CERTIFICATE IN ACCOUNTING & FINANCE 1

FINANCIAL ACCOUNTING &

REPORTING

Edition 2026

COMPILED BY: MURTAZA QUAID, ACA

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Although utmost care and caution is exercised, but error or omission can creep being to err is
human and perfection is the name. Hopefully, the patrons will bear me and discrepancy, if any,
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CH. CONTENTS Page No.

1 OVERVIEW OF THE COURSE 5 TO 11

2 IAS 23 - BORROWING COSTS 12 TO 35

3 IAS 16 - PROPERTY, PLANT AND EQUIPMENT 36 TO 77

4 IAS 40 – INVESTMENT PROPERTY 78 TO 100

5 IAS 20 - ACCOUNTING FOR GOVERNMENT GRANTS AND 101 TO 121

DISCLOSURE OF GOVERNMENT ASSISTANCE

6 IAS 36 - IMPAIRTMENT OF ASSETS 122 TO 146

7 ICAP PAST PAPERS – NON - CURRENT ASSETS 147 TO 158

8 IAS 38 – INTANGIBLE ASSETS 159 TO 215

9 IAS 41 - AGRICULTURE 216 TO 245

10 IAS 1 - PREPARATION OF FINANCIAL STATEMENTS 246 TO 311

11 STATEMENT OF CHANGES IN EQUITY 312 TO 330

ACCOUNTING POLICIES, CHANGES IN ACCOUNTING
12 IAS 8:- ESTIMATES AND ERRORS 331 TO 357

13 IAS 7: STATEMENT OF CASH FLOWS 358 TO 393

14 INCOMPLETE RECORDS 394 TO 458

15 ACCOUNTING FOR NON - PROFIT ORGANIZATIONS 459 TO 498

16 CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING 499 TO 532

 CAF 1 FAR 2026 EDITION

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 CAF 1 FAR 2026 EDITION

 Course duration = 90 hours

 Expected completion date = One

month before exam date

 Strategy for the exam,

 Learning and linking of concepts
from notes and class notings.
 Extensive practice from basics to
advanced questions
 Referring to summaries for
effective and efficient revision.
 Solving the past papers of each
topics after covering the topic.
 Extend of past paper coverage =
Last 15 attempts.

You must study at least 3 hours on daily basis to prepare CAF 1: Financial Accounting
& Reporting in 4.5 months as follow:
 Revision of previous topics 1 Hours
 New lecture to be covered 1 Hours
 Self Study and Practice 1 Hours

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 CAF 1 FAR 2026 EDITION

40%

31% 31% 30%

27% 28% 28%
25%
23% 22%

AUT UMN S P R IN G AUTUMN S P R IN G AUTUMN S P R IN G AUT UMN S P R IN G AUT UMN S P R IN G

2020 2021 2021 2022 2022 2023 2023 2024 2024 2025

 The over the previous session’s

result of 28% and the rolling average of 26% across recent attempts. This
improvement appears to be primarily attributable to a decrease in the proportion of
examinees who were exempted from Introduction to Accounting under the
transitional scheme, a group that has consistently demonstrated a lower pass rate.
 limited the ability of examinees to attempt the
full breadth of the paper. This was particularly evident in the short questions
(excluding MCQs), where in each question a significant proportion of examinees
(21%, 27%, 40%, 22%, and 28%) secured zero marks, despite numerous examinees
achieving full marks on the same questions. A similar pattern was also observed in Q8
(not-for-profit organizations), where 31% of examinees secured only 1 mark, even
though higher marks could have been achieved using basic accounting knowledge
alone, without requiring familiarity with the specific topic.

 were once
again evident, with frequent instances of

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 CAF 1 FAR 2026 EDITION

 The current pass rate of 28% aligns closely with the previous session’s result of 28%
and maintains consistency with the rolling average over recent sessions. This session
still included 26% examinees who received exemptions from Introduction to
Accounting due to the transition to the new scheme, a

prior to attempting this paper.

 The answer scripts varied widely in quality. Several examinees attained high scores in
the 80s and 90s reflecting strong preparation. However, the trend of
, with many examinees achieving good marks on certain questions while
struggling to secure reasonable marks on others, indicating a lack of comprehensive
topic coverage. This was most evident in short questions 1, 4, and 5, where 20%,
34%, and 30% respectively, secured zero marks despite many students achieving full
marks in these areas.
 As this is often the first written paper for many examinees,
their work frequently showed a

 The current result of 28% aligns closely with the previous result of 27% and the
average of the last five sessions, which was 26%.

 Roughly, one-third of the examinees taking this examination have been granted
exemptions from the Introduction to Accounting as a result of the transition to the
new scheme. Notably,

 The performance of the examinees displayed notable disparities among the answer
scripts. Among all papers, the highest number of examinees achieved more than 80
marks in this paper, with some even scoring as high as 97.

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 CAF 1 FAR 2026 EDITION

 The current result of 27% closely aligns with the previous result of 22% and the five-
session rolling average, which stands at 26%.
 Roughly, half of the examinees taking this examination have been granted
exemptions from the Introduction to Accounting due to the transition to the new
scheme. Notably, the

 The performance of the examinees displayed notable disparities among the answer
scripts. A considerable number of examinees achieved exceptional scores, attaining
marks in the 80s or even as high as 98. However, it is important to highlight that 19%
of the examinees obtained 20 marks or less, indicating a lack of understanding of the
subject's basics.

 was evident as candidates successfully garnered

high marks in three to four questions, yet faced challenges in
securing satisfactory marks in the remaining questions.

 The current result of 22% is fairly consistent with the previous result of 25% and the
average of the last 3 sessions which is 26%.
due to the transition
to the new scheme, and the passing rate for these examinees is significantly lower
than that of the other examinees.
 The performance of the examinees varied significantly across the answer scripts, with
some scoring exceptionally well, receiving marks in the 80s or even as high as 93.
However, it is worth noting that 18% of the examinees scored 20 or fewer marks,
indicating a lack of understanding of the subject's basics and inadequate exam
preparation.
 Some of the
. This could be attributed to the fact that for many examinees, it
was their .

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 CAF 1 FAR 2026 EDITION

 The current result of 25% is consistent with the previous result of 23%.

 Many examinees secured marks in the 80s and even as high as 88

was evident from the fact that a number of examinees secured a maximum of 1
mark in Q2, Q3, Q4, and Q8 whereas numerous other examinees secured full marks
in these questions. The examinees struggled to obtain the easy marks available in the
paper which could have been achieved with just basic preparation of the topic.

 The overall result of 23% in this session is lower than the previous session’s result of
31%.

under the
transition rules of the Education Scheme 2021.
 The performance of the examinees significantly varied from one answer script to
another answer script. There were many examinees who secured marks in the 80s
and even as high as 95. Some examinees secured good marks in three to four
questions but failed to obtain reasonable marks in the remaining questions. About
one third examinees did not secure any mark in Q.1, Q.3 and Q.5. It seems that

Some of the examinees were struggling to

obtain the easy marks available in the paper which could have been achieved with
basic preparation.

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 CAF 1 FAR 2026 EDITION

 IAS 1 Presentation of Financial  Statement of Changes in Equity  IAS 16: Property, Plant and
Statements Equipment
 IAS 7: Statement of Cash Flows
- Statements of Financial  IAS 38: Intangible Assets
Position (Balance Sheet)  IAS 8: Accounting Policies,  IAS 36: Impairment of Assets
- Profit or Loss (Income Accounting Estimates and Errors
 IAS 20: Government Grants &
Statement) Government Assistance
 Conceptual and Regulatory  IAS 23: Borrowing Costs
Framework for Financial  IAS 40: Investment Property
Reporting
 IAS 41: Agriculture
 Incomplete Records

 Accounting for NPOs

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CAF 1 FAR 2026 EDITION

Compiled by:
Murtaza Quaid, FCA

 Introduction
 Qualifying Assets
 Recognition Rule
 Specific Borrowings
 General Borrowings
 Period of Capitalization
 Expenditure on Qualifying Asset
 Disclosures

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 The core principle of IAS 23 Borrowing Costs is that

to the acquisition,
construction or production of a .

 Borrowing costs are interest and other costs that an entity incurs in
connection with the
 Examples include
 Interest expense (calculated using effective interest method),
 Loan processing fee,
 Commissions,
 Documentation charges, and
 Legal charges relating to borrowing of funds.
 Exchange differences on foreign currency borrowings are also borrowing
costs.
 IAS 23 does not deal with the actual or imputed cost of equity (including
preferred share capital not classified as liability), therefore,

 A qualifying asset is an asset that necessarily takes a substantial

period of time to get ready for its intended use or sale.
 Qualifying assets are usually self-constructed non-current assets
and long maturing inventories. Depending on the circumstances,
any of the following may be qualifying assets:
 inventories (IAS 2)
 manufacturing plants (IAS 16)
 power generation facilities (IAS 16)
 intangible assets (IAS 38)
 investment properties (IAS 40)

 Financial assets (i.e., cash and investments etc.), and inventories that are manufactured, or
otherwise produced, over a short period of time, are not qualifying assets. Similarly, assets
that are ready for their intended use or sale when acquired are not qualifying assets.
 “S ” is not defined in IAS 23, so here we need to apply some
. In exam, if an asset takes to be ready, then it would be a
qualifying asset.

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 CAF 1 FAR 2026 EDITION

 Borrowing costs that are directly attributable to the

acquisition, construction or production of a qualifying
asset must be capitalised as part of the cost of that
asset.
 All other borrowing costs are recognized as an
expense in the period in which they are incurred.
 Borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying
asset are those that would have been avoided if the
expenditure on the qualifying asset had not been
made.

 Specific borrowings are funds borrowed  General borrowings are funds borrowed for various
specifically for the purpose of obtaining a purposes and they are used (apart from these other
qualifying asset. purposes) also for the construction of a qualifying asset.
 The financing arrangements for a qualifying  The amount of borrowing costs eligible for capitalisation
asset may result in an entity obtaining is determined by applying a capitalisation rate to the
borrowed funds and incurring associated expenditures on qualifying asset.
borrowing costs before some or all of the
funds are used for expenditures on the  The amount of borrowing costs that an entity capitalises
qualifying asset. In such circumstances, the during a period shall not exceed the amount of
funds are often temporarily invested pending borrowing costs it incurred during that period.
their expenditure on the qualifying asset.
 The capitalisation rate shall be the weighted average of
 The amount of borrowing costs eligible for the borrowing costs applicable to all borrowings (other
capitalisation is the actual borrowing costs than specific borrowings) of the entity that are
incurred on that borrowing during the period outstanding during the period.
less any investment income on the temporary

investment of those borrowings.
� � � �
100
� ℎ �� � � �
Actual borrowing costs incurred XXXX
 The capitalisation rate is applied from the time
Less: Temporary investment income (XXX)
expenditure on the asset is incurred.

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 CAF 1 FAR 2026 EDITION

 Capitalisation of  Capitalisation of  Capitalisation of borrowing

borrowing costs should borrowing costs should be costs should cease when the
start only when: suspended if development asset is substantially
 Expenditures for the of the asset is suspended complete. The costs that
asset are being for an extended period of have already been
incurred; and time. capitalised remain as a part
of the asset’s cost, but no
 Borrowing costs are
additional borrowing costs
being incurred, and
may be capitalised.
 Activities necessary to
prepare the asset have
started.

 An entity shall begin capitalising borrowing costs as part of the cost of a qualifying asset on the
commencement date.
 The commencement date for capitalisation is the date when the entity first meets all of the
following conditions:
 it incurs expenditures (resulted in payment of cash or transfer of other assets) for the asset;
 it incurs borrowing costs; and
 it undertakes activities that are necessary to prepare the asset for its intended use or sale.
 The activities necessary to prepare the asset for its intended use or sale encompass more than
the physical construction of the asset. This includes technical and administrative work prior to
the commencement of physical construction, such as the activities associated with obtaining
permits prior to the commencement of the physical construction.
 However, such activities exclude the holding of an asset when no
production or development that changes the asset’s condition is
taking place. For example, borrowing costs incurred while land is
under development are capitalised during the period in which
activities related to the development are being undertaken.
However, borrowing costs incurred while land acquired for
building purposes is held without any associated development
activity do not qualify for capitalisation.

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 CAF 1 FAR 2026 EDITION

 An entity shall suspend capitalisation of borrowing costs during extended periods in which it
suspends active development of a qualifying asset.
 An entity does not normally suspend capitalising borrowing costs during a period when it carries
out substantial technical and administrative work. An entity also does not suspend capitalising
borrowing costs when a temporary delay is a necessary part of the process of getting an asset
ready for its intended use or sale. For example, capitalisation continues during the extended
period that high water levels delay construction of a bridge, if such high water levels are
common during the construction period in the geographical region involved.

 An entity shall cease capitalising borrowing costs when

substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are
complete. An asset is normally ready for its intended use
or sale when the physical construction of the asset is
complete even though routine administrative work
might still continue. If minor modifications, such as the
decoration of a property to the purchaser’s or user’s
specification, are all that are outstanding, this indicates
that substantially all the activities are complete.
 When an entity completes the construction of a
qualifying asset in parts and each part is capable of
being used separately while construction continues on
other parts, the entity shall cease capitalising borrowing
costs when it completes substantially all the activities
necessary to prepare that part for its intended use or
sale.

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 Expenditures on a qualifying asset include only

those expenditures that have resulted in payments
of cash or transfers of other assets.
 The average carrying amount of the asset during a
period, including borrowing costs previously
capitalised, is normally a reasonable
approximation of the expenditures to which the
capitalisation rate is applied in that period.
 Expenditures are reduced by:
 any progress payments received; and
 grants received in connection with the asset.

An entity shall disclose:

(a) The amount of borrowing costs capitalised during the period; and

(b) The capitalisation rate used to determine the amount of borrowing

costs eligible for capitalisation.

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

IAS 23: Borrowing Costs - Practice Questions

Question 1. [Identification of Qualifying Assets] [CAF 1 - ICAP Study Text]
Identify whether or not the following are qualifying assets.
(i) A construction company constructing a bridge for government which will take 6 years to complete.
(ii) A very sophisticated integrated circuits being made by an entity who manufactures and sales 10,000
to 12,000 units every month.
(iii) A power plant under construction, it may take 10 months to complete this.
(iv) An equipment purchased by X Limited, the equipment may be used immediately after it is delivered.
(v) Special order from a customer to manufacture a machine for him which will take 11 months at the
least.
(vi) An entity is constructing office building which will take 8 months to complete.

Question 2. [Specific Borrowing] [CAF 1 - ICAP Study Text]

Up Limited borrowed a loan of Rs. 10 million from Down Bank on 15% per annum for constructing its
power generation facilities.
The loan was received on February 01, 2011. Up Limited paid Rs. 3 million to contractor immediately but
remaining Rs. 7 million were paid to the contractor on March 1, 2011. The remaining Rs. 7 million were
temporarily invested in a saving account at 9% per annum.
Up Limited has year-end of 31 December. As on December 31, 2011 the construction is still in process and
the loan is also outstanding.
Required: Calculate the amount of borrowing cost to be capitalised for the year ended December 31,
2011?

Question 3. [Specific Borrowing] [CAF 1 – ICAP Study Text]

Shayan Limited (SL) started the construction of its new factory on 1 January 2018 with a specific loan of
Rs. 50,000,000 borrowed at an interest rate of 8% per annum.
The loan was used on the factory as follows:

Date of Payment Rs. in million

Jan 1, 2018 25
May 1, 2018 15
Oct 1, 2018 10

The construction of the asset was completed on 31 December 2018. However, during the accounting
period SL invested the surplus funds at an interest rate of 3%.
Required: How much the amount of borrowing cost eligible for capitalization at 31 December 2018?

IQ School of Finance

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question 4. [Specific Borrowing] [CAF 1 - ICAP Study Text]

On 1 January 2016 Okara Engineering issued a bond to raise Rs. 25,000,000 to fund a capital project which
will take three years to complete. Amounts not yet needed for the project are invested on a temporary
basis. During the year to 31 December 2016, Okara Engineering spent Rs. 9,000,000 on the project for
labour, materials and direct overheads etc.
The cost of servicing the bond was Rs. 1,250,000 during this period and the company was able to earn Rs.
780,000 through the temporary reinvestment of the amount borrowed.
Required: Calculate the amount of addition to capital work in progress during the year to December 31,
2016.

Question 5. [Specific Borrowings] [CAF 1 – ICAP Study Text]

On 1 Jan 20X6 Googly Industries Limited (GIL) borrowed Rs. 15 million to finance the production of two
assets, both of which were expected to take a year to build. Work started during 20X6. The loan facility
was drawn down and incurred on 1 Jan 20X6, and was utilised as follows:
Asset A Asset B
------- Rs. in million ------
1 January 20X6 2.5 5
1 July 20X6 2.5 5
The loan rate was 9% and GIL can temporarily invest the surplus funds at 7%.
Required: Calculate the borrowing costs which may be capitalised for each of the assets and
consequently the cost of each asset as at 31 December 20X6.

Question 6. [General Borrowing] [CAF 1 - ICAP Study Text]

SIKA Sports Limited is constructing a stadium for last some years. During the year ended 31 December
2011, it has incurred the following expenditures.

April 30, 2011 Rs. 2,500,000

July 31, 2011 Rs. 2,300,000

No specific loan was borrowed for the construction; rather general pool of funds was used. The following
loans are outstanding:

Loan from FBL @12% Outstanding since beginning of year Rs. 5,000,000

Loan from BAH @14% Outstanding since beginning of year Rs. 10,000,000

Loan from BAF @16% Outstanding since 01-09-2011 Rs. 750,000

Required: Calculate total borrowing costs eligible for capitalisation during the year ended December 31,
2011.

IQ School of Finance

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 CAF 1 FAR 2026 EDITION
IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question 7. [Comprehensive Example] [CAF 1 - ICAP Study Text]

Sahiwal Construction has three sources of borrowing:

Average loan in Interest expense Interest

the year (Rs.) incurred in the year (Rs.) rate

7-year loan 8,000,000 800,000 10%

10-year loan 10,000,000 900,000 9%

Bank overdraft 5,000,000 900,000 18%

The 7-year loan has been specifically raised to fund the building of a qualifying asset.
Sahiwal Construction has incurred the following expenditure on a project funded from general borrowings
for year ended 31 December 2016.

Date incurred: Amount (Rs.)

31st March 1,000,000

31st July 1,200,000

30th October 800,000

Required: Calculate the capitalisation rate and addition to capital work in progress.

Question 8. [General Borrowing] [CAF 1 – ICAP Study Text]

On January 1, 2018 Sara Limited (SL) started the construction of an asset. To meet the financing
requirements, borrowing was made from three different banks at the start of the year as follows:
Banks Amount (Rs.) Interest Rate per annum
A 70,000 10%
B 60,000 8%
C 50,000 12%

The funds were used on the assets as follows:

Date of Payment Amount (Rs.)
Jan 1, 2018 30,000
May 1, 2018 20,000
Oct 1, 2018 15,000

The construction of asset was completed on 31 December 2018.

Required: Calculate the general weighted average borrowing rate and eligible borrowing cost.

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 CAF 1 FAR 2026 EDITION
IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question 9. [Capitalization Period] [CAF 1 - ICAP Study Text]

Cord Limited is engaged in the manufacturing of automobiles. Currently the company is manufacturing its
power generation plant. The project was started on January 03, 2011 with company’s own funds.
Subsequently, Cord Limited borrowed a loan from ZBL Bank to finance the project on February 22, 2011.
The first payment out of the loan was made on March 04, 2011.
Due to some law and order situation, the project remained closed from April 25, 2011 to May 9, 2011.
The work was also stopped for a week from May 23, 2011 to May 30, 2011 so that necessary plan and
layout can be finalized after testing of project completed so far.
The plant was completed on July 31, 2011 except that some sign board could not be installed until August
10, 2011. Loan was repaid on August 31, 2011. Cord Limited started using the plant on September 1, 2011.
Required:
a) When Cord Limited should start capitalising borrowing costs?
b) Should Cord Limited suspend capitalisation from April 25, 2011 to May 9, 2011?
c) Should Cord Limited suspend capitalisation from May 23, 2011 to May 30, 2011?
d) When Cord Limited should cease to capitalise borrowing costs?

Question 10. [Specific Borrowings] [CAF 1 - ICAP Study Text]

Alpha Limited borrowed Rs. 9 million @ 15% per annum to fund a qualifying asset project on 1 January
2016. The following expenditures were made on the project during the year ending 31 December 2016:

Date Rs. in million

1 March 2016 2.5

1 October 2016 4.2

1 December 2016 2.3

Surplus funds were invested at the rate of 10% whenever available.

The project activities started on 1 March 2016. Work on the project was suspended during the whole
month of August and resumed at start of September. Construction was completed on 31 December 2016.
Required: Calculate the borrowing costs to be capitalised and to be charged to profit or loss.

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question 11. [Specific Borrowing] [Gripping IFRS: Graded Questions]

Money Limited began the construction of a new building on the 1 February 2015. Construction costs
incurred in 2015 were paid for as follows:

Amount in Rs.
On 1 February 500,000
On 1 July 600,000
On 1 November 800,000

The construction of the building ended on the 1 December 2015 when the building was complete and
ready for its intended use. This building is to be depreciated over 10 years to a nil residual value using the
straight-line method.
The construction was financed by a loan of Rs. 1,900,000 from Cash Limited. The loan was raised on 1
January 2015 specifically to facilitate the construction of the building. The interest rate is 25% per annum.
There were no capital repayments during the year. Surplus funds were invested at 20% per annum. The
interest is compounded annually.
The building is a qualifying asset for the purposes of IAS 23.
Required:
a) Calculate borrowing costs eligible for capitalization during the year ended 31 December 2015.
b) Calculate the depreciation for the year ended 31 December 2015.
c) Calculate the carrying amount of the buildings as at 31 December 2015.

Question 12. [General Borrowings] [CAF 1 - ICAP Study Text]

Khan Limited (KL) has the following loan arrangements as at 1 January 2020:

Loan Arrangements Rs. in million

7% Debentures 55
8% Loan notes 110
12% Line of credit 85
10% Running finance arrangement 150

On the 1 January 2020, KL commenced the construction of a new factory. The construction of the factory
will cost Rs. 100 million and the company funded the construction with the existing borrowings.
The factory was completed on 31 August 2020 but was not available for use until 31 January 2021 as a
result of minor modification. During the construction period, active work was interrupted, and the
building construction was stopped for two months as a result of unexpected adverse weather conditions.
Required: Calculate the borrowing cost to be capitalised and the cost of the building to be recognised
upon initial recognition.

IQ School of Finance

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 CAF 1 FAR 2026 EDITION
IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question 13. [General Borrowings] [Gripping IFRS: Graded Questions]

Yipdeedoo Limited began construction on a building, a qualifying asset on 1 March 20X1. The construction
was complete on 30 November 20X1 and brought into use from 1 January 20X2. Depreciation is provided
at 10% per annum to a Rs. 100,000 residual value.

The company had the following general loans outstanding during the year:

Bank Loan amount Interest rate Date loan raised Date loan repaid
Bank - A Rs. 300,000 15% 1 January 20X1 N/A
Bank – B Rs. 200,000 10% 1 April 20X1 30 September 20X1
Bank – C Rs. 100,000 12% 1 June 20X1 31 December 20X1

The interest on the loans is compounded annually. Construction costs:

Details Date incurred Amount Comments

Laying a slab 1 Mar 20X1 Rs. 60,000 -
Waiting for slab to cure 1 Mar – 31 Mar Nil This is a normal process
Purchase of materials 1 Apr 20X1 Rs. 120,000 -
Incurred evenly over the
Labor costs 1 Apr – 30 Nov 20X1 Rs. 330,000 months but paid at the
beginning of each month

Interest income of Rs. 30,000 was earned during the year. The building is a qualifying asset for the
purposes of IAS 23.
Required:
a) Calculate the amount of borrowing costs that are eligible for capitalization during the year ended 31
December 20X1.
b) Calculate the depreciation for the year ended 31 December 20X1.
c) Calculate the carrying amount of the buildings as at 31 December20X1.

IQ School of Finance

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question 14. [CAF 1 – ICAP Study Text]

On September 1, 2015, Spin Industries Limited (SIL) started construction of its new office building and
completed it on May 31, 2016. The payments made to the contractor were as follows:

Date of Payment Amount in Rs.

September 1, 2015 10,000,000
December 1, 2015 15,000,000
February 1, 2016 12,000,000
June 1, 2016 9,000,000

In addition to the above payments, SIL paid a fee of Rs. 8 million on September 1, 2015 for obtaining a
permit allowing the construction of the building.

The project was financed through the following sources:

(i) On August 1, 2015 a medium-term loan of Rs. 25 million was obtained specifically for the
construction of the building. The loan carried mark up of 12% per annum payable semi-annually.
A commitment fee @ 0.5% of the amount of loan was charged by the bank.

Surplus funds were invested in savings account @ 8% per annum. On February 1, 2016 SIL paid
the six-monthly interest plus Rs. 5 million towards the principal.

(ii) Existing running finance facilities of SIL

▪ Running finance facility of Rs. 28 million from Bank A carrying mark up of 13% payable
annually. The average outstanding balance during the period of construction was Rs. 25
million.
▪ Running finance facility of Rs. 25 million from Bank B. The mark up accrued during the period
of construction was Rs. 3 million and the average running finance balance during that period
was Rs. 20 million.
Required: Calculate the amount of borrowing costs to be capitalized on June 30, 2016 in accordance with
the requirements of International Accounting Standards. (Borrowing cost calculations should be based on
number of months).

IQ School of Finance

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question 15. [CFAP 1 – Question bank]

On July 1, 2015, Qureshi Steel Limited (QSL) signed an agreement with Pak Construction Limited for
construction of a factory building at a cost of Rs. 100 million. It was agreed that the factory would be ready
for use from January 1, 2017. The terms of payments were agreed as under:

(i) 10% advance payment would be made on signing of the agreement. The advance paid would be
adjusted at 10% of the quarterly progress bills.
(ii) 5% retention money would also be deducted from the progress bills. Retention money will be
refunded one year after completion of the factory building.
(iii) Progress bills will be raised on last day of each quarter and settled on 15th of the next month.
The under mentioned progress bills were received and settled by QSL as per the agreement:

Invoice date Amount in Rs.

September 30, 2015 30 million
December 31, 2015 20 million
March 31, 2016 10 million
June 30, 2016 15 million

On April 30, 2016 an invoice of Rs. 1.5 million was raised by the contractor for damages sustained at the
site, on account of rains. After negotiations, QSL finally agreed to make additional payment of Rs. 1.0
million to compensate the contractor. The amount was paid on May 15, 2016. It is expected that 75% of
the payment would be recovered from the insurance company.

The cost of the project has been financed through the following sources:

(i) Issue of right shares amounting to Rs. 15 million, on September 1, 2015. The company has been
following a policy of paying dividend of 20% for the past many years.
(ii) Bank loan of Rs. 25 million obtained on December 1, 2015. The loan carries a markup of 13% per
annum. The principal is repayable in 5 half yearly equal instalments of Rs. 5 million each along
with the interest, commencing from May 31, 2016. Loan processing charges of Rs.0.5 million were
deducted by the bank at the time of disbursement of loan. Surplus funds, when available, were
invested in short term deposits at 8% per annum.
(iii) Cash withdrawals from the existing running finance facility provided by a bank. Average running
finance balance for the year was Rs. 60 million. Markup charged by the bank for the year was Rs.
9 million.
Required: Compute cost of capital work in progress for the factory building as of June 30, 2016 in
accordance with the requirements of relevant IFRSs. (Borrowing costs calculations should be based on
number of months)

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question 16. [CFAP 1 – Question bank]

On January 1, 2016, Imran Limited started the construction of its new factory. The construction period is
approximately 15 months and the cost is estimated at Rs. 80 million. The work has been divided into 5
phases and payment to contractor shall be made on completion of each phase.

In the year the company had the following sources of finance available.

(i) Rights issue of shares amounting to Rs. 15 million on January 1, 2016. The company usually pays
a dividend of 10% each year.
(ii) Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1, 2016. (This loan was
outstanding for 306 days in the year).
(iii) On August 1, 2016, Rs. 10 million were borrowed from the bank. Interest thereon, is payable at
the rate of 11%. (This loan was outstanding for 153 days in the year).
Surplus funds, when available, were invested in short term deposits at 8% per annum.

The details of bills submitted by the contractor, during the year are as follows:

Particulars Date of payment Amount in Rs.

On completion of 1st phase March 1, 2016 20,000,000
On completion of 2nd phase April 1, 2016 18,000,000
rd
On completion of 3 phase October 1, 2016 16,000,000
On completion of 4th phase Payment not yet made 17,000,000

On June 1, 2016, the Building Control Authority issued instructions for stoppage of work on account of
certain discrepancies in the completion plan. The company filed a petition in the Court and the matter
was decided in the company’s favor on July 31, 2016. Work recommenced after a delay of 61 days.

The following periods may be relevant:

Period Days
March 1 to December 31 306
April 1 to December 31 275
August 1 to December 31 153
October 1 to December 31 92
Required:

a) Assuming that the loans were taken specifically for the project, calculate the amount of borrowing
costs that should be capitalized in the period ending December 31, 2016 in accordance with the
requirements of IAS 23 Borrowing Costs.
b) Assuming that the loans constituted general finance, calculate the amount of borrowing costs that
should be capitalized in the period ending December 31, 2016 in accordance with the requirements
of IAS 23 Borrowing Costs.

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question 17. [Expenditure on Qualifying Asset] [CAF 1 - ICAP Study Text]

Zeal Limited (ZL) is building a dam for Federal Government. The project will take 10 years to complete. On
February 01, 2011 ZL used Rs. 100 million from pool of general loans with capitalisation rate of 12% for
the expenditures incurred on the same date for payment to sub-contractors who started work
immediately.
On July 01, 2011 the Federal Government made first progress payment of Rs. 30 million.
As ZL had offered employment opportunities to locals of the area, considering this fact; Provincial
Government has given ZL a grant (award) of Rs. 10 million on October 31, 2011.
Required: The borrowing costs to be capitalised for Zeal Limited for the year ended December 31, 2011.

Question 18.
On January 1, 2012, ABC Limited started the construction of its new factory. The construction period is
approximately 11 months and the cost is estimated at Rs. 7,000 million.

In the year the company had the following sources of finance available.

(i) Rights shares subscription money received on 1st November 20112 of Rs. 5,000 million. The
company usually pays a dividend of 20% each year.
(ii) Bank loan of Rs. 5,000 million carrying a mark-up of 15% was raised on 1st January 2012 specifically
for construction of factory. (40% of the loan together with interest has to be repaid on 1st October
2012).
(iii) Band overdraft at the rate of 20% with the limit of Rs. 10,000 million. Apart from this qualifying
asset, average outstanding utilized amount of this facility is Rs. 1,600 million.
Return on temporary investment is 8% but surplus fund, as per the policy of the company, should first be
invested in utilized portion of bank overdraft.

The details of expenditure paid during the year are as follows:

Date of payment Rs. in million

January 1, 2016 2,000
April 1, 2016 3,000
October 1, 2016 2,000

Required: Calculate the amount of borrowing costs that should be capitalized in the period ending
December 31, 2012 in accordance with the requirements of IAS 23 Borrowing Costs.

