FA-MAY-JUNE'2019

FINANCIAL ACCOUNTING & REPORTING

Time allowed – 3:30 hours

Total marks – 100
[N.B – The figures in the margin include full marks. Questions must be answered in English. Examiner will take account of the
quality of language and 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) “For an item or transaction to be recognised in an entity's financial statements it needs to be measured as
a monetary amount. IFRSs use several different measurement bases but the Conceptual Framework
refers to just four.” Explain the four measurement bases referred to in Conceptual Framework. 4
(b) “This Conceptual Framework is not an IFRS and hence does not define standards for any particular
measurement or disclosure issue. Nothing in this Conceptual Framework overrides any specific IFRS.”
i) Discuss general guideline in the Conceptual Framework in case of conflict between conceptual
framework and IFRSs. 3
ii) What would be your suggestion in case you encounter circumstances where compliance with a
requirement in an IFRS would be so misleading that it would conflict with the objective of financial
statements set out in the Framework? 3

2. (a) You are the Chief Financial Officer of RSPB Holdings Ltd. and receive instructions from the Group
parent company to apply IAS 37. At the time of preparation of financial statements for the year ended
on 31 December 2018, you are confronted with the following independent situations.
i. The company introduced a new car model two months before the reporting date. This model, as for all
cars sold by the company, is guaranteed for a period of 12 months. By the reporting date and the date
when the financial statements are prepared, no claims have been received concerning this model.
ii. A famous actress who bought a specially designed version of the R170 model from the company
last year had an accident within five days after reporting date. The car was completely destroyed
and the actress was badly hurt. A few days ago the company received notification that the actress
has filed a lawsuit against the company alleging that the brakes, which were guaranteed to last for
two years, had failed and caused her accident. She claims Tk. 10 million for the replacement of the
car and another Tk. 4 million for medical and hospital bills and compensation for revenue lost during
the week she spent in the hospital. The company reviewed the situation with its legal advisor who
recommended that the company contest the case and believes that it is unlikely that the company
will be required to pay anything.
iii. Before the balance sheet date, 31 December 2018, the board of directors announced the details of
proposed dividend payments, subject to approval at the annual shareholders’ meeting. The annual
shareholders’ meeting was held in March 2019 and the dividend payments were approved.
iv. A fire occurred at the premises of the company on 15 December 2018. Total damage was assessed
at Tk. 700,000. It is a term of the company’s insurance policy that fire alarms be fitted to all
premises. No fire alarms were fitted to the premises affected by the fire. It is hoped that the
company’s insurers will cover this loss under the terms of the insurance policy. However, the
assessor has not yet provided his report or recommendations.
v. Legislation was passed on 30 September 2018 requiring the fitting of emissions filters to the
factories of the company immediately. This law has not been complied with by the year end. The
expected cost of fitting the filters is Tk. 750,000.

Required:

Explain how you account for each situation in accordance with IAS 37. Determine whether you should
recognise a provision and, if so, how you would estimate the amount. Give the reasoning behind your
answer. Where only disclosure is required, indicate what information the notes to the financial statements
should include. 15

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 (b) Friends Int. Ltd has entered into the following transactions during the year ended 31 December 2018.
i. Friends Int. Ltd made a major sale on 1 January 2018 for a fee of Tk. 1.35 million which related to
a completed sale and after-sales support for four years. The cost of providing the after-sales support
is estimated at Tk. 150,000 per annum and the mark-up on similar after-sales only contracts is 25%
on cost.
ii. The agro division of Friends Int. Ltd operates its retail outlets on a franchise basis. On 1 January
2018 a new outlet was opened, the franchisee paying a fee of Tk. 1.5 million to cover the initial
services. The franchise is for five years, and the franchisee will pay an additional annual fee of Tk.
180,000 commencing on 1 January 2018 to cover marketing and other support services provided by
Friends Int. Ltd during the franchise period. Friends Int. Ltd has estimated that the cost of providing
these services is Tk. 240,000 per annum, and has achieved a gross margin of 25% on providing
similar services on other contracts.
iii. On 1 October 2018 Friends Int. Ltd received Tk. 1.2 million in advance subscriptions. The
subscriptions are for 60 monthly issues of a magazine published by Friends Int. Ltd. Nine issues of
the magazine had been dispatched by the year end. Each magazine is of the same value and costs
approximately the same to produce.
iv. A batch of unseasoned timber, which had cost Tk. 750,000, was sold to Wasi Inc. Ltd for Tk.
300,000 on 1 January 2018. Friends Int. Ltd has an option to repurchase the timber in 10 years' time.
The repurchase price will be Tk. 300,000 plus interest charged at 12% per annum from 1 January
2018 to the date of repurchase. The market value of the timber is expected to increase as it seasons.

