ANSWERS TO PAST PAPERS A-1 a) The transactions/events will be accounted for as under in the separate and consolidated financial statements: - i) The

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1 ANSWERS TO PAST PAPERS A-1 a) The transactions/events will be accounted for as under in the separate and consolidated financial statements: - i) The inventory is a non financial asset and will remain at historic rate in the financial statements of the Branch i.e. Rs. 90 per Pound Sterling, however, in the consolidated financial statements of the F limited the inventory of the Branch will be translated using exchange rate prevailing at the reporting date i.e. Rs. 80 per Pound Sterling. As the NRV is higher than cost of inventory therefore, the ii) inventory will remain at cost i.e. Pound Sterling 1,000,000. The inventory will be measured in Branch and F Limited consolidated financial statements at NRV. For both Branch and F limited consolidated financial statements the exchange rate of Rs. 65 will be used i.e. the exchange rate of the date on which the inventory is measured at NRV will be used. b) The financial instruments will be classified as under according to provisions of IFRS 9: - i) If the investment is TFC s meets the business model test (i.e. to hold investments to collect contractual cash flows) and the 17% interest only reflect the time value of money and credit risk of the investee, the investment will be classified at amortized cost. However, if any of the above criteria is not satisfied the investment will be classified as at fair value through profit or loss account. If the investment meets the above two criteria, even then the investment can be designated as fair value through profit or loss if it results in any mismatching. The investment is subject to interest rate fair value risk. ii) iii) The loan will be classified under IFRS 9 at amortized cost unless it will result in certain mismatching, then it may be classified as at fair value through profit or loss account. The loan is subject to interest rate cash flow risk because the change in KIBOR will result in change in interest to be paid on loan. The loan in foreign currency to an associated concern will be classified as at amortized cost and will be subject to currency risk as the change in exchange rate will result in change in the value of investment. The investment is also subject to interest rate cash flow risk because of variable rate on investment. A-2 Date Particulars Debit Credit Purchase date Held for trading investment 20,000 Bank 20,000 [20 x 1,000] Jan Held for trading investment 10,000 Profit or loss account 10,000 [30 x 1,000] 20,000 Dec Held for trading investment 5,000 Profit or loss account 5,000 [35 x 1,000] 30,000 Mar Bank 32,000 Profit or loss account 3,000 Held for trading investment 35,000 [32 x 1,000] 35,000 The following disclosures will be made in the financial statements.

2 A-3 a) The requisite points are discussed as under: - i) Financial asset is any asset that is: a) Cash; b) An equity instrument of another entity; c) A contractual right: i. to receive cash or another financial asset from another entity; or ii. to exchange financial assets or financial liability with another entity under conditions that are potentially favorable to the entity; or d) a contract that will or may be settled in the entity s own instruments and is: i. a non-derivative for which the entity is or may be obliged to receive a variable number of the entity s own equity instruments; or ii. a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity s own equity instruments. For this purpose the entity s own equity instruments do not include puttable financial instruments classified as equity instruments in accordance with paragraphs 16A and 16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts for the future receipt or delivery of the entity s own equity instruments. Examples of financial assets are debtors, cash, bank and investment in equity of other entities. ii) iii) The financial assets will be recognized from the contract date, however, in case of regular way exchange the entity may opt for contract date or settlement date for initial recognition. The financial asset that represent investment in equity of others will be classified as at fair value through profit or loss account or at fair value through other comprehensive income depending upon the intention of management i.e. if held for trading will be classified as at fair through profit or loss account otherwise they will be classified as at fair though other comprehensive income. There exists an exception to this principal that if an investment is not held for trading but creating some accounting mismatch that it can be classified as at fair value through profit or loss account. The investments in debt securities of others will be classified as at fair value through profit or loss account unless the objective in those investments is hold and collect contractual cash flows and contractual cash flows are principal and interest (interest is also time value of money and credit risk for current investment). However, if the investment meets the said two test

