Financial Statements

Chapter 2: IAS 1: Presentation of financial statements
1 THE COMPONENTS OF FINANCIAL STATEMENTS

Section overview
Preparing financial statements

General purpose financial statements
Complete set of financial statements
Comparative information
Identification of financial statements
Reporting period
Elements of financial statement
1.1 Preparing financial statements

You should already have studied the basic rules of financial accounting, so you
ought to be reasonably familiar with how a statement of financial position and a
statement of comprehensive income are prepared. The basic rules can be
summarised as follows.
The balances on all the accounts in the general ledger (nominal ledger or
main) are extracted. These are a list of balances on all ledger accounts for
assets, liabilities, capital, income and expenses.
Adjustments are made for year-end items, such as:
depreciation charges for non-current assets;
accruals and prepayments for expense items;
adjusting the allowance for bad (irrecoverable) debts;
closing inventory; and
Adjustments are made for any items that have not been accounted for or
have been incorrectly accounted for. (Questions at this level might include
lease accounting, deferred taxation, provisions etc.).
The adjusted income and expense balances are entered into a statement of
comprehensive income to establish the profit or loss for the period.
The adjusted asset, liability and capital balances, together with the retained
profit for the year, are entered into a statement of financial position as at
the end of the reporting period.
This process can be used to prepare the statement of comprehensive income
and statement of financial position of a sole proprietor, a partnership or a
company.
Some entities must publish financial statements in accordance with international
financial reporting standards (international accounting standards). IAS 1
Presentation of Financial Statements, sets out the rules on the form and content
of financial statements which such entities must comply with. The rules contained
in international standards are known collectively as IFRS or IAS.
The following sections explain and summarise the IAS 1 requirements. This exam
will ask you to prepare financial statements in accordance with IAS 1 and the
Companies Ordinance 1984 so remember that the more specific guidance in the
fourth schedule will need to be followed in addition to what is explained in this
chapter.
Emile Woolf International 29 The Institute of Chartered Accountants of Pakistan

Financial accounting and reporting II
1.2 General purpose financial statements
Definition
General purpose financial statements (referred to as financial statements) are
those intended to meet the needs of users who are not in a position to require an
entity to prepare reports tailored to their particular information needs.
The financial statements published by large companies as part of their annual

reports are general purpose financial statements.
Objective
The objective of general purpose financial statements is to provide information
about the financial position, financial performance and cash flows of a company
that is useful to a wide range of users in making economic decisions.
Financial statements also show the results of the managements stewardship of
the resources entrusted to it.
To meet this objective, financial statements provide information about an entitys:
assets;
liabilities;
equity;
income and expenses, including gains and losses;
contributions by and distributions to owners in their capacity as owners; and
cash flows.
This information, along with other information in the notes, assists users of
financial statements in predicting the entitys future cash flows and, in particular,
their timing and certainty.
1.3 Complete set of financial statements

IAS 1 Presentation of Financial Statements specifies what published general-
purpose financial statements should include, and provides a format for a
statement of financial position, statement of comprehensive income, and
statement of changes in equity.
A complete set of financial statements consists of:
a statement of financial position as at the end of the period;
a statement of comprehensive income for the period;
a statement of changes in equity for the period;
a statement of cash flows (covered in chapter 3); and
notes to these statements, consisting of a summary of significant
accounting policies used by the entity and other explanatory information;
and
comparative information.
A company can use other use titles for the above statements.

1.4 Comparative information

A company must disclose comparative information in respect of the previous
period for all amounts reported in the current periods financial statements.
A company must present (as a minimum) statements of financial position,
comprehensive income cash flows and changes in equity for the previous
accounting period in addition to those for the current period.
Furthermore, when a company applies a new accounting policy retrospectively or
retrospectively restates or reclassifies items in its financial statements, the
financial statements must also include a statement of financial position as at the
beginning of the earliest comparative period. This means that when one of the
above circumstances occurs, the entity must present statements of financial
position, as at:
the end of the current period;
the end of the previous period; and
the beginning of the earliest comparative period.
1.5 Identification of financial statements

Listed companies usually publish financial statements as part of an annual report.
The financial statements must be clearly identified and distinguished from other
information in the same published document. This is very important as the
financial statements are audited whereas other information in the annual report is
not. Users must be able to identify the information that has been audited.
Each component of the financial statements must be properly identified with the
following information displayed prominently:
the name of the reporting entity;
whether the financial statements cover an individual entity or a group
(consolidated accounts for groups are described in later chapters);
the date of the end of the reporting period or the period covered by the
statement, whichever is appropriate;
the currency in which the figures are reported;
the level of rounding used in the figures (for example, whether the figures
thousands of rupees or millions of rupees).
1.6 Reporting period

Financial statements should be presented at least annually. If an entity changes
the date of the end of its reporting period, and a reporting period longer or shorter
than one year is used, its financial statements should disclose:
the period covered by the financial statements
the reason why the period is not one year, and
the fact that the comparative figures for the previous year are not
comparable.

1.7 Elements of financial statements

The objective of financial reporting is to provide useful information. In order to be
useful information must be understandable. A large company enters into
thousands of transactions so in order for users to be able to understand the
impact of these they must be summarised in some way.
Financial statements group transactions into broad classes according to their
economic characteristics. These broad classes are called the elements of
financial statements.
The elements directly related to the measurement of financial position in
the statement of financial position are assets, liabilities and equity.
The elements directly related to the measurement of performance in the
statement of comprehensive income are income and expenses.
Assets
Definition: Asset
A resource controlled by the entity, as a result of past events, and from which
future economic benefits are expected to flow to the entity.
Control is the ability to obtain economic benefits from the asset, and to restrict
the ability of others to obtain the same benefits from the same item.
An entity usually uses assets to produce goods or services to meet the needs of
its customers, and because customers are willing to pay for the goods and
services, this contributes to the cash flow of the entity. Cash itself is an asset
because of its command over other resources.
Many assets have a physical form, but this is not an essential requirement for the
existence of an asset.
Assets result from past transactions or other past events. An asset is not created
by any transaction that is expected to occur in the future but has not yet
happened.
An asset should be expected to provide future economic benefits to the entity.
Providing future economic benefits can be defined as contributing, directly or
indirectly, to the flow of cash (and cash equivalents) into the entity.
Liabilities
Definition: Liability
A present obligation of an entity, arising from past events, the settlement of
which is expected to result in an outflow of resources that embody economic
benefits.
A liability is an obligation that already exists. An obligation may be legally

enforceable as a result of a binding contract or a statutory requirement, such as a
legal obligation to pay a supplier for goods purchased.
Obligations may also arise from normal business practice, or a desire to maintain
good customer relations or the desire to act in a fair way. For example, an entity
might undertake to rectify faulty goods for customers, even if these are now
outside their warranty period. This undertaking creates an obligation, even
though it is not legally enforceable by the customers of the entity.

A liability arises out of a past transaction or event. For example, a trade payable
arises out of the past purchase of goods or services, and an obligation to repay a
bank loan arises out of past borrowing.
The settlement of a liability should result in an outflow of resources that embody
economic benefits. This usually involves the payment of cash or transfer of other
assets. A liability is measured by the value of these resources that will be paid or
transferred.
Equity
Definition: Equity
The residual interest in the assets of the entity after deducting all its liabilities.
Equity of companies may be sub-classified into share capital, retained profits and
other reserves.
Income
Financial performance is measured by profit or loss. Profit is measured as
income less expenses.
Definition: Income
Increase in economic benefits during the accounting period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from equity participants.
Income includes both revenue and gains.

Revenue is income arising in the course of the ordinary activities of the
entity. It includes sales revenue, fee income, royalties income, rental
income and income from investments (interest and dividends).
Gains include gains on the disposal of non-current assets. Realised gains
are often reported in the financial statements net of related expenses. They
might arise in the normal course of business activities. Gains might also be
unrealised. Unrealised gains occur whenever an asset is revalued upwards,
but is not disposed of. For example, an unrealised gain occurs when
marketable securities owned by the entity are revalued upwards.

Expenses
Definition: Expenses
Decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to equity
participants.
Expenses include:
Expenses arising in the normal course of activities, such as the cost of
sales and other operating costs, including depreciation of non-current
assets. Expenses result in the outflow of assets (such as cash or finished
goods inventory) or the depletion of assets (for example, the depreciation of
non-current assets).
Losses include for example, the loss on disposal of a non-current asset,
and losses arising from damage due to fire or flooding. Losses are usually
reported as net of related income. Losses might also be unrealised.
Unrealised losses occur when an asset is revalued downwards, but is not
disposed of. For example, and unrealised loss occurs when marketable
securities owned by the entity are revalued downwards

2 GENERAL FEATURES OF FINANCIAL STATEMENTS

Section overview
Introduction
Fair presentation and compliance with IFRSs
Going concern
Accrual basis of accounting
Materiality and aggregation
Offsetting
Frequency of reporting
Consistency of presentation
2.1 Introduction
IAS 1 describes and provides guidance on the following general features of
financial statements:
Fair presentation and compliance with IFRSs
Going concern
Accrual basis of accounting
Materiality and aggregation
Offsetting
Frequency of reporting
Consistency of presentation
2.2 Fair presentation and compliance with IFRSs
Disclosure of compliance
An entity whose financial statements comply with IFRSs must disclose that fact.
Financial statements shall not be described as complying with IFRS unless they
comply with all the requirements of each applicable Standard and Interpretation.
Fair presentation
Financial statements must present fairly the financial position, financial
performance and cash flows of an entity.
This means that they must be a faithful representation of the effects of
transactions and other events in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out in IFRS.
The application of IFRSs, with additional disclosure when necessary, is
presumed to result in financial statements that achieve a fair presentation.

Fair presentation requires:

the selection and application of accounting policies in accordance with IAS
8, Accounting Policies, Changes in Accounting Estimates and Errors;
the presentation of information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information; and,
the provision of additional disclosures when the particular requirements in
IFRSs are insufficient to enable users to understand the impact of particular
transactions or other events on the entitys financial position and financial
performance.
True and fair override

In extremely rare circumstances, management might conclude that compliance
with a requirement in IFRS would be so misleading that it would conflict with the
objective of financial statements set out in IFRS.
In these cases the requirement should not be followed as longs as the relevant
regulatory framework requires or otherwise does not prohibit this.
When an entity departs from a requirement in IFRS it must disclose:
that management has concluded that the financial statements present fairly
the entitys financial position, financial performance and cash flows;
that it has complied with applicable IFRS except that it has departed from a
particular requirement to achieve a fair presentation; and
details of the departure:
the Standard (or Interpretation) from which the entity has departed
and:
the nature of the departure (including the treatment that is required by
IFRS);
the reason why that treatment would be so misleading in the
circumstances that it would conflict with the objective of financial
statements set out in the Framework;
the treatment adopted; and,
for each period presented, the financial impact of the departure on
each item in the financial statements that would have been reported
in complying with the requirement.
If the relevant regulatory framework prohibits departure from a requirement the
entity must make the following disclosures to reduce the misleading aspects of
compliance to the maximum extent possible:
the Standard (or Interpretation) requiring the entity to report information
concluded to be misleading and:
the nature of the requirement;
the reason why management has concluded that complying with that
requirement is so misleading in the circumstances that it conflicts with the
objective of financial statements; and,
for each period presented, the adjustments to each item in the financial
statements that management has concluded would be necessary to
achieve a fair presentation.

2.3 Going concern

Financial statements must be prepared on a going concern basis unless
management either;
intends to liquidate the entity; or,
to cease trading; or
has no realistic alternative but to do so.
Management must assess an entitys ability to continue as a going concern when
preparing financial statements.
In making this assessment management must take into account all available
information about the future. (This is for at least twelve months from the reporting
date).
Disclosures
If management is aware, in making its assessment, of material uncertainties
related to events or conditions that may cast significant doubt upon the entitys
ability to continue as a going concern, those uncertainties must be disclosed.
If the financial statements are not prepared on a going concern basis, that fact
must be disclosed, together with:
the basis on which the financial statements are prepared; and,
the reason why the entity is not regarded as a going concern.
2.4 Accrual basis of accounting

Financial statements (except for cash flow information) must be prepared under
the accrual basis of accounting.
Under the accrual basis of accounting, items are recognised as assets, liabilities,
equity, income and expenses (the elements of financial statements) when they
satisfy the definitions and recognition criteria for those elements set out in the
Framework.
2.5 Materiality and aggregation

Each material class of similar items must be presented separately in the financial
statements.
Items of a dissimilar nature or function must be presented separately unless they
are immaterial.
An item that is not sufficiently material to warrant separate presentation on the
face of the financial statements may nevertheless be sufficiently material for it to
be presented separately in the notes.
Information is material if its non-disclosure could influence the economic
decisions of users taken on the basis of the financial statements.
Materiality depends on the size and nature of the item or aggregation of items
judged in the particular circumstances of its omission.