Required:
Prepare extracts from Friends Int. Ltd's financial statements for the year ended 31 December 2018, clearly
showing how each of the above would be reflected. Notes to the financial statements are not required. 10

3. ABC Limited is an IT service provider and has been into operation only for last five years. The industry is
highly competitive and volatile. Being new into the industry, the company is currently trying to aggressively
acquire new customers, even if it is at the cost of initial subsidy in service price.

The company builds customized software and provides implementation and maintenance service to its
customers. The company has also started off-the-shelf software sale business (for both internally developed
and software purchased from third parties) and maintenance service for third party software. Below was the
trial balance (unadjusted) of the company as of the close of 30 June 2019-

Unadjusted Trial Balance

Particulars Debit Credit
Revenue 13,500,000
Cost of software purchased 3,000,000
Software Inventory- purchased 1,000,000
Salary and admin expenses 3,500,000
Distribution costs (including commissions) 3,000,000
Property, plant and equipment, WDV
Writtne Down Value 10,000,000
Depreciation expense 2,000,000
Business development cost- deferred 3,000,000
Accounts receivable, net of impairment 2,500,000
Cash at bank 400,000
Income tax expense 500,000
Trade payables 3,500,000
Provisions 1,500,000
Retained earnings at 30 June 2018 2,400,000
Ordinary share capital (BDT10 per share) 8,000,000
28,900,000 28,900,000

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You have just joined as the head of financial reporting of the company and have come across below matters
that are yet to be addressed-
i. Of the total revenue, BDT 6,000,000 represents revenue earned from sale of own software and BDT
4,000,000 from maintenance service. Rest is from sale of off-the-shelf third party software.
ii. From July 2018, the company has started offering three year free maintenance and free implementation
for its own software. The company usually charges 10% of software cost as annual maintenance charge.
60% of the revenue recognized from sale of own software is against a sale executed on 1 July 2018
and the rest against a deal finalized on 30 June 2019. The product team had an expectation that the full
revenue from the second contract would be recognized during current year and to support that they had
already issued license to the customer, even though the implementation could be started from 1 July
2019. The software implementation is likely to require significant customization. ABC product team
is not in a position to estimate expected implementation cost.
iii. Revenue from software maintenance represents signing money paid by the customer for a third party
off-the shelf software (the company collects 40% of total service charge upfront). The contract was
signed at the beginning of current year for 2 years. The company had to pay BDT 1,000,000 to an agent
for acquiring the customer. The agent had deducted his share upfront, and hence revenue has been
recognized only to be net amount realized.
iv. Only third party software is recognized under the Board approved accounting policy. Software
inventory represents below items-
Cost Cost Market price
XYZ Antivirus Tk. 1,000,000 Tk. 300,000
ABC Application Tk. 500,000 Tk. 700,000
1,500,000 1,000,000

Since software price generally declines over time, the company has established a policy of valuing
inventory at market price. The company expects incur 10% commission costs on third party software sale.

v. The company was conducting a research for last three years. This year it had a breakthrough innovation
in health care app development. The first prototype gave a successful result in by December 2018. The
prototype was demonstrated in a software fair. A foreign buyer had offered USD1,000,000 for the
prototype. Two developers had to work for long two years, and were paid BDT2,000,000 in total as
salary. After successful demo, their annual pay-out was just doubled. The two developers had
completed necessary customization during last six month of the year. All salaries are recorded and
reported under single head- Salary and other employee benefits. After completion of the project, two
foreign investors had shown interest in purchasing the software at a price of USD 10,000,000.
USD1=BDT80 as of 30 June 2019.
vi. Office premises include two new sales centers established in an off-shore market. Total cost for the
sales center was BDT 1,000,000. The company has no experience in off-shore market. The centers
were inaugurated on 30 June 2019.
vii. This year the company had significant investment in market penetration related activities like
advertisement and promotion. Even though the promotion did not generate immediate growth in
revenue, management believes that such expenditure will drive business growth in coming two years
as well. The company hence changed its accounting policy to defer business development costs
proportionately. However, the policy has been applied only prospectively, i.e. from 1 July 2018. Last
year, the company had spent BDT 1000,000 for similar purpose.

The company is considering applying for further loan for off-shore operations and it’s important for the
company to present a healthy financial performance to convince the potential lenders.

Required:

You are asked to prepare an adjusted trial balance, showing required adjustments in separate columns along
with justification in light of IFRSs. Also calculate profit before tax for the year ended 30 June 2019. 25

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4. Wave Limited is a locally listed company in Bangladesh, and has just prepared its below Profit or Loss
statement-
Statement of Profit or Loss and Other Comprehensive Income
For the year ended 30 June 2018
Particulars Taka
Revenue 3,000,000
Cost of sales -1,400,000
Gross Profit 1,600,000
Employee benefits -200,000
Sales, marketing and promotion costs -400,000
Depreciation -250,000
Interest expense -50,000
Net profit before tax 700,000
Income tax expense ?
Net profit after tax ?
Other comprehensive income ?
Total comprehensive income ?
Mr. Rahman, the Accounts Manager is confused with below matters-
a) How he should calculate current tax, for the budget just approved in the Parliament has increased tax
rate from 25% to 30%.
b) Actuary valuation for gratuity fund (defined benefit) had reflected below out-comes-