3 but results in accounting mismatch it can be classified as at fair value through profit or loss account. iv) The financial assets classified at fair value through profit or loss account will be measured subsequently at fair value and any fair value gain or loss will be charged to profit or loss account. The investments classified at fair value through other comprehensive income will be measured subsequently at fair value and fair value gain or loss will be charged to other comprehensive income under the classification of items to be re-classified to profit or loss account. The investments classified at amortized cost will be measured at present value using effective interest rate and resulting interest income will be charge to profit or loss account. However, dividend or interest income on any investment will be charged to profit or loss account. b) In Pakistan we have not yet adopted IFRS 9, however, the application date of IFRS 9 internationally is 01 January A-4 Embedded Derivatives An embedded derivative is a component of a hybrid contract that also includes a nonderivative host with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract. A derivative that is attached to a financial instrument but is contractually transferable independently of that instrument, or has a different counterparty, is not an embedded derivative, but a separate financial instrument. Hybrid Contract with financial asset hosts If a hybrid contact contains a host that is a financial asset, the whole of the contract will be measured at fair value through profit or loss account. Other Hybrid Contracts If a hybrid contract contains a host that is not an asset within the scope of this IFRS, an embedded derivative shall be separated from the host and accounted for as a derivative under this IFRS if, and only if: (a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host; (b) a separate instrument with the same terms as the embedded derivative would (c) meet the definition of a derivative; and the hybrid contract is not measured at fair value with changes in fair value recognized in profit or loss (i.e. a derivative that is embedded in a financial liability at fair value through profit or loss is not separated). If an embedded derivative is separated, the host contract shall be accounted for in accordance with the appropriate IFRSs. This IFRS does not address whether an embedded derivative shall be presented separately in the statement of financial position. If an entity is required by this IFRS to separate an embedded derivative from its host, but is unable to measure the embedded derivative separately either at acquisition or at the

4 end of a subsequent financial reporting period, it shall designate the entire hybrid contract as at fair value through profit or loss. A-5 (a) Particulars Dr. Cr. Option -1 Option asset account [800,000/5]x4 640,000 Profit or loss account 640,000 Recording of option Bank account [800,000/5]x6 960,000 Option asset 640,000 Profit or loss account 320,000 Recording sale of rights Option -2 Option asset account [800,000/5]x4 640,000 Profit or loss account 640,000 Recording of option Profit or loss account 640,000 Option asset account 640,000 Recording the expiry of rights Option -3 Option asset account [600,000/5]x4 480,000 Profit or loss account 480,000 Recording of option Bank account 20,600,000 Profit or loss account 500,000 Investment (at FV through OCI) 21,100,000 [84,400,000x200,000/800,000] A-6 For recording of sale of investment Investment (at FV through OCI) [120,000x103] 12,360,000 Profit or loss account 120,000 Bank account (120,000x100) 12,000,000 Option asset account 480,000 Recording the purchase of additional right shares Bank account [100,000x107] 10,700,000 Investment (at FV through OCI) [84,400,000+12,360,000-21,100,000]x100,000/720,000 10,508,333 Profit or loss account 191,667 For recording sale of 100,000 shares. (a) Date Particulars Dr. Cr. Jul 1, 07 Cash 100,000,000 Payable to Green Limited *65,751,623 Unwinding of discount on loan 34,248,377 * Rs. 100 million + (1 + 15%) 3 = Rs. 65,751,623 Jun 30, Interest Expense 9,862,743 Payable to Green Limited 9,862,743 Rs. 65,751,623 x 15% = Rs. 9,862,743 Jun Deferred Tax Expense 8,534,972 Deferred Tax Liability 8,534,972