2.6 Offsetting
Assets and liabilities must not be offset except when offsetting is required by
another Standard.
The reporting of assets net of valuation allowancesfor example, obsolescence
allowances on inventories and doubtful debts allowances on receivablesis not
offsetting.
Items of income and expense must be offset when, and only when IFRS requires
or permits it. For example:
gains and losses on the disposal of non-current assets are reported by
deducting from the proceeds on disposal the carrying amount of the asset
and related selling expenses; and,
expenditure that is reimbursed under a contractual arrangement with a third
party (for example, a subletting agreement) is netted against the related
reimbursement.
Also gains and losses arising from a group of similar transactions are reported on
a net basis (for example, foreign exchange gains and losses or gains and losses
arising on financial instruments held for trading purposes).
Such gains and losses must be reported separately if their size, nature or
incidence is such that separate disclosure is necessary for an understanding of
financial performance.
2.7 Frequency of reporting

Financial statements must be presented at least annually.
When an entitys reporting date changes its financial statements are presented
for a period longer or shorter than one year. In such cases an entity must
disclose, in addition to the period covered by the financial statements:
the reason for using a period other than one year; and,
the fact that amounts presented in the financial statements are not
comparable.
2.8 Comparative information

Comparative information must be disclosed in respect of the previous period for
all amounts reported in the financial statements unless IFRS permits or requires
otherwise.
Comparative information must be included for narrative and descriptive
information when it is relevant to an understanding of the current periods
financial statements.
When the presentation or classification of items in the financial statements is
amended, comparative amounts must be reclassified (unless the reclassification
is impracticable). When comparative amounts are reclassified, an entity must
disclose:
the nature of the reclassification;
the amount of each item or class of items that is reclassified; and,
the reason for the reclassification.

The following must be disclosed when reclassification of comparative amounts is

impracticable:
the reason for not reclassifying the amounts; and,
the nature of the adjustments that would have been made if the amounts
were reclassified.
2.9 Consistency of presentation

The presentation and classification of items in the financial statements must be
retained from one period to the next unless:
a significant change in the nature of the operations of the entity or a review
of its financial statement presentation demonstrates that a change in
presentation results in a more appropriate presentation of transactions or
other events; or
a change in presentation is required by an IFRS.

3 STRUCTURE AND CONTENT OF THE STATEMENT OF FINANCIAL

POSITION
Section overview
Introduction
Current and non-current assets and liabilities
Current assets
Current liabilities
Information to be presented on the face of the statement of financial position
Equity capital and reserves
3.1 Introduction
IFRS uses terms which are incorporated into this study text. However, it does not
forbid the use of other terms and you might see other terms used in practice.
IAS 1 sets out the requirements for information that must be presented in the
statement of financial position or in notes to the financial statements, and it also
provides implementation guidance. This guidance includes an illustrative format
for a statement of financial position. This format is not mandatory but you should
learn it and use it wherever possible.
3.2 Current and non-current assets and liabilities

Current and non-current items should normally be presented separately in the
statement of financial position, so that:
current and non-current assets are divided into separate classifications;
and
current and non-current liabilities are also classified separately.
Chapter 12 explains the concept of deferred taxation and how to account for it.
Deferred tax balances must not be classified as current assets or current
liabilities.
Alternative
A company is allowed to use a presentation based on liquidity instead of
current/non-current if this provides information that is reliable and more relevant.
Financial institutions often use this approach.
Whichever method of presentation is used, a company must disclose the amount
expected to be recovered or settled after more than twelve months for each asset
and liability that combines amounts expected to be recovered or settled:
no more than twelve months after the reporting period, and
more than twelve months after the reporting period.

3.3 Current assets

IAS 1 states that an asset should be classified as a current asset if it satisfies
any of the following criteria:
The entity expects to realise the asset, or sell or consume it, its normal
operating cycle.
The asset is held for trading purposes.
The entity expects to realise the asset within 12 months after the reporting
period.
It is cash or a cash equivalent. (Note: An example of cash is money in a
current bank account. An example of a cash equivalent is money held in a
term deposit account with a bank.)
All other assets should be classified as non-current assets.
Operating cycle
The operating cycle is the time between the acquisition of assets for processing
and their realisation in cash or cash equivalents. When the entity's normal
operating cycle is not clearly identifiable, it is assumed to be twelve months.
Current assets include assets (such as inventories and trade receivables) that
are sold, consumed or realised as part of the normal operating cycle even when
they are not expected to be realised within twelve months after the reporting
period.
Illustration:
X Limited uses small amounts of platinum in its production process.
Platinum price has fallen recently so just before its year-end X Limited bought an
amount of platinum sufficient to cover its production needs for the next two years.
This would be a current asset. The amount expected to be used after more than
12 months should be disclosed.
Current assets also include assets held primarily for the purpose of trading and
the current portion of non-current financial assets.
Non-current assets
These are tangible, intangible and financial assets of a long-term nature.

3.4 Current liabilities

IAS 1 also states that a liability should be classified as a current liability if it
satisfies any of the following criteria:
The entity expects to settle the liability in its normal operating cycle.
The liability is held primarily for the purpose of trading. This means that all
trade payables are current liabilities, even if settlement is not due for over
12 months after the end of the reporting period.
It is due to be settled within 12 months after the end of the reporting period.
The entity does not have the unconditional right to defer settlement of the
liability for at least 12 months after the end of the reporting period.
All other liabilities should be classified as non-current liabilities.
Changing from non-current liability to current liability

Liabilities that were originally non-current may become current in a subsequent
year, when they become repayable within 12 months.
Example:
A company has a financial year end of 31 December. On 31 October Year 1, it
took out a bank loan of Rs> 50,000. The loan principal is repayable as follows:
1. Rs. 20,000 on 31 October Year 3
2. Rs. 30,000 on 31 October Year 4
The loan would be presented as follows:
As at 31 December Year 1
The full bank loan of Rs. 50,000 will be a non-current liability
A current liability of Rs. 20,000 repayable on 31 October Year 3 and a non-current
liability of Rs. 30,000 repayable on 31 October Year 4.
Current liability of Rs. 30,000
There is an exception to this rule. A liability can continue to be shown as a long-

term liability, even if it is repayable within 12 months, if the entity has the
discretion or right to refinance (or roll over) the loan at maturity.
3.5 Information to be presented on the face of the statement of financial

position
IAS 1 provides a list of items that, as a minimum, must be shown on the face of
the statement of financial position as a line item (in other words, on a separate
line in the statement).
Note that companies in Pakistan are also subject to the requirements of the
fourth and fifth schedules to the Companies Ordinance 1984.
The following table shows the IAS 1 requirements with the Companies
Ordinance equivalent requirements alongside.

Elements IAS 1 line items (minimum) Companies Ordinance 1984

Assets Property, plant and equipment Plant and equipment
Investment property
Intangible assets Intangible assets
Financial assets Long term investments
Long term loans and advances
Long term deposits and
prepayments
Investments accounted for
using the equity method
Biological assets
Inventories Store, spare parts, loose tools
Stock-in-trade
Trade and other receivables Trade debts
Loans and advances
Deposits and prepayments
Interest accrued
Other receivables
Financial assets
Tax refunds due
Cash and cash equivalents. Cash and bank balances
Liabilities Trade and other payables Trade and other payables
Interest, mark-up etc. on loans
Provisions
Financial liabilities Borrowings
Deposits
Murabaha
Current tax liabilities and assets Provision for taxation
Deferred tax liabilities and
assets
Equity Issued capital and reserves Issued, subscribed and paid up
attributable to the owners of the capital, distinguishing in respect
entity. of each class between:
Reserves by distinguishing
between capital reserves and
revenue reserves.
Note that there is no conflict between IAS 1 and the Companies Ordinance in
this respect. IAS 1 specifies a minimum requirement and the Companies
Ordinance simply sets a more detailed standard. All companies following these
requirements from the Companies Ordinance would automatically comply with
IAS 1.

Separate line items are also required in the statement of financial position in
accordance with the requirements of IFRS5: Non-current assets held for sale
and discontinued operations.
An entity must include additional line items if these are relevant to an
understanding of the entitys financial position.
Information to be shown on the face of the statement of financial position or in

notes
Some of the line items in the statement of financial position should be sub-
classified into different categories, giving details of how the total figure is made
up. This sub-classification may be presented either:
as additional lines on the face of the statement of financial position (adding
up to the total amount for the item as a whole) or
in notes to the financial statements.
For example:
Tangible non-current assets should be divided into sub-categories, as
required by IAS 16 Property, Plant and Equipment.
Inventories are sub-classified in accordance with IAS 2 Inventories into
categories such as merchandise, materials, work-in-progress and finished
goods.
Equity capital and reserves must also be sub-categorised, into categories
such as paid-up share capital, share premium and reserves.

IAS 1 does not specify a format for a statement of financial position that must be
used. However, the implementation guidance includes an illustrative statement of
financial position. The example below is based on that example.
Illustration: Statement of financial position of an individual entity

Statement of financial position of ABCD Entity as at 31 December 20XX
Rs. m Rs. m
Assets
Non-current assets
Property, plant and equipment 205.1
Intangible assets 10.7
Investments (available for sale financial assets) 6.8
222.6
Current assets
Inventories 17.8
Trade and other receivables 15.3
Cash and cash equivalents 0.7
33.8

Total assets 256.4

Statement of financial position of ABCD Entity as at 31 December 20XX

Rs. m Rs. m
Share capital 50.0
Other reserves 31.9
Retained earnings (accumulated profits) 60.6
142.5
Total equity
Non-current liabilities
Long-term borrowings 30.0
Deferred tax 4.5
Total non-current liabilities 34.5

Current liabilities
Trade and other payables 67.1
Short-term borrowings (bank overdraft) 3.2
Current portion of long-term borrowing 5.0
Current tax payable 4.1

Total current liabilities 79.4
113.9
Total liabilities

Total equity and liabilities 256.4

A specimen format to incorporate the requirements of the fourth schedule to the

Companies Ordinance 1984 is given at section 8 of this chapter.

3.6 Equity capital and reserves

Certain information about equity capital and reserves must be shown either on
the face of the statement of financial position or in the statement of changes in
equity or in the notes to the financial statements.
This information includes:
the number of shares authorised;
the number of shares issued and fully paid, and issued but not fully paid;
the par value of each share;
a reconciliation between the number of shares outstanding (shares in
issue) at the beginning and at the end of the year;
the rights and restrictions attached to each class of shares (if any);
a description of the nature and purpose of each reserve.
Note on the presentation of dividends

Dividends paid during the financial year appear in:
the statement of changes in equity, and
the statement of cash flows.
Dividends declared before the year end but not approved by the year end must
not be recognised as a liability. They would be shown, together with the amount
per share, in a note to the financial statements.

4 STRUCTURE AND CONTENT OF THE STATEMENT OF COMPREHENSIVE

INCOME
Section overview
A single statement or two statements

Information to be presented on the face of the statement of comprehensive
income
Analysis of expenses
Material items
Preparing a statement of financial position or statement of comprehensive income
4.1 A single statement or two statements

Total comprehensive income during a period is the sum of:
the profit or loss for the period; and
other comprehensive income.
IAS 1 requires an entity to present all items of income and expense during a
period in a statement of comprehensive income. (now known as a statement of
profit or loss and other comprehensive income).
This may be presented as a single statement with two parts:
a statement of profit or loss which shows the components of profit or loss
(beginning with Revenue and ending with Profit (or Loss) for the year; and
a statement of other comprehensive income.
Alternatively these two parts can be presented as two separate statements.
Whichever approach is used the following must be shown:
profit or loss;
total other comprehensive income;
comprehensive income for the period (the total of profit or loss and other
comprehensive income).
Other comprehensive income

IFRS specifies what must be included as other comprehensive income. Such
items include:
amounts recognised on revaluation of a non-current assets in accordance
with IAS 16 Property, plant and equipment and IAS 38 Intangible
assets.
The tax consequences of any such revaluation.

IAS 1 does not specify an exact format for the statement of comprehensive
income but the example below is based on a suggested presentation included in
the implementation guidance. (In this example, expenses are classified by
function See paragraph 4.3 of this section).
Example: statement of comprehensive income of an individual entity

XYZ Entity: Statement of comprehensive income for the year ended 31
December 20XX
Rs. 000
Revenue 678
Cost of sales 250

Gross profit 428
Other income 12
Distribution costs (98)
Administrative expenses (61)
Other expenses (18)
Finance costs (24)
Share of profit of associate 32

Profit before tax 271
Taxation (50)

Profit for the year from continuing operations 221
Loss for the year from discontinued operations (15)

PROFIT FOR THE YEAR 206

Gains on property revaluation 24
Share of other comprehensiveincome of associate 5
Available for sale financial assets 17

Other comprehensive income for the year (net of tax) 46

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 252


4.2 Information to be presented on the face of the statement of comprehensive

income
As a minimum, IAS 1 requires that the statement of comprehensive income
should include line items showing the following amounts for the financial period:
Line items
Revenue
Finance costs (for example, interest costs)
Share of the profit or loss of entities accounted for by the equity method
Tax expense
A single amount for the total of discontinued operations
Each component of other comprehensive income
Share of the other comprehensive income of entities accounted for by the
equity method
Total comprehensive income
Groups of companies must consolidate their financial statements. A consolidation

is the representation of the financial position and financial performance of a
series of separate entities as if they are a single entity. This is explained in
chapters 4 to 6).
For a consolidated statement of comprehensive income the following items
should also be shown on the face of the statement as allocations of profit or
income in the period:
Line items
Profit or loss for the period attributable to non-controlling interests (also called
minority interests)
Profit or loss attributable to the owners (equity holders) of the parent entity
Total comprehensive income attributable to non-controlling interests
Total comprehensive income attributable to the owners of the parent entity
Additional line items should be presented on the face of the statement of

comprehensive income when it is relevant to an understanding of the entitys
financial performance.
Recognition in profit or loss