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

IAS 23: Borrowing Costs - ICAP Past Papers

Question No. 7(iii) of Spring 2021, 5 marks
You have recently joined as the finance manager of Corv Limited (CL). While reviewing the draft financial
statements for the year ended 31 December 2020 prepared by the junior accountant, you have noted
the following:
(iii) CL is constructing a power generation plant for its factory. The project started on 1 February 2020
and would complete on 30 November 2021. The work remained suspended for 3 months. The project is
financed through long term loan, acquired specifically on 1 January 2020. The unutilised amount of loan
is kept in a separate saving account.

The accountant has deducted income of separate saving account from full year’s interest on loan and
presented the net amount as finance cost in the statement of profit or loss.

Required: Discuss how the above issues should be dealt in the financial statements of CL for the year
ended 31 December 2020 in accordance with the requirements of IFRSs.

Solution:

The accounting treatment adopted by accountant to expense out borrowing cost is incorrect as some
borrowing cost is eligible for capitalization. Power generation plant falls under definition of qualifying
asset as its construction involves substantial period.

Construction of the power plant is financed through specific borrowing so actual borrowing cost incurred
less temporary investment income on the borrowings would be capitalized. However, the borrowing cost
will be capitalized from the date when construction actually started i.e. 1 February 2020 rather than 1
January 2020. Further, the capitalization of borrowing costs should be suspended and charged to the
statement of profit or loss during the three months when work was suspended.

In the statement of profit or loss, borrowing cost on loan and interest income earned from saving account
should be presently separately.

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question No. 7 of Autumn 2021 – 7 marks

Following information pertains to non-current assets of Bunny Ear Limited (BEL):
Factory building:
On 1 March 2019, BEL started construction of the factory building. The construction work was completed
on 30 June 2020. Payments related to the construction of the factory were as follows:

The project was financed through:

(i) government grant of Rs. 200 million received on 1 February 2019. Unused funds from government
grant were invested in a saving account @ 8% per annum.
(ii) withdrawals from the following running finance facilities obtained from Bank A and Bank B. The
relevant details are:

Useful life of the factory building has been estimated at 25 years.

Required: Calculate borrowing costs to be capitalized during the year ended 31 December 2019 and 31
December 2020. (Borrowing costs are to be calculated on the basis of number of months)

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question No. 1 of Spring 2022, 8 marks

Bulan Pakistan Limited (BPL) is planning to commence construction of a warehouse on 1 January 2023 and
is expecting to complete it by 30 November 2023. The management wants to ascertain the borrowing
costs that can be included in the cost of warehouse. Relevant details in this respect are as follows:
(i) Expected payments related to the construction of the warehouse will be as follows:

(ii) The project can be financed through the following sources:

▪ Specific loan of Rs. 350 million at the rate of 16% per annum to be obtained on 1 January
2023. The principal will be payable in 5 equal annual instalments along with interest, from 1
January 2024.
▪ Withdrawals to be made from existing running finance facilities. These facilities will also be
used to finance other needs of BPL. Details of these facilities are as follows:

(iii) The surplus funds available from the loan will be invested in a saving account at 10% per annum.
(iv) The construction work is expected to be suspended for the entire month of June 2023 due to usual
monsoon rains.
Required: Calculate the borrowing costs to be capitalised in the cost of warehouse in each of the following
independent cases:
a) if all the payments will be made from the specific loan only. (04)
b) if all the payments will be made from running finance facilities only. (04)

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question No. 4 of Autumn 2023, 6 marks

You are the accountant of Betta Limited (BL). BL has commenced construction of a manufacturing plant
to expand its production line, which will take two years to complete. The cost of the plant will be financed
through a new loan specifically obtained for this purpose. Remaining cost will be financed through the
existing borrowings.
You have pointed out that a portion of borrowing costs needs to be capitalised in the cost of plant. The
management is interested in determining the estimated borrowing costs that will be capitalised in the
future and has requested you to prepare a working.
Required: List the information (key dates, amounts, etc.) that you will need to gather in order to calculate
the estimated borrowing costs to be capitalised.
Solution:

Following is the list of information which would be required to compute the borrowing costs to be
capitalised:
Dates for capitalisation period:
(i) Date when started incurring expenditures for the plant.
(ii) Date when started incurring borrowings costs.
(iii) Date when activities to construct the plant started.
(iv) Any period of time during which BL suspends active construction of plant.
(v) Date when substantially all the activities necessary to construct the plant are completed.
Details of borrowings:
(i) Details of new specific loan obtained from bank i.e. amount, rate of interest, date obtained and
date of repayment.
(ii) Income earned on the temporary investment of unused funds of specific loan.
(iii) Details of existing general borrowings i.e. amount and rate of interest for computing
capitalisation rate.
Details of expenditures incurred:
(i) Amount of expenditures incurred directly for construction of plant and payments dates.

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question No. 5 of Spring 2024, 8 marks

On 1 January 2023, Textio Limited (TL) commenced construction of its factory building. Below is the
breakdown of the payments made to the contractor:

These payments were financed through the following sources:

Additional information:
(i) Surplus funds available from both the loans and right shares were invested in a savings account
earning interest at a rate of 10% per annum.
(ii) The construction work was suspended from 1 July to 31 July 2023; however, substantial technical
and administrative work was carried during July 2023.
(iii) The construction of the factory building was completed on 30 November 2023, but due to minor
modifications, it was not available for use until 31 December 2023.
Required: Calculate the borrowing costs to be capitalized in the cost of factory building.

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IAS 23 – Borrowing Costs Compiled by: Murtaza Quaid

Question No. 1 of Spring 2025, 8 marks

On 1 January 2024, Lacoste Limited commenced the construction of a warehouse building. Below is a
breakdown of the payments made to the contractor:

Additional information:
(i) These payments were financed through the following sources:
▪ A long-term loan of Rs. 500 million, carrying interest at a rate of 16% per annum, was obtained
on 1 January 2024. The surplus funds from the loan were invested in a savings account at 10%
per annum.
▪ Withdrawals from a running finance facility from a bank, which carries interest at a rate of
18% per annum. This facility is also used for working capital needs.
▪ A government grant related to warehouse amounting to Rs. 300 million was received on 1
September 2024. The receipt of grant was used to reduce the utilization of the running finance
facility.
(ii) A legal dispute arose regarding land ownership rights, and the construction work was completely
halted from 1 June 2024 to 15 July 2024 due to a court order.
(iii) The construction of the warehouse was completed on 31 December 2024.
Required: Calculate the borrowing costs to be capitalized in the cost of warehouse building.

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✔ ✔

✔ ✔

IAS 16 does not apply to:

PPE classified as held for sale in accordance
with IFRS 5: Non-current assets held for sale
and discontinued operations;
Biological assets related to agricultural activity
(refer IAS 41: Agriculture);
Recognition and measurement of exploration
and evaluation assets (refer IFRS 6:
Exploration for and evaluation of mineral
resources);
X Mineral rights and mineral reserves such as oil,
natural gas and similar non-regenerative
resources.

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Tangible items that:

⮚ are held for:

✔ Use in the production or supply of goods or services,

✔ Rental to others, or

✔ Administrative purposes; and

⮚ are expected to be used during more than one

period

Land & Building for rental �IAS 40: Investment Property

It is probable that future economic

The cost of the asset can be reliably
benefits associated with the asset
measured
will flow to the entity

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Purchase price Any costs directly attributable to Initial estimate of the

bringing the asset to the location costs of dismantling and
▪ plus import duties
and condition necessary for it to be removing the item and
and non-refundable
capable of operating in a manner restoring the site on which
taxes,
intended by management. For e.g: it is located.
▪ after deducting
▪ Employee costs arising directly
trade discounts and
from the installation or
rebates
construction of the asset;
▪ Cost of site preparation;
▪ Initial delivery and handling costs
▪ Installation and assembly costs;
Deferred Payment ▪ Testing costs to assess whether the
asset is functioning properly
⮚ The cost of an item of property, plant
and equipment is the cash price ▪ Professional fees directly
equivalent at the recognition date. attributable to the purchase.
⮚ If payment is deferred beyond normal
credit terms, the difference between the
cash price equivalent and the total
payment is recognized as interest over
the period of credit

⮚ Costs of opening a new facility;

⮚ Costs of introducing a new product or service
(including costs of advertising and promotional
activities);
⮚ Costs of conducting business in a new location or
with a new class of customer (including costs of
staff training); and
⮚ Administration and other general overhead costs.

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⮚ Depreciation is the
of an asset .
⮚ Depreciation method
are expected to be consumed.
⮚ are required
separately .
⮚ Depreciation is , unless it is included
in the carrying amount of another asset.
⮚ Depreciation when the asset is .

⮚ The of an asset are

at reporting date.
⮚ are changes in estimates are
accounted for in accordance with IAS 8.
⮚ Depreciation in accordance with
IFRS 5 and when it is .
⮚ Revenue based depreciation is prohibited.

Depreciation = Cost – Residual Value

Useful Life
Alternatively,
Depreciation = (Cost – Residual Value) x Depreciation %

Depreciation = Opening WDV x Depreciation %

Depreciation = Cost – Residual Value x Unit produced

Useful Life (in Units)

Depreciation = (Cost – Residual Value) x Remaining years

Sum of year’s digit
Sum of year’s digit = Useful life (Useful life + 1)
2

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An asset may be acquired in exchange for another asset.

The cost of acquired asset is measured at:
⮚ the fair value of the asset given up;
⮚ the fair value of the asset received, if it is more clearly
evident;
⮚ the carrying amount of the asset given, if
▪ the exchange transaction lacks commercial substance or

▪ fair value of neither the asset received nor the asset given up is reliably
measurable.

⮚ Subsequent expenditure are recognized as an asset if it meets the

recognition criteria.

⮚ In practice, subsequent expenditure is capitalised if it:

▪ improves the asset (for example, by enhancing its performance or
extending its useful life); or
▪ is for a replacement part (provided that the part that it replaces is
treated as an item that has been disposed of).

⮚ Costs of replacing components/parts are required to be capitalized if the recognition criteria

are met.. The carrying amount of those parts that are replaced is derecognised

⮚ Continued operation of an item of property, plant and equipment (PPE) may require regular
major inspections for faults. The cost of such major inspection is recognized in the carrying
amount of the item of PPE as a replacement if the recognition criteria are satisfied.

⮚ Do not recognise capitalize the costs of the day-to-day servicing of the item. Rather, these costs
are recognised in profit or loss as incurred. Costs of day-to-day servicing are primarily the costs
of labour and consumables, and may include the cost of small parts. The purpose of these
expenditures is often described as for the ‘repairs and maintenance’ of the item of property,
plant and equipment.

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An entity shall choose either the cost model or the revaluation model as its
accounting policy and shall apply that policy to an entire class of property, plant and
equipment.

Cost XXXX
Less. Accumulated Depreciation (XXX)
Less. Accumulated Impairment (XXX)

Fair Value XXXX

Less. Accumulated Depreciation (XXX)
Less. Accumulated Impairment (XXX)

Cost XXXX
Less. Accumulated Depreciation (XXX)
Less. Accumulated Impairment (XXX)

▪
▪

Carrying Amount of an asset (After depreciation)

as if it had never been revalued / impaired.
 Higher of (i) Value in Use; or
(ii) Fair Value less Cost to sell

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⮚ If an asset is revalued, the entire class of assets to which that asset belongs is required to be revalued
⮚ An increase in value of PPE is credited to revaluation surplus. However, increase shall be credited in profit or
loss to the extent that it reverses a revaluation decrease of the same asset previously debited in profit or loss.
⮚ A decrease in value of PPE is debited to profit or loss. However, the decrease shall be debited to revaluation
surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset.
⮚ The net carrying amount of the asset is adjusted to the revalued amount by one of the following ways:
▪ Restate accumulated depreciation proportionately with the change in the
gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its
revalued amount; or
▪ Eliminate accumulated depreciation against the gross carrying amount and
then change the carrying amount of the assets to the revalued amount.

⮚ Revalued assets are depreciated the same way as under the cost model. However, an amount equal

through statement of changes in equity.

⮚ Revaluations should be carried out regularly to ensure that carrying amount of an asset should not differ
materially from its fair value at the reporting date.
⮚ Revaluation frequency depends upon the changes in fair value of the items measured (annual revaluation for
volatile items or intervals between 3 - 5 years for items with less significant changes)

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⮚ Carrying amount of an item of property, plant and equipment shall be

:
▪ ; or
▪ when from its use or disposal.

⮚ is the difference between the proceeds and the carrying

amount and is recognized in

⮚ When a , any
. The transfer to retained earnings is not made through
profit or loss.

IAS 16 requires the following disclosures in the notes to the financial statements, for each major
class of property, plant and equipment.
a) The measurement bases used (cost or revaluation model) for determining the gross carrying
amount
b) The depreciation methods used
c) The useful lives or depreciation rates used
d) Gross carrying amounts and the accumulated depreciation at the beginning and at the end of
the period
e) A reconciliation between the opening and closing values
for gross carrying amounts and accumulated depreciation,
showing:
 additions during the year
 disposals during the year
 depreciation charge for the year
 increase or decrease in asset resulting from revaluation
and impairment losses

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Opening Balance XXXX XXXX XXXX XXXX

Addition XXXX XXXX XXXX XXXX
Revaluation XXXX XXXX XXXX XXXX
Other Adjustment (XXX) (XXX) (XXX) (XXX)
Disposal (XXX) (XXX) (XXX) (XXX)

Opening Balance XXXX XXXX XXXX XXXX

Depreciation for the year XXXX XXXX XXXX XXXX
Other Adjustment (XXX) (XXX) (XXX) (XXX)
Disposal (XXX) (XXX) (XXX) (XXX)

Measurement Model CM / RM CM / RM CM / RM CM / RM
Depreciation Method SLM / RBM SLM / RBM SLM / RBM SLM / RBM
Useful Life / Rate of Depreciation X% X% X% X%

An entity must also disclose:

 the existence and amounts of restrictions on title,
and property, plant and equipment pledged as
security for liabilities;
 the amount of expenditures recognised in the
carrying amount of an item of property, plant
and equipment in the course of its construction;
 the amount of contractual commitments for the
acquisition of property, plant and equipment;
and
 if it is not disclosed separately in the statement
of comprehensive income, the amount of
compensation from third parties for items of
property, plant and equipment that were
impaired, lost or given up that is included in
profit or loss.

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When items of property, plant and equipment are

stated at revalued amounts the following must be
disclosed:
 the effective date of the revaluation;
 whether an independent valuer was involved;
 for each revalued class of property, plant and
equipment, the carrying amount that would
have been recognised had the assets been carried
under the cost model; and
 the revaluation surplus, indicating the change for
the period and any restrictions on the
distribution of the balance to shareholders.

When items of property, plant and equipment are

stated at revalued amounts the following must be
disclosed:
 the effective date of the revaluation;
 whether an independent valuer was involved;
 for each revalued class of property, plant and
equipment, the carrying amount that would
have been recognised had the assets been carried
under the cost model; and
 the revaluation surplus, indicating the change for
the period and any restrictions on the
distribution of the balance to shareholders.

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IAS 16 encourages disclosure of the following

information as users of financial statements might
find this information to be useful:
 the carrying amount of temporarily idle
property, plant and equipment;
 the gross carrying amount of any fully
depreciated property, plant and equipment that
is still in use;
 the carrying amount of property, plant and
equipment retired from active use and held for
disposal; and
 when the cost model is used, the fair value of
property, plant and equipment when this is
materially different from the carrying amount.

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IAS 16 – Property, Plant & Equipment Compiled by: Murtaza Quaid, ACA

IAS 16 – PROPERTY, PLANT AND EQUIPMENT

Practice Questions

Question 1. [Initial Measurement] [ICAP Study Text Questions]

Alex Limited (AL) company has purchased a large item of plant. The following costs were incurred.
Rupees
▪ List price of the machine 1,000,000
▪ Trade discount given 50,000
▪ Delivery cost 100,000
▪ Installation cost 125,000
▪ Cost of site preparation 200,000
▪ Architect’s fees 15,000
▪ Administration expense 150,000
Local government officials have granted AL a license to operate the asset on condition that AL will
remove the asset and return the site to its former condition at the end of the asset’s life. The initial
estimate of the liability in respect of the expected clearance cost amounts to Rs. 250,000.
Requried: At what amount, plant would be initially recognized?

Question 2. [Useful life and Residual value] [ICAP Study Text Questions]
An asset costs Rs. 100,000 and can be easily used for ten years. The management of the business
entity intends to use the asset for six years at which point expected residual value will be Rs. 40,000
(at current prices).
Required: What is depreciable amount and useful life of above asset?

Question 3. [Useful life and Residual value] [ICAP Study Text Questions]
ABC Enterprise bought a machine for Rs. 700,000 in early 2021. Although the machine can be used for
seven years but ABC Enterprises expects to use it for 5 years only.
ABC Enterprise estimated that machine can be disposed of for Rs. 620,000 (at current prices) and for
Rs. 680,000 (at prices expected at end of 2025). Further, a 5-year old similar machine can be disposed
of for Rs. 150,000 (at current prices) and for Rs. 330,000 (at prices expected at end of 2025).
Required: Determine the useful life and residual value of above machine.

Question 4. [Straight Line Method] [ICAP Study Text Questions]

Plant bought on 1 January 2021 for Rs. 100,000 with expected useful life of 5 years and residual value
of Rs. 10,000. The entity year ends on 31 December.
Required: Using straight line method, calculate the amount of annual depreciation and carrying
amount along with accumulated depreciation for the year 2021 to 2025.

Question 5. [Straight Line Method]

▪ A machine cost Rs. 250,000. It has an expected economic life of five years.
▪ It is expected that the machine will have a zero-scrap value at the end of its useful life.
▪ The machine was bought on the 1st September and the company has a 31st December year end.
Required: What is the depreciation charge for the first year.

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IAS 16 – Property, Plant & Equipment Compiled by: Murtaza Quaid, ACA

Question 6. [Straight Line Method] [ICAP Study Text Questions]

An item of equipment costs Rs. 1,260,000. It has an expected useful life of six years and an expected
residual value of Rs. 240,000.

Required: Using the straight-line method of depreciation, what is the annual depreciation charge and
what will be the carrying amount of the asset after four years?

Question 7. [Straight Line Method] [ICAP Study Text Questions]

The financial year of an entity is 1st January to 31st December. A non-current asset was purchased on
1st May for Rs. 60,000. Its expected useful life is five years and its expected residual value is zero. It is
depreciated by the straight-line method.
Required: What will be the charge for depreciation in the year of acquisition if a proportion of a full
year’s depreciation is charged, according to the period for which the asset has been held?

Question 8. [Reducing Balance Method]

A machine cost Rs. 100,000. It has an expected life of five years, and it is to be depreciated by the
reducing balance method at the rate of 30% each year.
Required: What is the annual depreciation and carrying amount over the life of the asset?

Question 9. [Reducing Balance Method] [ICAP Study Text Questions]

A non-current asset cost Rs. 64,000. It is depreciated by the reducing balance method, at the rate of
25% each year.
Required: What is the carrying amount at the end of year 3?

Question 10. [Reducing Balance Method] [ICAP Study Text Questions]

Plant bought on 1 January 2021 for Rs. 100,000 with expected useful life of 5 years and residual value
of Rs. 10,000. The entity year ends on 31 December.
Required: Using reducing balance method, calculate the amount of annual depreciation and carrying
amount along with accumulated depreciation for the year 2021 to 2025.

Question 11. [Reducing Balance Method]

An asset cost Rs. 10,000 and has an expected residual value of Rs. 2,000 at the end of its expected
useful life which is 5 years.
Required: What is the annual depreciation and carrying amount over the life of the asset?

Question 12. [Number of Units Produced]

▪ A machine cost Rs. 500,000.
▪ It is expected to produce 5,000,000 units over its useful life.
▪ 47,850 units were made in the first year of production.
Required: What is the annual depreciation and carrying amount of the asset at the end of first year?

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Question 13. [Number of Units Produced] [ICAP Study Text Questions]

Plant bought on 1 January 2021 for Rs. 100,000 with expected useful life of 5 years and residual value
of Rs. 10,000 and the plant can be used to produce 7500 units over its life. The entity year ends on 31
December.
Actual production of units has been 1500 units, 1800 units, 1200 units, 2000 units and 1000 units from
year 2021 to 2025 respectively.
Required: Using units of production method, calculate the amount of annual depreciation and carrying
amount along with accumulated depreciation for the year 2021 to 2025.

Question 14. [Sum of the Digits Method] [ICAP Study Text Questions]
Plant bought on 1 January 2021 for Rs. 100,000 with expected useful life of 5 years and residual value
of Rs. 10,000. The entity year ends on 31 December.
Required: Using sum of digits method, calculate the amount of annual depreciation and carrying
amount along with accumulated depreciation for the year 2021 to 2025.

Question 15. [Sum of the Digits Method]

A motor vehicle cost Rs.400,000. It has an expected residual value after 5 years of Rs.40,000.
Required: If the sum of the digits method of depreciation is used, what will be the carrying amount of
the asset at the end of Year 2?

Question 16. [Depreciation Charge]

An office property cost Rs. 5 million, of which the land value is Rs. 2 million and the cost of the
building is Rs. 3 million. The building has an estimated life of 50 years.
Required: What is the annual depreciation charge on the property, using the straight-line method?

Question 17. [Depreciation Charge and Period]

An entity constructed a building for its own use. The building was completed on 1 July 2008 and
occupied on 1 September 2008. The entity used the building for a long time but then due to
expansion in its business it decided on 1 July 2015 to shift to new rented premises. The entity shifted
to new premises on 1 August 2015 and disposed of the old building on 31 December 2015.
Required: Identify the date from which depreciation should be commenced and date when
depreciation charge should cease.

Question 18. [Change in Depreciation Method]

Marden Fabrics owns a machine which originally cost Rs. 30,000 on 1 January 2014. It has no
residual value.
It was being depreciated over its useful life of 10 years on a straight-line basis. At the end of 2017,
when preparing the financial statements for 2017, Marden Fabrics decided to change the method of
depreciation, from straight-line to the reducing balance method, using a rate of 25%.
Required: What is the annual depreciation for the year 2014 to 2017?

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Question 19. [Change in Depreciation Method]

On 1 January 2001, Air Limited purchased an asset for Rs. 10,000 with nil residual value and is
intended to be used for 10 years. The entity uses straight line method.
On 1 January 2003, Air Limited reconsidered the use of its depreciation methods and concluded that
the straight-line method is not appropriate for this type of asset instead 25% depreciation on
reducing balance method is appropriate.
Required: Calculate depreciation expense from year 2001 to year 2004.

Question 20. [Review of Useful Life]

Chiniot Engineering owns a machine which originally cost Rs. 60,000 on 1 January 2014. The machine
was being depreciated over its useful life of 10 years on a straight-line basis and has no residual
value. On 31 December 2017 Chiniot Engineering revised the total useful life for the machine to
eight years (down from the previous 10).
Required: What is the annual depreciation for the year 2014 to 2017?

Question 21. [Review of Useful Life and Residual Value]

On 1 January 2001, Water Limited purchased an asset for Rs. 12,000 with estimated residual value of
Rs. 2,000 and is intended to be used for 10 years. The entity uses straight line method.

In 2003, Water Limited reviewed the useful life and residual value of the asset. It was estimated that
the asset’s remaining useful life is now only 5 years, however, the estimate of residual value has
been increased to Rs. 3,000.

Required: Calculate depreciation expense from year 2001 to year 2004

Question 22. [Review of Useful Life and Residual Value]

A machine was purchased three years ago on 1 January Year 2. It cost Rs.150,000 and its expected
life was 10 years with an expected residual value of Rs.30,000.
Due to technological changes, the estimated life of the asset was re-assessed during Year 5. The total
useful life of the asset is now expected to be 7 years and the machine is now considered to have no
residual value.
Required: What is the annual depreciation for the year 2 to Year 5?

Question 23. [Derecognition]

▪ A non-current asset originally cost Rs.75,000.
▪ Accumulated depreciation is Rs.51,000.
▪ The asset is now sold for Rs.18,000.
▪ Disposal costs are Rs.500.
Required: Journalize the above

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Question 24. [Derecognition]

▪ A non-current asset cost Rs.82,000 when purchased.
▪ It was sold for Rs.53,000 when the accumulated depreciation was Rs.42,000.
▪ Disposal costs were Rs.2,000.
Required: Journalize the above

Question 25. [Exchange of Assets]

Following information pertains to three exchange transactions relating to fixed assets:

(i) (ii) (iii) (iv)

Rs. in million
Cash received/(paid) 1.1 (2.1) - -

Assets given-up:
Original cost 10.3 12.4 14.5 14.5
Book value 6.4 7.3 3.4 3.4
Estimated fair value 8.5 6.6 4.6 4.6
Assets received
Estimated fair value 7.1 9.0 4.1 N/A

Additional information:
▪ In case of transaction (i), fair values of both assets are reliably measurable.
▪ In case of transaction (ii), fair value of the asset received is clearly more evident.
▪ In case of transaction (iii), fair value of neither asset is reliably measurable.
▪ In case of transaction (iv), entity’s future cash flows are not expected to change as a result of this
exchange.
Required: Calculate the gain or loss on disposal for each of above transactions.

Question 26. [Exchange of Assets]

The following data relates to exchange of old machinery with new equipment by Adeel Limited:

Particulars Amount in Rs.

Cost (old machinery) 100,000
Accumulated depreciation (of machine given) 30,000
Cash received in exchange 18,000
Cost of new equipment acquired in exchange 60,000
Commission paid to broker 3,000

Required:
a) Prepare one combined journal entry for the disposal.
b) Prepare disposal account to determine the gain or loss on the disposal.

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Question 27. [Overall Concepts] [Gripping IFRS: Graded Questions]

The following costs were incurred by Travelling III Berry Limited during the construction of a new
factory plant in 20X1:
▪ Raw materials: Rs. 400,000 was purchased from external suppliers and Rs. 200,000 was purchased
from an internal division at a 25% mark-up on cost.
▪ Labour costs: Rs. 500 000 payments were made to the labourers (i.e. after deductions of Rs.
300,000 in respect of employee contributions to provident funds and medical aids and after
deduction of employee's tax of Rs. 200,000. TIB Limited contributes an equivalent amount to the
funds as do the employees).
▪ Specialized platform: a specialized platform had to be created for the factory plant. This platform
was constructed by subcontractors at a cost of Rs. 750,000. It has a useful life of 10 years and a
residual value of Rs. 50,000.
▪ Safety inspection: a safety inspection is required by before production could begin. The first
inspection was performed on 1 June 20X1 at a cost of Rs. 600,000. Inspections will be necessary
for the continued operation of the plant every 3 years.
▪ A launch party: a party to celebrate the opening of the factory was held on 5 June 20X 1 at a cost
of Rs. 100,000.
▪ The factory plant is expected to have a useful life of 20 years (the specialized platform will need
to be replaced during this period) and is expected to have a nil residual value. The straight-line
method is considered to be the most appropriate for the plant.
▪ The plant was available for use on 2 June 20X1 and was brought into use on 1 July 20X1.
▪ The plant will need to be dismantled after 20 years at an expected future cost of Rs. 3,000,000.
An appropriate discount rate is 10%.
▪ Day to day maintenance costs: Rs. 20,000 per month was incurred on a subcontracting company
that provided full maintenance of the plant.
Required:
a) Calculate the carrying amount of the plant in Travelling III Berry Limited's Statement of Financial
Position as at 31 December 20X1 in accordance with International Financial Reporting Standards.
b) Show the general journal entries in the years ended 31 December 20X1.

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Question 28. [Overall Concepts] [Gripping IFRS: Graded Questions]

Olympic Limited is a diversified industrial company with many different areas of operation. The
following information relates to the company's property, plant and equipment. The company has a
30th September year end.
▪ All the plant was purchased and brought into use on 1 October 20X1 at a cost of Rs. 800,000. The
cost of testing the plant amounted to Rs. 45,000 and samples manufactured while in the testing
phase were sold for Rs. 5,000. The useful life of the plant is estimated at five years and the residual
value is estimated at Rs. 40,000.
▪ The motor vehicle consists of a delivery van purchased on 1 October 20X3 at a cost of Rs. 270,000.
The useful life is estimated at four years and the residual value is estimated to be nil. At 30 May
20X4, the tyres of the delivery van are replaced with tyres of a better quality. The new tyres cost
Rs. 24,000 and have an estimated useful life of two years. It is estimated that the original tyres
cost Rs. 12,000. Costs of servicing the delivery van during the year amounted to Rs. 12,500.
▪ A helicopter was purchased on 1 October 20X0 at a cost of Rs. 1,500,000. The following
components were identified:

Components Cost (Rs.) Residual value (Rs.) Useful life (years)

Airframe 800,000 0 10
Interior 100,000 0 10
Engines and rotor blades 400,000 30,000 5
Inspection 200,000 0 3

In order to maintain the operating license for the helicopter, inspections are required to be
performed every three years on the anniversary of the purchase date. The cost of the inspection
at 1 October 20X3 amounted to Rs. 240,000.
▪ A photocopy machine was purchased for the office at a total cost of Rs. 280,000 and delivered to
the premises of Olympic Limited on 15 January 20X4. The machine needed to be installed by a
technician and this was completed by 31 January 20X4. The machine was available for use on this
date. However, management decided not to use the machine until 1 March 20X4 as an existing
photocopy machine was on lease until that date. Use of the machine began on 1 March as planned
and the machine was used continuously throughout the financial year except for the month of
August 20X4 when a new high tech machine was given to Olympic Limited on a trial basis. The
useful life of the machine is estimated at 3 years and the residual value is estimated at Rs. 40,000.
Required: Prepare the journal entries relating to the property, plant and equipment of Olympic
Limited.

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Question 29. [Overall concepts]

Following information pertains to plant and machinery of Alpha Enterprises (AE):
(i) As at 1 January 2018, balances of cost and accumulated depreciation amounted to Rs.
12,700,000 and Rs. 6,240,000 respectively.
(ii) On 1 April 2018, an old machine having fair value of Rs. 340,000 was exchanged for a new
machine. The balance of the purchase price was paid through a cheque of Rs. 680,000. The
list price of the new machine was Rs. 1,130,000. The old machine had been acquired for Rs.
870,000 on 1 September 2015.
(iii) On 1 February 2018, a plant having a list price of Rs. 10,000,000 was acquired. A trade discount
of 5% was allowed on the list price. The plant was ready for use on 1 August 2018 after
incurring the following costs:

(iv) On 31 October 2018, another machine was sold for Rs. 334,000. It was acquired on 1 January
2015 and had a net book value of Rs. 512,000 on 1 January 2018. A cost of Rs. 25,000 was
incurred on its disposal.
(v) AE depreciates plant and machinery at 20% per annum using the reducing balance method.
Required: Prepare following ledger accounts pertaining to the plant and machinery for the year ended
31 December 2018:
(a) Cost
(b) Accumulated depreciation
(c) Assets disposal

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Question 30. [Revaluation Model] [ICAP Study Text Questions]

Ali Limited (AL) uses the revaluation model for subsequent measurement of its property, plant and
equipment and has a policy of revaluing its assets on an annual basis using the net replacement value
method.
The following information pertains to AL’s building:
a) The building was purchased on 01 January 2010 for Rs. 200 million with expected useful life of ten
years.
b) AL depreciates buildings on the straight line basis over their useful life.
c) The results of revaluations carried out during the last three years by Standard Valuation Service,
an independent firm of values, are as follows:

Revaluation date Fair value (Rs. in million)

31 December 2010 280
31 December 2011 170
31 December 2012 180

Required: The journal entries relating to the above transactions including revaluations for the year
ended December 31, 2010, 2011, 2012 and 2013.