5 (Rs. 34,248,377 - Rs. 9,862,743) x 35% = Rs. 8,534,972 (b) Jul 1, 07 Employee Compensation Expense (200,000 x Rs. 8) 1,600,000 Employee Stock Options Outstanding 1,600,000 (200,000 stock options to employees at Rs.5 when market price is Rs.13) Apr 30, Bank account (190,000 x Rs. 5) 950,000 Employee stock options outstanding (190,000 x Rs. 8) 1,520,000 Equity share capital (190,000 x Rs. 10) 1,900,000 Share premium (190,000 x Rs. 3) 570,000 (190,000 equity shares of Rs.10 each at a premium of Rs.3 per share, in exercise of stock options.) Apr 30, Employee Stock Options Outstanding (10,000 x Rs. 8) 80,000 Employee Compensation Expenses 80,000 (To record the lapse of stock options for 10,000 shares) (c) May 31, Receivable from Orange Limited Equity - Fair Value Gain on AFS Investment * AFS Investment - GL (500,000*20) Gain on de-recognition of Investment 4,880, ,000 x 20 -[(500,000 x 10) + 120,000 ] = Rs. 4,880,000 A-7 (a) May 31, AFS Investment - Orange Limited (65*200,000) 13,000,000 Gain on initial recognition of AFS Investment 3,000,000 Receivable from Orange Limited 10,000,000 Date Particulars Dr. Cr. (i) Exchange loss 16,800, Loan from SBD (350,000 x 15) 5,250,000 Loan from JICA (500,000 x 15) 7,500,000 Loan from AFI (270,000 x 15) 4,050,000 (To record exchange loss at year end) (ii) Loan from SBD (old) 28,000,000 Loss on rescheduling (balancing) 4,000,000 32,000,000 Loan from SBD (new) (400,000 x 80) (To record the de-recognition of old liability of SBD based on testing at W-1 and recording of new liability of SBD at fair value)

6 Deferred loss on rescheduling 800,000 Loan from AFI (US$ 10,000 x Rs. 80) (To record the increase in loan amount) W-1: Testing for de-recognition as per criteria set out in IAS-39. SBD JICA AFI Carrying balance of old liability (US$) 350, , ,000 Revised amount as per original effective interest rate (US$) 390, , ,000 Effect of Rescheduling % 11.43% 7.00% -7.41% Effect > 10% Yes No No Conclusion b) Derecognize the old liability and recognize the new liability at fair value. No effect Rupees No effect Current portion of SBD - Current portion of JICA (250,000 x 80) 20,000,000 Current portion of AFI - 20,000,000 A-8 Market value of the above as at September 30, 2009 amounted to Rs. 2,250 million 2008: 2,930 million) The figures given in the question suggest that company had the funds in addition to sale proceeds to pay for cost associated with PIB investment. Therefore, Present Value has been taken as Rs. 104,641,483 (Rs. 100,000,000 + Rs. 4,641,483) Opening balance Expected cash flow Interest 15.5% Effect of change in estimate Closing balance Income to be recognized A B C=A x 15.5% D E=A+B+C+D C + D Rupees ,641,483 (15,000,000) 16,219, ,860,913 16,219, ,860,913 (15,000,000) 16,408,441 1,622, ,891,889 18,030, ,891,888 (20,000,000) 16,878, ,770,132 16,878, ,770,131 (20,000,000) 16,394, ,164,502 16,394, ,164,501 (118,000,000) 15,835, ,835,498