With the introduction of a requirement to present a statement of comprehensive
income, it is important to distinguish between:
items that should be included in the section of the statement between
revenue and profit; and
other comprehensive income.
A useful way of making this distinction is that if an item is included in the
statement of comprehensive income, between revenue and profit, the item is

recognised within profit or loss. This term is now used in accounting

standards.
Reclassification adjustments
A reclassification adjustment occurs when an item that has been recognised as
other comprehensive income in the statement of comprehensive income is
subsequently re-classified as profit or loss.
Information to be shown on the face of the statement of comprehensive income or

in the notes
The following information may be shown either on the face of the statement of
comprehensive income or in a note to the financial statements:
material items of income and expense
an analysis of expenses.
4.3 Analysis of expenses

Expenses should be analysed. Either of two methods of analysis may be used:
according to the function of the expense.
according to the nature of expenses; or
IAS 1 states that entities should choose the method that provides the more
relevant or reliable information. However, the fourth and fifth schedules to the
Companies Ordinance 1984 require classification by function with additional
information on nature.
IAS 1 encourages entities to show this analysis of expenses on the face of the
statement of comprehensive income rather than in a note to the accounts.
Analysis of expenses by their function

When expenses are analysed according to their function, the functions are
commonly cost of sales, distribution costs, administrative expenses and other
expenses. This method of analysis is also called the cost of sales method.
Illustration: Statement of comprehensive income Expenses analysed by

function
Rs. m
Revenue 7,200
Cost of sales (2,700)
Gross profit 4,500
Other income 300
Distribution costs (2,100)
Administrative expenses (1,400)
Other expenses (390)
Finance costs (60)
Income tax expense (250)
Profit for the period 600

IAS 1 also requires that if the analysis by function method is used, additional
information about expenses must be disclosed including:
depreciation and amortisation expense; and
employee benefits expense (staff costs).
Analysis of expenses by their nature

When expenses are analysed according to their nature, the categories of
expenses will vary according to the nature of the business.
In a manufacturing business, expenses would probably be classified as:
raw materials and consumables used;
staff costs (employee benefits costs);
depreciation.
Items of expense that on their own are immaterial are presented as other
expenses.
There will also be an adjustment for the increase or decrease in inventories of
finished goods and work-in-progress during the period.
Other entities (non-manufacturing entities) may present other expenses that are
material to their business.
An example of a statement of comprehensive income, showing expenses by their
nature is shown below for completeness, with illustrative figures included.
Illustration: Statement of comprehensive income Expenses analysed by nature

Rs. m Rs. m
Revenue 7,200
Other income 300
7,500
Changes in inventories of finished goods and 90
work-in-progress (reduction = expense, increase =
negative expense)
Raw materials and consumables used 1,200
Staff costs (employee benefits expense) 2,000
Depreciation and amortisation expense 1,000
Other expenses 2,300
Finance costs (interest cost) 60
6,650
Income tax expense 250

4.4 Material items

Material items that might be disclosed separately include:
a write-down of inventories from cost to net realisable value, or a write-
down of items of property, plant and equipment to recoverable amount;
the cost of a restructuring of activities;
disposals of items of property, plant and equipment;
discontinued operations;
litigation settlements;
a reversal of a provision.
4.5 Preparing a statement of financial position or statement of comprehensive

income
If you are required to prepare a statement of financial position, a statement of
comprehensive income in a format suitable for publication in accordance with IAS
1, you need to know the appropriate format.
If you are preparing a statement of comprehensive income in the cost of sales or
expenses by function method, you might need to separate total costs for items
such as employee benefits costs and depreciation charges into cost of sales,
distribution costs and administrative charges. The basis for separating these
costs between the functions would be given in the question.

5 STATEMENT OF CHANGES IN EQUITY (SOCIE)

Section overview
The contents of a statement of changes in equity

Retrospective adjustments
5.1 The contents of a statement of changes in equity

A set of financial statements must include a statement of changes in equity
(SOCIE).
A SOCIE shows for each component of equity the amount at the beginning of the
period, changes during the period, and its amount at the end of the period.
Components of equity include:
share capital;
share premium;
retained earnings;
revaluation surplus.
Note that according to s235 of the Companies Ordinance 1984 the revaluation
surplus is shown in the balance sheet (statement of financial position) after
capital and reserves. This implies that the surplus is not viewed as a part of
equity. This is a conflict with IFRS but companies in Pakistan would follow the
Companies Ordinance in this circumstance.
In a SOCIE for a group of companies, the amounts attributable to owners of the
parent entity and the amounts attributable to the non-controlling interest should
be shown separately. (Non-controlling interest is a concept used in group
accounts. This is covered in chapter 4)
For each component of equity, the SOCIE should show changes resulting from:
profit or loss for the period;
each item of other comprehensive income;
transactions with owners in their capacity as owners.
Transactions with owners in their capacity as owners

These include:
new issues of shares;
payments of dividends;
repurchases and cancellation of its own shares by the company.
These transactions are not gains or losses so are not shown in the statement so
comprehensive income but they do affect equity. The SOCIE highlights such
transactions.

5.2 Retrospective adjustments

IAS8 Accounting policies, changes in accounting estimates and errors
requires that when an entity changes an accounting policy or restates amounts in
the financial statements to correct errors, the adjustments should be made
retrospectively (to the extent that this is practicable).
Retrospective adjustments result in changes in the reported amount of an equity
component, usually retained earnings. Retrospective adjustments and re-
statements are not changes in equity, but they are adjustments to the opening
balance of retained earnings (or other component of equity).
Where retrospective adjustments are made, the SOCIE must show for each
component of equity (usually retained earnings) the effect of the retrospective
adjustment. This is shown first, as an adjustment to the opening balance, before
the changes in equity are reported. (This is covered in more detail in chapter 11)
Illustration: statement of changes in equity

PQR Entity:
Statement of changes in equity for the year ended 31 December 20X9
Share Share General Accumulated
capital premium reserve profits Total
Rs.m Rs.m Rs.m Rs.m Rs.m
Balance at 31
December 20X8 200 70 80 510 860
Change in accounting
policy - - - (60) (60)
Restated balance 200 70 80 450 800
Changes in equity for
20X9
Issue of share capital 80 100 180
Dividend payments (90) (90)
Profit for the year 155 155
Other comprehensive 12
income for the year 12
Balance at 31
December 20X9 280 170 92 515 1,057
The statement reconciles the balance at the beginning of the period to that at the
end of the period for each component of equity.

6 NOTES TO THE FINANCIAL STATEMENTS

Section overview
Introduction
Structure
Disclosure of accounting policies
Other disclosures
6.1 Introduction
Notes contain information in addition to that presented in the statement of
financial position, statement of comprehensive income, statement of changes in
equity and statement of cash flows.
Notes provide narrative descriptions of items in those statements and information
about items that do not qualify for recognition in those statements. They also
explain how totals in those statements are formed.
6.2 Structure
The notes to the financial statements of an entity must:
present information about the basis of preparation of the financial
statements and the specific accounting policies selected and applied for
significant transactions and other significant events;
disclose the information required by IFRSs that is not presented elsewhere
in the financial statements; and
provide additional information that is not presented on the face of the
financial statements but is relevant to an understanding of them.
Notes to the financial statements must be presented in a systematic manner.
Each item on the face of the statement of financial position, statement of
comprehensive income, statement of changes in equity and statement of cash
flows must be cross-referenced to any related information in the notes.
Notes are normally presented in the following order:
a statement of compliance with IFRS;
a summary of significant accounting policies applied;
supporting information for items presented on the face of each financial
statement in the order in which each financial statement and each line item
is presented; and
other disclosures, including:
contingencies;
uncontracted commitments; and
non-financial disclosures.

6.3 Disclosure of accounting policies

An entity must disclose the following in the summary of significant accounting
policies:
the measurement basis (or bases) used in preparing the financial
statements; and
the other accounting policies used that are relevant to an understanding of
the financial statements.
the judgements (apart from those involving estimations) made by
management in applying the accounting policies that have the most
significant effect on the amounts of items recognised in the financial
statements. For example:
whether financial assets are held-to-maturity investments;
when substantially all the significant risks and rewards of ownership
of financial assets and lease assets are transferred to other entities;
whether, in substance, particular sales of goods are financing
arrangements and therefore do not give rise to revenue; and
whether the substance of the relationship between the entity and a
special purpose entity indicates that the entity controls the special
purpose entity.
Which policies?
Management must disclose those policies that would assist users in
understanding how transactions, other events and conditions are reflected in the
reported financial performance and financial position.
If an IFRS allows a choice of policy, disclosure of the policy selected is especially
useful.
Some standards specifically require disclosure of particular accounting policies.
For example, IAS 16 requires disclosure of the measurement bases used for
classes of property, plant and equipment.
It is also appropriate to disclose an accounting policy not specifically required by
IFRSs, but selected and applied in accordance with IAS 8. (See chapter 11).
Key measurement assumptions

An entity must disclose information regarding key assumptions about the future,
and other key sources of measurement uncertainty, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year.
In respect of those assets and liabilities, the notes must include details of:
their nature; and
their carrying amount as at the reporting date.
Examples of key assumptions disclosed are:
future interest rates;
future changes in salaries;
future changes in prices affecting other costs; and,
useful lives.

Examples of the types of disclosures made are:

the nature of the assumption or other measurement uncertainty;
the sensitivity of carrying amounts to the methods, assumptions and
estimates underlying their calculation, including the reasons for the
sensitivity;
the expected resolution of an uncertainty and the range of reasonably
possible outcomes within the next financial year in respect of the carrying
amounts of the assets and liabilities affected; and
an explanation of changes made to past assumptions concerning those
assets and liabilities, if the uncertainty remains unresolved.
6.4 Other disclosures

An entity must disclose in the notes:
the amount of dividends proposed or declared before the financial
statements were authorised for issue but not recognised as a distribution to
owners during the period, and the related amount per share; and
the amount of any cumulative preference dividends not recognised.
An entity must disclose the following, if not disclosed elsewhere in
information published with the financial statements:
the domicile and legal form of the entity;
a description of the nature of the entitys operations and its principal
activities; and
the name of the parent and the ultimate parent of the group.

8 FINANCIAL STATEMENT SPECIMEN FORMATS

Section overview
Statement of comprehensive income (analysis of expenses by function)

Statement of financial position
IAS 1 does not specify formats for financial statements. However, it includes
illustrative statements in an appendix to the Standard).
The illustrations below are based on the illustrative examples but have been
modified to incorporate elements required by the fourth schedule to the
Companies Ordinance 1984.
8.1 Statement of comprehensive income (analysis of expenses by function)
Illustration: Statement of comprehensive income (analysis of expenses by

function)
Statement of comprehensive income for the year ended 31 December
2015
Rs. m
Revenue X
Cost of sales (X)
Gross profit X
Other income X
Distribution costs (X)
Administrative expenses (X)
Other expenses (X)
Profit from operations X
Other operating income
Income from financial assets X
Income from debts loans and advances to related parties X
X
Finance costs (X)
Profit before tax X
Taxation (X)
PROFIT FOR THE YEAR X
Sundry gains and losses X
OTHER COMPREHENSIVE INCOME FOR THE YEAR X
TOTAL COMPREHENSIVE INCOME FOR THE YEAR X

8.2 Statement of financial position
Illustration: Statement of financial position format

Statement of financial position as at 31 December 2015
Rs. m Rs. m
Assets
Non-current assets
Property, plant and equipment X
Intangible assets X
Goodwill X
Long term investments (CO) X
Long term loans and advances (CO) X
Long term deposits and prepayments (CO) X
Total non-current assets X
Current assets
Stores, spare parts and loose tools (CO) X
Stock-in-trade (CO)
Trade debts (CO) X
Current portion of long term loans and advances (CO) X
Cash and bank balances (CO) X
Total current assets X
Total assets X
Equity and liabilities

Capital and reserves
Share capital (Issued, subscribed and paid up
capital) X
Share premium
Accumulated profits (Unappropriated profits) X
Other reserves X
Total capital and reserves X
Revaluation surplus (CO) X
Long-term financing X
Long term liabilites agains assets subject to a
finance lease X
Deferred tax X
Total non-current liabilities X
Current liabilities
Trade and other payables X
Accrued interest / mark-up (CO)
Short-term borrowings X
Current portion of long-term borrowing X
Current tax payable X
Total current liabilities X
Total liabilities X
Total equity and liabilities X

CHAPTER 1 LEGAL BACKGROUND TO THE PREPARATION OF FINANCIAL

STATEMENTS
There are no questions specific to chapter one. This is because the learning outcomes in this
area concern the preparation of financial statements and these questions have given in
relation to chapter 2 in this question bank.
CHAPTER 2 IAS 1: PRESENTATION OF FINANCIAL STATEMENTS
2.1 LARRY
The trial balance of Larry at 31 December 2015 is as follows.
Rupees in million
Dr Cr
Administration charges 342
Bank account 89
Cash 2
Payables ledger 86
Accumulated amortisation on patents at 31 December 2015 5
Accumulated depreciation at 31 December 2015 918
Receivables ledger 189
Distribution expenses 175
Property, plant and equipment at cost 2,830
Interest received 20
Issued share capital 400
Loan 18
Patents at cost 26
Accumulated profits 1,562
Purchases 2,542
Sales 3,304
Inventories at 31 December 2014 118

6,313 6,313

The following information is also relevant.
(1) Inventories on 31 December 2015 amounted to Rs. 127 million.
(2) Current tax of Rs. 75 million is to be provided.
(3) The loan is repayable by equal annual instalments over three years.
Required
Prepare an statement of profit or loss (analysing expenses by function) for the year
ended 31 December 2015 and a statement of financial position as at that date.