Question 31. [Gross replacement vs. net replacement method] [Gripping IFRS: Graded Questions]
Cost of plant at 1/1/20X1: Rs. 200,000
Depreciation: 20% straight-line per annum to a nil residual value
The company re-values its plant on an annual basis. The following revaluations were performed:
▪ Fair value at 31 December 20X1 is Rs. 180,000
▪ Fair value at 31 December 20X2 is Rs. 108,000
▪ Fair value at 31 December 20X3 is Rs. 88,000
Required: Journalize the above in accordance with International Financial Reporting Standards using:
a) Gross replacement value method b) Net replacement value method.

Question 32. [Revaluation Model] [ICAP Study Text Questions]

Shahzad Textile Mills Limited (STML) purchased a plant for Rs. 500 million on 1 July 2010. The plant
has an estimated useful life of 10 years and no residual value.

STML uses revaluation model for subsequent measurement of its property, plant and equipment and
accounts for revaluations on net replacement value method. The details of revaluations performed by
an independent firm of valuers are as follows:

Revaluation date Fair value (Rs. in million)

1 July 2011 575
1 July 2012 390
1 July 2013 380

Required: Prepare journal entries to record the above transactions from the date of acquisition of the
plant to the year ended 30 June 2014.

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Question 33. [Revaluation Model] [ICAP Study Text Questions]

Rooney has recently finished building a new item of plant for its own use. The item is a press for use
in the manufacture of industrial diamonds. Rooney commenced construction of the asset on 1st April
2013 and completed it on 1st April 2015. The cost of manufacturing the asset were Rs. 30.8 million.
The cost of the hydraulic system is 30% of the total cost of manufacture.
The press comprises two significant parts, the hydraulic system and the ‘frame’. The hydraulic system
has a three-year life and the ‘frame’ has an eight-year life. Rooney depreciates plant on a straight line
basis.
Rooney uses the IAS 16 revaluation model in accounting for diamond presses and revalue these assets
on an annual basis.
Revaluation surpluses or deficits are apportioned between the hydraulic system and the ‘frame’ on
the basis of their year-end book values before the revaluation.
Required: Calculate the amount of revaluation gain or loss (to nearest ‘000), clearly indicating the
amount that will be recognised in profit or loss, for the year ended:
a) 31st March 2016 (assume that the press has a fair value of Rs. 21 million on this date)
b) 31st March 2017 (assume that the press has a fair value of Rs. 19.6 million on this date).

Question 34. [Subsequent Measurement – Cost Model] [Gripping IFRS: Graded Questions]
Wanderers Limited is a small listed company producing components for satellites that monitor
pollution levels across the globe. Its financial year end is 30 June.
The accounting policy of Wanderers Limited relating to equipment reads as follows:
'Equipment is carried at cost less accumulated depreciation and accumulated impairment losses.
Depreciation is provided at 20% per annum on the straight line basis.'
The company purchased an item of specialized equipment at a cost of Rs. 800,000 on 1 July 20XO.
Details regarding this equipment follow:
▪ At 30 June 20X1, significant developments in technology by competitors led management to
assess the recoverable amount of the equipment. The fair value less costs to sell was estimated
at Rs. 440,000 and the value in use was determined to be Rs. 380,000.
▪ Towards the end of the 20X3 financial year, it became apparent that the competitors' new
technology developed in 20X1 was not commercially viable. The recoverable amount was assessed
again and based on market prices, management estimated the fair value less costs to sell to be Rs.
500,000 and the value in use to be Rs. 400,000.
▪ The estimated useful life has remained unchanged throughout. The residual value is estimated to
be nil (unchanged).
Required: Prepare the journal entry to account for the change in the recoverable amount of the
equipment.

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Question 35. [Revaluation Model - Disclosures] [ICAP Study Text Questions]

Abid Limited (AL) uses the revaluation model for subsequent measurement of its property, plant and
equipment and has a policy of revaluing its assets on an annual basis using the net replacement
value method.
The following information pertains to AL’s buildings:
(i) Four buildings were acquired in same vicinity on 1 January 2012 at a cost of Rs. 300 million.
The useful life of the buildings on the date of acquisition was 20 years.
(ii) AL depreciates buildings on the straight line basis over their useful life.
(iii) The results of revaluations carried out during the last three years by Premier Valuation
Service, an independent firm of valuers, are as follows:

Revaluation date Fair value (Rs. in million)

1 January 2013 323
1 January 2014 252
1 January 2015 272

(iv) On 30 June 2015, one of the buildings was sold for Rs. 80 million.
Required: Prepare a note on “Property, plant and equipment” (including comparative figures) for
inclusion in AL’s financial statements for the year ended 31 December 2015 in accordance with
International Financial Reporting Standards.

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Question 36. [Presentation and Disclosures] [ICAP Study Text Questions]

Games Limited (GL) commenced a business of preparing and burning video game CDs on 1 July 2015.
The following information pertains to the year ended 31 March 2016:
(i) GL purchased 30 computers on the date of commencement of business at a cost of Rs. 20,000
each, purely for the task of burning CDs. The management of GL estimates that since the
computers are subject to obsolescence, more of its benefit can derived in its early life. The
total useful life at the date of acquisition was estimated to be 4 years and residual value was
estimated to be Rs. 4,802 for each computer. GL decided to adopt historical cost model for
subsequently measurement of computers.
(ii) GL purchased an office building at the date of start of business worth Rs. 3 million. GL decided
to adopt revaluation model. The useful life is estimated to be 10 years at the date of
acquisition with no residual value, and the economic benefits are expected to be derived
evenly over its useful life. At the end of the year, the fair value of office buildings was assessed
to be Rs. 3,237,500.
(iii) GL also purchased fittings for its administrative and selling departments, costing Rs. 120,000
on 1 July 2015. It is to be depreciated over 10 years using the straight-line method, with no
residual value.
(iv) GL made a contractual commitment with Al-Karim Computers to purchase 6 computers of Rs.
20,000 each to be delivered at GL’s premises on 1 May 2016.
The following information pertains to the year ended 31 March 2017:
(i) The computers were delivered at the GL’s premises by Al-Karim Computers at the said date.
It was decided to use the same method and same rate to depreciate these computers.
(ii) At the end of the year, the fair value of office building was assessed to be Rs. 2 million. At the
year-end GL mortgaged entire building with SJ Bank to obtain a loan of Rs. 1.75 million for
prospective investments in other divisions.
(iii) Fittings with a cost of Rs. 30,000 were disposed of for Rs. 22,000 on 1 January 2017. The
delivery charges of Rs. 1,000 were paid to transfer the fittings to buyer’s premises.
(iv) The fair values of the office building were determined by an independent firm M/s Hafeez
Valuation Services
Required: Prepare the disclosure note in accordance with IAS 16 in relation to property, plant and
equipment in the notes to the financial statements for the year ended 31 March 2017 (comparatives
are required but total columns are not required).

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Question 37. [Overall Concepts] [ICAP Study Text Questions]

Following information pertains to Rose Enterprises for the year ended 31 December 2017:
(i) Acquisition of land and construction of a factory building:

(ii) Acquisition and installation of new plant:

(iii) Other information:

▪ Cost of freehold land includes property tax for 2017-18 and transfer fee of Rs. 120,000
and Rs. 850,000 respectively.
▪ Factory building was available for use from 1 July 2017. The final invoice of Rs. 19,000,000
is still unpaid.
▪ Transportation and import charges of the plant include annual fire insurance premium
and insurance in-transit of Rs. 350,000 and Rs. 60,000 respectively.
▪ The plant started operations on 1 August 2017. Remaining amount was paid on 31 August
2017.
▪ Old plant was sold on 1 September 2017 at its written down value plus 20%. The plant
was purchased on 1 April 2015 at a cost of Rs. 8,500,000
▪ Building and plant are depreciated at the rate of 5% and 10% respectively on reducing
balance method.
Required:
(a) Pass journal entry to record disposal of the old plant.
(b) Determine written down value of the fixed assets as at 31 December 2017.

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Question 38. [Overall Concepts] [ICAP Study Text Questions]

Kamran Enterprises (KE) provides depreciation on plant and machines at 10% on written-down value.
Depreciation is charged from the month the asset is available for use in operations up to its disposal.
Cost of its plant & machines and the accumulated depreciation as on 1 July 2015 were Rs. 75 million
and Rs. 17 million respectively.
The following information is available in respect of its plant & machines, for the year ended 30 June
2016:
(i) On 1 October 2015, a second-hand machine was acquired from a Chinese company for Rs. 15
million. The machine was renovated and overhauled at a cost of Rs. 3 million. 25% of this
expenditure was in respect of purchase of consumables.
(ii) On 1 November 2015, KE transferred a machine having a list price of Rs. 10 million from its
stock-in-trade to its Engineering Department. KE sells such machines at cost plus 25%.
(iii) On 1 January 2016, certain parts to a plant were added at a cost of Rs. 4 million to extend its
useful life.
On 1 Mar 2016, the plant was damaged and remained in-operative for one month. KE spent
an amount of Rs. 3 million on repairs to restore the plant in working condition.
(iv) On 1 April 2016, a machine which was purchased on 1 July 2012 for Rs. 12 million was
completely damaged and was sold for Rs. 1.2 million.
Required: Prepare accounting entries to record the above transactions in KE’s books for the year
ended 30 June 2016.

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Question 39. [Overall Concepts] [ICAP Study Text Questions]

On 31 December 2013, Omega Chemicals Limited (OCL) changed its valuation model from cost to
revaluation for its buildings. The following information pertains to its buildings as at 31 December
2013:

As per the report of the professional valuer, there was no change in estimated useful life of the
buildings. OCL recorded revaluation effect for the office buildings on 31 December 2013 as per the
valuation report. However, no valuation effect was incorporated for the factory buildings as the
change in their value was considered to be temporary by OCL.
On 1 July 2014, one of the office buildings was sold for Rs. 30 million. On 31 December 2013, written
down value before revaluation and revalued amount of the sold building amounted to Rs. 27.72
million and Rs. 31.92 million respectively.
On 31 December 2014, factory buildings were revalued at Rs. 64 million whereas there was no change
in value of the office buildings.
OCL uses straight line method of depreciation which is charged from the date the asset is available for
use up to the date of disposal. Revaluation is to be accounted for by using net replacement value
method.
Required: In the light of the requirements of the International Financial Reporting Standards, prepare
accounting entries from the above information for the year ended 31 December 2014 including
correcting entries as on 31 December 2013.

Question 40. [Overall Concepts] [ICAP Study Text Questions]

Abbas Limited (AL) is engaged in the business of manufacturing near the Karachi-Hyderabad
Motorway. Its property, plant and equipment comprises of land, buildings, plant and machinery, and
equipment.
The balances of the property, plant and equipment as at 30 June 2018 are given below:

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The relevant information regarding measurement and depreciation is given below:

Additional information for the period up to 30 June 2018 are as follows:

▪ The equipment was purchased on 1 July 2016. No disposals and acquisitions took place in the
period up to 30 June 2018.
▪ Until 30 June 2018, 12,000 units had been produced by Abbas Limited in its factory. The plant and
machinery does not have any residual value. No additions or disposals of plant and machinery
took place till this date.
▪ The buildings were acquired on 1 July 2014 with a residual value of Rs. 11 million. No additions
and disposals took place till 30 June 2018.
▪ The land had actually cost Rs. 15 million on the date of its acquisition.
The following information pertains to the year ended on 30 June 2019:
(i) On 1 July 2018, land was revalued to Rs. 20 million. The value was determined by an
independent firm M/s Ashfaq Valuation Services.
(ii) During the year, 5,000 units were produced in the factory of AL.
(iii) On January 1, 2019, AL disposed 25% of its area comprising of land and buildings at a price of
Rs. 90 million. The portion of land was sold at its fair value as determined on 1 July 2018. The
legal costs of drafting transfer agreements were Rs. 0.1 million. It is assumed that value of
land and buildings is spread evenly across the area occupied.
(iv) Further equipment costing Rs. 60 million was acquired on 1 November 2018.
(v) In the meeting of its board of directors, it was decided to open a new factory premises near
Lahore-Islamabad motorway. An expenditure of Rs. 20 million was spent of the construction
of the factory on 1 December 2018. The construction had not been completed by the end of
the year.
(vi) Moreover, the directors also made a contract with M/s Uni Power & Co. to purchase plant and
machinery worth Rs. 35 million once the construction of factory building is completed.
Required: Prepare the disclosure note in accordance with IAS 16 in relation to property, plant and
equipment in the notes to the financial statements for the year ended 30 June 2019. (Comparatives
and column for total is not required).

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IAS 16 – PROPERTY, PLANT & EQUIPMENT

ICAP PAST PAPERS

Question No. 4 of Spring 2016 – 13 marks

(a) What conditions must be satisfied if an item has to be recognised as property, plant and equipment?
Also state at what amount such item shall be carried after the initial recognition if the entity is
following the revaluation model. (03)
Solution:
The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if:
(i) It is probable that future economic benefits associated with the item will flow to the entity; and
(ii) The cost of the item can be measured reliably.
After recognition as an asset, an item of property, plant and equipment whose fair value can be measured
reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment losses.
(b) On 1 January 2013 Delta acquired a specialized machine for its production department. The
available information is as follows:

Machine hours used during the years ended 31 December 2013, 2014 and 2015 were 2000, 3200
and 1400 respectively.

On 1 January 2015 Delta decided to upgrade the machine by adding new components at a cost of
Rs. 1,753,000. This upgrade led to a reduction in the production time per unit of goods being
manufactured by the machine. The upgrade also increased the estimated remaining life of the
machine at 1 January 2015 to 8,000 machine hours and its estimated residual value to Rs. 350,000.

Required: For the years ended 31 December 2013, 2014 and 2015, compute the relevant amounts
to be included (under each head) in the income statement and statement of financial position.
Notes to the financial statements are not required. (10)

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Question No. 2(c) of Spring 2017 – 4 marks

State the disclosure requirements for assets carried at revalued amounts, as referred to in IAS – 16
‘Property, Plant and Equipment’.

Solution:
When items of property, plant and equipment are stated at revalued amounts the following must be
disclosed:
▪ The effective date of the revaluation;
▪ Whether an independent valuer was involved;
▪ For each revalued class of property, plant and equipment, the carrying amount that would have
been recognised had the assets been carried under the cost model; and
▪ The revaluation surplus, indicating the change for the period and any restrictions on the distribution
of the balance to shareholders.

Question No. 2 of Autumn 2017 – 18 marks

The following information pertains to Sherdil Limited (SL):

(i) Buildings and equipment were acquired on 1 January 2014 for Rs. 450 million and Rs. 50 million
respectively.

(ii) The relevant information relating to both assets is summarised below:

SL transfers the maximum possible amount from revaluation surplus to retained earnings on an
annual basis.

(iii) The revalued amount of buildings as determined by Accurate Valuers (Private) Limited, an
independent valuation company, on 1 January 2015 and 2016 was Rs. 456 million and Rs. 378
million respectively.

(iv) Equipment costing Rs. 35 million was purchased on 1 August 2015. Half of the equipment
purchased on 1 January 2014 was disposed off on 30 June 2016.

Required: In accordance with International Financial Reporting Standards, prepare a note on ‘Property
plant & equipment’ (including comparative figures) for inclusion in SL’s financial statements for the year
ended 31 December 2016.

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Question No. 6 of Spring 2018 – 17 marks

(a) Following information pertains to a building acquired by SK Limited (SKL) on 1 July 2012 for Rs. 360
million:

(i) The building is being depreciated on straight-line basis over 10 years.

(ii) SKL uses revaluation model for subsequent measurement of buildings. It accounts for revaluation
on net replacement value method. The details of revaluations as carried out by independent
valuer are as follows:

(iii) There is no change in useful life of the building.

(iv) SKL transfers the maximum possible amount from the revaluation surplus to retained earnings on
an annual basis.
(v) SKL’s financial year ends on 31 December.
Required: Prepare entries to record revaluation surplus/loss on each of the above revaluation date.
(Entries to record depreciation expense, incremental depreciation and elimination of accumulated
depreciation are not required) (11)

(b) Following information pertains to three exchange transactions relating to fixed assets:

Additional information:

▪ In case of transaction (i), fair values of both assets are reliably measurable.
▪ In case of transaction (ii), fair value of the asset received is clearly more evident.
▪ In case of transaction (iii), fair value of neither asset is reliably measurable.
Required: Compute gain or loss on disposal of fixed assets in each of the above transactions. (06)

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Question No. 5 of Autumn 2018 – 12 marks

The following information is available in respect of machines of Akmal Brothers:

(i) The balances of cost and accumulated depreciation of machines as on 1 January 2017 were Rs.
800,000 and Rs. 333,000 respectively.
(ii) A machine acquired on 1 January 2014 having net book value of Rs. 31,935 on 1 January 2017 was
sold for Rs. 34,000 on 30 April 2017. Cost of disposal incurred was Rs. 5,000.
(iii) On 1 July 2017, a machine having fair value of Rs. 40,000 on that date was exchanged for a new
machine. The balance of the purchase price was paid through a cheque of Rs. 80,000. The list price
of the new machine was Rs. 130,000. The old machine had been acquired at a cost of Rs. 65,000
on 1 October 2015.
(iv) Machines are depreciated at 15% per annum using the reducing balance method.
Required:
Prepare the following ledger accounts pertaining to the machines for the year ended 31 December 2017:
(a) Cost (03)
(b) Accumulated depreciation (05)
(c) Gain/loss on disposal (04)

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Question No. 5 of Spring 2019 – 16 marks

The following information pertains to Piano Limited (PL):

Additional information:
(i) PL uses revaluation model for subsequent measurement and accounts for revaluation on net
replacement value method.
(ii) There is no change in useful life of plant. The remaining useful life of equipment was estimated as
15 years and 10 years in 2016 and 2018 respectively.
(iii) PL transfers maximum possible amount from the revaluation surplus to retained earnings on an
annual basis.
(iv) PL’s financial year ends on 31 December.
Required:
(a) Calculate depreciation on each asset for 2015 to 2018. (08)
(b) Prepare entries to record revaluation in 2018. (Entries to record depreciation expense,
incremental depreciation and elimination of accumulated depreciation are not required.
Further, entries prior to 2018 are also not required.) (08)

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Question No. 8 of Spring 2021 – 17 marks

Sputnik Sea Limited (SSL) runs a cruise business across oceans. Following information in respect of one of
SSL’s cruise ship is available:
(i) SSL bought a cruise ship on 1 March 2018. After completing all the required formalities, the ship
was ready to sail on 1 April 2018.
(ii) Details regarding components of the ship are as under:

(iii) On 1 May 2019, the ship suffered an accident which damaged its body. Repair work took 2 months
and costed Rs. 26 million. The repair work did not change useful life and residual values of the
components.
(iv) The average monthly sailing of the ship during the last three years are as under:

(v) SSL uses revaluation model for subsequent measurement. SSL accounts for revaluation on net
replacement value method and transfers the maximum possible amount from the revaluation
surplus to retained earnings on an annual basis.
(vi) The revalued amounts of the ship as at 31 December 2019 and 2020 were determined as Rs. 1,400
million and Rs. 1,000 million respectively. Revalued amounts are apportioned between the
components on the basis of their book values before the revaluation.
Required: Prepare necessary journal entries to record the above transaction from the date of acquisition
of the ship to the year ended 31 December 2020.

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Question No. 9 of Spring 2022 – 18 marks

Following information pertains to property, plant and equipment of Tsuki Limited (TL):

Additional information:
(i) TL uses revaluation model for subsequent measurement and accounts for revaluation on net
replacement value method.
(ii) TL transfers maximum possible amount from the revaluation surplus to retained earnings on an
annual basis.
(iii) The revalued amounts were determined by Sagheer Valuers (Private) Limited, an independent
valuation company.
Required: In accordance with IFRSs, prepare a note on ‘Property, plant and equipment’ (including
comparative information) for inclusion in TL’s financial statements for the year ended 31 December 2021.
(Column for total is not required)

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Question No. 4 of Spring 2024, 8 marks

You are the finance manager of Paradox Limited (PL). The financial statements of PL for the year ended
31 December 2023 are under preparation. In the beginning of 2023, PL adopted the revaluation model for
the subsequent measurement of property, plant and equipment. A new CEO has recently joined PL. He
has pointed out the following non-compliances of IFRSs after reviewing the draft financial statements of
PL:
(i) IAS 16 does not allow selective revaluation, so all classes of property, plant and equipment should
have been revalued.
(ii) The adoption of the revaluation model has been accounted for as a ‘Change in estimate’ (i.e.
prospectively) though it is a ‘Change in accounting policy’.
(iii) IAS 16 requires that incremental depreciation must be transferred from revaluation surplus to
retained earnings but the transfer has not been made in the draft financial statements.
(iv) Some vehicles have been given on rent by PL; these should have been included in investment
property, but instead, they are included in property, plant and equipment.
Required: Briefly respond to the non-compliances pointed out by the CEO.
Solution:
(i) The point raised by CEO is not correct. It is not necessary that all items of property, plant and
equipment (PPE) are revalued, if an item of PPE is revalued, the entire class of PPE to which that
asset belongs shall be revalued. So, selected classes of assets can be revalued but selected assets
within a class cannot be revalued.
(ii) The point raised by CEO is not correct. Adoption of revaluation model for property, plant and
equipment is a change in accounting policy. As per IAS 8, the initial application of a policy to
revalued assets in accordance with IAS 16 is not accounted for retrospectively.
(iii) The point raised by CEO is not correct. The transfer of incremental depreciation each year is not
compulsory. The entity can choose to transfer the whole revaluation surplus to retained earnings
upon disposal of assets or as incremental depreciation over the useful life of the assets.
(iv) The point raised by CEO is not correct. As per IAS 40, only land or a building can be investment
property. So, vehicles whether used in business or given for rentals, should be classified as
property, plant and equipment.

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IAS 16 – Property, Plant & Equipment Compiled by: Murtaza Quaid

Question No. 9 of Autumn 2024, 16 marks

The following information is available regarding property, plant and equipment of Khangarh Limited (KL):
(i) On 1 July 2023, KL revalued its factory building for the second time, resulting in an upward
revaluation of Rs. 18 million. Before this revaluation, the carrying amount was recorded as Rs. 81
million (gross amount of Rs. 90 million and accumulated depreciation of Rs. 9 million). This
followed a previous revaluation on 1 July 2021, which had resulted in a revaluation loss of Rs. 12
million.
(ii) On 1 November 2023, KL replaced a significant part of its machine that accounted for 30% of the
machine’s total value. The new part had a price of Rs. 35 million, however, only Rs. 22 million was
paid as the old part was given in exchange. This replacement extended the machine’s life by an
additional year. Originally, the machine was purchased for Rs. 75 million on 1 January 2021, and
it had accumulated depreciation of Rs. 12.5 million as at 30 June 2023 based on useful life of 15
years.
(iii) On 1 January 2024, KL sold a vehicle for Rs. 36 million and incurred a disposal cost of Rs. 2 million.
The vehicle was originally purchased on 1 April 2021, for Rs. 40 million.
Other information:
(i) KL accounts for revaluation using the net replacement value method and transfers the maximum
possible amount from the revaluation surplus to retained earnings on an annual basis.
(ii) All items of property, plant, and equipment are subsequently measured using the cost model,
except for the factory building.
(iii) Depreciation is applied using the straight-line method, except for vehicles, which are depreciated
using the reducing balance method at 15% per annum.
Required: Prepare the journal entries to be recorded in the books of KL during the year ended 30 June
2024 in respect of the above information. (Show all necessary workings. Narrations are not required)

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MAVEN MINDS
Assurance | Tax | Advisory | Outsourcing

IAS-16
PROPERTY, PLANT AND EQUIPMENT

INITIAL MEASUREMENT

EXCHANGE OF ASSET SUBSEQUENT COSTS

Subsequent expenditures are recognized as an asset if it

An asset may be acquired in exchange meets the recognition criteria.
for another asset. The cost of acquired
asset is measured at: In practice, subsequent costs are capitalised if it:
Fair value of the asset given up; - improves the asset (for example, by enhancing its
Fair value of the asset received, if it is performance or extending its useful life); or
more clearly evident; - is for a replacement part (Carrying amount of
Carrying amount of the asset given, if replaced parts is derecognised)
- the exchange transaction lacks Continued operation of PPE may require regular major
commercial substance or inspections. Cost of such major inspection is capitalized
if the recognition criteria are satisfied.
- fair value of neither the asset
received nor the asset given up Do not capitalize the costs of day-to-day servicing or
is reliably measurable. repairs & maintenance expenditure. Rather, these costs
are recognised in P/L as incurred.

DEPRECIATION

Method of Depreciation

Depreciation method reflects the pattern in which future

Depreciation is the systematic allocation economic benefits are expected to be consumed.
of depreciable amount of an asset over
its useful life.

Depreciation is charged to P/L, unless it (1) Straight Line Method

is capitalized as cost of another asset.
Depreciation commences when the Depreciation = Cost – Residual Value
asset is available for use. Useful Life

Depreciation ends (at earlier of) when Alternatively, Dep = (Cost – Residual Value) x Dep %
the asset is
- is classified as held for sale (IFRS 5) or (2) Reducing Balance Method
- is derecognized.
Depreciation = Opening WDV x Rate of Depreciation %
Significant parts/components are
depreciated separately over their
estimated useful life. (3) Units of Production Method

Residual value, the useful life and the

depreciation method of an asset are Depreciation = (Cost – Residual Value) x Unit produced
reviewed annually at reporting date. Useful Life (in Units)

Changes in residual value, depreciation

(4) Sum of Year’s Digits Method
method and useful life are changes in
estimates are accounted for
prospectively in accordance with IAS 8. Depreciation = (Cost – Residual Value) x Remaining years
Sum of year’s digit
Revenue based dep. is prohibited.
Sum of year’s digit = Useful life (Useful life + 1)
2
For further info, please contact:
[email protected]

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MAVEN MINDS
Assurance | Tax | Advisory | Outsourcing

IAS-16
PROPERTY, PLANT AND EQUIPMENT

SUBSEQUENT MEASUREMENT OF PPE

An entity shall choose either the cost model or the revaluation model as its accounting
policy and shall apply that policy to an entire class of property, plant and equipment.

REVALUATION MODEL COST MODEL

Fair value xxxx Cost xxxx

Less. Accumulated Depreciation (xxxx) Less. Accumulated Depreciation (xxxx)
Less. Accumulated Impairment (xxxx) Less. Accumulated Impairment (xxxx)
Carrying Amount xxxx Carrying Amount xxxx

Revaluation of PPE Lower of:

Historical Cost; or
Revaluation Surplus – OCI Recoverable Amount
Historical
Cost
Revaluation Gain / (Loss) – P/L
Historical Cost

Carrying Amount of an asset (After depreciation)

as if it had never been revalued / impaired.
REVALUATION MODEL
Recoverable Amount
If an asset is revalued, the entire class of assets
to which it belongs is required to be revalued Higher of : (i) Value in Use; or
(ii) Fair Value less Cost to sell
An increase in value of PPE is credited to
revaluation surplus (R/S). However, increase
shall be credited in P/L to the extent that it Depreciation of revalued asset
reverses a revaluation decrease of the same
asset previously debited in P/L. Revalued assets are depreciated the same
way as under the cost model.
A decrease in value of PPE is debited to P/L.
However, the decrease shall be debited to R/S However, an amount equal to incremental
to the extent of any credit balance existing in depreciation must be transferred from
the R/S in respect of that asset. “Revaluation Surplus” to accumulated profit/
retained earning through statement of
Net carrying amount of the asset is adjusted to
changes in equity.
the revalued amount either using:
1) Gross Replacement Method: Restate
accumulated depreciation proportionately Frequency of revaluation
with the change in the gross carrying amount Revaluations should be carried out regularly
of the asset so that the carrying amount of the to ensure that carrying amount of an asset
asset after revaluation equals its revalued should not differ materially from its fair value
amount; or at the reporting date.
2) Net Replacement Method: Eliminate Revaluation frequency depends upon the
accumulated depreciation against the gross changes in fair value of the items measured
carrying amount and then change the (annual revaluation for volatile items or
carrying amount of the assets to the revalued intervals between 3 - 5 years for items with
amount. less significant changes)

For further info, please contact:

[email protected]

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MAVEN MINDS
Assurance | Tax | Advisory | Outsourcing

IAS-16
PROPERTY, PLANT AND EQUIPMENT

PRESENATION AND DISCLOSURE

Disclosure for Property, Plant and Equipment under IAS 16 (Sample)

ABC Company
Notes to the Financial Statements
For the year ended31 December 20X1

Plant & Motor

16. Property, Plant and Equipmen Building Total
Machinery Vehicle
COST
Opening Balance xxxx xxxx xxxx xxxx
Addition xxxx xxxx xxxx xxxx
Revaluation xxxx xxxx xxxx xxxx
Other Adjustment (xxxx) (xxxx) (xxxx) (xxxx)
Disposal (xxxx) (xxxx) (xxxx) (xxxx)
Closing Balance xxxx xxxx xxxx xxxx

ACCUMULATED DEPRECIATION / IMPAIRMENT

Opening Balance xxxx xxxx xxxx xxxx

Depreciation for the year xxxx xxxx xxxx xxxx
Other Adjustment (xxxx) (xxxx) (xxxx) (xxxx)
Disposal (xxxx) (xxxx) (xxxx) (xxxx)
Closing Balance xxxx xxxx xxxx xxxx

Carrying Amount xxxx xxxx xxxx xxxx

Measurement Model CM/RM CM/RM CM/RM

Depreciation Method SLM/RBM SLM/RBM SLM/RBM

Useful Life / Rate of Depreciation X% X% X%

For further info, please contact:

[email protected]

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





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 Investment property is held to earn rentals or for capital appreciation or both. Therefore,
an investment property generates cash flows largely independently of the other assets held
by an entity. This distinguishes investment property from owner-occupied property.
 The production or supply of goods or services (or the use of property for administrative
purposes) generates cash flows that are attributable not only to property, but also to other
assets used in the production or supply process. IAS 16 applies to owned owner-occupied
property.

(or a part of it) or both:

 that is );

 to earn .

 Land held for long-term capital appreciation rather than for  Property intended for sale in the ordinary course of business;
short-term sale in the ordinary course of business.  Property in the process of construction or development for sale in
 Land held for a currently undetermined future use i.e., if an the ordinary course of business;
entity has not determined that it will use the land as  Property acquired exclusively with a view to subsequent disposal in
owner-occupied property or for short-term sale in the the near future;
ordinary course of business, the land is regarded as held for
capital appreciation.  Property acquired exclusively for development and resale;
 A building owned by the entity and leased out under one or  Owner-occupied property;
more operating leases (rental arrangement).  Property held for future use as owner-occupied property;
 A building that is vacant but is held to be leased out under  Property held for future development and subsequent use as
one or more operating leases. owner-occupied property;
 Property that is being constructed or developed for future use  Property occupied by employees (whether or not the employees pay
as investment property. rent at market rates); and
 Owner-occupied property awaiting disposal.

