounting & Financial Reporting

Full Length Mock

Total Time: 3 Hours
Additional Reading Time: 15 Minutes
Marks: 100

Question No. 1

(a). On 1 January 2023, Diverse Investor acquired 3 bonds. Each bond has a nominal value of Rs. 10,000, final maturity
date is 31 December 2025.

Bond 1: Purchase price was Rs. 10,000. Coupon of KIBOR 12M+0.5% is payable annually on 31 December.

Bond 2: Purchase price was Rs. 10,046. Coupon of KIBOR 12M+0.5% is payable annually on 30 November.

Bond 3: Purchase price was Rs. 9,946. Coupon of KIBOR 12M+0.5% is payable annually on 30 November. The credit
quality of the bond deteriorated and that resulted in a rating downgrade.

KIBOR 12M was 5% on 31 December 2022.

Required:-
Advice Diverse Investor how to measure the bonds in 2023 financial statements. (5 Marks)

(b). During 2023, Allied Bank provided 500 loans to the individual clients with total gross carrying amount of Rs. 1 million. (Rs.
2,000 in average). These loans share the same credit risk and are grouped into 1 portfolio based on their credit rating and
collateral. Based on a historical information and considering forward-looking information, Allied Bank's loss rate is 0.55%
(assumes 6 defaults). However, at 31 December, RGS Bank assumes 8 defaults (which is -equivalent to 0.74% loss rate) in
this portfolio. Credit risk has not significantly increased since the initial recognition (i.e. loans are in Stage 1).

Required:-
Based on the information below, calculate loan loss provision as at 31 December 2023. Total gross carrying
amount of 500 loans at 31 December 2023 is Rs. 800,000. (6 Marks)

(c). X purchased a loan on 1 January 20x5 and classified it as measured at fair value through OCI.
Terms: Nominal value 50 million. Coupon rate 10%. Term to maturity 3 years. Purchase price 48 million. Effective rate 11.67%.
Fair values at each year end to maturity are as follows 31 December 20x5.

49.2 million 31 December 20x6

49.5 million 31 December 20x7 50 million

Required:-

Show the double entry for each year to maturity (7 Marks)

Question No. 2
Following are the draft statements of financial position of Hockey Limited (HL), Golf Limited (GL) and Cricket Limited (CL)
as at 30 June 2022:

HL GL CL
------- Rs. In million --------- C$ in million
Assets
Property, plant and 6,065 3,130 330
equipment
Investment in GL 890 - -
Investment in CL 2,400 - -
Investment in joint venture - 650 -
Current assets 2,870 2,875 170
12,225 6,655 500
Equity and liabilities
Share Capital (Rs./C$ 10 3,000 2,000 150
each)
Retained earnings 6,500 3,280 235
Net pension liability 650 280 -
Other liabilities 2,075 1,095 115
12,225 6,655 500

From Faculty of Hasnain R. Badami, FCA

CFAP 1 – Advance Accounting & Financial Reporting

Additional information:

(i). On 1 July 2021, HL acquired 60% shareholdings in GL. The purchase consideration was one debenture (having par value
of Rs. 50) issued by HL for every two shares held in GL. The fair value of each share of GL was Rs. 24 on that date.

These debentures would be redeemed after 6 years at par value. The debentures carry an interest of 14% per annum
though market interest rate for similar debentures was 12% per annum. The issuance of debenture is not yet recorded in
HL’s books. Annual interest paid on 30 June 2022 was charged to profit or loss.

(ii). On acquisition date, GL’s retained earnings were Rs. 2,580 million and the fair value of GL’s net assets was equal to
their carrying value except the following:
• Investment in joint venture had a carrying value of Rs. 510 million using equity method and fair value of Rs. 680
million. The fair value of investment in the joint venture as on 30 June 2022 was estimated at Rs. 840 million.
• Land carried in GL’s book at its cost of Rs. 240 million. The land is held by GL for the purpose of building a residential
complex, however, HL intends to build a factory on this land. Fair value of land based on its use as residential
complex and factory is estimated at Rs. 450 million and Rs. 390 million respectively.
• Net pension liability of Rs. 220 million was appearing in GL’s books. It was estimated that the full settlement of this
liability would require net amount of Rs. 290 million on acquisition date.

(iii). On 1 January 2022, further 15% shareholdings in GL were acquired for Rs. 890 million paid in cash. GL’s retained earnings
on that date were Rs. 2,860 million.

