CMA JANUARY-2025 EXAMINATION

ADVANCEDLEVEL I
SUBJECT: FR342- ADVANCED FINANCIAL REPORTING
Model Solution
Solution of the Question No. 1
(a)
Consider the fundamental principles most at risk in the scenario:
• Objectivity – Your objectivity is at risk (there is a self-interest threat) due to the
domineering personality of the manager and the fact that a bonus is available if
objectives are met.
• Professional competence and due care – if you are concerned that revenue has not
been recognized in accordance with technical and professional standards, your
professional competence may be called into question.
You should not comply with your manager’s request. You should politely decline recognize revenue
per his instructions and try to explain your reasoning by reference to the IFRS Standards.
(b)
Recording investment in E plc
Tk. Tk.
Shares to be issued 1 July 20X7
DR Investment in E plc (5m × 60p) 3,000,000
CR Cash (issue costs) 10,000
CR Share capital (5m × 25p) 1,250,000
CR Share premium (3,000 – 1,250 – 10 issue costs) 1,740,000
Cash
DR Investment in E plc 1,000,000
CR Cash 1,000,000
Shares to be issued 1 July 20X8
DR Investment in E plc (1m × 60p) 600,000
CR Shares not yet issued (heading under equity) 600,000
Goodwill on consolidation of E plc
Tk. Tk.
Consideration transferred
Shares 3,000,000
Cash 1,000,000
Shares to be issued 600,000
4,600,000
Tk. Tk.
Non-controlling interests at acquisition (3,428 × 25%) 857,000
5,457,000
Fair value identifiable assets acquired and liabilities assumed
Net assets of Eclipse plc 3,628,000
Less: Contingent liability (200,000)
(3,428,000)
Goodwill 2,029,000
(c)
Cherry plc
TK
Share of Plum plc profit (25% × 118,000) 29,500
Share of Peach plc profit (40% × 56,000) 22,400
Less share of PURP (25% × 36,000 × 50/150) (3,000)
48,900

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Solution of the Question No. 2
(a)
Cash in bank—savings account ................................................................ 68,000
Cash on hand ................................................................................................ 9,300
Checking account balance .....................................................................................17,000
Cash to be reported .............................................................................................94,300
(b)
i.
Statement of profit or loss
Investment income (20,000 * (5.5 – 4.0)) 30,000
Dividend income (20,000 * 20c) 4,000
Transaction costs (2,000)

Statement of financial position

Investments in equity instruments (20,000 * 5.5) 110,000
(ii)
$
Statement of profit or loss
Dividend income 4,000
Other comprehensive income
Gain on investment in equity instruments
(20,000 * 5.5) – (20,000 * 4) 30,000
Statement of financial position
Investments in equity instruments
((20,000 * 5.5) + 2,000) 112,000

(c)
(i)
Dates Shares Fraction Weighted
Event Outstanding Outstanding Restatement of Year Shares
Beginning balance Jan. 1–Feb. 1 480,000 1.2 X 3.0 1/12 144,000
Issued shares Feb. 1–Mar. 1 600,000 1.2 X 3.0 1/12 180,000
Share dividend Mar. 1–May 1 720,000 3.0 2/12 360,000
Reacquired shares May 1–June 1 620,000 3.0 1/12 155,000
Share split June 1–Oct. 1 1,860,000 4/12 620,000
Reissued shares Oct. 1–Dec. 31 1,920,000 3/12 480,000
Weighted-average number of shares outstanding 1,939,000
3,256,000,000 (Net Income)
(ii) Earnings Per Share = = 1,679.22
1,939,000 (Weighted-Average Shares)
3,256,000,000 – 900,000
(iii) Earnings Per Share = = 1,678.75
1,939,000
(iv) Income from continuing operationsa .......................................................... 1,902.01
Loss from discontinued operationsb .......................................................... 222.80
Net income................................................................................................ 1,679.21
a
Net income .............................................................................................. 3,256,000,000
Add loss from discontinued operations ...................................................... 432,000,000
Income from continuing operations ........................................................... 3,688,000,000
3,688,000,000
= 1,902.01
1,939,000
b
(432,000,000)
= ( 222.80)
1,939,000
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Solution of the Question No. 3
(a)
Consolidated statement of financial position as at 31 December 20X9
TK
ASSETS
Non-current assets
Property, plant and equipment (80,000 + 58,200) 138,200
Intangible assets (W3) 61,000
199,200
Current assets
Inventories (18,000 + 12,000 – 800 PURP (W2)) 29,200
Trade and other receivables (62,700 + 21,100) 83,800
Investments 2,500