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 The recognition principle is similar to that of property, plant and equipment. An owned investment
property shall be recognized as an asset when, and only when:

[including the transaction cost]

Such as
 legal fees or
 professional fees,
When
 property transfer
, discount it to its present
taxes, etc.
value to set .

Such cost does include:

 Start-up expenses;
 Operating losses incurred before
 The accounting treatment for is investment property achieves the
same as those applied under IAS 16. planned occupancy level; &
 Abnormal waste incurred in
constructing or developing the
property.

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 Investment property is measured in accordance with  Investment Property is remeasured to ,

requirements set out for that model in IAS 16: at each reporting date.
Cost XXXX  of
Less. Accumulated Depreciation (XXX) investment property
Less. Accumulated Impairment (XXX)  is on investment
property kept at fair value model

• Switching from cost model to fair value or vice versa is allowed but only if the change results in the financial statements
providing reliable and more relevant information, and such change shall be retrospectively adjusted in accordance with the
requirements of IAS 8.
• Switching from cost model to fair value model would probably meet the condition and is therefore allowed.

INABILITY TO MEASURE FAIR VALUE RELIABLY

Is Investment Property under Construction?

YES NO
 Measure that investment property at cost until either  In exceptional cases, if there is clear evidence that fair value of
 its fair value becomes reliably measurable or investment property is not reliably measurable on a continuing basis. This
 construction is completed arises only when the market for comparable properties is inactive and
alternative reliable measurements of fair value are not available.
 When an entity completes the construction or development  In such case, the entity shall measure that investment property using cost
of a self-constructed investment property that will be carried model in IAS 16.
at fair value, any difference between:  Residual value of such property shall be assumed to be zero.
 the fair value of the property at that date; and
 The entity shall apply IAS 16 until disposal of such property.
 its previous carrying amount
shall be recognized in

If an entity has previously measured an investment property at fair value, it shall continue to measure the property at fair value
until disposal (or transfer to owner-occupied or Inventory) even if comparable market transactions become less frequent or
market prices become less readily available.

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 An investment property shall be derecognized:

 on disposal; or
 when the investment property is permanently
withdrawn from use and no future economic
benefits are expected from its disposal.
 Gains or losses arising from the retirement or
disposal of investment property shall be determined
as the difference between the net disposal proceeds
and the carrying amount of the asset and shall be
recognised in profit or loss in the period of the
retirement or disposal.

 An entity shall transfer a property to, or from, investment property when, and only when, there is a change in
use.
 A change in use occurs when the property meets, or ceases to meet, the definition of investment property and
there is evidence of the change in use. In isolation, a change in management’s intentions for the use of a
property does not provide evidence of a change in use.

Commencement of owner-occupation, or of development with a view

Investment property Owner-occupied property
to owner-occupation.

Commencement of development with a view to sale. Investment property Inventories

End of owner-occupation. Owner-occupied property Investment property

Inception of an operating lease (rental arrangement) to another party. Inventories Investment property

 When an entity decides to dispose of an investment property without development, it continues to treat the
property as an investment property until it is derecognised (eliminated from the statement of financial position)
and does not reclassify it as inventory.

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Transfers between investment property, owner-occupied property and inventories

do not change the carrying amount of the property transferred and they do not
change the cost of that property for measurement or disclosure purposes.

 Revalue the property as per IAS 40 and then transfer it to IAS 16

Commencement of owner From IAS 40
 Fair value at the date of transfer becomes the deemed cost for future
occupation to IAS 16
accounting purposes.

Commencement of  Revalue the property as per IAS 40 and then transfer it to IAS 2
From IAS 40
development  Fair value at the date of transfer becomes the deemed cost for future
to IAS 2
with a view to sale accounting purposes.

 Revalue the property to its fair value as per the rules of IAS 16 (even if policy
End of owner occupation
From IAS 16 is cost model) and then transfer it to IAS 40.
& commencement of
to IAS 40  On subsequent disposal of the investment property, the revaluation surplus
operating lease
included in equity may be transferred to retained earnings.

End of inventory &  Transfer the property at carrying amount and then revalue it as per IAS 40
From IAS 2 to
commencement of  Fair value at the date of transfer and any difference between previous
IAS 40
operating lease carrying amount is recognized in P/L

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An entity shall disclose:

a) whether it applies the fair value model or the cost model;
b) when classification is difficult, the criteria it uses to distinguish investment property from owner-occupied property or
inventory;
c) the extent to which the fair value (as measured or disclosed in the financial statements) of investment property is based on a
valuation by an independent valuer who holds a recognised and relevant professional qualification and has recent experience
in the location and category of the investment property being valued. If there has been no such valuation, that fact shall be
disclosed;
d) the existence and amounts of restrictions on the realisability of investment property or the remittance of income and
proceeds of disposal; and
e) contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements.
An entity shall also disclose the amounts recognised in profit or loss for:
a) rental income from investment property; and
b) direct operating expenses (including repairs and maintenance) arising from investment property:
 that generated rental income during the period; and
 that did not generate rental income during the period.

An entity shall disclose a reconciliation between the carrying An entity shall disclose:
amounts of investment property at the beginning and end of the  the depreciation methods used;
period, showing the following:
 the useful lives or depreciation rates used; and
a) additions (acquisitions & subsequent expenditure separately);
 gross carrying amounts and accumulated depreciation at the
b) disposals; beginning and at the end of the period.
c) net gains or losses from fair value adjustments; A reconciliation between opening and closing values showing:
d) transfers; and  additions (acquisitions & subsequent expenditure separately);
e) other changes.  depreciation;
For investment properties included at cost model because fair  disposals;
value cannot be measured reliably, in addition, an entity shall
disclose:  impairment losses and reversal thereof;
 a description of the investment property;  transfers; and
 an explanation of why fair value cannot be measured reliably;  other changes.
 if possible, the range of estimates within which fair value is When the cost model is used, the fair value of investment property
highly likely to lie; and shall be disclosed. If the fair value cannot be estimated reliably, the
same additional disclosures should be made as are disclosed under
 the fact of disposal of such investment property, its carrying the fair value model for investment properties included at cost
amount and gain or loss on disposal. model because fair value cannot be measured reliably.

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 CAF 1 FAR 2026 EDITION

Cost XXXX - XXXX

Accumulated Depreciation / Impairment (XXX) - (XXX)

Addition during the year XXXX XXXX XXXX

Transfer to Investment property XXXX XXXX XXXX
Transfer from Investment property (XXX) (XXX) (XXX)
Disposal / Deletion (XXX) (XXX) (XXX)
Depreciation (XXX) - (XXX)
Fair valuation - XXXX XXXX

Cost XXXX - XXXX

Accumulated Depreciation / Impairment (XXX) - (XXX)

Some properties comprise a portion that is held to earn rentals or for capital appreciation
and another portion that is held for use in the production or supply of goods or services or
for administrative purposes.

Whether these portions could be sold separately?

YES NO
Portions are accounted for the portions Whether the portion that is held for use in the
separately in accordance with applicable production or supply of goods or services or for
standards administrative purposes, is ?
YES NO

Account for the entire Account for the entire

property under IAS 40 property under IAS 16

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In some cases, an entity provides ancillary services to the occupants of a property it holds.

Investment Property

The owner of an office building provides

security and maintenance services to the tenants
who occupy the building.

Property, Plant & Equipment

An entity owns and manages a hotel and

services provided to guests are significant to the
arrangement as a whole.

It may be difficult to determine whether ancillary services are significant to the arrangement as a whole and judgement is
needed to determine whether a property qualifies as investment property. Therefore, an entity is required to develop (and
disclose) criteria for investment property classification so that it can exercise that judgement consistently.

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IAS 40 - Investment Property Compiled by: Murtaza Quaid

IAS 40: INVESTMENT PROPERTY - PRACTICE QUESTIONS

Question 1. [Initial and subsequent measurement] [ICAP CAF 1 Study Text]
▪ On 1 January Year 1 Entity P purchased a building for its investment potential.
▪ The building cost Rs. 1,000,000 with transaction costs of Rs. 10,000.
▪ The depreciable amount of the building component of the property at this date was Rs. 300,000.
▪ The property has a useful life of 50 years.
▪ At the end of Year 1 the property’s fair value had risen to Rs. 1,300,000.
▪ The investment property was sold in early Year 2 for Rs. 1,550,000, selling costs were Rs. 50,000.
Required:
(i) Journalize the above.
(ii) How the above property shall be presented at the end of Year 1.

Question 2. [Initial and subsequent measurement] [ICAEW Corporate Reporting – Study Manual]
▪ The Boron company is an investment property company.
▪ On 1 January 20X7, it purchased a retirement home as an investment at a cost of Rs. 600,000.
▪ Legal costs associated with the acquisition of this property were a further Rs. 50,000.
▪ Boron adopted fair value model for investment properties.
▪ At 31 December 20X7, the fair value of the retirement home was Rs. 700,000 and the cost to sell was
estimated at Rs. 40,000.
Required: What amount should appear in the statement of financial position and profit and loss in the
year ended on 31 December 20X7?

Question 3. [Disposal of investment property] [ICAEW Corporate Reporting – Study Manual]

▪ An entity purchased an investment property on 1 January 20X3 for a cost of Rs. 5.5 million.
▪ The property has a useful life of 50 years, with no residual value.
▪ The property had a fair value of Rs. 6.2 million at 31 December 20X5.
▪ On 1 January 20X6, the property was sold for net proceeds of Rs. 6 million.
Required: Calculate the profit and loss on disposal under both the cost and fair value model,

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Question 4. [Reclassification from IAS 40 to IAS 16] [ICAP CAF 1 Study Text]
Entity A has investment property carried at its fair value of Rs. 1,000,000 on 1 January 2019 with remaining
useful life of 10 years. Entity A uses fair value model under IAS 40.
On 30 June 2019, it was decided to use the building for administration rather than keeping it for
investment potential. At this date the fair value was Rs. 1,200,000.
Entity A uses cost model under IAS 16. On 31 December 2019 (year-end), the value of property has
increased to Rs. 1,300,000.
Required: Journal entries for the year ended 31 December 2019.

Question 5. [Reclassification from IAS 40 to IAS 2] [ICAP CAF 1 Study Text]

Entity B has investment property carried at its fair value of Rs. 1,000,000 on 1 January 2019 with remaining
useful life of 10 years. Entity B uses fair value model under IAS 40.
On 30 June 2019, board of directors decided to develop the property and use it for sale of plots. At this
date the fair value was Rs. 1,200,000. On 31 December 2019 (year-end), the value of property has
increased to Rs. 1,300,000.
Required: Journal entries for the year ended 31 December 2019.

Question 6. [Reclassification from IAS 16 to IAS 40] [ICAP CAF 1 Study Text]
Entity C has property being used as warehouse carried at Rs. 1,000,000 on 1 January 2019 with remaining
useful life of 10 years. Entity C uses cost model under IAS 16 for its properties.
On 30 June 2019, property was vacated, and management decided to keep it for investment potential. At
this date the fair value was Rs. 1,200,000. Entity C uses fair value model under IAS 40.
On 31 December 2019 (year-end), the value of property has increased to Rs. 1,300,000. Transfer from
revaluation surplus to retained earnings is made at the time of disposal only.
Required: Journal entries for the year ended 31 December 2019.

Question 7. [Reclassification from IAS 2 to IAS 40] [ICAP CAF 1 Study Text]
Entity D has commercial shop held for resale in its ordinary course of property business carried at Rs.
1,000,000 on 1 January 2019.
On 30 June 2019, it was given on rent to a local business rather than keeping it for resale. At this date the
fair value was Rs. 1,200,000. On 31 December 2019 (year-end), the value of property has increased to Rs.
1,300,000. Entity D uses fair value model under IAS 40.
Required: Journal entries for the year ended 31 December 2019.

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Question 8. [Reclassification from IAS 40 to IAS 16] [Gripping IFRS: Graded Questions]
Owlface Limited owns two buildings:
▪ A head office building located in Quetta; and
▪ Another office building located in Karachi.
The office building located in Quetta is used as Owlface Limited’s head office. A minor earthquake, on 30
June 20X5, destroyed this building. The building in Quetta was purchased on the 1 January 20X5 for Rs.
1,200,000 (total useful life: 10 years and residual value: nil).
The property in Karachi was leased to a tenant, Spider Limited. After the earthquake, Owlface Limited
urgently needed new premises for its head office. Since Spider Limited was always late in paying their
lease rentals, Owlface Limited decided to immediately evict them and move their head office to this
building situated in Karachi.
The building in Karachi was purchased on the 1 January 20X5 for Rs. 500,000. On the 30 June 20X5, the
fair value of the building in Karachi was Rs. 950,000. The total useful life was estimated to be 10 years
from date of purchase and the residual value was estimated to be nil.
Owlface Limited uses:
▪ The cost model to measures its property, plant and equipment; and
▪ The fair value model for its investment properties.
Required: journalize the above transactions in the books of Owlface Limited for the year ended 31
December 20X5.

Question 9. [Reclassification from IAS 16 to IAS 40] [Gripping IFRS: Graded Questions]
Chattels Chief Limited owns an office block.
▪ Chattels Chief Limited had occupied the office block from date of purchase until 30 June 20X5.
▪ The office block had cost Rs. 1,000,000 on 1 January 20X4.
▪ Its residual value is estimated to be nil and total useful life is estimated to be 10 years respectively
(both estimates have remained unchanged).
▪ On 30 June 20X5, Chattels Chief Limited moved out of the office block and thereafter rented it to
tenants under short-term operating leases.
▪ On 30 June 20X5, the fair value of the office block was Rs. 1,200,000.
▪ The fair value of the office block was Rs. 800,000 on 31 December 20X4 and Rs. 1,500,000 on 31
December 20X5.
Chattels Chief Limited measures owner-occupied property using the cost model and investment property
using the fair value model.
Required: Show all journals relating to the office block in the books of Chattels Chief Limited for the year
ended 31 December 20X5. Ignore tax.

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Question 10. [Change of use] [Gripping IFRS: Graded Questions]

Snake Limited is in the construction industry. It constructs buildings for resale, for leasing and for private
use.
▪ A building that Snake Limited had constructed in Islamabad (at a cost of Rs. 1,000,000) had been on
the market for 2 years and was still not sold. On 1 March 20X5 Snake Limited took it off the market
and leased it instead. It was leased on 1 March 20X5. Its fair value was Rs. 1,500,000 on 31 December
20X5 and Rs. 1,000,000 on 31 December 20X4.
▪ The fair value of a building in Baluchistan (rented out to tenants) has never been determinable. This
building was completed on J January 20X2 at a cost of Rs. 5,000,000. Its total estimated useful life is
10 years and its residual value is Rs. 1,000,000. Both estimates have remained unchanged.
▪ On 30 September 20X5, Snake Limited evicted the tenants from a building in Karachi and moved its
head office into the building instead. On this day, the fair value was Rs. 4,000,000, the remaining
useful life was 5 years and the residual value was Rs. 500,000. The fair value of this building was Rs.
3,000,000 on 31 December 20X4.
▪ On 30 September 20X5, Snake Limited leased out the old head office building in Lahore. The original
cost was Rs. 4,000,000 (acquired on 30 September 20X3), on which date the total useful life was 10
years and its residual value was nil. The fair value was Rs. 3,700,000 on 31 December 20X5. The fair
value on 30 September 20X5 was equal to its carrying amount.
▪ Rentals earned from the investment properties totaled Rs. 2,000,000.
▪ Rates paid totaled Rs. 1,000,000.
▪ Snake Limited applies the fair value model to its investment properties and the cost model to its
property, plant and equipment.
Required: Show the investment property note and the profit before tax note in Snake Limited's financial
statements for the year ended 31 December 20X5.

Question 11. [Change of use] [ICAEW Corporate Reporting – Study Manual]

An entity with the 31 December year end purchased an office building, with a useful life of 50 years, for
Rs. 5.5 million on 1 January 20X1. The amount attributable to the land was negligible. The entity used the
head office for five the years until 31 December 20X5 when the entity moved its head office to larger
premises. The building was reclassified as an investment property and leased out under a five year
operating lease.
Owing to a change in circumstances, the entity took possession of the building five year later on 31
December 20Y0, to use it as its head office once more. At that date, the remaining useful life of the
building was 40 years.
The fair value of the head office was as follow:
▪ At 31 December 20X5 = Rs. 6 million
▪ At 31 December 20Y0 = Rs. 7.5 million

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Required: How should the change of use be reflected in the financial statements if:
a) The entity uses the cost model for investment properties.
b) The entity uses the cost model for investment properties.

Question 12. [Partial Own Use] [ICAP CAF 1 Study Text]

You have recently joined as the finance manager of Corv Limited (CL). While reviewing the draft financial
statements for the year ended 31 December 2020 prepared by the junior accountant, you have noted that
CL acquired a three-story building on 1 March 2020. CL uses the ground floor for its marketing department
while remaining two floors were in excess of CL’s need and therefore were rented out. The first floor was
rented out on 1 June 2020 and the second floor was rented out on 1 December 2020.
The accountant has recorded the building as property, plant and equipment. The depreciation on ground,
first and second floors has been computed from 1 March 2020, 1 June 2020 and 1 December 2020
respectively.
The accounting policy of CL is to carry land and building at fair value (wherever permitted by IFRS).
Required: Discuss how the above issue should be dealt in the financial statements of CL for the year ended
31 December 2020 in accordance with the requirements of IFRSs.

Solution:
The accounting treatment adopted by accountant to record complete building under PPE head is
incorrect. Two floors which have been leased/rented out separately should be accounted for as
investment property. While ground floor used by marketing department should be recorded as property,
plant and equipment under IAS 16 and depreciated over its useful life.
As per CL policy, investment property should be recorded at fair value and changes in fair value should be
taken to statement of profit or loss. Any depreciation already charged on these floors should be reversed.

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Question 13. [Comprehensive Question] [CFAP 1 Past paper – Sum 2012, Q6, 16 marks]
Gee Investment Company Limited (GICL) acquires properties and develops them for diversified
purposes, i.e. resale, leasing and its own use. GICL applies the fair value model for investment properties
and cost model for property, plant and equipment.
The details of the buildings owned are as follows:
Residual Fair value as on 31 December
Date of Useful Life Cost
Property value 2011 2010
acquisition (years)
-------------------Rs. in million-----------------
A 1 August 2006 20 130 14 100 150
B 1 January 2009 15 240 24 240 210
C 1 July 2009 10 160 20 150 120
D 1 July 2008 10 10 1 Not available
E 1 August 2011 20 48 4 51 -
The following information is also available:
Property A GICL had been trying to sell this property for the last two years. However, due to weak
market, the directors finally decided to lease it with effect from 1 October 2011 when its
fair value was Rs. 120 million.
Property B The possession of this property was acquired from the tenants on 30 June 2010 when
the company shifted its head office from Property C to Property B. The fair value on the
above date was Rs. 195 million.
Property C When the head office was shifted from this property, it was leased to a subsidiary at
market rate. On the date of lease, the fair value was equal to its carrying amount.
Property D This property is situated outside the main city and its fair value cannot be determined. It
was rented to a government organization soon after the acquisition.
Property E This property is an office building comprising of three floors. After acquisition, two
floors were rented out. On 1 November 2011, GICL established a branch office on the
third floor.
Details of costs incurred on acquisition are as follows:
Rs. in million
Purchase price 42.50
Agent’s commission 0.50
Registration fees and taxes 2.00
Administrative costs allocated 3.00
48.00
Required: Prepare a note on investment property, for inclusion in GICL’s separate financial statements
for the year ended 31 December 2011. (Ignore comparative figures)

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Question 14. [Identification of investment property] [ICAEW Corporate Reporting – Study Manual]
Do the building referred in (a) – (d) below meet the definition of Investment Property?
(a) An entity has a factory that has been shut down due to chemical contamination, worker unrest and
strike. The entity plans to sell the factory.
(b) An entity has purchased a building that it intends to lease out under an operating lease.
(c) An entity has acquired a large scale office building, with the intention of enjoying its capital
appreciation. Rather than holding it empty, the entity has decided to try to recover its running costs
by renting the space. To make the building attractive to potential customers, the entity has fitted
the space out as small office units, complete with full scale telecommunication facilities, and offer
reception, cleaning, a loud speaker system and secretarial services. The expenditure incurred in
fitting out the offices has been a substantial proportion of the value of the building.
(d) An entity acquired a site on 30 April 20X4 with the intention of building office blocks to let. After
receiving planning permission, construction started on 1 September 20X4 and was completed at a
cost of Rs. 10 million on 30 March 20X5 at which point the building was ready for occupation,
The building remain vacant for several months and the entity incurred significant operating losses
during this period.
The first leases were signed in July 20X5 and the building was not fully let until 1 September 20X6.
Solution:
(a) The factory is not an investment property. It should be classified as property held for sale and
accounted for under IFRS 5.
(b) The building would qualify as an investment property under IAS 40 as the entity intends to earn
rental from under an operating lease.
(c) The provisions offered over and above the office space itself, fall within IAS 40 describes as
“ancillary services”. Considering the nature and extent of these services, it would be unlikely that
they could be described as “insignificant” in relation to the arrangements as a whole. The building is,
in essence, being used for the provision of serviced offices and therefore does not meet the
definition of an investment property.
Although, the entity’s main objective in acquiring the building is its potential capital appreciation,
the building should be recognized and measured in accordance with IAS 16 rather than IAS 40.
(d) The property should be recognized as an investment property on 30 March 20X5 when the offices
were ready to be occupied. Costs incurred, and consequently operating losses, after this date should
be expensed even though the entity did not start to receive rentals until later in 20X5.
Losses incurred during this ‘empty’ period are part of the entity’s normal business operations and do
not form part of the cost of the investment property.

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Question 15. [Identification of investment property] [IFRS Box – IFRS Kit]

How would you classify the following properties?
1. You own a small apartment to rent out, but your tenant goes bankrupt. You are looking for another
tenant and during your search, you use the apartment as your office. Investment or owner-
occupied?
2. You enter into a 30-year finance lease for a part of a building that you plan to let to your tenants.
3. You run a hotel. Its main activity is to rent apartments and rooms on the short-term basis.
4. A big investment company purchased a land deep under its fair value. As it was such a great bargain,
the company is undecided what to do with the land – either to sell it later or to develop some
property on it. The decision will be taken in the later accounting period.
5. You acquired a building under 30-year finance lease. You refurbished the offices and plan to sublet
these offices, but you are awaiting approvals from the local authorities.
6. You own an office building with 50 offices. You use 30 offices for your own consulting business and
you sublet 20 offices to tenants.
7. A subsidiary owns a building that fully leases out to its parent company. A parent company uses this
building for own office space.

Solution:
1. During the time you occupy it, it’s an owner-occupied property under IAS 16. When you find a new
tenant, it will be investment property.
2. This is a typical investment property.
3. It depends on the ancillary services you provide. If the rooms and apartments are serviced, there’s a
room maid cleaning the rooms, towels are changed, breakfast is served etc. – then it would be
classified as owner occupied property, as these services are significant in providing the overall
service to customers.
4. This land is classified as inventory, because it is held either for sale or for further development and
sale in the ordinary course of business. If the company decides to hold the land for long-term capital
appreciation, then it is reclassified to investment property.
5. This is an investment property, also during the waiting time. IAS 40 specifies that the building that is
vacant, but is held to be leased out via one or more operating leases, is investment property.
6. 3/5 of a building is investment property and 2/5 is an owner-occupied property. These portions are
accounted for separately.
7. In subsidiary’s accounts, the building is investment property. In group’s account, the building is
reclassified to owner-occupied property.

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MAVEN MINDS
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IAS-40
INVESTMENT PROPERTY

SUBSEQUENT MEASUREMENT OF PPE

After initial recognition, an entity can choose between fair value and cost model.
The accounting policy choice must be applied to all investment property.

FAIR VALUE MODEL Inability to measure fair value reliably

Under Fair Value Model, measure all of the

Is Investment Property under Construction?
investment property at fair value, except in
the extremely rare cases where this cannot
be measured reliably.
YES
Gain or loss from changes in FV of IP is
recognized in P/L. Measure that investment property at
Depreciation is NOT charged on IP kept at fair cost until either (whichever is earlier)
value model. its:
- Fair value becomes reliably
If IP is measured at FV, it shall continue to be measurable or
measured that IP at FV until disposal even if - Construction is completed
comparable market transactions become less
frequent or market prices become less readily When an entity completes the
available. construction or development of a
self-constructed investment property
that will be carried at fair value, any
difference between:
COST MODEL
- Fair value of the property at that
Under Cost Model, Investment Property is date; and
measured in accordance with requirements set - Its previous carrying amount
out for that model in IAS 16: shall be recognized in profit or loss.
Cost xxxx
Less. Accumulated Depreciation (xxxx)
Less. Accumulated Impairment (xxxx) NO
Carrying Amount xxxx
In exceptional cases, if there is clear
evidence that FV of IP is not reliably
measurable on a continuing basis,
SWITCHING THE MODELS the entity shall measure that IP using
CHANGE IN ACCOUNTING POLICY cost model in IAS 16.

This arises only when the market for

Switching from cost model to fair value or vice comparable properties is inactive
versa is allowed but only if the change results in & alternative reliable measurements
the financial statements providing reliable and of fair value are not available.
more relevant information, and such change shall
be retrospectively adjusted in accordance with the In such case, Residual value of such
requirements of IAS 8. property shall be assumed to be zero.

Switching from cost model to fair value model The entity shall apply IAS 16 until
would probably meet the condition and is disposal of such property
therefore allowed.

For further info, please contact:

[email protected]

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IAS-40
INVESTMENT PROPERTY

TRANSFER TO / FROM INVESTMENT PROPERTY

Transfers to / from investment property can be made only when there is a change in the
use of the property.

FOR INVESTMENT PROPERTY AT COST MODEL

Transfers between investment property, owner-occupied property and inventories

do not change the carrying amount of the property transferred and they do not
change the cost of that property for measurement or disclosure purposes.

FOR INVESTMENT PROPERTY AT FAIR VALUE MODEL

Circumstance Transfer Accounting treatment

Revalue the property as per IAS 40 and then

Commencement of transfer it to IAS 16
From IAS 40
owner occupation to IAS 16 Fair value at the date of transfer becomes the
deemed cost for future accounting purposes.

Commencement of Revalue the property as per IAS 40 and then

From IAS 40 transfer it to IAS 2
development with a
to IAS 2 Fair value at the date of transfer becomes the
view to sale
deemed cost for future accounting purposes.

Revalue the property to its fair value as per the

End of owner rules of IAS 16 (even if policy is cost model) and
occupation & then transfer it to IAS 40.
From IAS 16
commencement of to IAS 40 On subsequent disposal of the investment
operating lease property, the revaluation surplus included in
equity may be transferred to retained earnings.

Transfer the property at carrying amount and

End of inventory & then revalue it as per IAS 40
From IAS 2
commencement of
to IAS 40 Fair value at the date of transfer and any
operating lease difference between previous carrying amount
is recognized in P/L.

For further info, please contact:

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IAS-40
INVESTMENT PROPERTY

CLASSIFICATION OF INVESTMENT PROPERTY - CONECCTED CONCEPTS

Partial Own Use Provision Of Ancillary Services

Some properties comprise a portion that is held In some cases, an entity provides ancillary
to earn rentals or capital appreciation and a services to the occupants of a property it
nother portion that is held for use in the holds.
production or supply of goods/services
or for administrative purposes.
If the Services are Significant to the
arrangement as a whole
Whether these portions could be sold separately?
Classification: Property, Plant & Equipment

Portions are accounted for the

Example: An entity owns and manages a
hotel and services provided to guests are
Yes portions separately in accordance
significant to the arrangement as a whole.
with applicable standards

Whether the portion that is held for If the Services are Insignificant to the
use in the production or supply of arrangement as a whole
No goods or services or for administrative
purposes, is insignificant?
Classification: Investment Property

Example: The owner of an office building

Yes No provides security and maintenance services
to the tenants who occupy the building.
Account for the entire Account for the entire
property under IAS 40 property under IAS 16

Inter-company Rentals

Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated
financial statements that include both the lessor and the lessee, because the property is owner-
occupied from the perspective of the group.

However, such property will be investment property in the separate financial statements of the lessor,
if it meets the definition of investment property.

SOLD

DERECOGNITION OF INVESTMENT PROPERTY

When an investment property is derecognized, a gain or loss on disposal should be recognized in P/L.

This gain or loss should normally be determined as the difference between the net disposal proceeds
and the carrying amount of the asset.

For further info, please contact:

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IAS-40
INVESTMENT PROPERTY

PRESENATION AND DISCLOSURE

General disclosure (for both models)

An entity shall disclose:

Whether it applies the fair value model or the cost model;
When classification is difficult, the criteria used to distinguish IP from PPE and Inventory.
The extent to which the FV of IP (as measured or disclosed in F/S) is based on a valuation by an
independent valuer. If there has been no such valuation, that fact shall be disclosed.
The existence and amounts of restrictions on the realisability of IP or the remittance of income
and proceeds of disposal.
Contractual obligations to purchase, construct or develop investment property or for repairs,
maintenance (R&M) or enhancements.
Amounts recognised in P/L for:
- Rental income from investment property;
- Direct operating expenses (including R&M) arising from IP that generated rental income
during the period;
- Direct operating expenses (including R&M) arising from IP that did not generate rental
income during the period; and
- The cumulative change in FV recognised in P/L on a sale of IP from a pool of assets in which
the cost model is used into a pool in which the fair value model is used.

For Cost Model only For Fair Value Model only

An entity shall disclose: An entity shall disclose a reconciliation

- Depreciation methods used; between the carrying amounts of IP at the
- Useful lives or depreciation rates used; and beginning and end of the period, showing:
- Gross carrying amounts and accumulated - additions (acquisitions & subsequent
depreciation at the beginning and end of expenditure separately);
period. - disposals;
A reconciliation between opening and closing - net gains or losses from fair value
values showing: adjustments;
- additions (acquisitions & subsequent - transfers; and
expenditure separately); - other changes.
- depreciation;
- disposals; For IPs included at cost model because FV
- impairment losses and reversal thereof; cannot be measured reliably, an entity shall
- transfers; and also disclose:
- other changes. - Description of the IP;
- Explanation of why FV cannot be measured
When the cost model is used, the FV of
reliably;
investment property shall also be disclosed.
- If possible, the range of estimates within which
If FV cannot be estimated reliably, the same FV is highly likely to lie; and
additional disclosures should be made as are - Fact of disposal of such IP, its carrying amount
disclosed under the fair value model for and gain or loss on disposal.
investment properties whose FV cannot be
measured reliably

For further info, please contact:

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IAS-40
INVESTMENT PROPERTY

PRESENATION AND DISCLOSURE (Sample)

ABC Company
Notes to the Financial Statements
For the year ended 31 December 20X1

40. Investment Property Cost Model FV Model Total

At the start of the year

Cost xxxx - xxxx

Accumulated Depreciation / Impairment (xxxx) - (xxxx)

Carrying Amount / Fair value xxxx xxxx xxxx

Addition during the year xxxx xxxx xxxx

Transfer to Investment property xxxx xxxx xxxx

Transfer from Investment property (xxxx) (xxxx) (xxxx)

Disposal / Deletion (xxxx) (xxxx) (xxxx)

Depreciation (xxxx) - (xxxx)

Impairment / (Reversal) (xxxx) - (xxxx)

Fair valuation - xxxx xxxx

At the end of the year

Cost xxxx - xxxx

Accumulated Depreciation / Impairment (xxxx) - (xxxx)

Carrying Amount / Fair value xxxx xxxx xxxx

For further info, please contact:

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 Across the globe, the governments provide various types of assistance to businesses in
order to achieve various economic objectives such as to promote a specific type of
business (say, electric vehicles) or to create employment opportunities. The assistance
may be mere an aid by creating ease of doing business or it may be in the form of a
financial assistance. The most common form of such assistance is a grant of cash or land
to the business entity from local or national government.
 IAS 20 is applied in accounting for, and in the disclosure of, government grants and in
the disclosure of other forms of government assistance.