(iv). On 1 July 2020, HL acquired 80% shareholdings in CL (a foreign company) at a consideration of C$ 240 million.
On acquisition date, CL’s retained earnings were C$ 180 million. On the same date, fair value of CL’s net assets was equal
to their carrying value except for an office building whose fair value was higher than its carrying value by C$ 10 million with
remaining useful life of five years.

(v). On 1 July 2021, HL disposed off 50% shareholdings (leaving 30% with HL) in CL against cash consideration of C$ 215
million which was credited to ‘Retained earnings’ upon receipt. However, HL still retains significant influence in CL. On the
date of disposal, the fair value of CL’s share and CL’s retained earnings were C$ 25 per share and C$ 210 million
respectively.

(vi). The exchange rates per C$ are as follows:

1 Jul 30 June 2021/1 30 June Average rate for year
2020 July 2021 2022 2021-21 2021-22
Rs. 10 Rs. 12 Rs. 14 Rs. 11 Rs. 13

(vii). HL values non-controlling interest on the acquisition date at its proportionate share of the fair value of the subsidiary’s
identifiable net assets.

Required:
Prepare HL’s consolidated statement of financial position as at 30 June 2022 in accordance with the requirements of IFRSs.
(25 Marks)

Question No.3

(a). On 1 January 2021, PL approved a share based scheme for its employees who have completed 5 years of service in
PL. Under the scheme each employee will be issued 1,000 shares (having par value of Rs. 50 each) at the end of each
year for three consecutive years. There are no conditions attached other than continuous service till the date of issuance
of shares. On the grant date of 1 January 2021, total employees eligible for the scheme were 100.

Initially, PL expected that none of the eligible employees will leave PL during the 3 years. However, 5 eligible employees
left PL during 2021 and PL now expects that further 4 and 3 employees will leave during 2022 and 2023 respectively.

Fair value of PL’s share at the grant date was Rs. 240 per share which has increased to Rs. 265 on 31 December 2021.

(5 Marks)

(b). PL operates a funded pension plan for its employees. Following relevant information has been extracted from the
actuarial report:
2021 2020
Rs. In Million
Current service cost 63 75

From Faculty of Hasnain R. Badami, FCA

CFAP 1 – Advance Accounting & Financial Reporting
Negative past service cost - 120
Contribution to the fund 29 60
Pension paid 40 32
Present value of defined benefit 620 550
obligations on 31 December
Fair value of plan assets on 31 650 612
December
Asset ceiling on 31 December 25 45
(Present value of economic benefits
available)

The net pension liability at 1 January 2020 was reported as Rs. 80 million. Applicable discount rate is 12% per annum.

(5 Marks)

(c). On 1 January 2020, PL leased a plant from Bulbul Limited for 8 years at Rs. 30 million, payable annually in arrears. On
that date, fair value and useful life of this plant were Rs. 170 million and 10 years respectively, whereas, PL’s incremental
borrowing rate was 12% per annum.

On 1 January 2021, the lease contract was amended with mutual consent by reducing the original lease term from 8 years
to 5 years with the same annual payments. PL's incremental borrowing rate on 1 January 2021 was 14% per annum.

(07 Marks)

(d). On 1 January 2020, PL purchased 5 million debentures of Kiwi Limited having face value of Rs. 100 each for Rs. 515
million. Transaction cost of Rs. 4 million was also incurred on purchase of debentures. At initial recognition, PL determined
that debenture was not credit impaired and classified the investment in debentures as financial asset at fair value through
other comprehensive income. Coupon rate of debentures is 12% which is payable annually on 31 December.

Following further information regarding debentures is available:

1 Jan 2020 31 Dec 2020 31 December 2021

Amount in Rs. Per Debenture
Quoted price 105 109 111
12 months expected credit 2 2.5 4
losses
Life time expected credit 8.5 12.2 15.3
losses

(7 Marks)

Required:-

Prepare the extracts (including comparative figures) relevant to the above transactions from PL's statement of financial
position and statement of profit or loss and other comprehensive income for the year ended 31 December 2021 in
accordance with the IFRSs.

Question No. 4

Zohaib Limited (ZL) is in process of finalizing its financial statements for the year ended 31 December 2017. The following
information has been gathered for preparing the disclosures relating to taxation:
1) Profit before tax for the year after making all necessary adjustments was Rs. 103 million.

2) Expenses include:
• donations of Rs. 12 million not allowable for tax purposes.
• accruals of Rs. 30 million which will be allowed in tax on payment basis.

3) Other income includes government grant of Rs. 10 million and dividend of Rs. 4 million.