Questions
2.2 MINGORA IMPORTS LIMITED

The trial balance of Mingora Imports Limited at 31 December 2015 is as follows.
Rupees in million
Dr Cr
Patent rights 60
Work-in-progress, 1 January `2015 125
Leasehold buildings at cost 300
Ordinary share capital 600
Sales 1,740
Staff costs 260
Accumulated depreciation on buildings, 1 January 2015 60
Inventories of finished games, 1 January 2015 155
Consultancy fees 44
Directors salaries 360
Computers at cost 50
Accumulated depreciation on computers, 1 January 2015 20
Dividends paid 125
Cash 440
Receivables 420
Trade payables 92
Sundry expenses 294
Accumulated profits, 1 January 2015 121

2,633 2,633

The following information is also relevant.
(1) Closing inventories of finished games are valued at Rs. 180 million. Work in
progress has increased to Rs. 140 million.
(2) The patent rights relate to a computer program with a three year lifespan.
(3) On 1 January 2015 buildings were revalued to Rs. 360 million. This has not
yet been reflected in the accounts. Computers are depreciated over five years.
Buildings are now to be depreciated over 30 years.
(4) An allowance for bad debts (irrecoverable debts) of 5% is to be created.
(5) There is an estimated bill for current tax of Rs. 120 million which has not yet
been recognised.
Required
Prepare an statement of profit or loss (analysing expenses by nature for the year
ended 31 December 2015 and a statement of financial position as at that date.

2.3 BARRY
Barry has prepared the following draft financial statements for your review
Barry: Statement of profit or loss for year to 31st August 2015

Rs. in
000
Sales revenue 30,000
Raw materials consumed (9,500)
Manufacturing overheads (5,000)
Increase in inventories of work in progress and finished goods 1,400
Staff costs (4,700)
Depreciation (4,250)
Interest payable (350)

6,700

Statement of financial position as at 31st August 2015
Rs. in Rs. in
000 000
Assets
Non-current
Freehold land and buildings 20,000
Plant and machinery 14,000
Fixtures and fittings 5,600

39,600
Current assets
Prepayments 200
Trade receivables 7,400
Cash at bank 700
Inventories 4,600

12,900

Total assets 52,500

Equity shares of Rs. 1 each 21,000
Accumulated profit 14,000
Share premium 2,000

Total equity 37,000
Revaluation surplus 5,000
Current liabilities 5,300
8% Debentures 2019 5,200

Total equity and liabilities 52,500


Questions
Additional information
1 Income tax of Rs. 2.1 million has yet to be provided for on profits for the
current year. An unpaid under-provision for the previous years liability of Rs.
400,000 has been identified on 5th September 2015 and has not been
reflected in the draft accounts.
2 There have been no additions to, or disposals of, non-current assets in the
year but the assets under construction have been completed in the year at an
additional cost of Rs. 50,000. These related to plant and machinery.
The cost and accumulated depreciation of non-current assets as at 1st
September 2014 were as follows:
Cost Depreciation
Rs. in 000 Rs. in 000
Freehold land and buildings 19,000 3,000
(land element Rs. 10 million)
Plant and machinery 20,100 4,000
Fixtures and fittings 10,000 3,700
Assets under construction 400 -
3 There was a revaluation of land and buildings during the year, creating the
revaluation surplus of Rs. 5 million (land element Rs. 1 million). The effect on
depreciation has been to increase the buildings charge by Rs. 300,000. Barry
adopts a policy of transferring the revaluation surplus included in equity to
retained earnings as it is realised.
4 Staff costs comprise 70% factory staff, 20% general office staff and 10%
goods delivery staff
5 An analysis of depreciation charge shows the following:
Rs. in
000
Buildings (50% production, 50% administration) 1,000
Fixtures and fittings (30% production, 70% administration) 700
Required
Prepare the following information in a form suitable for publication for Barrys
financial statements for the year ended 31st August 2015.
Statement of profit or loss
Reconciliation of opening and closing property, plant and equipment (25)

2.4 OSCAR INC

The following trial balance has been extracted from the books of accounts of Oscar
Inc as at 31 March 2015.
Rs. in 000
Dr Cr
Administrative expenses 210
Share capital 600
Receivables 470
Bank overdraft 80
Income tax (overprovision in 2014) 25
Provision 180
Distribution costs 420
Non-current investments 560
Investment income 75
Plant and machinery
At cost 750
Accumulated depreciation (at 31 March 2015) 220
Retained earnings (at 1 April 2014) 180
Purchases 960
Inventory (at 1 April 2014) 140
Trade payables 260
Sales revenue 2,010
Interim dividend paid 120
3,630 3,630
(1) Inventory at 31 March 2015 was valued at Rs. 150,000.
(2) The income tax charge based on the profits on ordinary activities is estimated
to be Rs. 74,000.
(3) The provision is to be increased by Rs. 16,000.
(4) There were no purchases or disposals of fixed assets during the year.
Required
Prepare the companys statement of profit or loss for the year to 31 March 2015 and
a statement of financial position as at that date in accordance with IAS 1. (18)

Questions
2.5 CLIFTON PHARMA LIMITED

The following trial balance relates to Clifton Pharma Limited, a public listed
company, at 30 September 2015.
Rs. in 000
Dr Cr
Cost of sales 134,000
Operating expenses 35,000
Loan interest paid (see note (1)) 1,500
Rental of vehicles (see note (2)) 8,600
Revenue 338,300
Investment income 2,000
Leasehold property at cost (see note (4)) 250,000
Plant and equipment at cost 197,000
Accumulated depreciation at 1 October 2014:
- leasehold property 40,000
- plant and equipment 47,000
Investments 92,400
Share capital 280,000
Share premium 20,000
Retained earnings at 1 October 2014 19,300
Loan notes (see note (1)) 50,000
Deferred tax balance at 1 October 2014 (see note (5)) 20,000
Inventory at 30 September 2015 23,700
Trade payables 14,100
Bank 12,100
830,700 830,700
The following notes are relevant
(1) The effective interest rate on the loan notes is 6% per year.
(2) There are two separate contracts for rental of vehicles. A recent review by the
finance department of these contracts has reached the conclusion that Rs. 7
million of the total rental cost of vehicles relates to a finance lease rather than
an operating lease or rental arrangement.
The finance lease was entered into on 1 October 2014 which was when the
Rs. 7 million was paid: the lease agreement is for a four-year period in total,
and there will be three more annual payments in advance of Rs. 7 million,
payable on 1 October in each year. The vehicles in the finance lease
agreement had a fair value of Rs. 24 million at 1 October 2014 and they
should be depreciated using the straight line method to a nil residual value.
The interest rate implicit in the lease is 10% per year. The other contract for
vehicle rental is an operating lease and the rental payment should be charged
to operating expenses. (Note: You are not required to calculate the present
value of the minimum lease payments for the finance lease.)
(3) Other plant and equipment is depreciated at 20% per year by the reducing
balance method.
All depreciation of property, plant and equipment should be charged to cost of
sales.

(4) The leasehold property has a 25-year life and is amortised at a straight-line
rate. On 30 September 2015 the leasehold property was re-valued to Rs. 220
million and the directors wish to incorporate this re-valuation in the financial
statements.
(5) The provision for income tax for the year ended 30 September 2015 has been
estimated at Rs. 18 million. At 30 September 2015 there are taxable
temporary differences of Rs. 92 million. The rate of income tax on profits is
25%.
Required
(a) Prepare an statement of profit or loss for Clifton Pharma Limited for the year to
30 September 2015 (8)
(b) Prepare a statement of financial position (balance sheet) for Clifton Pharma
Limited as at 30 September 2015 (17)
(25)
2.6 SARHAD SUGAR LIMITED

The following trial balance relates to Sarhad Sugar Limited at 30 September 2015:
Rs. in 000
Dr Cr
Leasehold property at valuation 1 October 2014 (note (i)) 50,000
Plant and equipment at cost (note (i)) 76,600
Plant and equipment accumulated depreciation at
1 October 2014 24,600
Capitalised development expenditure at 1 October 2014
(note (ii)) 20,000
Development expenditure accumulated amortisation at 1
October 2014 6,000
Closing inventory at 30 September 2015 20,000
Bank 1,300
Trade payables and provisions (note (iii)) 23,800
Revenue (note (i)) 300,000
Cost of sales 204,000
Distribution costs 14,500
Administrative expenses (note (iii)) 22,200
Interest on bank borrowings 1,000
Equity dividend paid 6,000
Research and development costs (note (ii)) 8,600
Retained earnings at 1 October 2014 24,500
Deferred tax (note (v)) 5,800
Revaluation surplus (Leasehold property) 10,000
466,000 466,000
The following notes are relevant:
(i) Non-current assets tangible:
The leasehold property had a remaining life of 20 years at 1 October 2014.
The companys policy is to revalue its property at each year end and at 30
September 2015 it was valued at Rs. 43 million.

Questions
On 1 October 2014 an item of plant was disposed of for Rs. 25 million cash.
The proceeds have been treated as sales revenue by Sarhad Sugar Limited.
The plant is still included in the above trial balance figures at its cost of Rs. 8
million and accumulated depreciation of Rs. 4 million (to the date of disposal).
All plant is depreciated at 20% per annum using the reducing balance method.
Depreciation and amortisation of all non-current assets is charged to cost of
sales.
(ii) Non-current assets intangible:
In addition to the capitalised development expenditure (of Rs. 20 million),
further research and development costs were incurred on a new project which
commenced on 1 October 2014. The research stage of the new project lasted
until 31 December 2014 and incurred Rs. 14 million of costs. From that date
the project incurred development costs of Rs. 800,000 per month. On 1 April
2015 the directors became confident that the project would be successful and
yield a profit well in excess of its costs. The project is still in development at 30
September 2015.
Capitalised development expenditure is amortised at 20% per annum using
the straight-line method. All expensed research and development is charged
to cost of sales.
(iii) Sarhad Sugar Limited is being sued by a customer for Rs. 2 million for breach
of contract over a cancelled order. Sarhad Sugar Limited has obtained legal
opinion that there is a 20% chance that Sarhad Sugar Limited will lose the
case. Accordingly Sarhad Sugar Limited has provided Rs. 400,000 (Rs. 2
million x 20%) included in administrative expenses in respect of the claim. The
unrecoverable legal costs of defending the action are estimated at Rs.
100,000. These have not been provided for as the legal action will not go to
court until next year.
(iv) The directors have estimated the provision for income tax for the year ended
30 September 2015 at Rs. 114 million. The required deferred tax provision at
30 September 2015 is Rs. 6 million.
Required
(a) Prepare the statement of profit or loss for the year ended 30 September 2015.
(10)
(b) Prepare the statement of financial position as at 30 September 2015. (10)
Note: notes to the financial statements are not required. (20)

2.7 BSZ LIMITED

The post-closing trial balance of BSZ Limited, a listed company, as at June 30,
2015 is given below:
Debit Credit
Rs. in million
Cash at banks current accounts 7
Cash at banks in saving accounts 22
Stocks in trade closing 90
Accounts receivable 60
Provision for bad debts 3
Advances to suppliers 16
Advances to staff 6
Short term deposits 11
Prepayments 4
Sales tax receivable 12
Freehold land at revalued amount 375
Furniture and fixtures - cost 27
Accumulated depreciation Furniture and fixtures 8
Machines - cost 85
Accumulated depreciation Machines 27
Building on freehold land cost 150
Accumulated depreciation Building 26
Computer software cost 10
Accumulated amortization Computer software 2
Deferred taxation 40
Short term loan 85
Accounts payable 75
Accrued liabilities 7
Provision for taxation 17
Issued, subscribed and paid up capital (Rs. 10 each) 400
Surplus on revaluation of fixed assets 120
Accumulated profits 65
875 875
Additional Information
(i) The first revaluation of freehold land was carried out in 2011 and resulted
in a surplus of Rs. 120 million. The valuation was carried out under market
value basis by an independent valuer, Mr. Dee, Chartered Civil Engineer of
M/s SSS Consultants (Pvt.) Ltd., Islamabad.
(ii) The details relating to additions, disposal and depreciation/amortization of
fixed assets, during the year 2015 are given below:
The company uses the straight line method for charging depreciation
and amortization. The building is depreciated at a rate of 5% whereas
10% is charged on machines, furniture and fixtures and computer
software.
Construction on third floor of the building commenced on March 1,
2015 and is expected to be completed on September 30, 2015. The
cost incurred during the year i.e. Rs. 20 million was capitalised on June
30, 2015.