 Government refers to government,

government agencies and similar
bodies whether local, national or
international.

 Government grants are assistance by government in  Government assistance is action by government

the form of transfers of resources to an entity in designed to provide an economic benefit specific to
return for past or future compliance with certain an entity or range of entities qualifying under certain
conditions relating to the operating activities of the criteria.
entity  However, Government assistance does not include
 However, they exclude those forms of government benefits provided only indirectly through action
assistance which cannot reasonably have a value affecting general trading conditions, such as the
placed upon them and transactions with government provision of infrastructure in development areas or
which cannot be distinguished from the normal the imposition of trading constraints on competitors.
trading transactions of the entity.
 Government grants are sometimes called by other
names such as subsidies, subventions, or premiums.

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 Grants related to assets are government grants whose  Grants related to income are government grants other than
primary condition is that an entity qualifying for them those related to assets.
should purchase, construct or otherwise acquire long-term
assets.
 Subsidiary conditions may also be attached restricting the
type or location of the assets or the periods during which
they are to be acquired or held.

 Government grants, including non-monetary grants at fair value, shall not be recognized until
there is reasonable assurance that:
a) a) the entity will comply with the conditions attaching to them; and
b) b) the grants will be received.
 Receipt of a grant does not of itself provide conclusive evidence that the conditions attaching to
the grant have been or will be fulfilled.

 Government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as
expenses the related costs for which the grants are intended to compensate.
 The application of above principle may be summarised as follows:

These are usually recognised in These may also require the A government grant that These are recognised in profit or
profit or loss over the periods fulfilment of certain obligations becomes receivable as loss in the same period as the
and in the proportions in which and would then be recognised in compensation for expenses or relevant expenses.
depreciation expense on those profit or loss over the periods losses already incurred or for the
assets is recognised. that bear the cost of meeting the purpose of giving immediate
obligations. For example, a grant financial support to the entity
of land may be conditional upon with no future related costs shall
the erection of a building on the be recognised in profit or loss of
site and it may be appropriate to the period in which it becomes
recognise the grant in profit or receivable.
loss over the life of the building.

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Grants related to income are presented as part of profit or loss, either separately or under a general heading such as ‘other income’;
alternatively, they are deducted in reporting the related expense.

Debit Cash / Grant Receivable XXXX Debit Cash / Grant Receivable XXXX
Credit Deferred Grant XXXX Credit Deferred Grant XXXX

Debit Deferred Grant XXXX Debit Deferred Grant XXXX

Credit Other Income – P/L XXXX Credit Expenses – P/L XXXX

Government grants related to assets, including non-monetary grants at fair value, shall be presented in the statement of financial
position either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset.

Debit Non-current asset (PPE, etc.) XXXX

Credit Bank / Cash XXXX
Debit Non-current asset (PPE, etc.) XXXX
Credit Cash / Bank XXXX
Debit Cash / Grant Receivable XXXX
Credit Deferred grant XXXX
Debit Cash / Grant Receivable XXXX
Credit Non-current asset (PPE, etc.) XXXX
Debit Depreciation expense – P/L XXXX
Credit Accumulated depreciation (PPE, etc.) XXXX
Debit Depreciation expense – P/L XXXX
Credit Accumulated depreciation (PPE, etc.) XXXX
Debit Deferred grant XXXX
Credit Profit or loss XXXX

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 The following matters shall be disclosed:

a) the accounting policy adopted for government grants,
including the methods of presentation adopted in the
financial statements;
b) the nature and extent of government grants recognised in
the financial statements and an indication of other forms
of government assistance from which the entity has
directly benefited; and
c) unfulfilled conditions and other contingencies attaching to
government assistance that has been recognised.
 Government assistance may be significant so that disclosure of
the nature, extent and duration of the assistance is necessary in
order that the financial statements may not be misleading.

A government grant that becomes repayable shall be accounted for as a change in accounting estimate. It means that repayment is
to be recorded in the year the grant becomes repayable and prior period adjustments are not made.

Repayment of a grant related to an asset shall be recognised by increasing the carrying

amount of the asset or reducing the deferred income by the amount repayable.

The cumulative additional depreciation that would have been recognised in profit or loss
to date in the absence of the grant shall be recognised immediately in profit or loss.
First, debit unamortised balance of deferred grant, and
any excess is recognised as expense in profit or loss.
Debit Deferred grant (balancing figure) XXXX
Debit Deferred grant XXXX
Debit Profit or loss (cumulative additional depreciation) XXXX
Debit Profit or loss (excess, if any) XXXX
Credit Bank XXXX
Credit Bank XXXX

Debit Non-current asset (balancing figure) XXXX

Debit Profit or loss (cumulative additional depreciation) XXXX
Credit Bank XXXX

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 A government grant may take the form of a transfer of a

non-monetary asset, such as land or other resources, for the
use of the entity.

 The usual treatment is to record both grant and non-

monetary asset at that fair value. The alternative treatment is
to record both asset and grant at a nominal amount.

 Fair value is the price that would be received to sell an asset

or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.

 Forgivable loans are loans which the  The benefit of a government loan at a below market
lender undertakes to waive repayment rate of interest is treated as a government grant.
of under certain prescribed conditions.
 The benefit of below market rate of interest shall be
 A forgivable loan from government is measured as the difference between the cash receipt
treated as a government grant when under the government loan and the initial carrying
there is reasonable assurance that the amount of the loan measured and recognised in
entity will meet the terms for accordance with IFRS 9.
forgiveness of the loan. Until then, such
a loan is treated as a liability in  The entity shall consider the conditions and
accordance with IFRS 9. obligations that have been, or must be, met when
identifying the costs for which the benefit of the loan
is intended to compensate.

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IAS 20 – Practice Questions Compiled by: Murtaza Quaid

IAS 20 – ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE

OF GOVERNMENT ASSISTANCE (PRACTICE QUESTIONS)

Question 1. [Government Grant] [CAF 1 – ICAP Study Text]

Identify the following government grants as either “related to assets” or “related to income”.
(i) Grant by Federal Government on condition to import and install new power generation plant in
Pakistan.
(ii) Grant by Provincial Government on condition of construction and operation of factory in a
specific rural area.
(iii) Grant by sports ministry for conducting a Football League for next three years.
(iv) Grant by ministry of manpower for maintaining low labour turnover in last five years.

Question 2. [Government Grant - Period of Recognition] [CAF 1 – ICAP Study Text]

State the time of recognition of income related to following government grants:
a) The grant was received for maintaining good working conditions in the past.
b) The grant was received for maintaining certain working conditions for next three years.
c) The grant was received for installation of a plant that has useful life of 15 years and being
depreciated using 30% reducing balance method.
d) The grant was awarded to facilitate the acquisition of land subject to condition of building a factory
thereon.
e) The grant was awarded to facilitate the acquisition of land for dairy farming subject to condition of
maintaining minimum 70% local employment for next 10 years.

Question 3. [Grant related to income] [CAF 1 – ICAP Study Text]

On 31 December 2020, JKL Limited received grant of Rs. 50,000 towards the cost of training young
apprentices. The training program is expected to last for two years.
Actual total cost of training was Rs. 200,000 (70% incurred in year 2021 and 30% incurred in year 2022
as originally planned).
Year end is 31 December.
Required:
a) Show the journal entries in the company's general journal under both methods of presentation.
b) Prepare financial statement extracts under both methods of presentation.

Question 4. [Grant related to income] [Gripping IFRS: Graded Questions]

Tukumu Limited is a company that manufactures curios. Tukumu Limited operates in the Natal Midlands
and employs the local population to manufacture the curios.
As a result of the positive effect that Tukumu Limited has had on an otherwise impoverished area, it was
awarded a government grant of Rs. 150,000 on 1 January 20X6. This grant was given to Tukumu Limited
to subsidise 20% of future wages.

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Tukumu Limited had complied with all the conditions laid out to obtain the grant during the previous
financial year (20X5). The only condition that remained on 1 January 20X6 is to incur future wages.

Wages incurred and paid: Amount in Rs.

31 December 20X6 200,000
31 December 20X7 250,000
31 December 20X8 400,000
Year end is 31 December.
Required:
a) Show the journal entries in the company's general journal under both methods of presentation.
b) Prepare financial statement extracts under both methods of presentation.

Question 5. [Grant related to assets] [CAF 1 – ICAP Study Text]

On 1 January, 2021 ABC Limited acquired a plant at a cost of Rs. 600 million and received a grant of Rs.
60 million on the same date.
The plant is to be depreciated on straight line basis over its useful life of 3 years and Rs. 120 million
residual value. There is reasonable assurance that conditions of the grant shall be complied with.
Year end is 31 December.
Required:
a) Show the journal entries in the company's general journal under both methods of presentation.
b) Prepare financial statement extracts under both methods of presentation.

Question 6. [Grant related to assets] [Gripping IFRS: Graded Questions]

Dozey Limited manufactures and sells toys for babies. They have been operating a profitable business
for many years in the Amakanda area.
Due to a recent baby boom, Dozey Limited found it needed to purchase new equipment. At the time,
the directors discovered that the government was allocating grants to manufacturing companies
operating in the Amakanda area. Dozey Limited’s directors applied for a grant.
On 1 January 20X5, Dozey Limited was awarded a grant of Rs. 400 000 to purchase the much needed
equipment. Dozey Limited had met all the conditions of the grant by 31 December 20X4, apart from the
actual acquisition of the equipment. Dozey Limited purchased the equipment immediately on receipt of
the grant (1 January 20X5).
The cost of acquiring the equipment was Rs. 1,500,000. The useful life is expected to be 4 years. Dozey
Limited does not expect to receive any amount for the equipment at the end of its useful life.
Year end is 31 December.
Required:
a) Show the journal entries in the company's general journal under both methods of presentation.
b) Prepare financial statement extracts under both methods of presentation.

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Question 7. [Grant related to expense and asset] [Gripping IFRS: Graded Questions]
Potato Limited is a company that farms com. Potato Limited is a relatively new company in the corn
industry, having previously been in the gun manufacturing industry.
Potato Limited was awarded a government grant of Rs. 500,000 on 1 January 20X5, the details of which
are as follows:
▪ Rs. 300,000 is to assist with the purchase of a new harvester;
▪ Rs. 200,000 is for immediate financial support and is not associated with any future costs;
▪ All conditions attaching to the grant have been met.
Later that day, the harvester was acquired for Rs. 900,000. The harvester has a useful life of 5 years and,
at the end of its useful life, Potato Limited expects to sell it for Rs. 50,000 as scrap metal.
Year end is 31 December.
Required:
a) Show the journal entries in the company's general journal under both methods of presentation.
b) Prepare financial statement extracts under both methods of presentation.

Question 8. [Repayment of grant related to income] [CAF 1 – ICAP Study Text]

On 1 January 2021 Jam Limited (JL) received a cash grant of Rs. 1.5 million towards the cost of
employing a blockchain analyst on a new project for a 5 years’ period.
The grant is repayable in full if the project is not completed. The analyst was employed and the project
commenced from the 1 January 2021.
On 20th January 2023, the project was cancelled and the grant had to be repaid in full.
Required: Journal entries from 1 January 2021 till the date of repayment.

Question 9. [Repayment of grant related to asset] [CAF 1 – ICAP Study Text]

On 1st January 2020, Deep Water Limited installed a non-current asset with a cost of Rs. 500,000 and
received a grant of Rs. 100,000 in relation to that asset. The asset is being depreciated on a straight-line
basis over five years.
Grant was repaid on 1st January 2022 in full on failing to meet the conditions.
Required: Journal entries for the year 2020 to 2022 (under both methods of presentation).

Question 10. [Repayment of grant related to asset] [CAF 1 – ICAP Study Text]
On 1st January 2020, Deep Sea Limited installed a non-current asset with a cost of Rs. 500,000 and
received a grant of Rs. 100,000 in relation to that asset. The asset is being depreciated on a straight-line
basis over five years.
Grant of Rs. 90,000 was repaid on 1st January 2022 on failing to meet the few conditions of grant.
Required: Journal entries for the year 2020 to 2022 (under both methods of presentation).

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Question 11. [Repayment of grant related to asset] [Gripping IFRS: Graded Questions]
Blot Limited is a newly fanned company that is considering entering the ink business. Blot plans to
manufacture ink and sell it to printers.
Due to the scarcity of businesses in the sector, Blot Limited was awarded a government grant to
purchase the machinery it needed to start operations.
The grant was awarded to Blot Limited on 1 January 20X6 for an amount of Rs. 250,000 and is
conditional upon Blot manufacturing ink for an unbroken period of 3 years. Should Blot stop
manufacturing before the end of the 3 year period, the grant will have to be repaid in full.
Blot Limited purchased the requisite machinery on 1 January 20X6 for Rs. 500 000. The machinery is
expected to have a useful life of 4 years and a nil residual value.
Due to unforeseen circumstances, Blot Limited had to stop manufacturing ink on 1 January 20X8, but
intends to continue on 1 January 20X9.
Required: Journal entries for the year 20X6 to 20X8 (under both methods of presentation).

Question 12. [Forgivable loan] [CAF 1 – ICAP Study Text]

ABC Pharmaceutical Company received cash from government for a research and development project
of a children vaccine. As per the terms of the loan, the cash received from the government shall be
waived, if the entity is able to develop the vaccine within 3 years and sell it free of cost for 5 years.
Required: Briefly explain the accounting treatment of the above loan?
Solution: This is forgivable loan as the repayment shall be waived, under prescribed conditions i.e.
ability to develop vaccine within 3 years and sell it free of cost for 5 years.
If there is reasonable assurance to meet the conditions of waiver, this forgivable loan shall be
recognised as government grant.
However, if there is expectation that it will take more time than three years in the development or there
is expectation of selling the vaccine for a price before 5 years, the loan shall be recognised as a liability in
accordance with IFRS 9.

Question 13. [Forgivable loan] [CAF 1 – ICAP Study Text]

ABC Pharmaceutical Company received cash from government for a research and development project
of a children vaccine. As per the terms of the loan, the cash received from the government is repayable
in cash only if the entity decides to commercialize the results of the research phase of the project. If the
entity decides not to commercialize the results of the research phase, the cash received is not repayable
in cash, but instead the entity must transfer to the government the rights to the research.
Required: Explain whether the loan will be considered a forgivable loan?
Solution: In this scenario, cash received from the government does not meet the definition of a
forgivable loan in IAS 20.
This is because, in this arrangement, the government does not undertake to waive repayment of the
loan, but rather to require settlement in cash or by transfer of the rights to the research. The cash
received from government shall be recognised as liability in accordance with IFRS 9.

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Question 14. [Concessional Loan] [CAF 1 – ICAP Study Text]

On 1 January 2023, MZ Limited received a loan under government support scheme whereby the loan of
Rs. 100,000 is provided at a mark-up rate of 5% per annum whereas market rate of interest for similar
loan is 12% annum. The loan is for immediate financial support and is repayable on 31 December 2023.
MZ Limited has determined the initial carrying amount of loan in accordance with IFRS 9 at Rs. 93,750
(i.e. Rs. 100,000 + 5% x 100,000 = Rs. 105,000 x 1.12-1)
Required: Prepare the journal entry on 1 January 2023 on receipt of the above loan.

Question 15. [Government assistance] [CAF 1 – ICAP Study Text]

JK Limited constructed its factory few years ago in Gwadar. Since then the government has provided
infrastructure by improvement to the general transport and communication network and the supply of
improved facilities including water reticulation which is available on an ongoing indeterminate basis for
the benefit of an entire local community including JK Limited factory. The business of JK Limited has
become much more profitable since provision of these facilities.
Required: State whether the actions by government in above circumstances are considered government
assistance in accordance with IAS 20.
Solution: The above actions affecting general trading conditions are not government assistance as per
IAS 20.

Question 16. [Government assistance] [CAF 1 – ICAP Study Text]

The government provided following to XYZ Limited:
(i) Free technical advice
(ii) Free marketing advice for export to Central Europe
(iii) Free provision of guarantees for export trade with European Countries.
(iv) Supportive government procurement policy that is responsible for significant sales by XYZ
Limited.
Required: Briefly explain whether the above benefits provided by government will be considered as
government grant.
Solution: Items (i) to (iii) are not government grants as these are government assistance that cannot
reasonably have a value placed upon them.
Item (iv) is not government grant as it cannot be distinguished from general trading conditions.

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Question 17. [Non-monetary grant and government assistance] [Gripping IFRS: Graded Questions]
Anthony Limited wanted to start manufacturing guns and weapons. To do this they were required to
obtain a license from the government. The company applied for a license and was awarded one on the
30 June 20X8. The fair value of the grant is reliably determined to be worth Rs. 900,000 and has to be
renewed for this amount in 5 years’ time. The company had to pay the government Rs. 50,000 to obtain
the licence.
The company was also given free technical advice by government experts on the manufacturing of
weapons as well as on the marketing thereof This assistance was given because of the company's
excellent BEE rating (a government imposed set of criteria that companies in that country should abide
by) in its other operations.
The company has a 31 December financial year end.
Required:
a) Journal entries for the year 20X8 (under both methods of presentation).
b) Disclosure necessary for the government assistance not recognised in Anthony Limited’s accounting
records.

Question 18. [Comprehensive Example] [CAF 1 – ICAP Study Text]

Adeel Limited (AL) imported and installed a plant at total cost of Rs. 250 million on 1 January 2021. The
plant has useful life of 3 years. The residual value of plant at the end of useful life has been estimated at
Rs. 128 million. Based on this AL has correctly determined depreciation rate of 20% under reducing
balance method that it uses for depreciating plant and machineries.
On the same date, AL also received a government grant of Rs. 60 million towards this plant. It is
reasonably certain that AL will comply with the conditions of this grant. AL has policy to present the
plant and grant separately in its financial statements.
AL year-ends on 31 December.
Required: Prepare journal entries in the books of AL in respect of above plant from 1 January 2021 to 31
December 2023 (Journal entry for disposal of plant is not required).

Question 19. [Comprehensive Example] [CAF 1 – ICAP Study Text]

Kashif Limited (KL) imported and installed a plant at total cost of Rs. 250 million on 1 January 2021. The
plant has useful life of 3 years. The residual value of plant at the end of useful life has been estimated at
Rs. 128 million. Based on this KL has correctly determined depreciation rate of 20% under reducing
balance method that it uses for depreciating plant and machineries.
On the same date, KL also received a government grant of Rs. 60 million towards this plant. It is
reasonably certain that KL will comply with the conditions of this grant. KL has policy to present the
grant as deduction from the carrying amount of the plant in its financial statements.
KL year-ends on 31 December.
Required: Prepare journal entries in the books of KL in respect of above plant from 1 January 2021 to 31
December 2023 (Journal entry for disposal of plant is not required).

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Question 20. [Comprehensive Example] [Gripping IFRS: Graded Questions]

Brightspark Limited a manufacturer of light bulbs recently received a government grant of C 300 000 to
assist with the company cash flows pursuant to the purchase of a glass blower for C 500 000 on
1/1/20X8. A condition placed on this grant required Brightspark to produce 10,000 light bulbs for the
new parliament buildings by 31/12/20X9. Failure to comply with part or this entire requirement would
cause a proportionate amount of the grant to be repayable.
▪ For the 20X8 financial year Brightspark produced and installed 6,000 light bulbs in the new
parliament building. However due to frequent power cuts during 20X9 only 2,000 of the government
light bulbs were produced and installed in 20X9.
▪ The useful life of the glass blower was 5 years
Required:
a) Prepare journal entries for the years ended 31 December 20X8 & 20X9, accounting for the grant and
the glass blower assuming Brightspark has a policy of accounting for the grant as deferred income.
b) Prepare journal entries for the years ended 31 December 20X8 and 20X9, accounting for the grant
and the glass blower assuming Brightspark has a policy of writing off the grant against the asset.

Question 21. [Comprehensive Example] [CAF 1 – ICAP Study Text]

During the year ended 30 June 2023, Katie received three grants, the details of which are set out below:
a) On 1 September 2022, a grant of Rs. 40,000 from local government. This grant was in respect of
training costs of Rs. 70,000 which Katie had incurred.
b) On 1 November 2022 Katie bought a machine for Rs. 350,000. A grant of Rs. 100,000 was received
from central government in respect of this purchase. The machine, which has a residual value of Rs.
50,000, is depreciated on a straight-line basis over its useful life of five years.
c) On 1 June 2023, a grant of Rs. 100,000 from local government. This grant was in respect of
relocation costs that Katie had incurred moving part of its business from outside the local area. The
grant is repayable in full unless Katie recruits ten employees locally by the end of 30 June 2023.
Katie is finding it difficult to recruit as the local skill base does not match the needs of this part of
the business.
Required: Show how the above transactions should be reflected in the financial statements of Katie for
the year ended 30 June 2023. Where any accounting standards allow a choice you should show all
possible options.

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IAS 20 – Accounting for Government Grants and Disclosure of

Government Assistance – ICAP Past Papers

Question No. 2 of Autumn 2019, 5 marks

Discuss how the following should be dealt with in the financial statements of relevant entities according
to IAS 20 Accounting for Government Grants and Disclosure of Government Assistance:
(a) The government makes a grant to an entity which is planning to develop teaching software for
children with learning difficulties. The purpose of the grant is to help the entity to meet its general
financing requirement in the initial phase. No further conditions attached to the grant. (01)
(b) A manufacturing entity sets up a plant in an area of high unemployment. A government grant of Rs.
4 million is received with a condition that the grant is repayable in full if the number of its employees
fell below 100 at any time during the next four years. It is highly probable that the entity will comply
with the condition attached to the grant. (03)
(c) Free technical advice has been provided by the government’s export promotion department to help
an exporter to market his new technology in North America. (01)
Solution:
Part (a)
The grant has been provided for the purpose of giving immediate financial support to the entity with no
further conditions, so this grant should be immediately recognised in profit or loss in full in the period in
which the entity qualifies to receive it (when it is receivable) with disclosure to ensure that its effect is
clearly understood.
Part (b)
Since there is reasonable assurance that conditions attaching to the grant will be met, the grant is
recognised in statement of profit or loss over the four year period in which the entity incurs the costs of
employing 100 people. Amount taken to statement of profit or loss may be either be presented as other
income or shown as deduction from the related expense. The remaining amount of grant will be presented
as deferred income under liabilities in the balance sheet.
Part (c)
Free technical advice is government assistance that cannot reasonably have a value placed upon it and
therefore should not be recognised. However, an indication of such assistance should be disclosed in
financial statements.

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Question No. 7(i) of Spring 2021, 6 marks

You have recently joined as the finance manager of Corv Limited (CL). While reviewing the draft financial
statements for the year ended 31 December 2020 prepared by the junior accountant, you have noted that
in January 2020, Government allotted an industrial plot to CL at a prime location subject to the condition
that CL will establish a factory. CL constructed the factory building which was available for use on 1
October 2020. Due to delay in recruitment of key factory employees, the production activities will
commence on 15 March 2021.
The accountant has not recorded the land as it was given free of cost. While the factory building is still
appearing in capital work in progress as production activities will commence on 15 March 2021.
The accounting policy of CL is to carry land and building at fair value (wherever permitted by IFRS).
Required: Discuss how the above issues should be dealt in the financial statements of CL for the year
ended 31 December 2020 in accordance with the requirements of IFRSs.
Solution:
The accounting treatment adopted by accountant for not recording land is incorrect. Allotment of land by
Government is a transfer of a non-monetary asset and should be considered as a government grant. Such
non-monetary grant may be recorded at fair value or at a nominal value. As per CL’s policy, fair value of
the land should be assessed and reported in the financial statements under the head property, plant and
equipment (PPE). The grant was made subject to construction of factory so the resulting deferred income
should be recognized in income on a systematic basis over the useful life of the factory building.
The factory building should also be transferred from capital work in progress to PPE account as the
building is available for use on 1 October 2020. Further depreciation on building should also be charged
from same date i.e. 1 October 2020.

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Question No. 2 of Autumn 2022, 7 marks

Discuss how the following should be dealt with in the current year’s financial statements of relevant
entities in accordance with IAS 20.
(a) Xero Limited (XL) received a government grant to setup a plant in an under-developed rural area
three years ago. One of the conditions of the grant was that XL will maintain a minimum of 200
employees during the next five years. However, due to worsening economic conditions, XL failed to
maintain 200 employees and the full grant became repayable immediately in the current year.
XL has been presenting the grant in statement of financial position by deducting the grant in arriving
at the carrying value of the plant. (04)
(b) One Limited received a loan from government in the current year at an interest rate of 5% per
annum. The prevailing market interest rate is 12% per annum. The only condition attached to the
loan is that it should be used for acquisition of textile machinery. (03)
Solution:
Part (a)
▪ When a government grant becomes repayable it is accounted for as a change in accounting estimate.
▪ As the grant was presented as deduction from related plant, its repayment would be recognized by
increasing the carrying value of the plant
▪ The cumulative additional depreciation that would have been recognized in profit or loss to date in
the absence of the grant must be recognized immediately in profit or loss.
▪ Also the circumstances giving rise to repayment of the grant might indicate the possible impairment
of the new carrying amount of the plant.
Part (b)
▪ The benefit of the government loan at a below market rate of interest is treated as a government
grant. The loan shall be recognised and measured as per IFRS 9.
▪ Government grant should be recorded as the difference between the initial carrying amount of the
loan and the proceeds received.
▪ As the primary condition for the loan is acquisition of textile machinery, the grant should be
considered as grant related to asset and should be recognized in profit or loss over the life of the
machinery.
▪ The grant may be presented in the statement of financial position by setting up the grant as deferred
income or by deducting the grant in arriving at the carrying value of the machinery.

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Question No. 2 of Spring 2023, 8 marks

Discuss how the following should be dealt with in the financial statements of relevant entities according
to IAS 20:
(a) A government grant of Rs. 25 million was received by an entity in 2022 for the damage to its head
office building caused by the flood in December 2021. As a result of damage, an impairment loss of
Rs. 21 million was recognised in 2021. (02)
(b) A manufacturing entity established a plant in an area with high illiteracy rate and received a
government grant of Rs. 40 million. The grant received was equivalent to two years’ salaries of the 50
local persons employed by the entity. The grant is repayable in full if the number of these employees
falls below 50 at any time during the next five years. It is highly probable that the entity will comply
with the condition attached to the grant. (03)
(c) Government built an alternate road to the industrial zone, in which an entity’s factory is situated. The
new road has reduced the distance to the market and would result in an annual saving of
transportation costs of Rs. 3 million for the entity. (03)
Solution:
(a) Since this grant has been given as compensation for expenses or losses that were already incurred in
2021, it should be recorded in profit or loss in 2022. The amounts reported in 2021 should not be
restated.
(b) Since there is reasonable assurance that conditions attaching to the grant will be met, This is a grant
related to income which should be recognized in the statement of profit or loss over the 5 years in
which the entity incurs the costs of employing 50 local people. Amount taken to the statement of
profit or loss may either be presented as other income or shown as deduction from the related
expense. The remaining amount of grant will be presented as deferred income under liabilities in the
statement of financial position.
(c) The saving of transportation cost is not a government grant as no transfer of resources has been made.
Further, it is not considered as government assistance as the benefits is provided indirectly to the
entity. Building of the road is basically a provision of better trading conditions to all entities operating
in the industrial zone. Consequently, the effect of saving of transportation cost need not be accounted
for nor disclosed in the financial statements of the entity.

IQ School of Finance

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IAS 20 – Practice Questions Compiled by: Murtaza Quaid

Question No. 5 of Autumn 2023, 7 marks

Shark Limited (SL) established a desalination plant at a total cost of Rs. 300 million in a coastal area to
provide clean drinking water. The plant started commercial production on 1 January 2019 and had an
estimated useful life and residual value of six years and Rs. 30 million, respectively.
On 1 January 2020, SL received a government grant of Rs. 160 million towards the cost of the plant. The
sanction letter stated that SL should also operate the plant for atleast 300 days in each of the next three
years. At inception, there was a reasonable assurance that condition of the grant shall be complied with.
SL recorded the grant as deferred income.
In 2022, the plant was not operated for 120 days. Owing to this, the government issued a notice to SL for
repayment of Rs. 100 million. Accordingly, the amount was repaid by SL immediately.
Required: Prepare relevant extracts from SL’s statement of profit or loss for the year ended 31 December
2022, and statement of financial position as at that date. (Show comparative figures)

Question No. 4 of Spring 2025, 8 marks

Trussardi Limited (TL) is engaged in the business of assembling electric automobiles. Below information is
available for the year 2024:
(i) On 1 January 2024, the government allotted an industrial land to TL in an underdeveloped area
to set up a plant for assembling electric buses. The plant has a useful life of 10 years and became
available for use on 1 October 2024. The fair value of the land was Rs. 600 million on 1 January
2024 and Rs. 615 million on 1 October 2024.
(ii) During 2024, TL achieved additional sales of Rs. 100 million, which increased profits by Rs. 19
million due to supportive government procurement policies.
(iii) In 2024, due to a violation of one of the conditions attached to a government grant received in
2021 to set up a plant for assembling electric cars, TL received a notice from the government
authorities to repay the amount of Rs. 75 million. The grant was initially recorded as deferred
income in the financial statements. The balance of deferred grant income at the time of
repayment was Rs. 48 million.
Required: In accordance with IAS 20 ‘Accounting for Government Grants and Disclosure of Government
Assistance’, discuss how the above should be dealt with in the financial statements of TL for the year
ended 31 December 2024. (Entries are not required)

IQ School of Finance

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MAVEN MINDS
Assurance | Tax | Advisory | Outsourcing

IAS-20 Government Grants & Government Assistance

OBJECTIVE SCOPE

IAS 20 deals with all types of government grant except:

IAS 20 is applied in accounting for, and in
the disclosure of, government grants and
Government assistance in the form of tax reliefs (tax
in the disclosure of other forms of holidays, tax credits etc.)
government assistance. Government participation in the ownership of an entity
Government grants covered by IAS 41 Agriculture.

GOVERNMENT GRANTS
Grants related to Assets
Assistance by government in the form of
Government grants whose primary condition
transfers of resources to an entity in return for
is that an entity qualifying for them should
past or future compliance with certain purchase, construct or otherwise acquire
conditions relating to the long-term assets.
operating activities of the entity.
Subsidiary conditions may also be attached
However, they exclude those forms of restricting the type or location of the assets or
government assistance which cannot the periods during which they are to be
reasonably have a value placed upon them & acquired or held.
transactions with government which cannot be
distinguished from normal trading transactions
of the entity. Grants related To income
Government grants are also called as Govt. Grants other than those related to assets.
subsidies, subventions, or premiums.