4) Government grant is not taxable while dividend income is subject to tax rate of 10%.

5) Accounting depreciation for the year exceeds tax depreciation by Rs. 20 million.

6) On 31 December 2017 buildings were revalued for the first time resulting in a surplus of Rs. 60 million. Revaluation does
not affect taxable profits.

From Faculty of Hasnain R. Badami, FCA

CFAP 1 – Advance Accounting & Financial Reporting

7) On 1 January 2017 ZL granted 5,000 share options each to 12 senior executives, conditional upon the executives
remaining in ZL’s employment until 31 December 2018. The exercise price is Rs. 20 per share. On grant date, ZL estimated
the fair value of the share options at Rs. 180 per option. As on 31 December 2017 it was estimated that 2 employees would
leave ZL before 31 December 2018. Fair value of each share as on 31 December 2017 was Rs. 150. As per tax laws, intrinsic
value of the share option on the exercise date is an admissible expense.

8) On 1 January 2017 ZL had issued 1.5 million 10% convertible Term Finance Certificates (TFCs) of Rs. 100 each. Interest is
payable annually on 31 December whereas the principal is to be paid at the end of 2020. Two TFCs are convertible into
one ordinary share at any time prior to maturity. On the date of issue, the prevailing interest rate for similar debt without
conversion option was 12% per annum. The tax authorities do not allow any deduction for the imputed discount on the
liability component of the convertible TFCs.

9) Net deferred tax liability as on 1 January 2017 arose on account of:

Rs. In million
Property, plant and equipment (Rs. 95 million * 35%) 33.25
Unused tax losses (Rs. 85 million * 35%) (29.75)
Deferred tax liability 3.50

10) The tax rate for 2017 is 30% while it was 35% in 2016 and prior periods.

Required:
Prepare notes on taxation and deferred tax liability/asset for inclusion in ZL’s financial statements for the year ended 31
December 2017, in accordance with the IFRSs. (18 Marks)

Question No. 5

(a).

You have recently joined as Finance Manager of Soccer Limited (SL), a football manufacturer. Being one of the sponsors
for the upcoming world cup in Qatar, SL’s delegation has been invited to watch few matches of the world cup in the
stadium.
You have been informed that the statutory audit of SL for the year ended 30 June 2022 is in final stage and the auditor
has recommended certain material adjustments in the financial statements before issuing an unmodified audit report. In
a meeting with CFO, who is a chartered accountant, you have been informed about the disappointment of the SL’s
directors due to selected audit adjustments which slide SL’s profit below the target. Therefore, CFO has asked you to take
up the matter with the audit engagement partner regarding the selected adjustments and also asked you to invite the
audit partner to the trip to Qatar with SL’s delegation.
Required:
Briefly explain how CFO may be in breach of the fundamental principles of ICAP’s Code of Ethics for Chartered
Accountants. Also state the potential threats that you may face in the above circumstances and how you should respond.
(8 Marks)
(b).

Mustafa Bank Limited (MBL) is listed on all the stock exchange in Pakistan. At the year end, the total borrowings of the bank
amounted to Rs. 29,761 million, which included borrowings outside Pakistan amounting to Rs. 11,712 million, details of
borrowings at the year-end were as follows.

1. All local borrowings are in Pak Rupees.

2. Inter-bank call money borrowings amounted to Rs. 3,600 million. These borrowings were unsecured and carried mark-up
ranging between 8.7% and 12.1% per annum.

3. MBL operators in several countries where it maintains nostro accounts. The overdrawn nostro accounts amounted to Rs.
456 million. Mark-up on overdrawn nostro accounts was charged by the foreign banks at the rates prevailing in the
respective countries.

4. Outstanding loans from the State Bank of Pakistan (SBP) under the export Refinance scheme amounted to Rs. 14,182
million. These loans carried mark-up ranging betwe4en 9.7% and 11% per annum and were secured by MBL’s cash and
other securities held by SBP.

From Faculty of Hasnain R. Badami, FCA

CFAP 1 – Advance Accounting & Financial Reporting
5. The borrowings under repurchase agreements amounted to Rs. 11,523 million and carried markup ranging between
6.3% and 12.5% per annum. These borrowings are secured against government securities amounting to Rs. 24,802 million
and are repayable latest by April 2013.

Required:
Prepare notes on “Borrowings” for inclusion in the Financial Statement of Mustafa Bank Limited with appropriate disclosures
in accordance with the State Bank of Pakistan guidelines. (7 Marks)

From Faculty of Hasnain R. Badami, FCA