Questions
Furniture and fixtures worth Rs. 8 million were purchased on April 1,

2015.
A machine was sold on February 28, 2015 to NJ Enterprise at a price of
Rs. 13 million. At the time of disposal, the cost and written down value
of the machine was Rs. 15 million and Rs. 10 million respectively.
(iii) 50% of the accounts receivable were secured and considered good. 10%
of the unsecured accounts receivable were considered doubtful. Bad debts
expenses for the year amounted to Rs. 1.0 million. An amount of Rs. 1.4
million was written off during the year.
(iv) All advances given to suppliers are considered good and include an
amount of Rs. 4.0 million paid for goods which will be supplied on December
31, 2016.
(v) Cash at banks in saving accounts carry interest / mark-up ranging from 3%
to 7% per annum.
(vi) The authorised share capital of the company is Rs. 500 million.
Required
Prepare the statement of financial position as at June 30, 2015 along with the
relevant notes showing all possible disclosures as required under the International
Accounting Standards and the Companies Ordinance, 1984.
(Comparative figures and the note on accounting policies are not required.)(22)

2.8 YASIR INDUSTRIES LIMITED

The following trial balance related to Yasir Industries Limited (YIL) for the year
ended June 30, 2015:
Dr Cr
Rs. in million
Ordinary share capital (Rs. 10 each) - 120.00
Retained earnings - 10.20
Sales - 472.40
Purchases 175.70 -
Production labour 61.00
Manufacturing overheads 39.00
Inventories (July 1, 2014) 38.90
Administrative expenses 40.00 -
Distribution expenses 19.80 -
Financial charges 0.30 -
Cash and bank - 13.25
Trade creditors - 30.40
Accrued expenses - 16.20
10% redeemable preference shares - 40.00
Debentures - 80.00
Deferred tax (July 1, 2014) - 6.00
Suspense account 30.00 -
Leasehold property - at cost 230.00 -
Machines at cost 168.60 -
Software at cost 20.00 -
Acc. depreciation Leasehold property (June 30, 2015) - 40.25
Acc. depreciation Machines (June 30, 2015) - 48.60
Acc. amortization Software (June 30, 2015) - 12.00
Trade receivables 66.00 -
889.30 889.30
(i) Sales include an amount of Rs. 27 million, made to a customer under sale or
return agreement. The sale has been made at cost plus 20% and the expiry
date for the return of these goods is July 31, 2015.
(ii) The value of inventories at June 30, 2015 was Rs. 42 million.
(iii) A fraud of Rs. 30 million was discovered in October 2014. A senior employee
of the company who left in June 2014, had embezzled the funds from YILs
bank account. The chances of recovery are remote. The amount is presently
appearing in the suspense account.
(iv) On January 1, 2015 YIL issued debenture certificates which are repayable in
2020. Interest is paid on these at 12% per annum.
(v) Financial charges comprise bank charges and bank commission.
(vi) The provision for current taxation for the year ended June 30, 2015 after
making all the above adjustments is estimated at Rs. 16.5 million.

Questions
(vii) The carrying value of YILs net assets as on June 30, 2015 exceeds their tax
base by Rs. 30 million. The income tax rate applicable to the company is 30%.
(viii) On July 1, 2014, the leasehold property having a useful life of 40 years was
revalued at Rs. 238 million. No adjustment in this regard has been made in the
books.
(ix) Depreciation of leasehold property is charged using the straight line method.
50% of depreciation is allocated to manufacturing, 30% to administration and
20% to selling and distribution.
Required
In accordance with the requirements of the Companies Ordinance, 1984 and
International Accounting Standards, prepare the:
(a) statement of financial position as of June 30, 2015.
(b) statement of profit or loss for the year ended June 30, 2015. (20)
(Comparative figures and notes to the financial statements are not required.)

2.9 SHAHEEN LIMITED

Following is the trial balance of Shaheen Limited (SL) as at June 30, 2015:
Rs. in 000
Dr Cr
Manufacturing costs 100,000
Selling and distribution costs 35,000
Administrative costs 30,000
Opening inventories 23,000
Interest on borrowings 5,000
Provision for income tax 2,000
Advance income tax paid 6,000
Property, plant and equipment 86,000
Accumulated depreciation on property, plant
and equipment 12,000
Export licence 6,000
Cash and bank balances 4,725
Other receivable and prepayments 14,000
Provisions for litigation 5,000
Long term borrowings 31,525
Deferred tax 5,000
Share capital (Rs. 10 each and fully paid) 60,000
Retained earnings 20,000
347,525 347,525
(i) Sales last year (year ended 30 June 2014) included goods invoiced at Rs 10
million which were sent to a customer on June 25, 2014 under a sale or
return agreement, at cost plus 20%. The goods were returned on August 25,
2014. No correction has been made for the return.
(ii) The export licence has been obtained for exporting a new product and is
effective for five years up to December 31, 2019. However, the exports
commenced from July 1, 2015.
(iii) Closing inventories are valued at Rs. 30 million.
(iv) Details of property, plant and equipment are as follows:
Plant and
Land Buildings equipment
Rs in 000
Cost as at June 30, 2014 20,000 36,000 30,000
Fully depreciated amounts included in cost 3,000
Estimated useful life at the date of purchase 20 years 10 years
The company uses straight line method for charging depreciation.
Depreciation is allocated to manufacturing, distribution and administrative
costs at 75%, 15% and 10% respectively.
(v) Rs. 6 million of the long term borrowings is of current maturity (i.e. will be
repaid within 12 months).

Questions
(vi) During the year Rs. 5 million was paid in full and final settlement of income
tax liability against which a provision of Rs. 7.0 million had been made in the
previous year. Current years taxable income exceeds accounting income by
Rs. 5 million of which 0.8 million are permanent differences. Applicable tax
rate for the company is 35%.
(vii) On July 30, 2015 the board of directors proposed a final dividend at 15% for
the year ended June 30, 2015 (2014: at 20%)
Required
In accordance with the requirements of the Companies Ordinance, 1984 and
International Financial Reporting Standards, prepare:
(a) The statement of financial position as of June 30, 2015
(b) The statement of profit or loss for the year ended June 30, 2015
(c) The statement of changes in equity for the year ended June 30, 2015.
(Comparative figures and notes to the financial statements are not required)
(25)
2.10 MOONLIGHT PAKISTAN LIMITED

Following is the summarised trial balance of Moonlight Pakistan Limited (MPL), a
listed company, for the year ended December 31, 2015:
Rs. in million
Debit Credit
Land and buildings - at cost 2,600 -
Plants at cost 2,104 -
Trade receivables 702 -
Stock in trade at December 31, 2015 758 -
Cash and bank 354 -
Cost of sales 1,784 -
Selling expenses 220 -
Administrative expenses 250 -
Financial charges 210 -
Accumulated depreciation as on January 1, 2015 Buildings - 400
Accumulated depreciation as on January 1, 2015 Plants - 670
Ordinary shares of Rs. 10 each fully paid - 1,200
Retained earnings as at January 1, 2015 - 510
12% Long term loan - 1,600
Provision for gratuity - 8
Deferred tax on January 1, 2015 - 22
Trade payables - 544
Right subscription received - 420
Revenue - 3,608
8,982 8,982

(i) The land and buildings were acquired on January 1, 2011. The cost of
land was Rs. 600 million. On January 1, 2015 a professional valuation firm
valued the buildings at Rs. 1,840 million with no change in the value of land.
The estimated life at acquisition was 20 years and the remaining life has not
changed as a result of the valuation. 60% of depreciation on buildings is
allocated to manufacturing, 25% to selling and 15% to administration.
(ii) Plant is depreciated at 20% per annum using the reducing balance method.
(iii) On March 31, 2015 MPL made a bonus issue of one share for every six
held. The issue has not been recorded in the books of account.
(iv) Right shares were issued on September 1, 2015 at Rs. 12 per share.
(v) The interest on long term loan is payable on the first day of July and January.
No accrual has been made for the interest payable on January 1, 2013.
(vi) MPL operates an unfunded gratuity scheme for all its eligible employees.
The provision required as on December 31, 2015 is estimated at Rs. 23
million. Rs. 3 million were paid during the year and debited to the provision
for gratuity account. Cost of gratuity is allocated to production, selling and
administration expenses in the ratio of 60% : 20% : 20%.
(vii) The tax charge for the current year after making all related adjustments is
estimated at Rs. 37 million. The timing differences related to taxation are
estimated to increase by Rs. 80 million, over the last year. The applicable
income tax rate is 35%.
Required
In accordance with the requirements of Companies Ordinance, 1984 and
International Financial Reporting Standards, prepare the following:
(a) Statement of Financial Position as of December 31, 2015.
(b) Statement of profit or loss for the year ended December 31, 2015. (22)
(Comparative figures and notes to the financial statements are not required)

Questions
2.11 FIGS PAKISTAN LIMITED

Figs Pakistan Limited is a listed company engaged in the business of manufacturing
and marketing of personal care and food products. Following is an extract from its
trial balance for the year ended 31 December 2015:
Debit Credit
Rs. in million
Sales - Manufactured goods 56,528
Sales - Imported goods 1,078
Scrap sales 16
Dividend income 12
Return on savings account 2
Sales tax - Imported goods 53
Sales tax - Manufactured goods 10,201
Sales discount 2,594
Raw material stock as on 1 January 2015 1,751
Work in process as on 1 January 2015 73
Finished goods (manufactured) as on 1 January 2015 1,210
Finished goods (imported) as on 1 January 2015 44
Purchases - Raw material 22,603
Purchases - Imported goods 658
Stores and spares consumed 180
Salaries, wages and benefits 2,367
Utilities 734
Depreciation and amortization 1,287
Stationery and office expenses 230
Repairs and maintenance 315
Advertisement and sales promotion 4,040
Outward freight and handling 1,279
Legal and professional charges 71
Auditor's remuneration 13
Donations 34
Workers Profit Participation Fund 257
Worker Welfare Fund 98
Loss on disposal of property, plant and equipment 10
Financial charges on short term borrowings 133
Exchange loss 22
Financial charges on lease 11
(i) The position of inventories as at 31 December 2015 was as follows:
Rs. m
Raw material 2,125
Work in process 125
Finished goods (manufactured) 1,153
Finished goods (imported) 66

(ii) The basis of allocation of various expenses among cost of sales, distribution
costs and administrative expenses are as follows:
Cost of Distribution Administrative
sales costs expenses
% % %
Salaries, wages and benefits 55 30 15
Depreciation and amortization 70 20 10
Stationery and office expenses 25 40 35
Repairs and maintenance / Utilities 85 5 10
(iii) Salaries, wages and benefits include contributions to provident fund (defined
contribution plan) and gratuity fund (defined benefit plan) amounting to Rs. 54
million and Rs. 44 million respectively.
(iv) Auditors remuneration includes taxation services and out-of-pocket expenses
amounting to Rs. 4 million and Rs. 1 million respectively.
(v) Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One
of the companys directors, Mr. Peanut is a trustee of DCF.
(vi) The tax charge for the current year after making all related adjustments is
estimated at Rs. 1,440 million. Taxable temporary differences of Rs. 3,120
originated in the year million, over the last year. The applicable income tax
rate is 35%.
(vii) 274 million ordinary shares were outstanding as on 31 December 2015.
(viii) There is no other comprehensive income for the year.
Required
Prepare the statement of profit or loss for the year ended 31 December 2015 along
with the relevant notes showing required disclosures as per the Companies
Ordinance, 1984 and International Financial Reporting Standards. Comparatives are
not required. (24)

Questions
CHAPTER 4 PREPARATION OF FINANCIAL STATEMENTS

4.1 SAGODHA SPICES LIMITED
The following trial balance has been extracted from the books of account of Sagodha
Spices Limited, a limited liability company, at 31 March 2015.
Rs. 000 Rs. 000
Share capital (ordinary shares of Rs.1 fully paid) 600
Trade receivables 470
Bank overdraft 80
Income tax (overprovision in 2014) 25
Retirement benefit liability 180
Non-current asset investments 560
Investment income 75
Plant and equipment
At cost 750
Accumulated depreciation (at 31 March 2015) 220
Accumulated profit (at 1 April 2014) 240
Purchases 960
Inventories (at 1 April 2014) 140
Trade payables 260
Revenue 1,950
Dividend paid 120

3,630 3,630

(1) Inventories at 31 March 2015 were valued at Rs.150,000.
(2) The following items are already included in the balances listed in the above trial
balance.
Distribution Administrative
costs expenses
Rs.000 Rs.000
Depreciation (for year to 31 March 2015) 27 5
Hire of plant and machinery 20 15
Auditors remuneration 30
(3) The income tax expense based on the profit on ordinary activities is estimated to
be Rs.54,000.
(4) The retirement benefit liability is to be increased by Rs.16,000. The increase
should be charged to administrative expenses. No retirement benefits are
expected to be paid for the foreseeable future.
Required:
Prepare the companys statement of comprehensive income for the year to 31 March
2015 and a statement of financial position at that date in accordance with IAS 1
Presentation of Financial Statements. (20)

Financial accounting and reporting I
4.2 KASUR CHEMICALS LIMITED

The list of balances of Kasur Chemicals Limited shows the following balances at 31
December 2015.
Dr Cr
Rs.000 Rs.000
Share capital (600,000 shares) 300
Share premium 20
Revaluation reserve 20
Accumulated profit 1 January 2015 40
Inventory (goods for resale) at 1 January 2015 60
Revenue 1,000
Purchases 540
Purchases returns 26
Sales returns 28
Carriage outwards 28
Warehouse wages 80
Sales representatives salaries 60
Administrative wages 40
Warehouse plant and equipment cost 126
Accumulated depreciation 1 January 2015 50
Delivery vehicle hire 20
Goodwill 90
Distribution expenses 10
Directors salaries (charge to administrative expenses) 30
Rental income 16
Cash at bank 60
Trade payables 60

1,532 1,532

(1) Inventory (goods for resale) at 31 December 2015 amounted to Rs.100,000.
(2) Annual depreciation on warehouse plant and equipment of Rs.32,000 should be
provided.
(3) Income tax for 2015 should be taken as Rs.50,000.
Required:
Prepare the companys statement of comprehensive income for the year to 31
December 2015 and a statement of financial position at that date in accordance with
IAS 1 Presentation of Financial Statements. (20)

Questions
4.3 OKARA HAIR PRODUCTS LIMITED

The following draft statement of comprehensive income has been prepared for Okara
Hair Products Limited for the year ended 30 June 2015.
Rs.000 Rs.000
Opening inventory 78 Sales 2,282
Purchases 1,055 Sales returns (66)
Purchase returns (25)
Gross profit c/d 1,170 Closing inventory 62
2,278 2,278
Wages and salaries 160 Gross profit b/d 1,170