7 Computation of effect of change in estimate Revised Expected Cash Flow Discounted by Discounted Effective rate (15.5%) 2010 (20,000,000) , (20,000,000) ,992, (118,000,000) ,583,649 Revised present value 108,891,889 Existing Present Value (105,860,913-15,000,000+16,408,441) 107,269,354 Effect of change in estimate 1,622,535 A-9 Trade data accounting (i) Purchase contract Date Description Debit Credit 28-Sep-11 Financial assets (20,000X24) 480,000 Financial liability 480,000 (To record purchase of assets) 30-Sep-11 Financial assets (21,000x23.5)-480,000) (FV23,500- EL 10,000) 13,500 Financial liability (Exchange gain) (20,000X ( ) 10,000 Increase in FV - P&L 23,500 (To record change in FV and exchange rate) 03-Oct-11 Financial assets (21,500x25)-(21,000x23.5) (FV12,500 + EG 44,000 31,500) Financial liability (480,000-10,000) 470,000 Exchange gain - P&L (21,000-20,000) x ( ) 1,500 (EG 31,500 - EL 30,000) Increase in FV - P&L (21,500-21,000) x25 12,500 Bank (20,000x25) 500,000 (To record change in FV and exchange rate on settlement t) (ii) Sale contract 29-Sep-11 Account receivable (35,000X23) 805,000 Loss on disposal - P&L 4,200 Financial assets 809,200 (To record sale of financial assets) 30-Sep-11 Account receivable (35,000X( ) 17,500 Exchange gain - P&L 17,500 (To record account receivable at year-end exchange rate) 04-Oct-11 Bank (35,000X26) 910,000 Exchange gain - P&L 87,500 Account receivable (805,000+17,500) 822,500 (To record settlement of sale of financial assets)

8 (b) Settlement Date Accounting (i) Purchase contract Date Description Debit Credit 30-Sep-11 Receivables (21,000-20,000)x ,500 Increase in FV -P&L 23,500 (To record change in FV of financial assets) 03-Oct-11 Financial assets (21,500x25) 537,500 Increase in FV -P&L(500x25) 12,500 Exchange gain - P&L (1,000x( ) 1,500 Receivables 23,500 Bank (20,000x25) 500,000 (To record purchase of financial assets and settlement thereof) (ii) Sale contract 29-Sep-11 Exchange loss - P&L (809,200-(34,000x23)) 27,200 Financial assets (35,000x23)-809,200 4,200 Increase in FV - P&L (35,000-34,000)x23 23,000 (To record change in fair value and exchange difference) 30-Sep-11 Financial assets (35,200x23.5)-(35,000x23) 22,200 Exchange gain - P&L (35,000x ( ) 17,500 Increase in FV - P&L (35,200-35,000) x23.5 4,700 (To record account receivable at year-end exchange rate) 4-Oct-11 Bank (35,000x26) 910,000 Gain on disposal - P&L 82,800 Financial assets (35,200x23.5) 827,200 (To record settlement t of sale of financial assets) A-10 Date Description Debit Credit (a) 27-Dec-11 Cash 10,150,000 Financial liability under Repo (Borrowing) 10,150,000 (Record the financial liability at its fair value) 31-Dec-11 Interest expense (Rs. 10,183,337 - Rs. 10,150,000) x ) Financial liability under Repo (Borrowing) (Record the accrual of interest on financial liability) 31-Dec-11 6-Jan-12 6-Jan-12 Investment in TFCs Profit & Loss A/c (Rs. 10,166,669 - Rs. 10,144,337) (Record the increase in TFC value) Interest expense (Rs. 10,183,337 - Rs. 10,150,000) x ) Financial liability under Repo (Borrowing) (Record interest till maturity on financial liability) Financial liability under Repo (Borrowing) Cash (Record payment of financial liability under repo) 16, ,332 16,668 16,669 22,332 16,668 10,183,337 10,183,337

