FINANCIAL & CORPORATE REPORTING

Total time 3 hours

Total marks 100
[N.B. Figures in the margin indicate 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 questions must be answers in one place in order of sequence].
Marks
1. a. A professional accountant should recognize and assess the potential professional threats.
What are the threats and how a professional accountant should safeguard and eliminate or
reduce the threats in the light of IFAC Code of Ethics, which has been adopted by ICAB.
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b. As per BAS 18 what are the criteria for recognising revenue for the following cases:
(i) Sale of goods
(ii) Rendering of services
c. Under the following circumstances how the revenue should be recognized and treated in the
accounts?

(i) A producer manufactures capital machinery after receiving advance in full. It received 10
orders valuing Tk. 20 million during the year. It delivered 7 orders valuing Tk. 14 million by
the year end 31 Dec 2012.
(ii) An equipment seller sells equipment by requiring a 20% deposit followed by no further
payments until the full amount is due after two years. The price of the equipment is
calculated using a 10% per annum finance charge. A customer took delivery of an
equipment costing Tk. 200,000 on I January 2012.
(iii) A car dealer sell a new car, together with one years insurance and one years servicing for
Tk. 1,700,000. The fair value of the components are: car Tk.1,800,000; insurance Tk.
120,000 and servicing Tk. 80,000.
d. An entity entered into a contract for the provision of services over a two year period. The total
contract price was Tk. 150,000 and the entity initially expected to earn a profit of Tk. 20,000 on the
contract. In the first year costs of Tk. 60,000 were incurred and 50% of the work was completed.
The contract did not progress as expected and management was not sure of the ultimate outcome
but believe that the costs incurred to date would be recovered from the customer.
What revenue should be recognized for the first year? Give explanation to your answer.

2. a. Discuss the indications of impairment of assets from the viewpoint of external and internal
sources as stated in BAS 36.

b. ABC Ltd., closes its accounts on 30 April. After the catastrophic destruction of Rana Plaza in
Savar, inspection of its freehold building was carried out by specialist professionals after two
weeks of its year end on 30 April 2013. The specialist professionals reported that there were
major problems with the foundations and cracks in the walls. In their view these problems must
have arisen several years ago, even though the visible evidence had only now come to light.
Required: Explain how this event should be dealt with in the financial statements of ABC Ltd.,
for the year ended 30 April 2013.
c. Vintage Ltd. is a large industrial manufacturer. It operates from a single freehold factory. Its
accounting policy is that non-current assets, other than land and buildings, are measured
subsequent to initial recognition using the cost model in BAS 16 Property Plant and
Equipment. Land and Buildings are re-measured using the revaluation model of BAS 16, with
transfers being made from revaluation surplus to retained earning when permitted.
Vintage Ltd. Is considering the accounting treatment of two separate assets for the year ended
on 31 December, 2012.
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(1) A piece of manufacturing equipment was acquired on 1 January 2011 for Tk. 250,000. The
useful life was assessed as five years. On 31 Dec 2012 the government published proposed
changes in the regulations that mean that the company will have to withdraw certain product
lines manufactured on that equipment from sale by 31 December 2014. The net sales
proceeds of the equipment are estimated at Tk. 200,000 and the net cash inflows over the
equipments remaining three year life are estimated at Tk. 33,000, 22,000, and 7,000
respectively. Vintage Ltd. can borrow at 12% pa but estimates that this particular equipment
could only be funded at 15% pa.
(2) The companys freehold factory was acquired ten years ago for Tk. 2.2 million (of which Tk.
200,000 was attributable to the land). Its useful life was estimated at 25 years and the residual
value was estimated at Tk. Nil. Five years ago the factory was revalued to Tk. 2.4 million (land
Tk. 200,000) and the overall useful life and residual value remained unchanged. The
revaluation surplus was recognized in other comprehensive income and held in revaluation
surplus. On 31 December 2012 the management of Vintage Ltd. noted that the market value
of the similar property has declined significantly and the fair value of the factory was now Tk.
1.2 million (land Tk. 200,000).
(i) Explain when a company is required to carry out a review for impairment?

(ii) Explain, with supporting numerical calculations, the required accounting treatment for
Vintage Ltds manufacturing equipment and freehold factory in 2012.

d. (i) All investment properties should be measured at fair value. What is fair value of an
investment property and how it is measured?

(ii) Discuss the following treatment under the changed circumstances:

a. An office premises was purchased for official use in the commercial centre but now
decision has changed, and decided to sale the property to exploit capital gain potentials.
b. Occupation of an investment property by the entity itself for training purposes.
c. A building that occupied by the entity is vacated so that it can let to third parties.
3. You are the Group Accountant at Rahim Electronics Ltd. (REL), a listed company which operates in
the electronics sector. It prepares financial statements in accordance with BFRS. A first draft of the
consolidated financial statements has been prepared. However, three issues remain outstanding
which you need to resolve before preparing the final income statement together with a
computation of the basic earnings per share (EPS).
The following are extracts form the draft consolidated financial statements of Rahim Electronics
for the year ended 30 June 2012.
Consolidated statement of comprehensive income for the year ended June 2012
Revenue
Cost of sales
Gross profit
Operating expenses
Profit from operations
Dividend from Karim Ltd. (see (1))
Profit before tax
Tax
Profit after tax and total comprehensive income for the year
Attributable to:
Owners of Rahim Electronics
Non-controlling interest

Tk.000
8,750
(5,130)
3.620
(790)
2,830
(2,150)
720
(210)
510
430
80
510
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The following information on the outstanding issues has been provided:

(1) On 1 January 2012 Rahim Electronics subscribed for 400,000 ordinary shares of Karim Ltd on
incorporation at par. The other issued shares were subscribed for in equal proportions by Hasib
Ltd. and Rakib Ltd. The issued ordinary share capital of Karim is one million ordinary shares. Rahim
Electronics, Hasib and Rakib have entered into an agreement so that strategic operating and
financial decisions require the unanimous consent of all three parties. Rahim Electronics has no
similar existing contractual arrangements and wishes to apply an accounting policy to this type of
arrangement that best reflects the substance and economic reality of its interest.
The following is an extract of the financial statements of Karim for the six months ended 30
June 2012:
Revenue
Cost of sales

Tk. 000
1,200
(700)

Operating costs
Taxation
Net profit

Tk. 000
(300)
(50)
150

The current draft of Rahim Electronicss income statement includes the dividends received
from Karim during the year. No other amounts have been recognized in respect of Karim. A
dividend of Tk. 100,000 was paid by Karim on 27 June 2012.
(2) On 1 July 2011 Rahim Electronics acquired some freehold land. On 1 October 2011 work on
obtaining planning permission for the construction of a new factory began and physical
construction subsequently started on 1 January 2012. Work on the factory was completed on
31 March 2012. Rahim Electronics borrowed Tk.10 million of funds at an interest rate of 10%
per annum on 1 July 2011 to fund the project.
Payments were made in stages as the project progressed and any surplus funds were invested
to earn interest income. The interest income per quarter can be summarized as:
Quarter ended
30 September 2011
31 December 2011

Tk.000
100
80

31 March 2012
30 June 2012
Total

Tk.000
20
Nil
200

All interest expense and interest income amounts have been included in profit in the draft
statement of comprehensive income. The factory was available to use on 1 April 2012 and is
being depreciated over 20 years. Other construction costs have been treated correctly.
(3) On 1 August 2011 Jamil Ltd. an 80% owned subsidiary of Rahim Electronics, sold an
investment for Tk. 340,000. The investment had been acquired in 2006 at a cost of Tk.110,000
and was immediately classified as an available for sale financial asset. The carrying amount of
the investment in the consolidated statement of financial position at 30 June 2011 was Tk.
260,000. A gain on disposal of Tk.80,000 has been included in net finance expenses for the
year ended 30 June 2012.
Rahim Electronics had 350,000 Tk. 1 ordinary shares in issue on 1 July 2011. On 1 October
2011 Rahim Electronics issued 100,000 new Tk.1 ordinary shares at market price. A 1 for 5
bonus issue was completed on 1 January 2012. A further 50,000 Tk.1 ordinary shares were
issued at market value on 1 April 2012. These share transactions have been correctly reflected
in the draft financial statements.
The financial statements for the year ended 30 June 2011 disclosed an EPS of Tk.0.90.
Requirements
Draft a file note suitable for inclusion in the companys financial records that includes:
(a) An explanation of the required BAS/BFRS accounting treatment of these three issues,
preparing relevant calculations where appropriate.
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(b) A revised consolidated statement of comprehensive income for the year ended 30 June 2012.

(c) A calculation of the basic EPS figure, including the comparative amount.

Note: Ignore taxation.

4. a. The classification of a lease depends on the substance of the transaction rather than form of
the contract. Lease can either be a finance lease or an operating lease, as determined by
applying the principles of substance over form, how you would categorise the two types of
lease transaction and treat in the accounts?

b. You are the Chief accountant at BEL, a listed company that operates in the engineering sector
and is also listed in DSE. BEL has recently invested heavily in new plant and the levels of debt
(and gearing) have increased substantially. To improve cash flow the directors entered into a
major sale and leaseback transaction over an item of plant on 1 July 2011.
You have been trying to finalise the financial reporting of the sale and leaseback transaction in
the financial statements of BEL for the year ended 30 June 2012 which are prepared in
accordance with BFRS. However, the documentation for the transaction is incomplete and you
have been unable to concluded as to whether this is a sale and finance leaseback or a sale and
operating leaseback transaction. The details you are aware of are as follows:
The plant had a carrying amount of Tk.9 million on 1 July 2011.
The remaining life of the plant on that date has provisionally been estimated as eight
years by one of your colleagues.
Proceeds from the lease company of Tk.12 million were received on 1 July 2011. You
believe that this represents the market value of the plant at that date.
BEL has leased the plant back over a six year period. The first of six equal annual payments
of Tk.2.5 million was made on 30 June 2012.
BEL has the option to purchase the machinery for its market value at the end of the six
year lease term. It is not clear whether this will happen.
The rate of interest implicit in the lease (if it were a finance lease) has been calculated as
6.8% per annum.
The Managing Director of BEL telephoned you and asked you to meet him to discuss the
formulation of a financial reporting treatment for the sale and leaseback transaction. He said:
Im concerned about how we account for this sale and leaseback transaction. There are two
possible treatments, either as a sale and operating leaseback or as a sale and finance
leaseback. I have not discussed it with the auditors yet. I want to maximize profit and
minimize debt at all costs. I suggest that if one way is better than the other then we create the
necessary documentation and reasoning to achieve what we want. For example, with my
position in the industry, well be able to justify any remaining useful life to anyone. Also our
investors tell me that their accounting rules are different even though I thought that
accounting practice was the same worldwide.
Requirements
Prepare notes for your meeting with the Managing Director which should:
(i) Explain and prepare extracts from financial statements for the two possible financial
reporting treatments of the sale and leaseback transaction identified above for the year
ended 30 June 2012.

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(ii) Asses the potential impact on the financial statements and key financial ratios in the
current and future years of the two different possible financial reporting treatments.

The End