GOVERNMENT GRANTS - PERIOD OF RECOGNITION RECOGNITION

Government grants shall be recognised in P/L on a systematic Government grants shall be recognized
basis over the periods in which the entity recognises the when there is reasonable assurance
related costs as expenses, for which the grants are intended that:
to compensate. the entity will comply with the
conditions attaching to them; &
The application of above principle may be summarised as
follows: the grants will be received.

Grants related to Assets Grants related to Income

Grants related to Depreciable Assets Compensation of Expenses already

incurred or immediate Financial Support
Recognised in P/L over the periods and in the
proportions in which depreciation expense on A government grant that becomes receivable
those assets is recognised. as compensation
for expenses or losses already incurred or
Grants related to Non-depreciable Assets for giving immediate financial support to
the entity with no future related costs
Such grant may require the fulfilment of shall be recognised in P/L of the period in
certain obligations and would then be which it becomes receivable.
recognised in P/L over the periods that bear
the cost of meeting the obligations.
For example, a grant of land may be Grants in recognition of Future Expenses
conditional upon construction of a building
on the site and therefore it should be Recognised in P/L in the same period as the
recognised in P/L over the life of the building. relevant expenses.

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IAS-20 Government Grants & Government Assistance

GOVERNMENT GRANTS - PRESENTATION

Presentation: Grants related to Income

Grants related to income are presented as part of profit or loss, either separately or under a general
heading such as ‘other income’; alternatively, they are deducted in reporting the related expense.

(1) Present the grant as other income (2) Present the grant as deduction from related expense

On receipt/accrual of grant On receipt/accrual of grant

Cash / Grant Receivable xxxx Cash / Grant Receivable xxxx
Deferred Grant xxxx Deferred Grant xxxx
On recognition of grant as income in P/L On recognition of grant as income in P/L
Deferred Grant xxxx Deferred Grant xxxx
Other Income – P/L xxxx Expenses – P/L xxxx

Presentation: Grants related to Assets

Government grants related to assets, including non-monetary grants at fair value, shall be presented in
the statement of financial position either by setting up the grant as deferred income or by deducting the
grant in arriving at the carrying amount of the asset.

(1) Setting up the grant as deferred income (2) Deducting the grant from carrying
amount of an asset
On acquisition of asset
On acquisition of asset
Non-current asset (PPE, etc.) xxxx
Non-current asset (PPE, etc.) xxxx
Bank / Cash xxxx
Bank / Cash xxxx
On receipt/accrual of grant
On receipt/accrual of grant
Cash / Grant Receivable xxxx
Cash / Grant Receivable xxxx
Deferred grant xxxx
Deferred grant xxxx
Period end depreciation expense
Period end depreciation expense (reduced)
Depreciation expense – P/L xxxx
Depreciation expense – P/L xxxx
Acc. dep (PPE, etc.) xxxx
Acc. dep (PPE, etc.) xxxx
Period end amortisation of deferred grant
Deferred grant xxxx
Profit or loss xxxx

OTHER GOVERNMENTS GRANTS

(1) Non-monetary grants (2) Forgivable loans (3) Loans at below market
rates of interest
A government grant may take
Forgivable loans are loans which The benefit of a government
the form of a transfer of a
the lender undertakes to waive loan at a below-market rate
non-monetary asset, such as
repayment of under certain of interest is treated as a
land or other resources, for the
prescribed conditions. government grant
use of the entity
Accounting Treatment Accounting Treatment Accounting Treatment
Usually, both grant and non-monetary A forgivable loan from government The benefit of below market rate
asset are recognized at fair value. is treated as a government grant when of interest is measured as the
there is reasonable assurance that the difference between the cash
The alternative treatment is to record
entity will meet the terms for forgiveness receipt under government loan &
both asset and grant at a nominal of the loan. Until then, such a loan the initial carrying amount of the
amount is treated as a liability in accordance loan measured and recognised in\
with IFRS 9. accordance with IFRS 9

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MAVEN MINDS
Assurance | Tax | Advisory | Outsourcing

IAS-20
Government Grants & Government Assistance

REPAYMENT OF GOVERNMENT GRANT

A government grant that becomes repayable shall be accounted for as a change in accounting estimate.
It means that repayment is to be recorded in the year the grant becomes repayable and prior period
adjustments are not made.

Repayment of a grant related to income Repayment of grant related to asset

First, debit unamortised balance of deferred Repayment of a grant related to an asset shall
grant, and any excess is recognised as expense in be recognised by increasing the carrying
profit or loss. amount of the asset or reducing the deferred
income by the amount repayable.
Deferred grant xxxx
Profit or loss (excess, if any) xxxx The cumulative additional depreciation that
Bank xxxx would have been recognised in profit or loss
to date in the absence of the grant shall be
recognised immediately in profit or loss.

Presentation Method 1: Setting up the Presentation Method 2: Deducting the grant in

grant as deferred income arriving at the carrying amount of an asset

Deferred grant (bal.) xxxx Non-current asset (bal.) xxxx

Cumulative additional Dep – P/L xxxx Cumulative additional Dep – P/L xxxx
Bank xxxx Bank xxxx

GOVERNMENT ASSISTANCE PRESENTATION & DISCLOSURE

Action by government designed to provide an Accounting policy adopted for government

economic benefit specific to an entity or range grants, including the methods of presentation
of entities qualifying under certain criteria. adopted in the financial statements;
However, Government Assistance does not Nature and extent of government grants
include benefits provided only indirectly through recognised in the financial statements and an
action affecting general trading conditions, indication of other forms of government
such as the provision of infrastructure in assistance from which the entity has directly
development areas or the imposition of trading benefited; and
constraints on competitors. Unfulfilled conditions and other contingencies
attaching to government assistance that has
been recognised.
Government assistance may be significant so
that disclosure of the nature, extent and duration
of the assistance is necessary in order that the
financial statements may not be misleading.

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 The concept of prudence requires that assets must not be overstated,

and accordingly, IAS 36 ensures that an asset’s carrying amount must
not exceed its recoverable amount.
 Asset is impaired when:

 Therefore, IAS 36 requires that if an asset’s carrying amount exceeds its

recoverable amount, then it is written down to recoverable amount by
recognising impairment loss.

 is the amount by which the carrying amount of an asset

exceeds its recoverable amount.

 is the amount at which an asset is recognised after

deducting any accumulated depreciation (amortization) and
accumulated impairment losses thereon.

 of an asset is the higher of its fair value less costs of

disposal and its value in use.

 is the present value of the future cash flows (net) expected

to be derived from an asset, including its eventual disposal.

 is the price that would be received to sell an asset in an

orderly transaction between market participants at the measurement
date.

 are incremental costs directly attributable to the

disposal of an asset, excluding finance costs and income tax expense.

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IAS 36 is applicable to certain assets including, IAS 36 is not applicable to various assets because
but not limited to: IFRSs applicable to those assets have mechanism
to ensure that the relevant asset is not
 Property, plant and equipment (IAS 16)
overstated, for example:
 Investment property measured using cost
 Inventories are measured at lower of cost
model (IAS 40)
and net realizable value (IAS 2)
 Intangible assets (IAS 38)
 Investment property measured at fair value
(IAS 40)

Irrespective of whether there is any indication of  An entity shall assess at the end of each reporting
impairment, an entity shall also annually test for period whether there is any indication that an
impairment following assets: asset may be impaired. If any such indication
exists, the entity shall estimate the recoverable
 Intangible asset not yet available for use amount of the asset.
 Intangible asset having indefinite life  Where there is no indication of impairment, then
no further action needs to be taken.
 Goodwill
 IAS 36 does not require to test every asset for
impairment in each period as it is usually not
practical to determine recoverable amount of
every asset due to:
 Time constraints
 Cost constraints

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In assessing whether there is any indication that an asset may be impaired, an entity shall consider,
as a minimum, the following indications:

 Evidence is available of obsolescence or physical  The asset’s market value has declined during the period
damage of an asset. significantly more than would be expected as a result of
the passage of time or normal use.
 Significant adverse changes including the asset becoming
idle, plans to discontinue or restructure the operation to  Significant changes in technology, markets, economic
which an asset belongs. factors or laws and regulations that have an adverse
effect on the entity.
 Significant adverse changes including plans to dispose of
an asset before the previously expected date and  An increase in market interest rates or rate of return on
reassessing the useful life of an asset as finite rather than investments, affecting the value in use of the asset.
indefinite.
 The entity’s net assets have a higher carrying value than
 There is evidence that the asset’s expected economic its market capitalisation indicating that assets might be
performance is, or will be, worse than expected. overvalued. Market capitalisation is total market value
of equity of the entity and is usually computed as:

 Asset is impaired when:

= –

 Higher of:
 Value in Use; or
 Fair Value minus Costs of Disposal

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 An impairment loss shall be recognized

 To (in case of non-revalued asset); or
 As a if the asset is carried at revalued amount in line with IAS 16.
(i.e. in Other Comprehensive Income or Profit/Loss Account, as the case may be)
 IAS 36 is also applied to assets that are carried at revalued amount and it provides following guidance in this regard:

 The recoverable amount of the revalued asset is necessarily close to, or greater than, its
revalued amount.
 In this case, after the revaluation requirements have been applied, it is unlikely that the
revalued asset is impaired and recoverable amount need not be estimated.

 The fair value less costs of disposal of the revalued asset is necessarily less than its fair value.
Therefore, the revalued asset will be impaired if its value in use is less than its revalued amount.
 In this case, after the revaluation requirements have been applied, an entity applies IAS 36 to
determine whether the asset may be impaired

 After the recognition of an impairment loss, or reversal of impairment loss, the depreciation (amortization) charge for the
asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a
systematic basis over its remaining useful life.

Higher of:

 The following elements shall be reflected in the calculation of an asset’s  is the price that would be received to sell an asset in an
value in use: orderly transaction between market participants at the measurement
 an estimate of the future cash flows the entity expects to derive date.
from the asset;
 expectations about possible variations in the amount or timing of  It may be possible to measure fair value less costs of disposal, even if
those future cash flows; there is not a quoted price in an active market for an identical asset.
 the time value of money, represented by the current market However, sometimes it will not be possible to measure fair value less
risk-free rate of interest; costs of disposal because there is no basis for making a reliable
 the price for bearing the uncertainty inherent in the asset; and estimate of the price at which an orderly transaction to sell the asset
 other factors, such as illiquidity, that market participants would would take place between market participants at the measurement
reflect in pricing the future cash flows the entity expects to derive date under current market conditions. In this case, the entity may
from the asset. use the asset’s value in use as its recoverable amount.

 The elements identified above can be reflected either as adjustments to  might include legal costs, stamp duty, costs of
the future cash flows or as adjustments to the discount rate. removing the asset, and direct incremental costs to bring an asset
into condition for its sale. Redundancy and restructuring costs (to be
 Estimates of future cash flows should be based on reasonable and
incurred after the sale of business) are not costs of disposal.
supportable assumptions that represent management’s best estimate of
the economic conditions that will exist over the remaining useful life of
the asset.

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 Estimates of future cash flows must include:  Estimates of future cash flows must not include:
 Cash inflows from the continuing use of the asset;  Cashflows from receivables/payables
 Cash outflows that will be necessarily incurred to  Cashflows from financing activities; or
generate the cash inflows from continuing use of the  Income tax receipts or payments.
asset; and  Cash outflows expected from future restructuring to which an
 Net disposal proceeds at the end of the asset’s useful entity is not yet committed; or
life.  Cash outflows expected from improving or enhancing the
asset’s performance.
 The future cash flows from continuing use are estimated for
the asset in its current condition.  Once the entity is committed to the restructuring, its estimates of
future cash inflows and cash outflows for the purpose of
determining value in use reflect the cost savings and other benefits
from the restructuring.

Present value is calculated by applying a suitable discount rate to the cash flows.
The discount rate must be a that reflects current market assessments of:
 the time value of money; and
 the risks specific to the asset for which the future cash flow estimates have not been adjusted.

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IAS 36 – Impairment of assets Compiled by: Murtaza Quaid

IAS 36 – IMPAIRMENT OF ASSETS

PRACTICE QUESTIONS

Question 1. Impairment Review [CAF 1: FAR 1 – ICAP Study Text]

An asset has carrying amount of Rs. 530,000. Its value in use is Rs. 500,000 and fair value less costs of
disposal is Rs. 470,000.
Required: Calculate recoverable amount, impairment loss (if any) and carrying amount after impairment
review.

Question 2. Impairment Review [CAF 1: FAR 1 – ICAP Study Text]

An asset has carrying amount of Rs. 490,000. Its value in use is Rs. 500,000 and fair value less costs of
disposal is Rs. 470,000.
Required: Calculate recoverable amount, impairment loss (if any) and carrying amount after impairment
review.

Question 3. Impairment Review [CAF 1: FAR 1 – ICAP Study Text]

Consider the following three independent scenarios related to revalued assets:

Required: Discuss whether IAS 36 needs to be applied and calculate the impairment loss (if any).

Question 4. Impairment Review [CAF 1: FAR 1 – ICAP Study Text]

Consider the following three independent scenarios related to revalued assets:

Required: Discuss whether IAS 36 needs to be applied and calculate the impairment loss (if any).

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Question 5. Impairment Review [CAF 1: FAR 1 – ICAP Study Text]

Premier Limited (PL) owns a plant which has a carrying amount of Rs. 248 million as at 1 April 2019. It is
being depreciated at 12.5% per annum on a reducing balance basis.
The plant is used to manufacture a specific product which has been suffering a decline in sales due to
obsolescence.
PL has estimated that the plant will be retired from use on 31 March 2023.
The estimated net cash flows from the use of the plant and their present values are:

On 1 April 2020, PL had an alternative offer from the competitor to purchase the plant for Rs.200
million.
Required: Calculate the impairment loss.

Question 6. Impairment Review [CAF 1: FAR 1 – ICAP Study Text]

On 1 January Year 1 Entity Q purchased for Rs.240,000 a machine with an estimated useful life of 20
years and an estimated zero residual value.
Depreciation is charged on a straight-line basis.
On 1 January Year 4 an impairment review showed the machine’s recoverable amount to be Rs.100,000
and its remaining useful life to be 10 years.
Required: Calculate:
a) The carrying amount of the machine on 31 December Year 3 (immediately before the impairment).
b) The impairment loss recognized in the year to 31 December Year 4
c) The depreciation charge in the year to 31 December Year 4

Question 7. Impairment Review [CAF 1: FAR 1 – ICAP Study Text]

An asset’s carrying amount is Rs. 500,000 and its fair value less costs of disposal is Rs. 600,000.
Required: Calculate impairment loss if value in use is:
(a) Rs. 700,000
(b) Rs. 600,000
(c) Rs. 400,000

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Question 8. Impairment Review [CAF 1: FAR 1 – ICAP Study Text]

Sky-Line Limited (SL) operates a 4 Star Hotel facility in Murree. The hotel was constructed at a cost of
Rs.300 mnillion, 5 years back and it has been depreciated on a straight-line basis (total useful life of 15
years and residual value of 20%).
There are indications that the property is not performing as expected due to;
▪ opening of a competing hotel nearby,
▪ a significant drop in number of tourists to the area because of terrorism.
There is a 40% probability that the hotel will generate net cash flows of Rs. 40 million per annum and
60% probability that the cash flows would only be Rs. 20 million per annum for its remaining useful life
and it is now estimated that net disposal proceeds at the end of useful life will be negligible.
The property’s fair value has been estimated at Rs. 200 million and 5% of the proceeds from sale would
be expended in closing the deal.
Required: Calculate the impairment loss if the appropriate discount rate is 10%.

Question 9. Impairment Review [CAF 1: FAR 1 – ICAP Study Text]

Naveed Limited has an item of plant which has a carrying value of Rs.1,800,000 as at the end of the year
December 2020. It has undergone an impairment review and the following estimates were produced:
Fair value of plant is Rs.1,400,000 and costs of disposal are 2% of selling price.
Revenue and associated costs per annum for remaining useful life (assume all cash flows occur at the
end of the year):

The plant has an estimated residual value of Rs.50,000.

A discount rate of 10% is applicable to investments equivalent in risk to this plant.
Required: Calculate the impairment loss if the appropriate discount rate is 10%. (assume all cash flows
occur at the end of the year).

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Question 10. Impairment Review [CAF 1: FAR 1 – ICAP Study Text]

The assistant financial controller of the Hussain Associates Limited has identified the following issue
which she believes may indicate impairment of an asset:

Hussain Associates Limited owns and operates an item of plant that cost Rs. 640,000 and had
accumulated depreciation of Rs. 400,000 at 1 October 2015. It is being depreciated at 12.5% on cost.

On 1 April 2016 (exactly halfway through the year) the plant was damaged when a factory vehicle
collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant, but it
still operates, albeit at a reduced capacity. It is also expected that as a result of the damage the
remaining life of the plant from the date of the damage will be only two years.

Based on its reduced capacity, the estimated present value of the plant in use is Rs. 150,000. The plant
has a current disposal value of Rs. 20,000 (which will be nil in two years’ time), but Hussain Associates
Limited has been offered a trade-in value of Rs. 180,000 against a replacement machine which has a cost
of Rs. 1 million (there would be no disposal costs for the replaced plant). Hussain Associates Limited is
reluctant to replace the plant as it is worried about the long-term demand for the product produced by
the plant. The trade-in value is only available if the plant is replaced.

Required: Prepare extracts from the statement of financial position and statement of profit or loss of
Hussain Associates Ltd in respect of the plant for the year ended 30 September 2016.

Question 11. Recognition of Impairment

Saqib Ltd has a single manufacturing plant which has a carrying amount of Rs. 900,000. A new
government has passed legislation which significantly restricts exports of the product produced by the
plant. As a consequence, and for the foreseeable future, Saqib Ltd’s production will be cut by 40%. Cash
flow forecasts have been prepared derived from the most recent budgets/forecasts for the next five
years approved by management.

Particulars 2016 2017 2018 2019 2020

Inflow from use of equipment 320,000 300,000 200,000 150,000 200,000
Outflow to operate the equipment 40,000 47,000 12,000 25,000 70,000
Disposal proceeds (net) - - - - 150,000

If the plant was sold now if would realize Rs. 660,000, net of selling costs. Saqib Ltd estimates the pre-
tax discount rate specific to the plant to be 15%, excluding the effects of general inflation.
Required: Calculate the recoverable amount of the plant and any impairment loss.

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Question 12. Recognition of Impairment [CAF 1: FAR 1 – ICAP Study Text]

An asset has cost of Rs. 500,000 and accumulated depreciation of Rs. 200,000. Its recoverable amount
has been estimated at Rs. 280,000.

Required: Journal entries to record the impairment loss.

Question 13. Recognition of Impairment [CAF 1: FAR 1 – ICAP Study Text]

An asset has cost of Rs. 500,000 and accumulated depreciation of Rs. 200,000. Its recoverable amount
has been estimated at Rs. 280,000. Asset has balance of Rs. 7,000 in revaluation surplus arising from
previous revaluation.

Required: Journal entries to record the impairment loss.

Question 14. Reversal of Impairment [CAF 1: FAR 1 – ICAP Study Text]

An asset was purchased for Rs. 100,000 on 1 January 2021 with 10 years useful life and nil residual
value. Depreciation is charged on straight line basis.

On 31 December 2021, Depreciation of Rs. 10,000 was recorded. On this date, the recoverable amount
of asset was determined to be Rs. 72,000 and therefore impairment loss of Rs. 18,000 was recognised.

On 31 December 2022, Depreciation of Rs. 8,000 [i.e., Rs.72,000 / 9 years] was recorded and asset now
has carrying amount of Rs. 64,000. On this date, recoverable amount has been estimated at Rs. 95,000.

Required: Journal entry to record the reversal if entity uses cost model.

Question 15. Reversal of Impairment [CAF 1: FAR 1 – ICAP Study Text]

An asset was purchased for Rs. 100,000 on 1 January 2021 with 10 years useful life and nil residual
value. Depreciation is charged on straight line basis.

On 31 December 2021, Depreciation of Rs. 10,000 was recorded. On this date, the recoverable amount
of asset was determined to be Rs. 72,000 and therefore impairment loss of Rs. 18,000 was recognised.

On 31 December 2022, the depreciation of Rs. 8,000 [i.e., Rs.72,000 / 9 years] was recorded. On this
date, the recoverable amount has been estimated at Rs. 95,000.

Required: Journal entry to record the reversal if entity uses revaluation model.

Question 16. Recognition of Impairment [CAF 1: FAR 1 – ICAP Study Text]

A company has a machine in its statement of financial position at a carrying amount of Rs. 300,000. The
machine is used to manufacture the company’s best-selling product range, but the entry of a new
competitor to the market has severely affected sales.

As a result, the company believes that the future net cash flows from the machine over the next three
years will be only Rs. 150,000, Rs. 100,000 and Rs. 50,000. The asset will then be sold for Rs. 25,000. An
offer has been received to buy the machine immediately for Rs. 240,000, but the company would have
to pay shipping costs of Rs. 5,000. The applicable discount rate is 10%.

Required: Calculation and journal entry for impairment loss.

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Question 17. Recognition of Impairment [CAF 1: FAR 1 – ICAP Study Text]

On 1 January Year 1 Entity Q purchased for Rs.240,000 a machine with an estimated useful life of 20
years and an estimated zero residual value. Depreciation is on a straight-line basis.
The asset had been re-valued on 1 January Year 3 to Rs.250,000, but with no change in useful life at that
date.
On 1 January Year 4 an impairment review showed the machine’s recoverable amount to be Rs.100,000
and its remaining useful life to be 10 years.
Required: Calculate:
(a) The carrying amount of the machine on 31 December Year 2 and hence the revaluation surplus
arising on 1 January Year 3.
(b) The carrying amount of the machine on 31 December Year 3 (immediately before the
impairment).
(c) The impairment loss recognised in the year to 31 December Year 4.
(d) The depreciation charge in the year to 31 December Year 4.

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IAS 36: IMPAIRMENT OF ASSETS

ICAP PAST PAPERS
Question No. 6 of Spring 2011, 11 marks
On March 1, 2007 Style Textiles imported an automatic plant for Rs. 27 million. The commissioning of
the plant was completed in December 2007 with a cost of Rs. 3 million. The commercial production
commenced on January 1, 2008 and at that time, economic life of the plant was estimated as 8 years.
During an exercise carried out to determine the impairment in the value of plant as on December 31,
2009 the following estimates have been made:
▪ Due to lack of demand the estimated plant utilization is reduced from 80% to 70%.
▪ It is estimated that due to under utilization of the plant, the life of the plant will be increased by 2
years but an overhauling of the plant would have to be carried out at the end of year 2015 at a cost
of Rs. 1 million.
▪ The applicable discount rate is 10%.
▪ The net annual cash flows (excluding overhauling cost) have been estimated as under:

The current selling price of a similar plant in the local market is Rs. 15 million. The present
decommissioning cost of the plant is estimated at Rs. 0.2 million.
Required: Work out the impairment (if any) in the value of the plant as on December 31, 2009.

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Question No. 5 of Spring 2013, 11 marks

Dominant Fertilizers has two plants. Following information is available for the purpose of impairment
testing:
(i) The remaining useful life of both plants is expected to be 3 years.
(ii) The fair values and written down values of the plants as on 31 December 2012 were as follows:

(iii) Expected cash flows from each plant in next three years are as follows:

(iv) Present value factor, based on a discount factor of 10%, for year 1, year 2 and year 3 are 0.909,
0.826 and 0.751 respectively.
Required: Compute impairment (if any) on each plant.

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Question No. 7 of Autumn 2016, 17 marks

Kamran Enterprises (KE) provides depreciation on plant and machines at 10% on written-down value.
Depreciation is charged from the month the asset is available for use in operations up to the month
prior to its disposal. Cost of its plant & machines and the accumulated depreciation as on 1 July 2015
were Rs. 75 million and Rs. 17 million respectively.
The following information is available in respect of its plant & machines, for the year ended 30 June
2016:
(i) On 1 October 2015, a second-hand machine was acquired from a Chinese company for Rs. 15
million. The machine was renovated and overhauled at a cost of Rs. 3 million. 25% of this
expenditure was in respect of purchase of consumables.
(ii) On 1 November 2015, KE transferred a machine having a list price of Rs. 10 million from its
stock-in-trade to its Engineering Department. KE sells such machines at cost plus 25%.
(iii) On 1 January 2016, certain worn-out parts of a plant were replaced at a cost of Rs. 4 million. The
replaced parts neither enhanced the useful life of the plant nor its operating efficiency. The old
parts were sold for Rs. 0.75 million. The plant was purchased for Rs. 25 million on 1 January
2015.
On 1 May 2016, the plant was damaged and remained in-operative for one month. KE spent an
amount of Rs. 3 million on repairs to restore the plant in working condition.
(iv) On 1 April 2016, a machine which was purchased on 1 July 2012 for Rs. 12 million was
completely damaged and was sold for Rs. 1.2 million.
Required: Prepare accounting entries to record the above transactions in KE’s books for the year ended
30 June 2016.

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Question No. 4 of Spring 2018, 20 marks

The following information pertains to property, plant and equipment of Orchid Limited (OL), a listed
company:

Buildings
▪ The revalued amount of buildings as determined by Shabbir Associates, an independent valuer, on
31 December 2015 and 2017 was Rs. 700 million and Rs. 463 million respectively.
▪ On 30 June 2017 a building having original cost of Rs. 66 million was sold to Baqir Limited for Rs. 85
million. It was last revalued at Rs. 87 million. OL incurred a cost of Rs. 2 million on disposal.
▪ OL transfers the maximum possible amount from revaluation surplus to retained earnings on an
annual basis.
Plant
▪ On 31 December 2016 the recoverable amount of the plant was assessed at Rs. 360 million with no
change in useful life.
▪ During 2017, OL has decided to change the depreciation method for plant from straight line to
reducing balance. The new depreciation rate would be 10%.
Required: Prepare following disclosure note of property, plant and equipment (along with comparative
figures) to be presented in the financial statements of OL for the year ended 31 December 2017. (Total
column is not required)

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Question No. Q6(b) of Autumn 2018, 7 marks

Property, plant and equipment as disclosed in the draft financial statements of Apricot Pakistan Limited
(APL) for the year ended 30 June 2018 include a plant having a carrying value of Rs. 610 million. The
performance of the plant has been deteriorating since last year which is affecting APL’s sales.
Following information/estimates relate to the plant for the year ending 30 June 2019:

Cash flows from the plant are expected to decrease by 15% each year from 2020 and onward. The
plant’s residual value after its remaining useful life of 3 years is estimated at Rs. 100 million.
An offer has been received to buy the plant immediately for Rs. 570 million but APL has to incur the
following costs.

Applicable discount rate is 9%.

Required: Calculate the amount of impairment loss (if any) on plant, for the year ended 30 June 2018.

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Question No. 3 of Autumn 2020, 8 marks

On 1 July 2014, Indus Pharma Limited (IPL) received a government grant of Rs. 280 million to setup a
plant in an under-developed rural area. The grant is repayable in full if the conditions attached to the
grant are not met for a period of five years from the date of commencement of the production. At the
inception, it was highly probable that IPL would comply with the conditions for the required period.
IPL incurred total cost of Rs. 630 million on plant and it started production on 1 January 2015. Useful life
of the plant was estimated at 7 years. IPL deducted government grant in arriving at the carrying amount
of the asset.
In January 2019, IPL showed its inability to comply with the conditions attached to the grant and
regulatory authority issued a notice to IPL for repayment of the grant in full. Accordingly, the grant was
repaid by IPL.
In view of repayment of the grant, IPL carried out an impairment review of the plant on 31 December
2019. Net annual cash inflows for the remaining life of the plant have been estimated at Rs. 90 million
and Rs. 80 million for 2020 and 2021 respectively. These cash inflows are net of annual interest and
maintenance cost of Rs. 10 million and Rs. 6 million respectively for both years. Applicable discount rate
is 12%.
On the date of impairment review, the existing plant can be sold in the local market for Rs. 160 million.
Estimated cost of disposal would be Rs. 5 million.
Required: Prepare journal entries for the year ended 31 December 2019 in respect of the above
information. (Show all necessary workings. Narrations are not required)

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Question No. 2 of Autumn 2021, 7 marks

The draft financial statements of Barbary Cement Limited (BCL) for the year ended 31 December 2020
include a plant having a carrying value of Rs. 400 million. Due to technological change, the remaining
useful life of the plant has been reduced to 4 years.
Following information has been gathered for impairment testing of the plant:
(i) Inflows from sale of product to be manufactured by the plant for the year 2021 are estimated at
Rs. 200 million. These inflows are subject to 10% decrease in each subsequent year due to
declining demand.
(ii) Outflows from operational cost for 2021 are estimated at Rs. 80 million. These outflow would
increase by 5% in each subsequent year despite decline in demand due to inflation and increase
in plant’s wear and tear.
(iii) BCL’s net profit is subject to income tax of 20%.
(iv) Depreciation on plant is calculated using straight line method.
(v) The plant’s net disposal proceeds at the end of the useful life is estimated at Rs. 100 million.
(vi) Pre-tax and post-tax discount rates are 12% and 9.6% per annum respectively.
(vii) A technologically advanced plant with similar capacity can be purchased at Rs. 350 million. BCL
has received an offer to buy the existing plant for Rs. 250 million. BCL will have to incur shipping
cost of Rs. 7 million, to dispatch the existing plant to the purchaser.
Required: Compute the impairment loss to be recognized as at 31 December 2020.

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Question No. 5 of Autumn 2022, 8 marks

On 1 March 2017, Zarmoney Limited imported an automatic plant for Rs. 130 million. The
commissioning of the plant was completed on 1 January 2018 at a cost of Rs. 10 million. The economic
life of the plant was estimated as 12 years and useful life of the plant was estimated as 8 years. The
plant is being depreciated at 20% per annum using reducing balance method.
Due to declining demand for the product manufactured from this plant, an impairment test was carried
out at 31 December 2021. Following information has been gathered for impairment testing of the plant:
(i) The current selling price of a similar plant in the local market is Rs. 50 million. The present
decommissioning cost of the plant is estimated at Rs. 2 million.
(ii) The plant’s net disposal proceeds at the end of the useful life is estimated at Rs. 4 million.
(iii) The current market risk-free rate of interest is 8% per annum, however, an investor would ask
additional return of 2% for bearing the uncertainty inherent in such a plant.
(iv) A junior accountant has calculated following net cash flows from operating the plant:

However, a review of accountant’s working has revealed the following:

▪ Depreciation of the plant has been included as an outflow in each year.
▪ Tax payments of Rs. 2 million has been included as an outflow in each year.
▪ Inflows from plant in 2022 include receipts from sale of existing inventory amounting to Rs. 3 million
Required: Compute the impairment loss (if any) in the value of the plant to be recognised on 31
December 2021. (Show all necessary workings)

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Question No. 4 of Spring 2023, 8 marks

On 1 July 2019, Sumerian Limited (SL) purchased a manufacturing plant for Rs. 570 million. The plant is
being depreciated at a rate of 15% per annum using the reducing balance method. On 31 December
2021, the remaining life of the plant was estimated at 4 years resulting in an increase of 5% in
depreciation rate.
SL carried out impairment testing of the plant on 31 December 2021 and also on 31 December 2022
using the following estimates:

Required: Calculate the carrying value of the manufacturing plant as at 31 December 2021 and 2022.