9 (b) 01-Jan-11 Profit and loss account Long term loan (W-1) (Record the revised loan at its fair value) 31-Dec-11 Interest expense (W-1) Long term loan Cash (Record the interest expense for the year 2011) (c) 1-M-11 Impairment loss (Rs. 80m - Rs. 60m) Plant and machinery (Record the impairment in the value of plant and machinery) 1-Jul-11 Bank Plant and machinery Deferred profit (Rs. 90m - Rs. 60m) (Record the sale of plant and machinery under sale and leaseback arrangement) 31-Dec-11 Lease rental expense / Profit and loss account Bank (Record the payment of lease rental) 31-Dec-11 Deferred profit (Rs. 30m - 5) -2 Profit and loss account (Record transfer of deferred profit to P & L) 746, ,056 6,074, ,394 6,300,000 20,000,000 90,000,000 9,660,000 3,000,000 20,000,000 60,000,000 30,000,000 9,660,000 3,000,000 W-1: Determination of Interest Expense and Fair Value of Loan Year Cash flow (Rs.) Disc, Discounted cash flow (Rs.) 31-Dec-ll (6,300,000) (5,727,273) 31-Dec-12 (6,300,000) (5,206,612) 31-Dec-13 (66,300,000) (49,812,171) (60,746,056) Less: Existing principal outstanding 60,000,000 Amount to be provided in Profit and Loss (746,056) Year Amortized cost at start of the year Interest Cash flow Amortized cost at year-end Rs. Rs. Rs. Rs. 31-Dec-ll 60,746,056 6,074, ,300,000 60,520, Dec-12 60,520,661 6,052, ,300,000 60,272, Dec-13 60,272,727 6,027, ,300,000 - A-11 Answer 2(a) Date Description Dr. Cr. Rupees Inventory / stock (4,000 x Rs. 6,200) 24,800,000 Bank / Creditor 24,800,000 (Record the purchase of stock)

10 Note: The futures contract has a zero value at the date it is entered into, so no entry is made in the financial statements Financial asset (4,000 x 750) 3,000,000 Profit and loss a/c (hedging gain) 200,000 Inventory / stock (4,000 x Rs. 700) 2,800,000 (Record the net hedging gain on the price movement of inventory and futures) Answer 2(b) Cash (200-4) 196,000,000 Debentures (W-1) 181,630,000 Equity (W-1) 14,370,000 (Record the proceed from issuance of debentures in accordance with IAS-32) Interest expense ( x 11.81%) 21,450,000 Debentures (balancing) 5,450,000 Cash (Rs. 200 x 8%) 16,000,000 (Recognize the interest expense for the year) W-1: Determination of Equity and Liability Components Discount the cash flows at 11% Present value of interest at the end of: Rs. in million 30-Jun-12 (Rs. 200 million x 8%) x [14-(1+0.11) Jun-13 (Rs. 200 million x 8%) x fl 4- (1+0.11) Jun-14 (Rs. 200 million x 8%) x [1 + (1+0.II) 3 ] Jun-14 Present value of principal [Rs. 200 million x (1 + (1+0.1 lf Total liability component Total equity element (balancing) Proceed of issue Allocate issue costs Liability Equity Total Rs. in million Proceeds Issue cost (3.71) (0.29) (4.00) A-12 Qasmi Investment Limited Journal entries for 31 December 2011 and 2012 Date 31-Dec-2011 Description Debit Credit Rs. in million Accrued Interest written off (P&L) Accrued Interest

11 (Accrued interest on 12%TFCs for 2010 is no more receivable, now written off.) Financial assets (12% TFCs) W.3 ( ) 4.89 Interest income (P&L) 4.89 (Interest income on 12% TFCs at 4.426% for 2011) Impairment loss (P&L) W.l Financial assets (12% TFCs) (Impairment of financial assets (12% TFCs) as interest for 2010 to 2013 is no more receivable) 31-Dec-2012 Financial assets(12% TFCs) W.l (88.53x16.426%) Interest income (P&L) (Interest income for 2012) Financial assets (12% TFCs) W Impairment reversal (P&L) (Reversal of impairment of financial assets on rescheduling of payments for TFCs) W.l Impairment Carrying value of 12% TFCs on W PV of future cash flows on x [( ) 2 ] Impairment loss W.2 Impairment Reversal Revised carrying amount on rescheduling at lower of (A) and (B) below (A) PV of the future cash flow as per the agreed revised schedule (B) Amortised cost on impairment reversal date of would have been had the impairment not been recognised. W Existing carrying amount at x (103.07) Impairment reversal W.3 Original amortisation schedule Cash flow dates Effective % Cash flow 12%) Amortised cost R s. in million Jan-2009 (100x95%) Dec (12.00) Dec (12.00) Dec (12.00) Dec (12.00) A-13 OMEGA LIMITED Extract from statements of comprehensive income For the year ended December 31, 2013 Rs. Profit for the year Dividend received from AWL (20,000x10%15%x ,000 Transfer of FV gain reserve of on derecognition W-1 of AWL investment 500,000 FV/exchange gains on valuation of AWL shares on W-1 2,124,000