Office expenses 236 Dividends received 20
Depreciation:
Plant and machinery 84
Delivery vans 48
Office furniture 17
Selling expenses 95
Rent of plant and machinery 21
Factory expenses 109
Legal expenses 25
Interest charges 70
Net profit c/d 162
1,190 1,190
Taxation on profits 54 Net profit b/d 162

Net profit after tax 116 Tax over-provided in
the previous year 8
170 170
Additional information:
(1) Directors salaries are classified as administrative expenses.
(2) Other wages and salaries are apportioned 70% to distribution costs and 30% to
administrative expenses.
(3) Okara Hair Products Limited analyses expenses by function.
Required
Prepare the companys statement of comprehensive income for the year to 30 June
2015 in accordance with IAS 1 Presentation of Financial Statements. (20)

4.4 THATTA TOURS LIMITED

The trial balance of Thatta Tours Limited as at 31 December 2015 is as follows:
DR CR
Rs.000 Rs.000
Ordinary share capital (Rs.1 shares) 980
Cash at bank 23
Tax (over-provision in 2014) 25
10% loan notes (repayable in 2020) 300
General administrative expenses 46
Administrative salaries 24
General distribution expenses 25
Distribution salaries 10
Directors remuneration 35
Loan notes interest paid 15
Development costs (incurred on 31 Dec. 2015) 30
Dividend paid 30
Dividends received 20
Investments 45
Land and buildings at cost 4,200
accumulated depreciation at 1 January 2015 2,600
Plant and machinery at cost 200
accumulated depreciation at 1 January 2015 75
Retained earnings at 1 January 2015 64
Purchases and sales 405 920
Profit on disposal of factory 60
Trade receivables and trade payables 16 100
Inventory at 1 January 2015 35
Bad debts 5
5,144 5,144
Additional information:
(1) Closing inventory is valued at the lower of cost or net realisable value. At 31
December 2015 it amounted to Rs.55,000.
(2) Non-current assets are depreciated on a straight-line basis assuming no residual
value. The following depreciation rates are to be applied:
Buildings 5%
Plant and machinery 20%
The depreciation charge for the year is to be apportioned as follows:
Distribution costs Administrative expenses
Buildings 70% 30%
Plant and machinery 75% 25%
The cost of the land was Rs.3,200,000. There were no purchases or sales of
non-current assets during the year.
(3) Development costs are an intangible asset and are to be amortised (depreciated)
over a three-year period. The amortisation (depreciation) charge is to be
allocated to cost of sales.
(4) The profit (after tax) on disposal of the factory is considered to be material
amount for which separate disclosure is required.
(5) Tax on the profits for the year is estimated at Rs.95,000.

Questions
(6) Directors' remuneration is to be analysed between distribution costs and

administrative expenses as follows:
Distribution Rs.15,000
Administration Rs.20,000
Required
Prepare the companys statement of comprehensive income for the year ended 31
December 2015 and statement of financial position as at 31 December 2015. (25)
4.5 BSZ LIMITED

The chief accountant at BSZ Limited left the company suddenly for urgent family
reasons part way through the year end adjustment process.
The following trial balance has been extracted after some of the closing adjustments
but before others for the year ended 30 June, 2015:
Dr. Cr.
Rs. m Rs. m
Cash at bank 29
Inventories (closing) 90
Accounts receivable 60
Provision for bad debts as at 1 July 2014 1
Advances to suppliers 16
Advances to staff 6
Short term deposits 11
Prepayments 16
Property, plant and equipment cost
Freehold land and buildings 405
Furniture and fixtures 27
Machines 85
Computer equipment 10
Accumulated depreciation as at 1 July 2014
Building 26
Machines 27
Furniture and fixtures 8
Computer equipment 2
Short term loan 114
Accounts payable 75
Taxation liability 17
Share capital 400
Accumulated profits 65
Suspense account 13
755 755

Additional Information:
(i) The depreciation charge for the year has not yet been calculated. The
company uses the straight line method for charging depreciation. The building
is depreciated at a rate of 5% whereas 10% is charged on machines, furniture
and fixtures and computer equipment.
(ii) The land element of freehold land and buildings cost Rs. 255 million. This is
to be revalued upwards by Rs. 120 million.
(iii) The buildings element of freehold land and buildings includes costs
associated with the construction of an extension to the building. Construction
of the extension commenced on 1 March 2015 and is expected to be
completed on 30 September 2015. The cost incurred during the year i.e. Rs.
20 million was capitalised on 30 June 2015.
(iv) The cost of furniture and fixtures includes additions of Rs. 8 million made on 1
April 2015.
(v) A machine was sold on 28 February 2015 at a price of Rs. 13 million. The
machine cost Rs. 15 million. The accumulated depreciation on this machine as
at 1 July 2014 was Rs. 4 million. The only entry made so far has been to credit
the sale proceeds to a suspense account.
(vi) 5 % of the receivables are considered doubtful.
(vii) Advances given to suppliers include an amount of Rs. 4.0 million paid for
goods which will be supplied on 31 December 2017.
Required:
Prepare the statement of financial position as at 30 June 2015. (20)

Questions

The following trial balance related to Yasir Industries Limited (YIL) for the year ended
June 30, 2015:
Dr Cr
Rs. m Rs. m
Share capital - 120.00
Retained earnings - 10.20
Sales - 478.40
Purchases 175.70 -
Production labour 61.00
Manufacturing overheads 39.00
Inventories (July 1, 2014) 38.90
Administrative expenses 40.00 -
Distribution expenses 19.80 -
Financial charges 0.30 -
Cash and bank - 13.25
Trade creditors - 30.40
Accrued expenses - 16.20
Loan - 120.00
Suspense account 30.00 -
Leasehold property - at cost 230.00 -
Machines at cost 168.60 -
Software at cost 20.00 -
Acc. depreciation Leasehold property (June 30, 2015) - 40.25
Acc. depreciation Machines (June 30, 2015) - 48.60
Acc. amortization Software (June 30, 2015) - 12.00
Trade receivables 66.00 -
889.30 889.30
Additional Information:
(i) Sales include an amount of Rs. 27 million, made to a customer under sale
or return agreement. The sale has been made at cost plus 20% and the
expiry date for the return of these goods is July 31, 2015.
(ii) The value of inventories at June 30, 2015 was Rs. 42 million.
(iii) A fraud of Rs. 30 million was discovered in March 2015. A senior employee of
the company who left in February 2015, had embezzled the funds from YILs
bank account. The chances of recovery are remote. The amount is presently
appearing in the suspense account.
(iv) The loan was taken on January 1, 2015 YIL. Interest is paid at 10% per
annum in arrears. No amount has been recognised for this interest.
(v) Financial charges comprise bank charges and bank commission.
(vi) The provision for current taxation for the year ended June 30, 2015 after
making all the above adjustments is estimated at Rs. 16.5 million.

(vii) On July 1, 2014, the leasehold property having a useful life of 40 years
was revalued at Rs. 238 million. No adjustment in this regard has been made
in the books.
(viii) Depreciation of leasehold property is charged using the straight line method.
50% of depreciation is allocated to manufacturing, 30% to administration
and 20% to selling and distribution.
Required:
Prepare the:
(a) The statement of financial position as of June 30, 2015.
(b) The statement of comprehensive income for the year ended June 30, 2015.(20)

CHAPTER 2 IAS 1: PRESENTATION OF FINANCIAL STATEMENTS
2.1 LARRY
For the year ended 31 December 2015
Rs. in
million
Revenue 3,304
Cost of sales (2,542 + 118 127) (2,533)
Gross profit 771
Other income 20
Administrative expenses (342)

As at 31 December 2015
Assets Rs. in
million
Non-current assets
Property, plant and equipment (2,830 918) 1,912
Intangible assets (26 5) 21
1,933
Current assets
Inventories 127
Trade and other receivables 189
Cash (89 +2) 91
407
Total assets 2,340
Equity
Share capital 400
Retained earnings (1,562 + 199) 1,761
2,161
Long-term borrowings (18 x 2/3) 12
Current liabilities
Trade and other payables 86
Current portion of long-term borrowing (18 3) 6
Current tax payable 75
167

Answers
2.2 MINGORA IMPORTS LIMITED

Statement of profit or loss for the year ended 31 December 2015
Rs. in
million
Revenue 1,740
Change in inventories of finished goods and work-in-progress (W3) 40
Staff costs (W3) (620)
Depreciation and other amortisation expense (W3) (42)
Other expenses (W3) (359)
Statement of financial position as at 31 December 2015
Assets Rs. in
million
Non-current assets
Property, plant and equipment (W1) 368
Intangible assets (W2) 40
408
Current assets
Inventories (180 + 140) 320
Trade and other receivables (420 x 95%) 399
Cash 440
1,159
Total assets 1,567
Equity
Share capital 600
Other reserves 120
Retaind earnings 635
1,355
Current liabilities
Trade and other payables 92
Current tax payable 120
212
Statement of changes in equity for the year ended 31 December 2015
Amounts in Rs. million
Share Revaluati Retained
capital on earnings Total
reserve
Balance at 31 December 2014 620 121 721
Dividends paid (125) (125)
Net revaluation surplus in the 120 - 120
year (360 (300 60))
Profit after tax for the period - - 639 639
Balance at 31 December 2015 620 120 635 1,355

Workings
(1) Property, plant and equipment
Rs. in
million
Cost brought forward
Leasehold 300
Computers 50
Revaluation 60
Cost carried forward 410
Accumulated depreciation brought forward (60 + 20) 80
Revaluation (60)
Charge for the year
Leasehold (360 30) 12
Computers (50 5) 10
Accumulated depreciation carried forward 42
Carrying amount carried forward 368
(2) Intangible assets
Rs. in
million
Cost 60
Amortisation (60 3) (20)
Carried forward 40
(3) Allocation of costs
Amounts in Rs. million
Change
in Staff Depreciat Other
inventori costs ion etc expenses
es
Work-in-progress (140 (15)
125)
Staff costs 260
Finished goods (180 (25)
155)
Consultancy fees 44
Doubtful receivables (420 21
5%)
Sundry 294
Amortisation of patent 20
(W2)
Depreciation (12 + 10) 22
(W1)
(40) 620 42 359

Answers
2.3 BARRY
Barry
For the year ended 31st August 2015
Rs. in
million
Revenue 30,000
Cost of sales (W1) (19,650)
Gross profit 10,350
Distribution costs (W1) (1,370)
Administrative expenses (W1) (1,930)
Profit from operations 7,050
Finance costs (350)
Profit before tax 6,700
Tax (W2) (2,500)
Profit after tax 4,200
Barry
As at 31st August 2015
Rs. in
million
ASSETS
Non-current assets
Property, plant and equipment 39,600
Current assets
Inventory 4,600
Trade and other receivables (7,400 + 200) 7,600
Cash and cash equivalents 700
12,900
Total assets 52,500
EQUITY AND LIABILITIES
Equity shares 21,000
Share premium 2,000
Accumulated profits (W3) 11,800
Total equity 34,800
Revaluation reserve (W4) 4,700
Non current liabilities
Borrowings 5,200
Current liabilities
Trade and other payables 5,300
Taxation (2,100 + 400) 2,500
7,800

Reconciliation of opening and closing property, plant and equipment

Rs. in 000
Assets
Plant & Fixtures
under
Land Buildings machine & Total
construct
ry fittings
ion
Cost/ Valuation
At 1 Sept 2014 10,000 9,000 20,100 10,000 400 49,500
Additions - - - - 50 50
Reclassification - - 450 - (450) -
Revaluation 1,000 1,000 - - - 2,000
At 31 Aug 2015 11,000 10,000 20,550 10,000 - 51,550
Depreciation
At 1 Sept 2014 - 3,000 4,000 3,700 - 10,700
Revaluation - (3,000) - - - (3,000)
Charge for year - 1,000 2,550 700 - 4,250
At 31 Aug 2015 - 1,000 6,550 4,400 - 11,950
Net book value

At 31 Aug 2015 11,000 9,000 14,000 5,600 - 39,600
At 1 Sept 2014 10,000 6,000 16,100 6,300 400 38,800
Workings
1 Allocation of expenses Rs.in 000

Cost of Admin Distrib
sales
Raw materials consumed 9,500
Manufacturing overheads 5,000
Increase in inventories (1,400)
Staff costs (70%/20%/10%) 3,290 940 470
Depreciation
Building (50%/50%) 500 500
Fixtures and fittings (30%/70%) 210 490
19,650 1,930 1,370
2 Tax charge
Rs. in
000
Current year 2,100
Under provision from previous year 400
2,500

Answers
3 Accumulated profits carried forward

Rs. in 000
Accumulated profits carried forward per question 14,000
Less tax charge
- Current year estimate 2,100
- Under-provision in previous year 400
(2,500)
Add transfer of excess depreciation on revalued building 300
11,800
4 Revaluation reserve carried forward
Revaluation reserve per question 5,000
Add transfer of excess depreciation on revalued building (300)
4,700
2.4 OSCAR INC
(a) Statement of profit or loss
For the year ended 31 March 2015
Rs. in 000
Sales 2,010
Operating costs (140 + 960 150 + 420 + 210 + 16) (1,596)

Operating profit before interest 414
Income from investments 75

Profit before taxation 489
Income tax (49)

440

As at 31 March 2015
Assets
Non-current assets
Tangible assets 530
Investments 560

1,090
Current assets
Inventory 150
Receivables 470

620

1,710

Share capital 600
Retained earnings 500

1,100
Current liabilities 414
Provisions for liabilities and charges 196

1,710


Workings
(1) Income tax

Rs. in 000
Income tax (current year) 74
Over provision for tax in the previous year (25)