Actuary valuation report of Wave Ltd Taka

Current service cost 75,000
Actuarial loss 50,000
125,000
No provision has been made in the above financial statement considering the report was available on 15
July 2018, after the books were closed. The fund could not be transferred to the NBR approved gratuity
fund. Last year, the company had provided Tk.100,000 for gratuity (current service), for which fund
was transferred this year. In earlier assessment years, tax office had allowed gratuity expenses based on
actual fund transfer to trustee board.
c) Written down value for the only depreciable asset is Tk.300,000 and tax WDV is Tk.400,000. Current
year tax depreciation allowance (for tax purpose) is Tk.200,000.
Required:
Assist the Chairman of the company to complete the statement of profit or loss and other comprehensive
income. 15

5. Canada Ltd has investments in two companies, Toronto Ltd and Calgary Ltd. The draft, summarized
statement of financial position of the three companies at 31 December 2018 are shown below.
Canada Toronto Calgary
ASSETS Tk '000 Tk '000 Tk '000
Non-current assets
Property, plant and equipment 18,750 15,000 6,250
Investment in Toronto Ltd 16,250 - -
Intangibles 250 300 -
Other investment 2,500 1,000 850
Total non-current assets 37,750 16,300 7,100
Current assets
Inventories 2,500 1,250 500
Accounts and other receivables 2,750 1,125 475
Advance, deposits and prepayments 3,450 1,150 300

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 Cash and cash equivalents 500 125 225
Total current assets 9,200 3,650 1,500
TOTAL ASSETS 46,950 19,950 8,600
EQUITY AND LIABILITIES
Equity
Share capital (Tk. 10 ordinary shares) 25,000 15,000 2,500
Preference share capital (irredeemable) 5,000 - -
Revaluation reserve - 1,250 -
Retained earnings 7,500 (700) 4,550
Total equity 37,500 15,550 7,050
Non-current liabilities
Borrowings 4,350 775 512
Current liabilities
Bank overdraft 1,050 1,250 600
Accounts and other payables 1,750 1,800 275
Tax payable 550 125 38
Dividends 1,750 450 125
Total current liabilities 5,100 3,625 1,038
Total liabilities 9,450 4,400 1,550
TOTAL EQUITY AND LIABILITIES 46,950 19,950 8,600
The following additional information is relevant.
(a) Canada Ltd acquired 70% of the Tk. 10 ordinary shares in Toronto Ltd on 1 November 2017 for
Tk.13.75 million cash. At that date the balance on Toronto Ltd's retained earnings and revaluation
reserve were Tk. 1.5 million and Tk. 1.25 million respectively.
(b) On 10 September 2014 Canada Ltd acquired 40% of the Tk. 10 ordinary shares in Calgary Ltd for Tk.
2.5 million cash. The retained earnings of the company on the date of acquisition of share capital was
Tk. 2.25 million.
(c) The intangibles carried by Toronto Ltd are Tk. 175,000 goodwill acquired on the acquisition of the net
assets and trade of an unincorporated business in 2016, and Tk. 125,000 relating to legal rights acquired
in the same year over specialised machinery, without which Toronto Ltd cannot operate.
(d) Toronto Ltd sold goods to Canada Ltd valued at Tk. 2 million during the year ended 31 December 2018
and a half of these goods have been re-sold by Canada Ltd. Toronto Ltd calculated the transfer price of
the goods at cost plus a mark-up of 25%.
(e) Toronto Ltd sold a property to Canada Ltd on 1 January 2018 for Tk. 1 million. The property had a
carrying amount of Tk. 750,000 in the accounts of Toronto Ltd as at 1 January 2018, with an original
cost of Tk. 1.5 million in January 2013 and an estimated useful life of ten years from that date.
(f) Canada Ltd has carried out annual impairment reviews on goodwill. As at 31 December 2018 the
impairment reviews revealed cumulative losses of Tk. 290,000 relating to the goodwill arising in the
business combination with Toronto Ltd and Tk. 300,000 in respect of the investment in Calgary Ltd.
Goodwill in respect of Toronto Ltd was originally estimated to have a useful life of five years.
(g) Current liabilities of the companies include the following amounts for dividends declared before the
year end
Preference shares (Tk.) Ordinary shares (Tk.)
Canada Ltd 500,000 1,250,000
Toronto Ltd - 450,000
Calgary Ltd - 125,000
Canada Ltd has not yet accounted for any dividends receivable.
(h) There have been no changes in the share capitals of the companies since Canada Ltd acquired the shares.
Required:
Prepare the consolidated statement of financial position of Canada Ltd as at 31 December 2018. 25

-The end-
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