12 Loss on de-recognition of AWL shares W-1 (308,000) Other comprehensive income FV gain / (loss) on investment available for sale W-1 693,000 Exchange gain on investment available for sale W-1 225,225 W-1 Date No. of shares FV per share Investments Gain/(loss) Remarks AED AED Conv. rate Rupees Rupees 01-May , , ,000, Dec , , ,500, ,000 Fv gain 01-Jan , , ,624,000 2,124,000 Gain on valuation of AWL on its acquisition by HL 01-Jun , , ,316,000 (308,000) Loss on derecognition of AWL shares 31-Dec , , ,009, ,000 FV gain 31-Dec , , ,234, ,225 Exchange gain 3,234,225 A-14 Classification of debentures from held to maturity to available for sale Interest income and FV increase (non-current assets) investments available for sale Fair value reserve Rs. Rs. Rs. Debentures at fair value as at [16x(104/100) Interest income for the year statement of profit or loss 2.22 FV increase other comprehensive income for the year (IFRS 9 Para 5.6.1) W FV reserve for investment available for sale W-1 ( ) W Opening balance Interest earned at 14% [15.76x14.09%], [15.50x14.09%] Interest 12% [16x12%] (1.92) (1.92) Debentures at fair value at Rs. 104 [16x104/100] [16x102/100]

13 Other comprehensive income AFS reserve A-15 Date Particulars Debit Credit Rs. (m) Rs. (m) 01-Jan-2013 The fair value of the forward exchange contract at inception is Zero, therefore, no accounting entry is required Sep-2013 Other comprehensive income [IAS 39, Para 95] Profit or loss account 5.50 Financial liability (Forward contract) (To record loss on the forward contract since 01 Jan 2013) 01-Nov-2013 Other comprehensive income [IAS 39, Para 95] Profit or loss account ( ) 9.50 Financial liability (To record loss on the forward contract since 30 September 2013) 01-Nov-2013 Property, plant and equipment (balancing) Other comprehensive income ( ) Accounts payable (50x11.15) (To record delivery of the equipment and liability at delivery date spot rate) 01-Dec-2013 Profit or loss account Financial liability (Forward contract) (To record loss on the forward contract since 01 November 2013) 01-Dec-2013 Accounts payable Financial liability (Forward contract) ( ) Profit or loss account Bank (To record settlement of account payable and the forward contract) Working 30-Sep-2013 Loss on forward contract at forward rates ( )x50 (130.50) Effect on expected cash flows at spot rates ( )x Hedge effectiveness, highly effective [IAS 39 AG 105 (b)] 90% 01-Nov-2013 Loss on forward contract at forward rates ( )x50 (52.00) Effect on expected cash flow at spot rates ( )x Hedge effectiveness, highly effective [IAS 39, AG 105 (b)] 42.5/ % 01-Dec-2013 Loss on forward contract at forward rates ( )x50 (67.50) Effect on expected cash flow at spot rates ( )x Hedge effectiveness, highly effective [IAS 39, AG 105 (b) 85% A-16 The deposit is considered a financial asset. As per IFRS-9, a financial asset is classified as measured at either amortized cost or fair value. ISL should measure this investment at amortized costs because: It appears that the asset is held within ISL business model where the objective is to hold assets in order to collect contractual cash flows.

14 The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. The additional 2% interest is an example of an embedded derivative. As the host contract is a financial asset, the derivative is not separated out for the purposes of accounting and the entire hybrid contract is accounted for together.