49

(2) Tangible assets plant and machinery
Rs. in 000
Cost at 1 April 2014 and 31 March 2015 750

Accumulated depreciation
At 31 March 2014 188
Provided during the year (27 + 5) 32

At 31 March 2015 220

Net book value at 31 March 2015 530

(3) Current liabilities

Rs. in 000
Trade payables 260
Mainstream corporation tax 74
Bank overdraft 80

414

(4) Provisions for liabilities and charges
Rs. in 000
At 1 April 2014 180
Provided in the year 16

At 31 March 2015 196

(5) Retained earnings

Rs. in 000
Retained earnings 440
Opening retained earnings 180
Dividends (120)

Closing retained earnings 500


Answers
2.5 CLIFTON PHARMA LIMITED

(a) Clifton Pharma Limited
Statement of profit or loss for the year ended 30 September 2015
Rs. in
000
Revenue 338,300
Cost of sales: see working (1) (180,000)
Gross profit 158,300
Operating expenses: see working (2) (36,600)
Investment income 2,000
Finance costs: Loan notes see working (3) (3,000)
Finance lease see working (2) (1,700)
(4,700)
Income tax expense: see working (4) (21,000)
Profit for the period 98,000
(b) Clifton Pharma Limited

Statement of financial position as at 30 September 2015
Non-current assets
Property, plant and equipment: see working (5) 358,000
Investments 92,400
450,400
Current assets
Inventory 23,700
Bank 12,100
112,200
Total assets 562,600
Share premium 20,000
Retained earnings: see working (6) 117,300
417,300
Revaluation surplus 20,000
3% loan notes: see working (3) 51,500
Deferred tax: see working (4) 23,000
Finance lease obligation: see working (2) 11,700
86,200
Current liabilities
Accrued lease finance costs: see working (2) 1,700
Finance lease obligation: see working (2) 5,300
Income tax payable 18,000
39,100

Workings
(1) Cost of sales Rs. in 000
As given in the trial balance 134,000
Depreciation of plant and equipment: 20% (197,000 30,000
47,000)
Depreciation of leased vehicles: 24,000/4 years 6,000
Amortisation of leasehold property: 250,000/25 years 10,000
180,000
(2) Vehicle rentals and finance lease. Operating expenses

Rental costs given in the trial balance 8,600
Relating to finance lease (7,000)
Balance: relating to operating lease operating expense 1,600
Other operating expenses (trial balance in question) 35,000
Total operating expenses 36,600
Finance lease
Fair value of leased assets 24,000
Less: First rental payment, paid in advance (7,000)
1 October 2014
Remaining obligation, 1 October 2014 17,000
Interest at 10% to 30 September 2015 (current liability) 1,700
Lease payment due 1 October 2015 7,000
Capital repayment due (= balance, current liability) (5,300)
Remaining lease obligation = non-current liability 11,700
(3) Loan notes
The effective interest rate is 6%. Actual interest paid was Rs.1,500,000
(in trial balance); therefore the balancing Rs.1,500,000 should be added
to the loan notes obligation, to make the total loan notes liability Rs.50
million + Rs.1,500,000 = Rs.51.5 million.
(4) Taxation
Deferred tax liability b/f 20,000
Deferred tax: credit in the statement of profit or loss 2,000
Deferred tax liability c/f (92,000 25%) 23,000
Tax expense
Income tax on profits for the year 18,000
Deferred tax movement 3,000
Tax charge in the statement of profit or loss 21,000

Answers
(5) Non-current assets and depreciation

Leasehold property Rs. in 000
Carrying value in the trial balance (250,000 40,000) 210,000
Amortisation charge for the year to 30 September 2015 (10,000)
200,000
Re-valued amount 220,000
Transfer to revaluation reserve 20,000
The annual depreciation charges for plant and equipment and the leased
vehicles are shown in workings (1) Rs. in 000
Cost or Accumulated Carrying
valuation depreciation amount
Leasehold property 220,000 0 220,000
Plant and equipment 197,000 77,000 120,000
(non-leased)
Leased vehicles 24,000 6,000 18,000
441,000 83,000 358,000
(6) Retained profits

At 1 October 2014 (trial balance) 19,300
Profit for the year 98,000
Retained profits at 30 September 2015 117,300
2.6 SARHAD SUGAR LIMITED

(a) Sarhad Sugar Limited
Statement of profit or loss for the year ended 30 September 2015
Revenue (300,000 2,500) 297,500
Cost of sales (w (i)) (225,400)
Gross profit 72,100
Distribution costs (14,500)
Administrative expenses (22,200 400 + 100 see note below) (21,900)
Finance costs (1,000)
(Income tax expense (11,400 + (6,000 5,800 deferred tax)) (11,600)
Profit for the year 23,100
(b) Sarhad Sugar Limited

Statement of financial position as at 30 September 2015
Assets
Non-current assets (w (ii))
Property, plant and equipment (43,000 + 38,400) 81,400
Development costs 14,800
96,200
Current assets
Inventory 20,000

63,100
Total assets 159,300
Equity and liabilities:
Equity
Retained earnings (w (iii)) 41,600
117,100
Revaluation reserve (w (iii)) 5,500
Deferred tax 6,000
Current liabilities
Trade payables (23,800 400 + 100 re legal action) 23,500
Bank overdraft 1,300
Current tax payable 11,400
36,200
Note: As it is considered that the outcome of the legal action against Sarhad
Sugar Limited is unlikely to succeed (only a 20% chance) it is inappropriate to
provide for any damages. The potential damages are an example of a
contingent liability which should be disclosed (at Rs.2 million) as a note to the
financial statements. The unrecoverable legal costs are a liability (the start of
the legal action is a past event) and should be provided for in full.
Workings (figures in brackets in Rs.000)
(i) Cost of sales: Rs. in 000
Per trial balance 204,000
Depreciation (w (iii)) leasehold property 2,500
plant and equipment 9,600
Loss on disposal of plant (4,000 2,500) 1,500
Amortisation of development costs (w (iii)) 4,000
Research and development expensed (1,400 + 2,400 (w (iii)) 3,800

225,400

(ii) Non-current assets:
Leasehold property
Valuation at 1 October 2014 50,000
Depreciation for year (20 year life) (2,500)

Carrying amount at date of revaluation 47,500
Valuation at 30 September 2015 (43,000)

Revaluation deficit 4,500

Plant and equipment per trial balance (76,600 24,600) 52,000

Disposal (8,000 4,000) (4,000)

48,000
Depreciation for year (20%) (9,600)

Carrying amount at 30 September 2015 38,400


Answers
Capitalised/deferred development costs Rs. in 000

Carrying amount at 1 October 2014 (20,000 6,000) 14,000
Amortised for year (20,000 x 20%) (4,000)
Capitalised during year (800 x 6 months) 4,800

Carrying amount at 30 September 2015 14,800

Note: development costs can only be treated as an asset from the point
where they meet the recognition criteria in IAS 38 Intangible assets.
Thus development costs from 1 April to 30 September 2015 of Rs.48
million (800 x 6 months) can be capitalised. These will not be amortised
as the project is still in development.
The research costs of Rs.14 million plus three months development
costs of Rs.24 million (800 x 3 months) (i.e. those incurred before 1
April 2015) are treated as an expense.
(iii) Movements on reserves
Revaluation Retained
surplus earnings
Rs. in 000
Balances at 1 October 2014 10,000 24,500
Dividend (6,000)
Comprehensive income 23,100
Revaluation loss (4,500)
Balances at 30 September 2015 5,500 41,600
2.7 BSZ LIMITED

BSZ Limited
Statement of financial position as at June 30, 2015
Note Rs. in
million
ASSETS
Fixed Assets
Property, plant & equipment 1 576
Intangible assets 2 8
584
Long term advances considered good 4
Current assets
Stocks in trade 90
Accounts receivable 3 57
Advances, deposits, prepayments and other
receivables 4 45
Cash at banks 5 29
221
809

Rs. in
million
EQUITY AND LIABILITIES
Share capital and reserves
Authorized share capital
50,000,000 shares of Rs. 10 each 500
Issued, subscribed and paid up capital

40,000,000 shares of Rs. 10 each 400
Unappropriated profit 65
465
Deferred taxation 40
Current liabilities
Short term loan 85
Account and other payables 6 82
Provision for taxation 17
184
809
Rs. in
Notes million
1. Property, plant and equipment
Operating assets 556
Capital work in progress building 20
576
1.1 Operating assets Rs. in million

Freehold
Cost/revalued amount land Building Machines Fixtures Total
As of July 01 2014 375.0 130.0 100.0 19.0 624.0
Additions - - - 8.0 8.0
Disposals - - (15.0) - (15.0)
As at June 30 2015 375.0 130.0 85.0 27.0 617.0
Accumulated
depreciation
As of July 01 2014 - 19.5 22.5 5.9 47.9
For the year - 6.5 18.1
(105 85) + 10% 15 9.5
8
/12)
(105 19) + 10% 8 3/12) 2.1
Disposals - - (5.0) - (5.0)
As at June 30 2015 - 26.0 27.0 8.0 61.0
Carrying amount 375.0 104.0 58.0 19.0 556.0
Depreciation rate - 5% 10% 10%

Answers
1.2 Revaluation
During the year 2011, the first revaluation of freehold land was carried out.
The valuation was carried out under market value basis by an independent
valuer, Mr. Dee, Chartered Civil Engineer of M/s SSS Consultants (Pvt.)
Ltd., Islamabad. It resulted in a surplus of Rs. 120 million over book values
which was credited to surplus on revaluation of fixed assets. Had there
been no revaluation, the value of freehold land would be Rs. 255 million.
1.3 Disposal of machine

Rs. in
million
Proceeds 13.0
Cost 15.0
Accumulated depreciation (5.0)
Carrying amount (10.0)
Profit on disposal 3.0
Note 2015
Rs. in
million
2. Intangible Assets
Cost of computer software/license 10.0
Accumulated Amortization as of July 1, 2014 1.0
Amortization for the year 1.0
Accumulated Amortization as of June 30, 2015 2.0
Carrying value as at June 30, 2015 8.0
Amortization rate 10%
3. Accounts Receivable
Considered good
- Secured 30
- Unsecured 27
57
Considered doubtful 3
60
Less: Provision for bad debts 3.1 3
57
3.1 Provision for bad debts

Balance as at July 1, 2014 3.4
Provision made during the year 1.0
Amount written off during the year (1.4)
Balance as at June 30, 2015 (Rs. 30 million x 10%) 3.0
4 Advances, Deposits, Prepayments and Other Receivables

Advances
- suppliers - considered good 12
- staffs 6
18
Deposits 11
Prepayments 4
Sales tax receivable 12
45

5 Cash at banks
Cash at banks - current accounts 7
saving accounts 5.1 22
29
5.1: It carries interest / mark up ranging from 3% to 7% per annum.
6 Accounts and other payables

Accounts payable 75
82

Yasir Industries Limited
Statement of Financial Position as at June 30, 2015
Assets Rs. in
million
Non-current assets
Property, plant and equipment (W2) 351.00
Intangible assets (20 12) 8.00
359.00
Current assets
Inventories (W6) 64.50
Trade receivables (W5) 39.00
103.50
462.50
Equity and Liabilities
Equity
Issued, subscribed and paid up capital 120.00
Retained earnings (W4) 87.10
207.10
Revaluation surplus 41.25
Redeemable preference shares 40.00
Debentures 80.00
Deferred taxation (W 10) 9.00
129.00
Current liabilities
Trade payables 30.40
Accrued expenses (W3) 25.00
Taxation 16.50
Bank overdraft 13.25
85.15
Total equity and liabilities 462.50

Answers
Yasir Industries Limited

Statement of profit or loss for the year ended June 30, 2015
Rs. in
million
Sales revenue (W5) 445.40
Cost of sales (W7) (250.72)
Gross profit 194.68
Distribution costs (W8) (20.05)
Administrative expenses (W8) (40.38)
Financial charges (W9) (9.10)
125.15
Loss due to fraud (30.00)
Profit before tax 95.15
Income tax expense (W10) (19.50)
Profit for the year 75.65
Workings
(W1) Leasehold property
Annual depreciation before the revaluation (230 40 years) = Rs. 5.75 million per
annum.
Depreciation this year has been charged incorrectly on cost (whereas it should
have been on the revalued amount).
This years charge must be added back
Dr Cr
Accumulated depreciation 5.75
Cost of sales (50%) 2.88
Administrative expenses (30%) 1.72
Distribution costs (20%) 1.15
Rs. in
million
Carrying amount at the 30 June (as per trial balance)(230.00 40.25) 189.75
Add back depreciation incorrectly charged (see above) 5.75
Carrying amount of property at the start of the year 195.5
Revaluation surplus Rs. in

million
Revalued amount of leasehold property 238.00
Less: WDV of leasehold property at revaluation 195.50
Revaluation surplus arising in the year 42.50
Transfer to retained earnings in respect of incremental depreciation
(Rs. 7 million Rs. 5.75 million) (1.25)
41.25
Depreciation of revalued property

Number of years depreciation by the year end: (40.25 5.75) = 7 years.
Therefore, remaining useful life as at the year-end = 33 years
Revaluation was at the start of the year
Remaining useful life at the start of the year = 34 years
Depreciation charge based on the revalued amount (238/34 years) = Rs. 7 million

Dr Cr
Cost of sales (50%) 3.5
Administrative expenses (30%) 2.1
Distribution costs (20%) 1.4
Accumulated depreciation 7.00
(W2) Property, plant and equipment