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Question No. 2 of Autumn 2024, 8 marks

Raj Shahi Limited (RSL) acquired a machinery on 1 January 2019 for Rs. 480 million. RSL uses cost model
for subsequent measurement and depreciates the machinery on a straight-line basis over its estimated
useful life of 8 years.
At the end of year 2021, the machinery had undergone an impairment review and was consequently
impaired by Rs. 40 million.
At the end of year 2023, the machinery underwent another impairment review and the following
estimates related to machinery were made on 31 December 2023:
(i)

(ii) The machinery can be sold in its current condition for net proceeds of Rs. 135 million. However,
this amount is expected to decrease by Rs. 45 million with the passing of each year.
(iii) Income tax is payable at 30%.
(iv) The applicable discount rate is 12% per annum.
Required: Compute the impairment loss, if any, in the value of the machinery to be recognized on 31
December 2023. (Show all workings)

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IAS 36 – IMPAIRMENT OF ASSETS

Compiled by: Murtaza Quaid
SCOPE IMPORTANT DEFINITIONS

IAS 36 applies to all assets except: Recoverable amount of an asset is defined as the higher of its fair value minus costs
 Inventories (IAS 2); of disposal, and its value in use.
 Assets arising from contracts with customer IFRS 15;
 Deferred tax assets (IAS 12); Fair value (FV) is the price that would be received to sell an asset or paid to transfer
 Assets arising from employee benefits (IAS 19); a liability in an orderly transaction between market participants at the
 Financial assets (IAS 39/IFRS 9); measurement date.
 Investment property measured at FV (IAS 40);
 Biological assets measured at FV less CTS (IAS 41); Costs of disposal are incremental costs directly attributable to the disposal of an
 Insurance contract (IFRS 4); and asset or cash-generating unit, excluding finance costs and income tax expense.
 Non-current assets or disposal groups held for sale Value in use is the present value of future cash flows from using an asset, including
(IFRS 5); its eventual disposal.
IAS 36 does apply to Impairment loss is the amount by which the carrying amount of an asset (or a cash-
 Land, building , machinery (IAS 16); generating unit) exceeds its recoverable amount.
 Investment property at cost (IAS 40);
 Intangible assets (IAS 38); Cash-generating unit is the smallest identifiable group of assets that generates cash
 Goodwill; inflows that are largely independent of the cash inflows from other assets or groups
 Financial assets classified as: of assets.
o Subsidiaries (IFRS 10);
o Associates (IAS 28); and Corporate assets are assets other than goodwill that contribute to the future cash
o Joint ventures (IFRS 11). flows of both the CGU under review and other CGUs.

IMPAIRMENT TESTING

ANNUAL TESTING INDICATION BASED TESTING

Annual impairment testing is compulsory for: An entity shall estimate the recoverable amount of the assets, when there is an indicator
 Intangible assets with an indefinite useful life of impairment. Indicators are assessed at each reporting date.
(such as trademarks);
 Intangible assets not yet available for use;
 Goodwill acquired in a business combination;
 CGUs to which goodwill has been allocated. INTERNAL INDICATORS EXTERNAL INDICATORS

 Obsolescence or physical damage of  Significant decline in market value of

IQ School of Finance an asset. the assets below that would be
 Significant changes with an adverse expected as a result of the passage of
IMPAIRMENT
effect on the entity related to the use time or normal use.
Asset is impaired If : of an asset, for e.g.  Significant changes with an adverse
Carrying amount (CA) > Recoverable amount (RA) - The asset becoming idle, effect on the entity in the
- Plans to discontinue or restructure technological, market, economic or
Impairment = CA – RA the operation to which an asset legal environment in which the entity
belongs, operates or in the market to which an
 An impairment loss shall be recognized - Plans to dispose of an asset before asset is dedicated.
- To P/L account or the previously expected date,  Increased market interest rates or
- As a revaluation decrease if the asset is - Reassessing useful life of asset as other market rates affecting discount
carried at revalued amount in line with finite rather than indefinite. rate used in calculating asset’s value
other IFRS.  Evidence from internal reporting in use and decrease the asset’s
 Adjust the depreciation in the future periods indicating that economic recoverable amount materially.
in order to reflect the asset’s new carrying performance of an asset is, or will be,  Carrying amount of the net assets of
amount. worse than expected. the entity is higher than its market
capitalization.
For your valuable feedback, any update, error or
query, kindly let me know at [email protected]

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RECOVERABLE AMOUNT REVERSAL OF IMPAIRMENT

Recoverable amount is the higher of asset’s or CGU’s:  At the end of each reporting period, the entity should determine
whether an impairment loss recognized in prior periods for an asset
(other than goodwill) may no longer exist or may have decreased.
VALUE IN USE  An impairment loss may be reversed only if there has been a
change in the estimates used to determine the asset’s recoverable
Value in use is the PV of the future cash flows expected to be derived amount.
from an asset or CGU.  However, the CA of an asset is not increased above the lower of:
- Its recoverable amount;
Step 1: Estimate your future cash flows - Its historical cost i.e. depreciated carrying amount had no
To measure value in use, base cash flow projections on: impairment loss originally been recognized.
 Reasonable and supportable assumptions that represent
management’s best estimate of the economic conditions that will
exist over the remaining useful life of the asset. INDIVIDUAL ASSETS
 The most recent financial budgets/forecasts but for a maximum
period of 5 years.  Reversal of impairment is recognized in the profit or loss unless it
 Extrapolation of cash flow projections for the periods beyond 5 relates to a revalued asset.
years using a steady or declining growth rate for subsequent years.  However, the CA of an asset is not increased above the lower of:
- Its recoverable amount;
Include the following in cash flows estimations: - Its historical cost i.e. depreciated carrying amount had no
 Projections of cash inflows from continuing use of asset. impairment loss originally been recognized.
 Projections of cash outflows necessarily incurred to generate the
cash inflows from continuing use of the asset. For your valuable feedback, any update, error or
 Net cash flows for disposal of the asset at the end of its useful life. query, kindly let me know at [email protected]
DO NOT include the following in cash flows estimations:
 Cash flows from receivables/payables.
 Cash outflows expected from future restructurings which is not yet
committed.
 Cash outflows expected from improving or enhancing the asset’s
performance.
 Cash flows from financing activities.
 Income tax receipts and payments.

Be consistent in projecting cash flows & selecting discount rate.

Either:
 Adjust future cash flows by the inflation and use the nominal
discount rate; or
 Alternatively, project future cash flows in the real terms and use
real discount rate.

Step 2: Determine discount rate

Discount rate shall be a pre-tax rate that reflects current market

assessment of:
 Time value of money; &
 Risks specific to the asset for which future cash flow estimates have
not been adjusted.

FAIR VALUE LESS COST TO SELL

 Rules and guidelines for measuring the fair value of any assets are
set by the standard IFRS 13 Fair Value Measurement.
 Costs of disposal are for example legal costs, stamp duties and
similar transaction taxes, costs of removing the asset and direct
incremental costs to bring an asset into condition for its sale.

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ICAP PAST PAPERS

NON-CURRENT ASSETS
IAS 23: Borrowing Costs
IAS 16: Property, Plant and Equipment
IAS 40: Investment Property
IAS 20: Government Grant & Assistance
IAS 36: Impairment of Assets

CAF 1: FINANCIAL ACCOUNTING & REPORTING

MURTAZA QUAID

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Question No. 6 of Autumn 2019 – 17 marks

The following information pertains to Monday Limited (ML):
(i) The balances of property, plant and equipment as on 1 January 2018:

Revaluation surplus related to the office building as at 1 January 2018 amounted to Rs. 8.5
million.
(ii) On 1 September 2018, a new equipment was acquired by making payment of Rs. 70 million to
the supplier. An old equipment was also given in exchange to the supplier. The fair values of
the old and new equipment were assessed at Rs. 21 million and Rs. 93 million respectively.
The old equipment had been acquired at a cost of Rs. 40 million on 1 July 2016. Cost incurred
on installing the new equipment amounted to Rs. 5 million.
(iii) On 1 January 2018, ML commenced construction of a manufacturing plant. The whole process
of assembling and installation was completed on 31 October 2018. However, the work was
stopped from 16 to 31 August 2018 due to unexpected rains.
The total cost of Rs. 660 million incurred on the plant was paid as under:

The plant was financed through a bank loan of Rs. 500 million obtained on 1 March 2018. The
loan carries a mark-up of 18% payable annually. The surplus funds available from the loan
were invested in a saving account and earned Rs. 17 million during capitalization period.
(iv) On 31 December 2018, the revalued amount of office building was assessed at Rs. 178 million
by Precise Valuers, an independent valuation firm. Value in use of the office building as at 31
December 2018 was estimated at Rs. 186 million.
(v) Other relevant details are as follows:

* Remaining life at the date of last revaluation

ML accounts for revaluation on net replacement value method and transfers the maximum
possible amount from revaluation surplus to retained earnings on an annual basis.
Required: Prepare a note on ‘Property plant and equipment’ for inclusion in ML’s financial statements
for the year ended 31 Dec 2018. (Comparatives figures and column for total are not required)

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Question No. 8 of Spring 2020 – 20 marks

Following information pertains to non-current assets of Distaghil Limited (DL):
(i) DL purchased specialised vehicles for Rs. 370 million on 1 July 2017. The vehicles have an
estimated useful life of 10 years with residual value of Rs. 30 million.
The revalued amounts of the vehicle as at 31 December 2018 and 2019 were determined at
Rs. 302 million and Rs. 290 million respectively. There was no change in useful life or residual
value.
(ii) DL setup a manufacturing plant in a remote area at a cost of Rs. 280 million. The plant had a
useful life of 8 years. The plant was purchased on 1 January 2018 and was available for use on
1 April 2018. The commercial production started on 1 June 2018.
On 1 July 2018, DL received a government grant of Rs. 120 million towards the cost of the
plant. The sanction letter states that if DL ceases to use the plant in the remote area before
31 December 2021, DL would be required to repay the grant in full.
(iii) A warehouse was given on rent on 1 January 2018. Previously, the warehouse was in use of
DL.
On 1 January 2018, carrying value and remaining useful life of the warehouse was Rs. 80
million and 16 years respectively. Fair value of the warehouse on various dates are as follows:

Other information:
▪ DL uses cost model for subsequent measurement of property, plant and equipment except for
specialised vehicles for which revaluation model is used.
▪ DL transfers the maximum possible amount from the revaluation surplus to retained earnings on
an annual basis.
▪ Government grant is recorded as deferred income and a part of it is transferred to income each
year.
▪ Investment property is carried at fair value model.
Required: Prepare relevant extracts from DL’s statement of profit or loss and other comprehensive
income for the year ended 31 December 2019 and statement of financial position as on that date.
(Show comparative figures)

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Question No. 3 of Autumn 2020, 8 marks

On 1 July 2014, Indus Pharma Limited (IPL) received a government grant of Rs. 280 million to setup a
plant in an under-developed rural area. The grant is repayable in full if the conditions attached to the
grant are not met for a period of five years from the date of commencement of the production. At the
inception, it was highly probable that IPL would comply with the conditions for the required period.
IPL incurred total cost of Rs. 630 million on plant and it started production on 1 January 2015. Useful
life of the plant was estimated at 7 years. IPL deducted government grant in arriving at the carrying
amount of the asset.
In January 2019, IPL showed its inability to comply with the conditions attached to the grant and
regulatory authority issued a notice to IPL for repayment of the grant in full. Accordingly, the grant
was repaid by IPL.
In view of repayment of the grant, IPL carried out an impairment review of the plant on 31 December
2019. Net annual cash inflows for the remaining life of the plant have been estimated at Rs. 90 million
and Rs. 80 million for 2020 and 2021 respectively. These cash inflows are net of annual interest and
maintenance cost of Rs. 10 million and Rs. 6 million respectively for both years. Applicable discount
rate is 12%.
On the date of impairment review, the existing plant can be sold in the local market for Rs. 160 million.
Estimated cost of disposal would be Rs. 5 million.
Required: Prepare journal entries for the year ended 31 December 2019 in respect of the above
information. (Show all necessary workings. Narrations are not required)

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Question No. 8 of Autumn 2020 – 20 marks

Following information pertain to property, plant and equipment of Harappa Industries Limited (HIL)
for the year ended 30 June 2020:
(i)

*An amount of Rs. 12 million had been charged to profit or loss upon previous revaluation
(ii) On 30 June 2020, the revalued amounts of the land and buildings were assessed by Smart
Consultant at Rs. 120 million and Rs. 35 million respectively.
(iii) Setting up of a new plant was commenced on 1 July 2019 and substantially completed on 29
February 2020. The plant was available for use on 1 April 2020 and immediately put into use.
Useful life of the plant was estimated at 10 years. Details of the cost incurred are as under:

The cost of the plant was financed through an existing running finance facility with a limit of
Rs. 200 million carrying mark-up of 12% per annum. A government grant of Rs. 20 million
related to the plant was received on 1 January 2020. The grant amount was used for
repayment of the running facility.
(iv) One of the vehicles had an engine failure on 1 January 2020 and its engine had to be sold as
scrap for Rs. 0.1 million. The vehicle had been acquired on 1 January 2018 at a cost of Rs. 2.5
million. 40% of the cost is attributable to its engine. Though the engine of similar capacity was
available at a cost of Rs. 1.2 million, the old engine was replaced on 1 January 2020 with a
higher capacity engine at a cost of Rs. 1.8 million.
(v) HIL uses cost model for subsequent measurement of property, plant and equipment except
for land and buildings.
(vi) HIL accounts for revaluation on net replacement value method and transfers the maximum
possible amount from revaluation surplus to retained earnings on an annual basis.
(vii) HIL deducts government grant in arriving at the carrying amount of the asset.
Required: In accordance with IFRSs, prepare a note on ‘Property, plant and equipment’ for inclusion
in HIL’s financial statements for the year ended 30 June 2020.
(Comparatives figures and column for total are not required)

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Question No. 7 of Autumn 2021 – 16 marks

Following information pertains to non-current assets of Bunny Ear Limited (BEL):
Land:
In January 2019, the government allotted a piece of land to BEL subject to the condition that BEL will establish
a factory building on it. The land was recorded at its fair value of Rs. 100 million.
Factory building:
On 1 March 2019, BEL started construction of the factory building. The construction work was completed on 30
June 2020. Payments related to the construction of the factory were as follows:

The project was financed through:

(i) government grant of Rs. 200 million received on 1 February 2019. Unused funds from government grant
were invested in a saving account @ 8% per annum.
(ii) withdrawals from the following running finance facilities obtained from Bank A and Bank B. The relevant
details are:

Manufacturing plant:
The manufacturing plant was purchased on 1 August 2020 at cost of Rs. 420 million. Rs. 240 million was financed
through an interest free loan from government. The loan will be forgiven if the plant is operated for atleast 4
years by BEL. Upon acquisition, there is a reasonable assurance that BEL will comply with this condition.
Other information:
▪ BEL uses cost model for subsequent measurement of property, plant and equipment.
▪ All government grants are recorded as deferred income and a part of it is transferred to income each year.
▪ Useful life of the factory building and manufacturing plant has been estimated at 25 years and 10 years
respectively.
Required: Prepare relevant extracts (including comparative figures) from BEL’s statement of profit or loss for
the year ended 31 December 2020 and statement of financial position as on that date.
(Notes to the financial statements are not required. Borrowing costs are to be calculated on the basis of
number of months)

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Question No. 9 of Autumn 2022 – 20 marks

Following information pertains to non-current assets of GnuCash Limited (GL):
(i) GL purchased a manufacturing plant for Rs. 340 million on 1 January 2021. On that date, the
plant had an estimated useful life and residual value of 13 years and Rs. 60 million respectively.
The revalued amounts and residual value were as follows:

(ii) A warehouse owned by GL was given on rent on 1 January 2022. Previously, the warehouse
was in use of GL.
The warehouse was acquired by GL on 1 July 2019 at a cost of Rs. 200 million and is being
depreciated @ 10% per annum on reducing balance method.
Fair value of the warehouse on various dates are as follows:

Rentals earned for the year ended 30 June 2022 amounted to Rs. 10 million out of which Rs.
6 million is still outstanding.
(iii) GL acquired a property comprising of three similar showrooms at a total cost of Rs. 900 million
on 1 October 2021. 40% of the cost of property is attributable to the value of land. Each of the
showroom can be leased out separately and has a useful life of 15 years with no residual value.
GL is using one showroom for its own products while the other showrooms were held to be
leased out. On 1 March 2022, the two showrooms were given on monthly rent of Rs. 4 million.
The fair value of each showroom is increasing by Rs. 3 million each month.
Other information:
▪ Cost model is used for subsequent measurement of all property, plant and equipment except for
manufacturing plant for which revaluation model is used.
▪ Maximum possible amount is transferred from the revaluation surplus to retained earnings on an
annual basis.
▪ Fair value model is used for subsequent measurement of all investment properties.
Required: Prepare notes on ‘Property, Plant and Equipment’ and ‘Investment Property’, for inclusion
in GL’s financial statements for the year ended 30 June 2022.
(Comparative figures and column for total are not required)

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Question No. 9 of Spring 2023 – 17 marks

Following information pertains to non-current assets of Mesopotamia Limited (ML):
(i) On 1 July 2019, ML acquired a warehouse at a cost of Rs. 300 million and was immediately given on
rent to a third party. On 1 January 2022, ML commenced the development work on its warehouse
with a view to put it in own use. The development work was completed on 31 March 2022 at a cost
of Rs. 50 million. ML started using the warehouse for its inventory on 1 May 2022. Fair value of the
warehouse on various dates are as follows:

Depreciation is charged on warehouse at a rate of 10% per annum using the reducing balance
method.
(ii) On 1 January 2020, ML purchased a heavy duty vehicle for Rs. 360 million. On purchase date, the
vehicle had an estimated useful life and residual value of 5 years and Rs. 72 million respectively.
During 2022, ML has decided to change the depreciation method for vehicles from reducing balance
to straight line.
(iii) On 1 June 2021, ML started construction of an office building. The building was available for use on
1 October 2022 and was immediately put into use. Details of the construction costs incurred are as
under:

*The bill from the contractor was received on 1 December 2021.

These payments were financed through the following sources:
(A) A short term loan of Rs. 200 million obtained on 1 April 2021 from Bank A at the rate of 16% per
annum. The surplus funds available from the loan were invested in a saving account at 10% per
annum. On 1 March 2022, ML repaid the loan using the proceeds received from a right issue of shares.
(B) Excess cash available with ML in current bank accounts.
(C) Withdrawals from its short term investments earning a profit of 12% per annum.
(D) Withdrawals from a running finance facility from Bank B carrying interest at 14% per annum. The
facility is also used for working capital needs.
Depreciation is charged on office building using straight line method over the estimated useful life of 20
years.
Additional information:
▪ Cost model is used for subsequent measurement of all property, plant and equipment.
▪ Fair value model is used for subsequent measurement of all investment properties.
Required: Prepare relevant extracts (including comparative figures) from ML’s statement of profit or loss
for the year ended 31 December 2022 and statement of financial position as on that date.

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ICAP Past Papers – Non-Current Assets Compiled by: Murtaza Quaid, ACA

Question No. 9 of Autumn 2023 – 17 marks

The following information pertains to non-current assets of Trout Limited (TL):
(i) Details of the property, plant and equipment as at 1 January 2022 are as follows:

*Remaining life at the date of last revaluation

As at 1 January 2022, the revaluation surplus related to the office building amounted to Rs.
32 million. However, on 31 December 2022, due to a slump in the market, the building was
again revalued by an independent valuer, and this time, the office building was valued at only
Rs. 156 million.
(ii) On 1 July 2022, a new equipment was acquired by making payment of Rs. 50 million to the
supplier. In addition, an old equipment was given in exchange to the supplier. The fair values
of the old and new equipment were assessed at Rs. 60 million and Rs. 105 million, respectively.
The old equipment had been acquired at a cost of Rs. 80 million on 1 July 2019.
(iii) On 1 January 2022, TL completed construction of the warehouse at a cost of Rs. 55 million for
subsequent sale to customer. However, warehouse was given on rent at an annual rent of Rs.
8 million on 1 April 2022. The fair value of the warehouse on various dates are as follows:

Other information:
▪ TL accounts for revaluation using the net replacement value method and transfers the maximum
possible amount from revaluation surplus to retained earnings on an annual basis.
▪ The fair value model is used for the subsequent measurement of all investment properties.
Required: Prepare the notes on ‘Property, plant and equipment’ and ‘Investment property’ to be
included in TL’s financial statements for the year ended 31 December 2022. (Comparative figures and
a column for the total are not required)

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ICAP Past Papers – Non-Current Assets Compiled by: Murtaza Quaid, ACA

Question No. 8 of Spring 2024, 13 marks

Following information pertains to properties of Synthesia Limited (SL):
(i) SL obtained possession of property A from tenants on 30 April 2023 when SL shifted its head
office from property B to property A. Property B was rented out immediately. On 30 April
2023, the fair value of property A was Rs. 740 million, while the fair value of property B was
determined as equal to its carrying amount.
The details of properties A and B are as follows:

60% of costs and fair values of both properties refer to the land element.
(ii) On 1 February 2023, SL started construction of property C with a view to earn rentals in the
future. The construction was completed on 30 September 2023 at a total cost of Rs. 430
million. This included Rs. 7 million and Rs. 12 million for professional fees for legal services
and abnormal wastage of material during construction respectively.
Operating losses of Rs. 10 million were also incurred before the property was rented out on 1
December 2023.
Fair value of property C was determined as Rs. 380 million, Rs. 390 million and Rs. 395 million
as at 30 September 2023, 1 December 2023 and 31 December 2023 respectively.
Other information:
(i) Fair value model is used for subsequent measurement of all investment properties.
(ii) Cost model is used for subsequent measurement of all property, plant and equipment.
(iii) Depreciation is charged using the reducing balance method at a rate of 10%.
(iv) Rental revenue received during 2023 and accrued at 31 December 2023 are Rs. 45 million and
Rs. 6 million respectively.
(v) Repair and maintenance expenses related to investment property amounted to Rs. 25 million.
(vi) All fair values are determined by Alpha Brothers, an independent firm of valuers.
Required:
(a) Prepare the note on ‘Investment property’ to be included in SL’s financial statements for the year
ended 31 December 2023. (11)
▪ Show each property in a separate column.
▪ Columns for total and comparative are not required.
(b) Assuming that SL follows cost model for investment properties, prepare journal entry to record
transfer of property A on 30 April 2023. (02)

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Question No. 9 of Spring 2025, 16 marks

The following information pertains to Calvin Klein Limited (CKL):
(i) The factory building was acquired on 1 January 2021 at a cost of Rs. 125 million with a useful
life of 10 years. The revalued amounts of the factory building as on 31 December 2022 and
2024 were Rs. 110 million and Rs. 70 million respectively.
(ii) Two similar machines costing Rs. 100 million each were acquired on 1 January 2023 while a
third machine costing Rs. 40 million was acquired on 1 October 2024. In December 2024, all
machines were damaged in an accident and are currently operating at less than 100%
capacity. CKL plans to repair them in the coming months.
The following information has been gathered for potential impairment testing:

(iii) 20 similar vehicles costing Rs. 5 million each were acquired on 1 January 2022. On 30 June
2024, CKL disposed of two vehicles to employees at 70% of the original cost.
Other information:
▪ The cost model is used for subsequent measurement of all property, plant and equipment except
for the factory building, which is measured using the revaluation model.
▪ Depreciation is charged on all assets using reducing balance method at 15% per annum, except
for factory building, which is depreciated over its useful life using the straight-line method.
▪ CKL accounts for revaluation using the net replacement value method and transfers the maximum
possible amount from revaluation surplus to retained earnings on an annual basis.
Required: Prepare a note on property, plant and equipment for inclusion in CKL’s financial statements
for the year ended 31 December 2024. (Comparative figures and the total column are not required)

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Entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible
resources such as scientific or technical knowledge, design and implementation of new processes or systems, licences, intellectual
property, market knowledge and trademarks (including brand names and publishing titles).
Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films,
customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer
loyalty, market share and marketing rights.
IAS 38 is required to be applied in accounting for intangible assets, except intangible assets that are within the scope of another
Standard;
If another Standard prescribes the accounting for a specific type of intangible asset, an entity applies that Standard instead of this
Standard. For example, this Standard does not apply to:
a) intangible assets held for sale in the ordinary course of business (IAS 2 is applicable).
b) deferred tax assets (IAS 12 is applicable).
c) leases of intangible assets (IFRS 16 is applicable).
d) financial assets (IAS 32 or IFRS 10/IAS 27/IAS 28 is/are applicable)
e) goodwill acquired in a business combination (IFRS 3 is applicable).
f) assets arising from contracts with customers (IFRS 15 is applicable)
Rights held by a lessee under licensing agreements for items such as motion picture films, video recordings, plays,

Each intangible asset has 3 main characteristics:

1. It is identifiable
2. It is non-monetary
3. No physical substance
It can happen that an asset has all 3 characteristics, but you
cannot recognize it in your statement of financial position. The reason is
that it still may not meet the recognition criteria.
, A telecom company may have millions of customers.
In this case, such company has a customer list that is an intangible asset,
but it can’t show it in its balance sheet, because it cannot measure its cost.
Just be aware of these situations.

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An intangible asset must be identifiable. Intangible asset must be a non-monetary

An asset is identifiable if it is either: asset. Some intangible assets may be contained
 is separable (can be exchanged, in or on a physical substance such as a
An intangible asset must meet the
rented, sold or transferred definition criteria of an asset i.e. control  compact disc (in the case of
separately); or over a resource and existence of future computer software),
 arises from contractual or other legal economic benefits.  legal documentation (in the case of
rights, either from contract, An entity controls an asset if the entity a licence or patent) or
legislation etc. In this case, the asset has the power to obtain the future  film.
does not need to be separable. economic benefits flowing from the
Intangible assets may have secondary
underlying resource and to restrict the
physical element. Therefore, although
access of others to those benefits.
these activities may result in an asset
The future economic benefits flowing with physical substance (e.g. a
from an intangible asset may include prototype), the physical element of the
revenue from the sale of products or asset is secondary to its intangible
services, cost savings, or other benefits component, i.e. the knowledge
resulting from the use of the asset by the embodied in it.
entity

An intangible asset shall be recognised if, and only if:

It is probable that the expected

future economic benefits that The cost of the asset can be
are attributable to the asset reliably measured
will flow to the entity

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The initial measurement of an intangible

asset depends on how you acquired the
asset. An intangible asset may be acquired in
following ways:
a) Acquired or Purchased Separately
b) Acquired in Exchange of Another Asset
c) Acquired by way of Government Grant
d) Internally Generated Intangibles
(Other than Goodwill)
e) Internally Generated Goodwill
f) Acquired in Business Combination

 plus import duties and non-refundable taxes,  Costs of employee benefits arising directly from
 after deducting trade discounts and rebates bringing the asset to its working condition;
 Professional fees (e.g. legal or consulting fees)
arising directly from bringing the asset to its
working condition; and
 Posts of testing whether the asset is functioning
 Recognition of costs in the carrying amount of an intangible asset ceases when the properly.
asset is in the condition necessary for it to be capable of operating in the manner
intended by management. For example, initial operating losses or cost of redeploying
the asset.
 Costs of introducing a new product/service
 Income and expenses relating to incidental operations (not directly attributable) are
recognised immediately in profit or loss. (including advertising/promotional activities);

 If payment for an intangible asset is deferred beyond normal credit terms, its cost is  Costs of conducting business in a new location
the cash price equivalent. The difference between the cash price equivalent and the or with a new class of customer (including costs
total payment is recognized as interest over the period of credit of staff training); and
 Administration and other general overhead
costs.

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An intangible asset may be acquired in exchange for another asset. The cost of the
intangible asset acquired will be:
 Fair value of the asset given up ± Cash paid (received);
 Fair value of the acquired asset, if this is more clearly evident;
 Carrying amount of the asset given up ± Cash paid (received), if:
 the exchange transaction lacks commercial substance or
 fair value of neither the asset received nor the asset
given up is reliably measurable.

 In some cases, an intangible asset may be acquired

free of charge, or for nominal consideration, by
way of a government grant.
 This may happen when a government transfers or
allocates to an entity intangible assets such as
airport landing rights, licences to operate radio or
television stations, import licences or quotas or
rights to access other restricted resources.
 In accordance with IAS 20, an entity may choose to recognise both the intangible
asset and the grant initially at fair value.
 Alternatively, the entity recognises the asset initially at a nominal amount plus any
expenditure that is directly attributable to preparing the asset for its intended use.

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 To assess whether an internally generated intangible

asset meets the criteria for recognition, an entity
classifies the generation of the asset into:
a) a research phase; and
b) a development phase.
 Although the terms ‘research’ and ‘development’ are defined, the terms ‘research
phase’ and ‘development phase’ have a broader meaning for the purpose of IAS 38.
 If an entity cannot distinguish the research phase from the development phase of an
internal project to create an intangible asset, the entity treats the expenditure on
that project as if it were incurred in the research phase only.

 is original and planned investigation undertaken with  is the application of research findings or other
the prospect of gaining new scientific or technical knowledge knowledge to a plan or design for the production of new or
and understanding. substantially improved materials, devices, products, processes, systems
or services before the start of commercial production or use.
 Examples of research activities are:
 Examples of development activities are:
 activities aimed at obtaining new knowledge;  the design, construction and testing of pre-production or
 the search for, evaluation and final selection of, pre-use prototypes and models;
applications of research findings or other knowledge;  the design of tools, jigs, moulds and dies involving new
technology;
 the search for alternatives for materials, devices, products,
processes, systems or services; and  the design, construction and operation of a pilot plant that is
not of a scale economically feasible for commercial production;
 the formulation, design, evaluation and final selection of and
possible alternatives for new or improved materials,  the design, construction and testing of a chosen alternative for
devices, products, processes, systems or services. new or improved materials, devices, products, processes,
 In the research phase of an internal project, an entity cannot systems or services.
demonstrate that an intangible asset exists that will generate  In the development phase of an internal project, an entity can, in
probable future economic benefits. Therefore, some instances, identify an intangible asset and demonstrate that the
asset will generate probable future economic benefits. This is because
the development phase of a project is further advanced than the
research phase.

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 An intangible asset arising from development (or from the development phase of an internal
project) shall be recognised if, and only if, an entity can demonstrate all of the following:
a) the of completing the intangible asset so that it will be available for
use or sale.
b) its the intangible asset and use or sell it.
c) its the intangible asset.
d) how the intangible asset will generate . Among other
things, the entity can demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness
of the intangible asset.
e) the the development and to use or sell the
intangible asset.
f) its attributable to the intangible asset during its development.

Expenditure on an intangible item that was initially recognised as an expense shall not be recognised as part of the cost of an
intangible asset at a later date.