TK
Cash and cash equivalents (10,000 + 3,000 + 500) 13,500
129,000
Total assets 328,200
EQUITY AND LIABILITIES
Equity attributable to owners of the parent Ordinary
share capital 120,000
Share premium account 18,000
Revaluation surplus 23,000
Retained earnings (W5) 57,160
218,160
Non-controlling interests (W4) 6,040
Total equity Current liabilities 224,200
Acquired contingent liability 58,000
Trade and other payables (35,000 + 11,000) 46,000
Total equity and liabilities 328,200
(b) Adjustments
When group companies have been trading with each other two separate adjustments may be
required in the consolidated statement of financial position. When group companies have been
trading with each other two separate adjustments may be required in the consolidated statement of
financial position.
(i) Elimination of unrealized profits
If one company holds inventories at the year-end which have been acquired from another group
company, this may include a profit element that is unrealized from a group perspective. Here Steele
Ltd sells goods to Close Ltd at cost plus 25%. The mark-up of 25% will only become realized when
the goods are sold to a third party. Therefore, if any intra- group inventory is still held at the year
end, the profit thereon should be eliminated from the consolidated accounts.
This will require an adjustment of TK 800 (4,000 × 25/125) which is always made against the selling
company’s retained earnings ie:
DR CR
TK TK
Steele Ltd’s earnings (W2) 800
Consolidated inventory 800
As well as eliminating the unrealized profit, this reduces inventory back to its original cost to the
group.
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(ii) Eliminate intra-group balances
As group companies are effectively treated as one entity, any intra-group balances must be
eliminated on consolidation. Here, intra-group current accounts have arisen as a result of the intra-
group trading and these must be cancelled out. Before this can be done the current accounts must
be brought into agreement by adjusting the accounts of the ‘receiving’ company (here Steele Ltd)
for the electronic payment in-transit ie:
DR C
TK R
TK
Cash 500
Current account 500
This will reduce the current account receivable to TK 2,700, which means that it now agrees with
the payable balance shown in the accounts of Close Ltd.
DR CR
TK TK
Current account in Close Ltd 2,700
Current account in Steele Ltd 2,700

WORKINGS
(1) Group structure
Close Ltd

80%

Steele Ltd
(2) Fair value of identifiable assets acquired and liabilities assumed
Year end Acquisition Post-
TK date acquisition
TK
Share capital 60,000 60,000 –
Revaluation surplus 16,000 16,000 –
Retained earnings
Per question 13,000
Less: PURP (4,000 × 25/125) (800)
12,200 8,000 4,200
Contingent liability (58,000) (58,000)
30,200 26,000
(3) Goodwill
TK
Consideration transferred 84,000
Non-controlling interest at acquisition (26,000 × 20% (W2)) 5,200
89,200
Less fair value of identifiable assets acquired and liabilities assumed (W2) (26,000)
63,200
Impairment to date (500 + 1,700) (2,200)
Balance c/f 61,000

(4) Non-controlling interests at year end

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 TK
Steele Ltd – NCI at acquisition (20% × 26,000 (W2)) 5,200
Share of post-acquisition reserves (20% × 4,200 (W2)) 840
6,040
(5) Retained earnings
TK
Close Ltd 56,000
Steele Ltd (80% × 4,200 (W2)) 3,360
Less goodwill impairment to date (W3) (2,200)
57,160

Solution of the Question No. 4

(a) Held-to- maturity (b) FV through (c) AFSFA
P/L
20X1 20X2 20X1 20X2 20X1 20X2
TK'00 TK'00 TK'000 TK'00 TK'000 TK'000
0 0 0
Profit or loss
Interest income (W1)/(W2) 1,200 1,200 1,200 1,387 1,200 1,387
Gain/(loss) due to change in
FV (W2) – – (187) – – *(187)
1,200 1,200 1,013 1,387 1,200 1,200
Other comprehensive income
Available-for-sale financial
assets – – – – (187) 187
1,200 1,200 1,013 1,387 1,013 1,387