Rs. in
million
Leasehold property (Rs. 238m 7) 231
Machines (Rs. 168.6 Rs. 48.6m) 120
351
(W3) Accrued Expenses
Rs. in
million
As per trial balance 15.00
Accrued interest on debentures (Rs. 80m 12% 6/12) 4.80
Dividend on preference shares (Rs. 40m 10%) 4.00
23.80
(W4) Retained earnings
Rs. in
million
Balance as per trial balance 10.20
Profit for the year 75.65
Transfer from revalution surplus 1.25
87.10
(W5) Sales and receivables
Sales. Rec.
Rs. in Rs. m
million
Given in the trial balance 478.40 66.00
Deduct revenue incorrectly recognised (sale or return) (27.00) (27.00)
Cost of sales 451.40 39.00
(W6) Closing inventory
Rs. in
million
Given in the question 42.00
Add back inventory held by customer on sale or return (100/120 27) 22.50
Cost of sales 64.50
(W7) Cost of sales
Rs. in
million
Opening inventory as of July 1, 2014 38.90
Purchases 175.70
Direct labour 61.00
Manufacturing overheads excluding incremental depreciation 39.00
Less: Closing inventory (64.50)
Deduct depreciation incorrectly charged on cost (2.88)
Add depreciation charged on revalued amount 3.50
Cost of sales 250.10

Answers
(W8) Administrative expenses and distribution costs

Admin. DIst/
Rs. in Rs. m
million
Given in the trial balance 40.00 19.80
Deduct depreciation incorrectly charged on cost (1.72) (1.15)
Add depreciation charged on revalued amount 2.10 1.40
Cost of sales 40.38 20.05
(W9) Financial charges
Rs. in
million
Balance as per trial balance 0.30
Accrued interest on debentures (Rs. 80m 12% 6/12) 4.80
Preference dividend for the year (Rs. 40m 10%) 4.00
9.10
(W10) Taxation
Deferred taxation Rs. in
million
Balance b/f 6.00
Charge for the year (balancing figure) 3.00
Balance c/f (30% Rs. 30 million temporary difference) 9.00
Tax expense Rs. in

million
Current tax 16.50
Deferred tax (see above) 3.00
19.50

2.9 SHAHEEN LIMITED

Shaheen Limited
As of June 30, 2015
Assets Rs. in 000
Non-current assets
Property, plant and equipment (86,000 12,000 4,500) 69,500
Intangible assets (6,000 600) 5,400
74,900
Current assets
Stock in trade 30,000
Trade receivables (37,800 10,000) 27,800
Other receivables and prepayments (14,000 + 6,000) 20,000
Cash and bank balances 4,725
82,525
157,425
Share capital and reserves
issued, subscribed and paid up capital 60,000
Unappropriated profit 35,372
95,372
Long term borrowings (31,525 6,000) 25,525
Deferred taxation (5,000 1,470) 3,530
29,055
Current liabilities
Current portion of long term borrowings 6,000
Provision for litigation 5,000
Provision for taxation (2,000 + 9,988 2,000) 9,998
32,998
157,425
Shaheen Limited
Statement of profit or loss and other comprehensive income
As of June 30, 2015 Rs. in 000
(104,708
Cost of sales (W2) )
Gross profit 95,292
Selling and distribution expenses (W2) (36,275)
Administrative expenses (W2) (30,450)
(66,725)
Financial charges (5,000)
Profit before taxation 23,567
Taxation (W3) (6,528)
Profit after taxation 17,039
Other comprehensive income net of tax -
Total comprehensive income 17,039

Answers
Shaheen Limited
Statement of changes in equity 2015
As of June 30, 2015 Rs.000
Issued,
Retained
subscribed &
earnings
paid up capital
Balance July 1, 2014 60,000 32,000*
Correction of prior year error (10,000 20/120) (1,667)
Balance July 1, 2014 (restated) 60,000 30,333
Comprehensive income for the year 17,039
Dividend for the year ended June 30, 2014
(60,000*0.20) (12,000)
Balance June 30, 2015 60,000 35,372
*Retained earnings as at 01-07-09 = 20,000+ (20% of 60,000)=32,000
Workings
W1 Depreciation for the year
On building (36,000/20) 1,800
On plant and equipment (30,000 3,000)/10 2,700
Total 4,500
W2 Costs Selling and

Cost of Administrative
distribution
sales costs
costs
Opening inventory 23,000
Costs as per Trial balance 100,000 35,000 30,000
Closing inventory (30,000)
Depreciation (75%, 15%, and 10% of
Rs. 4,500) 3,375 675 450
Adjustment for goods sent on sale or
return, erroneously booked as sales
last year now returned during the year.
(10,000/1.2) 8,333
Amortization of export license
(6,000/5*0.5) 600
104,708 36,275 30,450
W3:Taxation
profit before tax 23,567
Disallowances and add backs 5,000
Taxable income 28,567
Current For the year (28,567*0.35) 9,998
For prior years (7,000 5,000) (2,000)
Deferred For the year (5,000 800)*0.35 (1,470)
6,528

2.10 MOONLIGHT PAKISTAN LIMITED
(a) Moonlight Pakistan Limited

Statement of Financial Position
As at December 31, 2015
Rs. in
million
ASSETS
Non-current assets
Property, plant and equipment (W2) 3,472
Current assets
Stocks in trade 758
Cash and bank 354
1,814
5,286
EQUITY
Issued, subscribed and paid-up capital (W3) 1,750
Share premium (420 x 2/12) 70
Retained earnings (W3) 876
2,696
LIABILITIES
Long term loan 1,600
Deferred tax (22 + 80 x 35%) 50
Provision for gratuity 23
1,673
Current liabilities
Creditor and other liabilities (544 + 96) 640
Income tax payable 37
677
5,286
(b) Moonlight Pakistan Limited

For the year ended December 31, 2015
Rs. in
million
Sales 3,608
Cost of sales (W1) (2,149)
Gross profit 1,459
Selling expenses (W1) 252
Administrative expenses (W1) 270
522
937
Financial charges (210 + 1,600 x 12% x 6/12) 306
Profit before taxation 631
Taxation (37 + 80 x 35%) 65
Profit after taxation 566

Answers
W1: Cost of sales/selling expenses/admin expenses

Cost of Selling Admin.
sales expenses expenses
Rs. in million
As per trial balance 1,784 220 250
Depreciation building (60% : 25% : 15%) (W2) 69 29 17
Depreciation plant 287 - -
Provision for gratuity (23-8) x 60%:20%:20% 9 3 3
2,149 252 270
W2: Property, plant and equipment
Land Building Plant Total
Rs. in million
Cost as at January 1, 2015 600 2,000 2,104 4,704

Accumulated depreciation - (400) (670) (1,070)
Revaluation (1,840 - (2,000 - 400 )) - 240 - 240

Current year depreciation - (287) (402)
(1,840/16) (115)
600 1,725 1,147 3,472

W3: Share Capital/Retained Earnings
Share capital Retained earnings
Rs. in million
As per trial balance 1,200 510
Bonus issue (1200 6) 200 (200)
Right issue (420 x 10/12) 350 -
Profit for the year - 566
1,750 876
2.11 FIGS PAKISTAN LIMITED

Figs Pakistan Limited
Statement of profit or loss and other comprehensive income
2015
Rs. in
Note million
Sales 1 44,758
Cost of sales 2 (26,203)
Gross profit 18,555
Distribution costs 3 (6,431)
Administrative expenses 4 (752)
Other operating expenses 5 (399)
Other operating income 6 30
Profit from operations 11,003
Finance costs 7 (166)
Taxation 8 (2,532)
Profit after tax 8,305
Other comprehensive income -
Total comprehensive income for the year 8,305

Figs Pakistan Limited

Notes to the financial statements
Rs. in
1 Sales Note million
Manufactured goods
Gross sales 56,528
Sales tax (10,201)
46,327
Imported goods
Gross sales 1,078
Sales tax (53)
1,025
Sales discounts (2,594)
44,758
2 Cost of sales
Raw material consumed (1,751 + 22,603 - 2,125) 22,229
Stores and spares consumed 180
Salaries, wages and benefits (2,367 55%) 2.1 1,302
Utilities (734 85%) 624
Depreciation and amortizations (1.287 70%) 901
Stationery and office expenses (230 25%) 58
Repairs and maintenance (315 85%) 268
25,562
Opening work in process 73
Closing work in process (125)
25,510
Opening finished goods (manufactured) 1,210
Closing finished goods (manufactured) (1,153)
25,567
Finished goods (imported)
Opening stock 44
Purchases 658
702
Closing stock (66)
636
26,203
2.1 Salaries, wages and benefits include Rs. 30 million (54 55%) and Rs. 24
million (44 55%) in respect of defined contribution plan and defined benefit
plan respectively.

Answers
Rs. in
3 Distribution costs million
Advertisement and sales promotion 4,040
Outward freight and handling 1,279
Salaries, wages and benefits (2,367 30%) 3.2 710
Utilities (734 5%) 37
Depreciation and amortization (1,287 20%) 257
6,431
Salaries, wages and benefits include Rs. 16 million (54 30%) and Rs. 13
million (4430%) in respect of defined contribution plan and defined benefit plan
3.1 respectively.
Rs. in
4 Administrative expenses million
Salaries, wages and benefits (2,367 15%) 4.1 355
Utilities (734 10%) 73
Depreciation and amortization (1,287 10%) 129
Legal and professional charges 71
Auditor's remuneration 4.2 13
752
Salaries, wages and benefits include Rs. 8 million (54 15%) and Rs. 7 million
(4415%) in respect of defined contribution plan and defined benefit plan
4.1 respectively.
Rs. in
4.2 Auditor's remuneration million
Audit fees 8
Taxation services 4
Out of pocket expenses 1
13
5 Other operating expenses
Donation 5.1 34
Worker's Profit Participation Fund 257
Worker Welfare Fund 98
Loss on disposal of property, plant and equipment 10
399
5.1 Donations
Donations include Rs. 5 million given to Dates Cancer Foundation (DCF). One
of the companys directors, Mr. Peanut is a trustee of DCH.
Donations other than that mentioned above were not made to any donee in
which a director or his spouse had any interest at any time during the year.

Rs. in
6 Other operating income million
Income from financial assets
Dividend income 12
Return on savings account 2
Income from non-financial assets
Scrap sales 16
30
7 Finance costs
Finance charges on short term borrowings 133
Exchange loss 22
Finance charges on lease 11
166
8 Taxation
Current - for the year 1,440
Deferred (3,120 35%) 1,092
2,532

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Chapter 2: IAS 1: Presentation of financial statements

1 THE COMPONENTS OF FINANCIAL STATEMENTS

Preparing financial statements

1.1 Preparing financial statements

Emile Woolf International 29 The Institute of Chartered Accountants of Pakistan

1.2 General purpose financial statements

The financial statements published by large companies as part of their annual

1.3 Complete set of financial statements

Emile Woolf International 30 The Institute of Chartered Accountants of Pakistan

1.4 Comparative information

1.5 Identification of financial statements

1.6 Reporting period

Emile Woolf International 31 The Institute of Chartered Accountants of Pakistan

1.7 Elements of financial statements

A liability is an obligation that already exists. An obligation may be legally

Emile Woolf International 32 The Institute of Chartered Accountants of Pakistan

Income includes both revenue and gains.

Emile Woolf International 33 The Institute of Chartered Accountants of Pakistan

Emile Woolf International 34 The Institute of Chartered Accountants of Pakistan

2 GENERAL FEATURES OF FINANCIAL STATEMENTS

2.2 Fair presentation and compliance with IFRSs

Emile Woolf International 35 The Institute of Chartered Accountants of Pakistan

Fair presentation requires:

True and fair override

Emile Woolf International 36 The Institute of Chartered Accountants of Pakistan

2.3 Going concern

2.4 Accrual basis of accounting

2.5 Materiality and aggregation

Emile Woolf International 37 The Institute of Chartered Accountants of Pakistan

2.7 Frequency of reporting

2.8 Comparative information

Emile Woolf International 38 The Institute of Chartered Accountants of Pakistan

The following must be disclosed when reclassification of comparative amounts is

2.9 Consistency of presentation

Emile Woolf International 39 The Institute of Chartered Accountants of Pakistan

3 STRUCTURE AND CONTENT OF THE STATEMENT OF FINANCIAL

3.2 Current and non-current assets and liabilities

Emile Woolf International 40 The Institute of Chartered Accountants of Pakistan

3.3 Current assets

Emile Woolf International 41 The Institute of Chartered Accountants of Pakistan

3.4 Current liabilities

Changing from non-current liability to current liability

There is an exception to this rule. A liability can continue to be shown as a long-

3.5 Information to be presented on the face of the statement of financial

Emile Woolf International 42 The Institute of Chartered Accountants of Pakistan

Elements IAS 1 line items (minimum) Companies Ordinance 1984

Emile Woolf International 43 The Institute of Chartered Accountants of Pakistan

Information to be shown on the face of the statement of financial position or in

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Illustration: Statement of financial position of an individual entity

Statement of financial position of ABCD Entity as at 31 December 20XX

A specimen format to incorporate the requirements of the fourth schedule to the

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3.6 Equity capital and reserves

Note on the presentation of dividends

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4 STRUCTURE AND CONTENT OF THE STATEMENT OF COMPREHENSIVE

A single statement or two statements

4.1 A single statement or two statements

Other comprehensive income

Emile Woolf International 47 The Institute of Chartered Accountants of Pakistan

Example: statement of comprehensive income of an individual entity

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4.2 Information to be presented on the face of the statement of comprehensive