Statement of financial position

Financial asset (W1)/(W2) 20,000 – 19,813 – 19,813 –
Reserves
Gain/(loss) due to change in
FV (W2) – – – – (187) –
* reclassified from equity to profit or loss on derecognition.
WORKINGS:
1. Amortized cost
TK'000
Cash – 1.1.20X1 20,000
Effective interest at 6% (same as nominal as no discount 1,200
on issue/premium on redemption)
Coupon received (nominal interest 6% 20m) (1,200)
At 31.12.20X1 20,000
Effective interest at 6% 1,200
Coupon and capital received ((6% 20m) + 20m) (21,200)
At 31.12.20X2 0
2. Fair value:
TK'000
Cash 20,000
Effective interest (as above) 1,200
Coupon received (as above) (1,200)
Fair value loss (187)
At 31.12.20X1 (W3) 19,813
Interest at 7% (7% 19,813) 1,387
Coupon and capital received ((6% 20m) + 20m) (21,200)
At 31.12.20X2 0
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 3. Fair value at 31.12.20X1
TK'000
Interest and capital due on 31.12.20X2 at new market rate 19,813
(21.2m/1.07)
(b) Substance over form and the presentation of financial liabilities under IAS 32, Financial
Instruments: Presentation
(i) The Conceptual Framework requires information to be relevant and faithfully represented.
Faithful representation means that financial information represents the substance of an
economic phenomenon rather than merely representing its legal form. The substance is not
always consistent with the legal form of a transaction. This is often the case when an
arrangement involves a number of linked transactions or components.
IAS 32 uses the substance of a financial liability rather than its legal form to determine the
classification in the statement of financial position. Some financial instruments take the legal
form of equity but are liabilities in substance as they include contractual obligations to transfer
economic benefits to the holder. This approach is consistent with the definition of a liability in the
Conceptual Framework and such financial liabilities are classified in liabilities and not equity.
More complex financial instruments may combine features of both equity instruments and
financial liabilities. IAS 32 looks at the substance of the components of the instrument and
classifies them separately.
(ii) Financial statement extracts
Statement of financial position as at 31 December 20X3

TKm
Ordinary share capital 50
Preference share capital (irredeemable) 10
Non-current liabilities
Preference share capital (redeemable) 20
Statement of profit or loss for the year ended 31 December 20X3
TKm
Finance cost (20m × 8%) (1.6)

Statement of changes in equity for the year ended 31 December 20X3

Ordinary Irredeemable
share preference Retained
capital share capital earnings Total
TKm TKm TKm TKm
Balance at 1 January 20X3 50 - 75 125
Issue of share capital 10 10
Dividends paid (10 × 12% × 6/12) (0.6) (0.6)
Total comprehensive income (15 –1.6) 13.4 13.4
Balance at 31 December 20X3 50 10 87.8 147.8

Solution of the Question No. 5

(a) The futures contract was intended to protect the company from a fall in oil prices (which would
have reduced the profit when the oil was eventually sold). However, oil prices have actually risen,
so that the company has made a loss on the contract.
(a) Without hedge accounting
The futures contract is a derivative and therefore should be remeasured to fair value under IAS 39.
The loss on the futures contract should be recognized in profit or loss:

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 Dr Profit or loss (40,000 x [TK24 – TK80,000
TK22])
Cr Financial liability TK80,000

(b) With hedge accounting

The loss on the futures contract should be recognized in profit or loss, as before. There is an
increase in the fair value of the inventories:
TK
Fair value at 31 December 20X3 (40,000 xTK22.25) 890,000
Fair value at 1 December 20X3 = cost (800,000)
Gain 90,000
The gain should also be recognized in profit or loss and adjusted against the carrying amount of the
inventories:
Dr Inventory TK90,000
Cr Profit or loss TK90,000
The net effect on profit or loss is a gain of TK10,000, compared with a loss of TK80,000 without
hedging.

Note: The hedge is highly effective: 80,000/90,000 = 89% which is within the 80% – 125% range.

(b)
(i) Pension expense for 20X5 consisted only of the service cost component amounting to 60,000.
There was no net gain or loss, plan assets, or defined benefit obligation as of January 1, 20X5.
Pension expense for 20X6 comprised the following:
Service cost ............................................................................................... 85,000
Interest expense
(60,000 X 11%) ...................................................................................... 6,600
Interest revenue
(50,000 X 11%) ...................................................................................... (5,500)
Pension expense .............................................................................. 86,100
Pension expense for 20X7 comprised the following:
Service cost ............................................................................................... 119,000
Interest expense
(200,000 X 8%) ...................................................................................... 16,000
Interest revenue
(85,000 X 8%) ........................................................................................ (6,800)
Pension expense .............................................................................. 128,200
(ii) Journal Entries—20X5
Pension Expense ............................................................................. 60,000
Cash....................................................................................... 50,000
Pension Asset/Liability............................................................ 10,000
Journal Entries—20X6
Pension Expense ............................................................................. 86,100
Other Comprehensive Income (G/L) ................................................ 78,900
Cash....................................................................................... 60,000
Pension Asset/Liability............................................................ 105,000
Journal Entries—20X7
Pension Expense ............................................................................... 128,200
Other Comprehensive Income (G/L) .................................................. 5,800
Cash......................................................................................... 105,000
Pension Asset/Liability.............................................................. 29,000

= THE END =
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