 The cost of an internally generated intangible asset is the sum of expenditure incurred from the date when the intangible
asset first meets the recognition criteria.
 The cost comprises all directly attributable costs:
 costs of materials and services used or consumed in generating the intangible asset;
 costs of employee benefits arising from the generation of the intangible asset;
 fees to register a legal right; and
 amortisation of patents and licences that are used to generate the intangible asset.
 IAS 23 specifies criteria for the recognition of interest as an element of the cost of an internally generated intangible asset.
 The following are not components of the cost of an internally generated
intangible asset:
 selling, administrative and other general overhead expenditure unless
this expenditure can be directly attributed to preparing the asset for use;
 identified inefficiencies and initial operating losses incurred before the
asset achieves planned performance; and
 expenditure on training staff to operate the asset.

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 Internally generated brands, mastheads, publishing titles, customer

lists and items similar in substance
.
 Expenditure on above items cannot be distinguished from the cost
of developing the business as a whole. Therefore, such items are
not recognised as intangible assets.
 Internally generated goodwill is not recognised as an asset because
it is not an identifiable resource (i.e. it is not separable nor does it
arise from contractual or other legal rights) controlled by the entity
that can be measured reliably at cost.
 Differences between the fair value of an entity and the carrying amount of its identifiable net assets at any time
may capture a range of factors that affect the fair value of the entity. However, such differences do not
represent the cost of intangible assets controlled by the entity.

 A transaction or other event in which an acquirer obtains control of

one or more businesses is called business combination. For example,
when a company (the acquirer) buys a controlling interest (usually
50% or more voting power) in another company (the acquiree). In
this case, consolidated financial statements are to be prepared by the
acquirer.
 The cost of that intangible asset is its fair value at the acquisition date.
The fair value of an intangible asset will reflect market participants’
expectations at the acquisition date about the probability that the
expected future economic benefits embodied in the asset will flow to
the entity.
 If an asset acquired in a business combination is separable or arises from contractual or other legal rights,
sufficient information exists to measure reliably the fair value of the asset. Thus, the reliable measurement
criterion is also satisfied.
 Even an intangible asset that was not recognised in the financial statements of the subsidiary (acquiree) might be
recognised (separately from goodwill) in the consolidated financial statements of parent (acquirer) entity.

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 This means that the acquirer recognises as an asset separately from

goodwill an in-process R&D project of the acquiree if the project meets
the definition of an intangible asset.
 An acquiree’s in-process R&D project meets the definition of an
intangible asset when it:
a) meets the definition of an asset; and
b) is identifiable, i.e. is separable or arises from contractual or other
legal rights.

 Research or development expenditure that relates to an in-process R&D project acquired separately or in a
business combination and recognised as an intangible asset, and is incurred after the acquisition of that project
shall be accounted for in accordance with IAS 38 rules on research and development as explained earlier in this
chapter.

Calculate goodwill at the date of acquisition Calculate goodwill at the date of acquisition
(i.e. the parent achieves control) as follow: (i.e. the parent achieves control) as follow:

- Fair value of Consideration transferred XXXX - Fair value of Consideration transferred XXXX
- Non-Controlling Interest XXXX - Non-Controlling Interest
Less. FV of Identifiable Net Assets of subsidiary (XXX) XXXX
Less. FV of Identifiable Net Assets of subsidiary (XXX)

Consolidate goodwill, assets, liabilities and NCI of the subsidiary at the year end.
Journal Entry at the date the parent achieves control is as follow:
Debit: Goodwill XXXX
Debit: Net Assets of Subsidiary XXXX
Credit: FV of Consideration transferred XXXX
Credit: Non-Controlling Interest XXXX

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 If useful life is assessed to be finite, the entity shall assess  An intangible asset shall be regarded by the entity as
that useful life in terms of: having an indefinite useful life when, based on an
a) the length of time period, or analysis of all of the relevant factors, there is no
foreseeable limit to the period over which the asset is
b) number of production or similar units. expected to generate net cash inflows for the entity.
 An shall be  An
. (rather annually or
 The of an intangible asset with a finite when there is indication for impairment).
useful life unless:  The shall be
a) there is a commitment by a third party to purchase to determine whether useful life
the asset at the end of its useful life; or continues to be indefinite.
b) there is an active market for the asset and  The change in the useful life assessment from indefinite
 residual value can be determined by reference to finite shall be accounted for as a change in an
to that market; and accounting estimate in accordance with IAS 8.
 it is probable that such a market will exist at  The change in the useful life assessment from indefinite
the end of the asset’s useful life. to finite is an indicator that the asset may be impaired.

 The contractual period and/or renewal options may also

impact the assessment of useful life of intangible assets:
 The of an intangible asset that arises from
contractual or other legal rights the
, but
may be shorter depending on the period over which
the entity expects to use the asset.
 If the are conveyed
for a limited term that , the useful life
of the intangible asset shall
(s) only if there is
by the entity .




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 An intangible asset with a life shall be .

 , i.e. when it is in the location and
condition necessary for it to be capable of operating in the manner intended by management.
at the earlier of the date that the
and the date that the .
 The amortisation method used shall reflect the pattern in which the asset’s future economic benefits
are expected to be consumed by the entity. If that pattern cannot be determined reliably, the
straight-line method shall be used. There is a rebuttable presumption that an amortisation method
that is based on the revenue generated by an activity that includes the use of an intangible asset is
inappropriate.
 A variety of amortisation methods can be used;
a) Straight line method,
b) Diminishing balance method;
c) The units of production method.
 The method used is selected on the basis of the expected pattern of consumption of the expected future economic benefits embodied
in the asset and is applied consistently from period to period
 The amortisation charge for each period shall be recognised in profit or loss unless IAS 38 or another Standard permits or requires it to
be included in the carrying amount of another asset.
 The amortisation period and the amortisation method for an intangible asset with a finite useful life shall be reviewed at least at each
financial year-end.

Cost XXXX Fair Value XXXX

Less. Accumulated Depreciation (XXX) Less. Accumulated Depreciation (XXX)
Less. Accumulated Impairment (XXX) Less. Accumulated Impairment (XXX)

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 For the purpose of revaluations under IAS 38, fair value shall be measured by reference to an active
market and if an intangible asset is accounted for using the revaluation model, all the other assets in its
class shall also be accounted for using the same model, unless there is no active market for those assets.
 An active market is a market in which transactions for the asset or liability take place with sufficient
frequency and volume to provide pricing information on an ongoing basis. [IFRS 13 Appendix A]
 If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active
market for this asset, the asset shall be carried at cost model.
 The items within a class of intangible assets are revalued simultaneously to avoid selective revaluation of assets and the reporting of mixed
amounts.
 Revaluations shall be made with such regularity that at the end of the reporting period the carrying amount of the asset does not differ
materially from its fair value. The frequency of revaluations depends on the volatility of the fair values of the intangible assets being revalued.

 The revaluation model does not allow:

a) the revaluation of intangible assets that have not previously been recognised as assets e.g. internally generated brand; or
b) the initial recognition of intangible assets at amounts other than cost.
 The revaluation model is applied after an asset has been initially recognised at cost. However, if only part of the cost of an intangible asset is
recognised as an asset because the asset did not meet the criteria for recognition until part of the way through the process (e.g. development
costs), the revaluation model may be applied to the whole of that asset.
 Also, the revaluation model may be applied to an intangible asset that was received by way of a government grant and recognised at a
nominal amount.

 It is uncommon for an active market to exist for an intangible asset,

although this may happen. An active market may exist for freely
transferable taxi licences, fishing licences or production quotas.
However, an active market cannot exist for brands, newspaper
mastheads, music and film publishing rights, patents or trademarks,
because each such asset is unique.
 If the fair value of a revalued intangible asset can no longer be
measured by reference to an active market, the carrying amount of
the asset shall be its revalued amount at the date of the last
revaluation by reference to the active market less any subsequent
accumulated amortisation and any subsequent accumulated
impairment losses.
 The fact that an active market no longer exists for a revalued
intangible asset may indicate that the asset may be impaired and that
it needs to be tested in accordance with IAS 36.
 If the fair value of the asset can be measured by reference to an
active market at a subsequent measurement date, the revaluation
model is applied from that date.

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IAS 38: Intangible Asset or Expense? By Silvia [CPD Box]

IAS 38: Intangible Asset or Expense?

By Silvia [CPD Box]
Recently I had an argument with auditors of one company related to the customer list they bought.
The company paid significant amount of cash for the list of customers of telecommunications.
The list contained the names, addresses and phone numbers of all the clients.
And, the buyer intended to use the list to contact the potential customers and offer them their own
services.
Well, if it’s ethical or not – I leave that up to you, but the auditors of the buyer said that the price paid
for the customer list is an expense in profit or loss.
Is it???
I was not so sure.
To me, the customer list perfectly meets the definition of the intangible asset and in this case after
asking few more questions I was sure that the buyer acquired an asset instead of expense in profit or
loss.
In today’s article we will look at how to distinguish between intangible assets and expenses and you
can find practical illustration in the end.
Including the customer list.

What is an intangible asset?

When I am unsure whether certain item is intangible asset or just an expense, I always look to the basic
definition of an asset in IAS 38 and in Conceptual Framework, too:
An asset is a resource controlled by an entity as a result of past events, from which future economic
benefits are expected to flow to the entity. (Framework, par. 4.4 (a))
And, IAS 38 expands this definition for intangible assets by specifying that on top of basic definition, an
intangible asset is an identifiable non-monetary asset without physical substance.
To sum up, each intangible asset has 3 main characteristics:
1. It is controlled by the entity
2. No physical substance
3. It is identifiable.
Just warning: it can happen that an asset has all 3 characteristics, but you cannot recognize it in your
statement of financial position.
The reason is that it still may not meet the recognition criteria.

Compiled by: Murtaza Quaid, ACA IQ School of Finance

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IAS 38: Intangible Asset or Expense? By Silvia [CPD Box]

For example, let’s say you are a telecom company and you have millions of customers.
In this case, you have a customer list that is an intangible asset (please see below for reasoning), but you
can’t show it in your balance sheet, because you cannot measure its cost.
Just be aware of these situations.
Now, let me explain shortly what each characteristic means.

1. Controlled by the entity

If you are able to get the future economic benefits from the use of the asset and at the same time, you
can prevent others to get these benefits, then you control the asset.
In most cases, you control intangible asset when you have the legal rights to it.
For example, you may have bought the licenses or signed some contract.
Sometimes, control is achieved in a different way.
For example, you may develop some great software internally and you control its sales.
In some cases, you can’t really demonstrate sufficient control of asset and thus you can’t recognize it.
Typical example of such situation is qualified employee – human resources are rarely intangible assets,
because you can’t demonstrate control.

2. No physical substance
This one is clear – if some asset has physical substance, then it’s tangible and not intangible.
However, there’s a small exception.
Sometimes, intangible asset is attached to something physical in order to carry it or store it.
In this case, the asset is still intangible because the value of the related physical asset is very small when
compared to the value of intangible asset.

3. It is identifiable
This one is crucial, I think.
The asset is identifiable in one of these 2 cases:
1. It is separable – so, you can actually separate the asset and sell it, transfer it, license it or do any
other action. Hypothetically.
2. Arises from the legal rights – either from contract, legislation etc. In this case, the asset does not
need to be separable.
For example, imagine you worked hard and you created a famous brand.
Is it identifiable?
Yes, it is, because you can (hypothetically) license it or sell it.
So, you know what the intangibles are.

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From now on, always focus on these 3 characteristics to answer whether you deal with an intangible
asset or not.

Can we capitalize the intangible asset?

If it is an intangible asset, then you still have 2 more questions to answer before you capitalize it:

1. Can you measure its cost reliably?

This one is straightforward.
If you can’t measure the cost, then you cannot capitalize even when it is an intangible asset.
I described the example above: you cannot capitalize internally generated customer list because you
can’t really determine your cost to develop it.

2. Are the future economic benefits of the asset expected to flow to the entity?
Oh, I love this one.
Future economic benefits can be either increase in revenues or reduction in expenses.
Either way you look at them, the future economic benefits are the potential to increase your profits.
However, many people believe that you must be able to measure them – otherwise they are not the
future economic benefits.
No, not at all.
In fact, it is almost impossible.
Imagine you invest in the nicer office, you buy artwork, nice furniture… can you really measure the
increase of your revenues as a result of these assets?
No, you cannot, but you are quite sure that nicer office has the potential to pull more money out of the
pockets of your clients.

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On top of these requirements, there are still some intangible assets that are not intangible assets under
IAS 38, but something else.
Important note: The above applies fully to the intangible assets that are NOT under development. If
you are developing intangible assets, then you have to meet further 6 conditions to capitalize the
expenditures, but let’s touch it in some of my next articles.
Let’s me show you some specific examples.

Examples of intangible assets

Licenses to trade
Imagine you own a taxi company.
You operate a taxi service, but you also act a s an intermediary for single private
taxi drivers to get their own license.
So, as a part of your business you acquire transferrable taxi licenses from the
government and you sell some of them to the private drivers who buy from you
as it’s easier to get the license this way.
You acquired 1 000 number of taxi licenses.
You employ 400 taxi drivers and you plan to sell another 600 taxi licenses to
private drivers.
In this case, all 1 000 taxi licenses are indeed intangible assets, because they satisfy all requirements.
However, you won’t account for all of them as for intangible assets under IAS 38.
Instead:
1. 400 licenses used by your own employees are intangible assets; and
2. 600 licenses to be sold are your inventories under IAS 2, because you hold them for sale in the
ordinary course of business.

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Internet websites
Let’s say that your company operates an e-shop via its branded
website.
The e-shop is famous and attracts a lot of customers. There’s also a
section with a company’s blog with articles about the newest
fashion trends.
This website is an intangible asset, because yes, the company
controls it, it has no physical substance and it is identifiable (i.e.
company can sell it).
However, can you recognize it as an asset?
Yes, it brings the future economic benefits, so this one is met.
But, can you measure its cost reliably?
If it was developed externally by the third parties, then yes, you can.
If it was developed internally, then well, you have to apply the rules in IAS 38 and especially in SIC 32
Intangible assets – website costs to determine the capitalization.

Hockey team
Imagine you purchase a hockey team (lucky you!).
The price you paid was derived from the quality and fame of the specific hockey
players in that team.
Now, is this hockey team – or better said – contracts with players an intangible
asset?
Well, I always say that no, normally you do not capitalize contracts with
employees or any other expenses related to employees, because you can’t
control them.
In this case, the situation can be different.
For example, hockey players might be prohibited to play in another teams by the legal rules placed by
some hockey authority.
Also, the contracts with individual players might legally bind the player to stay with the same team for a
number of years.
In this case, you would be able to demonstrate control and yes, recognize hockey team as your
intangible asset.

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Software licenses
You purchased a number of computers for your employees.
When the computers arrived, you made an online purchase of
corresponding number of licenses for Windows XY operating
system to run the computers.
Also, you purchased a license to use the specific accounting
software.
On top of the purchase cost you are required to pay the annual fee for upgrades of the software. You
can continue using the license for accounting software also without annual upgrade fees, but you won’t
receive any updates.
Here, we have 3 items:

1. Operating system Windows XY

Yes, it is an intangible asset because it meets all the criteria.
However, operating system is an integral part of the computers, because the computers can’t run
without the system.
Therefore, you would recognize computers together with operating system as property, plant and
equipment, so no separate intangible asset.
For further reference, look to par. 4 of IAS 38.

2. Accounting software license

This is an intangible asset, too.
In this case, you need to recognize the license as an intangible asset, because accounting software is
NOT essential to run the computer.

3. Annual upgrades
Annual upgrades do not meet the definition of an intangible asset, because they are not separable.
They are expensed in profit or loss when incurred.
You can see them as something similar to maintenance and repair costs of property, plant and
equipment.

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Customer lists
Imagine you bought a customer list from telecom company
with names of their clients, addresses and phone numbers.
Is this an intangible asset?
In most cases yes, because:
▪ It has no physical substance,
▪ It is identifiable (yes, it is because you were able to buy it),
▪ You control it,
▪ You can measure its cost reliably (you paid for it) and,
▪ You expect the future economic benefits (increased sales as a result of new list of potential
customers).
I spoke more about it in this IFRS Q&A podcast episode.
Warning: in some countries and at some circumstances such a customer list is not an intangible asset.
The reason is that some countries have legislation in place that prevents you from random contacting
the potential customers on the list.
In this case you would not be able to get the future economic benefits from the list because you cannot
use it (so why would you buy it anyway?). Thus you do not control the asset fully.
However, telecoms often ask their customers to agree with passing their data to third parties for
advertising purposes, so in this case you would be able to use the list (hint – read the small letters in the
contracts to know what you agree to!).
You have to assess all of these things to conclude whether the customer list is an asset or not.

Advertising campaign
The last but not least.
Some companies invest heavy cash into their advertising campaigns.
Literally millions.
Imagine you plan to invest 1 mil. EUR into the advertising campaign over the next year.
Your advertising agency told you that this campaign would build and strengthen your brand and position
in many years to come.
So, some people believe that yes, they should capitalize advertising campaign as it brings the future
economic benefits.
No dispute on this.
The only thing is that the advertising campaign is NOT identifiable – you can’t separate it and sell it to
someone else.
Therefore, you should recognize the expenditures for advertising campaign in profit or loss.
Of course, when you prepay the campaign for let’s say 2 years, then you should recognize the expenses
over 2 years as the services are consumed.

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How to account for Intangible Assets under IAS 38

By Silvia [CPD Box]
Many companies incur huge costs from which they expect to benefit in the future.
For example, companies pay salaries to software engineers who develop some game or an application.
Well, how would you treat these costs?
It does not feel OK to put all salaries of these engineers in profit or loss when they are incurred, because
the company will benefit from these expenses in the future.
Or, in other words, how my readers love to say it: the costs incurred now will be matched with revenues
in the future.
In this article, you’ll find the short summary of the main rules in IAS 38 Intangible assets and the video is
in the end.

What assets are covered by IAS 38?

The standard IAS 38 prescribes the rules for accounting for all intangible assets except for the intangible
assets covered by another standard.
What is excluded? Here you go:
▪ Deferred tax assets – covered by IAS 12 Income Taxes,
▪ Goodwill – covered by IFRS 3 Business Combinations,
▪ Intangible assets held for sale – covered by IFRS 5 Non-Current Assets Held For Sale and
Discontinued Operations,
▪ Financial assets – covered by IAS 32 Financial Instruments: Presentation and IFRS 9 Financial
Instruments,
▪ Exploration and evaluation assets – covered by IFRS 6 Exploration for and Evaluation of Mineral
Assets,
▪ Expenditures for development and extraction of minerals, oils, natural gas and other non-
regenerative resources, etc.

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What is an intangible asset?

An intangible asset is an identifiable non-monetary asset without physical substance.
That’s the definition from IAS 38, par. 8.
People can interpret this definition in many different ways, just as they need and therefore, IAS 38
contains a good guidance on how to apply it.

When can we recognize an intangible asset?

Sometimes it can happen that your item meets all the criteria and has all characteristics of an intangible
asset, but you still cannot recognize it in your financial statements.
The reason for this situation could be that your item does not meet the recognition criteria.
You can recognize an intangible asset only when:
▪ Future economic benefits from the asset are probable;
▪ Cost can be measured reliably.
Again, I strongly recommend checking this article to learn more about the recognition criteria.

When you generate the asset internally…

When you actually purchase some item from someone else, it’s relatively easy to decide whether it’s an
intangible asset or an expense.
Also, it’s more probable that the recognition criteria are met.
But, what about the situation when you actually develop intangible assets yourself?
Well, this area is really very complex and tricky and that’s why IAS 38 offers specific guidance for
internally generated intangible assets.

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Research
Research is investigation that you undertake to acquire some information knowledge or understanding.
For example, you are evaluating different alternatives for your new software product.
Or, you are examining the competing products on the market, studying their features and trying to find
their weaknesses in order to design better product.
You CANNOT capitalize any expenditure for research.
You need to expense it in profit or loss as incurred.
And, let me warn you, that yes, all feasibility studies, evaluating whether the project is viable or not,
ARE research and need to be EXPENSED in profit or loss.
Yes, also when you paid huge money for it.
This applies to both internal research and research conducted by the external provider, too.

Development
Development usually happens after the research phase.
At the development stage, you actually plan or design the new products, materials, processes, etc. –
BEFORE the start of commercial production or use.
It is critical to distinguish development and research, because yes, you CAN CAPITALIZE the expenditures
for the development.
But it’s not a free ride.
You have to meet 6 criteria before you can capitalize these expenditures.
If you are preparing yourself for exam, then the great mnemonic to remember these 6 criteria is PIRATE:
▪ Probable future economic benefits,
▪ Intention to complete and use or sell the asset,
▪ Resources adequate and available to complete and use or sell the asset,
▪ Ability to use or sell the asset,
▪ Technical feasibility,
▪ Expenditures can be reliably measured.
Thank you, unknown genius, to inventing this pirate mnemonic, I used it at my own exam & it worked
well!
You can capitalize the expenditures for development only when all 6 criteria are met – not before. Also,
you cannot capitalize it retrospectively.
Just as an example, let’s say that you incurred Rs. 5,000 for development in May 20X1 and further Rs.
10,000 in September 20X1.
If you met all the 6 conditions in August 20X1, you can capitalize only CU 10 000 incurred in September.
Expenditure of CU 5 000 from May must be expensed in profit or loss.

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Goodwill
Never ever capitalize internally generated goodwill.
You can only recognize the goodwill acquired at business combination, but that’s the different story
(IFRS 3).

Other internally generated assets

Maybe you have created some other intangible assets, like brands, customer lists, publishing titles,
mastheads or similar.
IAS 38 prohibits capitalizing these assets if created internally, because it’s hard if not impossible to
measure their cost reliably.

How to measure intangible assets initially?

The initial measurement of an intangible asset depends on how you acquired the asset.
I have summarized it in the following table:

How acquired? How initially measured?

Separate purchase Cost – see below

Directly attributable costs incurred after the asset

Internally generated
first meet 6 PIRATE criteria – see above

As a part of business combination Fair value at the acquisition date

Fair value or nominal amount + directly

By a government grant
attributable expenditure

Fair value; if not possible, then carrying amount

Within exchange of assets
of asset given up

Cost of intangible asset

Cost of a separately acquired intangible asset comprises (IAS 38.27):
▪ Its purchase price, plus import duties and non-refundable taxes, less discounts and rebates,
▪ Any directly attributable costs of preparing the asset for its intended use.

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What about the subsequent measurement?

Intangible assets are subsequently measured in a very similar way as property, plant and equipment.
You can chose from 2 models:
1. Cost model: The intangible asset is carried at its cost less accumulated amortization (similar as
depreciation) less any accumulated impairment loss.
2. Revaluation model: The intangible asset is carried at its fair value at the revaluation date less
accumulated amortization less any accumulated impairment loss.
Let me just add that the revaluation model is not applied very frequently for intangible assets because
there must be an active market – which is rare.
And, you cannot apply the revaluation model for brands, mastheads, patents, trademarks and similar
assets.
The reason is that these assets are very specific and unique and there’s no active market.
I will not deal with journal entries of amortization and revaluations, because they are almost the same
as with property, plant and equipment, so please check them out in this article.
Journal entries for revaluations are covered also in the video – just scroll down and watch!

Amortization and useful life

Similarly as with property, plant and equipment, amortization is the allocation of depreciable amount
of an intangible asset over its useful life.
Here, you need to decide about:
1. How much to amortize, or what the depreciable amount is (cost – residual value),
2. How long to amortize, or what’s the asset’s useful life, and
3. How to amortize, or what amortization method you apply.
However, there’s one specific about the amortization – it is the useful life of intangible assets.
Intangibles can have:
▪ Finite useful life: In this case you can estimate the life of the asset up front, for example some
software, or
▪ Indefinite useful life: There is no foreseeable limit to period over which the asset will generate cash
flows, for example brands.
When you have an asset with indefinite useful life, you do NOT amortize it.
Instead, you should revise the asset’s useful life at the end of each financial year and seek for the
indicators of impairment.

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When to derecognize intangible assets?

You should derecognize the intangible asset either:
▪ When you dispose it of, or
▪ When no more future economic benefits are expected from the asset
The gain or loss on derecognition of intangibles is calculated as:
▪ Net disposal proceeds, less
▪ Asset’s carrying amount
Gain or loss are recognized in profit or loss.

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IAS 38: INTANGIBLE ASSETS – PRACTICE QUESTIONS

Question 1. [ICAP CAF 5 Study Support Material]
Ateeq Limited acquires new technology that will significantly reduce its energy costs for manufacturing.
Costs incurred include:

Required: Calculate the cost that can be capitalised.

Question 2. [ICAP CAF 5 Study Support Material]

On 30 June 20X4, Habib Limited (HL) discovered that it had been manufacturing a product illegally since
this product happened to be a patented product for which it did not have the necessary rights. HL
immediately shut down its factory and hired a firm of lawyers to act on its behalf in the acquisition of
the necessary rights to manufacture this patented product.

Legal fees of Rs.50,000 were incurred during July 20X4.

The legal process was finalized on 31 July 20X4, HL was then required to pay Rs.800,000 to purchase the
rights, including Rs.80,000 as refundable taxes.

During the month of July 20X4, factory was shut-down:

▪ Overhead costs of Rs.40,000 were incurred;

▪ Significant market share was lost due to shut-down. HL’s total sales over August and September was
Rs.20,000 but its expenses were Rs.50,000, resulting in a loss of Rs.30,000.

To increase market share, HL spent an extra Rs.25,000 aggressively marketing its product. This
marketing campaign was successful, resulting in sales returning to profitable levels in October.
Required: Discuss which of the above costs relating to acquisition of patent can be capitalised.
Solution:
▪ Purchase price: The purchase price should be capitalized, but this must exclude refundable taxes.
Rs. 720,000 (800,000 – 80,000).
▪ Legal costs: This is a directly attributable cost. Directly attributable costs must be capitalized i.e. Rs.
50,000.
▪ Overhead costs: This is not an incidental cost that is necessary to the acquisition of the rights (the
shut-down was only necessary because HL had been operating illegally).

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▪ Operating loss: The operating loss incurred while demand for the product increased to its normal
level is an example of a cost that was incurred after the rights were acquired. Costs incurred after
the Intangible Asset is available for use will not be capitalized.
▪ Advertising campaign: The extra advertising incurred in order to recover market share is an example
of a cost that was incurred after the rights were acquired. Furthermore, advertising costs are listed
in IAS 38 as one of the costs that should be expensed out.

Question 3. [ICAP CAF 5 Study Support Material]

Company Q has undertaken the development of a new product. Total costs to date have been Rs.
800,000. All of the conditions for recognising the development costs as an intangible asset have now
been met.
However, Rs. 200,000 of the Rs. 800,000 was spent before it became clear that the project was
technically feasible, could be resourced and the developed product would be saleable and profitable.
Required: Discuss the accounting treatment.
Solution: The Rs. 200,000 incurred before all of the conditions for recognising the development costs as
an intangible asset were met must be written off as a research costs (expense). The remaining Rs.
600,000 should be capitalised and recognised as an intangible asset (development costs).

Question 4. [ICAP CAF 5 Study Support Material]

Sino Care Limited (SCL) started a R&D project for developing new product on 1st January 20X1. The
following expenditure was incurred during 20X1. Year-end is 31 December 20X1.

▪ Research phase (1 January to 31 March): Rs. 1 million per month

▪ Development phase (1 April to 31 October): Rs. 1.5 million per month.
The project become technically feasible on 31 August 20X1 when initial patent was also submitted for
registration.
Required: Discuss the accounting treatment.
Solution:
Expenditure incurred in research phase from 1 January to 31 March of Rs. 3 million (i.e. Rs. 1 million x 3
months) shall be charged to profit or loss.
Expenditure incurred in development phase from 1 April to 31 August of Rs. 7.5 million (i.e. Rs. 1.5
million x 5 months) shall be charged to profit or loss since in this period the capitalisation criteria was
not met. Even after the criteria for capitalisation has been met subsequently, this expenditure shall not
be reinstated as an asset.
Expenditure incurred in development phase after capitalisation criteria has been met from 1 September
to 31 October of Rs. 3 million (i.e. Rs. 1.5 million x 2 months) shall be capitalised as intangible asset.

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Question 5. [ICAP CAF 5 Study Support Material]

Saqib Limited began researching and developing an intangible asset. The following is a summary of the
costs that the R&D Department incurred each year:
20X1: Rs.180,000
20X2: Rs.100,000
20X3: Rs.80,000
Additional information:
▪ The costs listed above were incurred evenly throughout each year.
▪ Included in the costs incurred in 20X1 are administrative costs of Rs. 60,000 that are not considered
to be directly attributed to the research and development process. The first two months of the year
were dedicated to research. Then development began from 1 March 20X1 but it was unable to
measure reliably the expenditure on development till 31 March 20X1.
▪ Included in the costs incurred in 20X2 are administrative costs of Rs. 20,000 that are considered to
be directly attributed to the research and development process.
▪ Included in the costs incurred in 20X3 are training costs of Rs. 30,000 that are considered to be
directly attributed to the research and development process as in preparation for the completion of
the development process, certain employees were trained on how to operate the asset.
Required: Prepare journal entries related to the costs incurred for each of the years ended 31 December
20X1 to 20X3 and briefly comment on accounting treatment. .

Question 6. [ICAP CAF 5 Study Support Material]

During 20X5 Henry has the following research and development projects in progress:
Project A was completed at the end of 20X4. Development expenditure brought forward at the
beginning of 20X5 was Rs. 412,500 on this project. Savings in production costs arising from this project
are first expected to arise in 20X5. In 20X5 savings are expected to be Rs. 100,000, followed by savings
of Rs. 300,000 in 20X6 and Rs. 200,000 in 20X7.
Project B commenced on 1 April 20X5. Costs incurred during the year were Rs. 56,000. In addition to
these costs a machine was purchased on 1 April 20X5 for Rs. 30,000 for use on the project. This machine
has a useful life of five years. At the end of 20X5 there were still some uncertainties surrounding the
completion of the project.
Project C had been started in 20X4. In 20X4 the costs relating to this project of Rs. 36,700 had been
written off, as at the end of 20X4 there were still some uncertainties surrounding the completion of the
project. Those uncertainties have now been resolved before a further Rs. 45,000 costs incurred during
the year.
Required: Show movement and balance of non-current assets of Henry for the year to 31 December
20X5.

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Question 7. [ICAP CAF 5 Study Support Material]

Company X buys 100% of Company Y. Company Y owns a famous brand that it launched several years
ago. The fair value of the brand has been estimated at Rs. 6 million at acquisition date.
Required: Discuss the recognition of brand in financial statements.
Solution: The brand is not recognised in Company Y’s financial statements (IAS 38 prohibits the
recognition of internally generated brands).
From the Company X group viewpoint the brand is a purchased asset. Part of the consideration paid by
Company X to buy Company Y was to buy the brand and it should be recognised in the consolidated
financial statements at its fair value of Rs. 6 million.

Question 8. [ICAP CAF 5 Study Support Material]

Company X buys 100% of Company Y. Company Y has spent Rs. 600,000 on a research and development
project. This amount has all been expensed as the IAS 38 criteria for capitalising costs incurred in the
development phase of a project have not been met. Company Y has knowhow as the result of the
project.
Company X estimates the fair value of Company Y’s knowhow which has arisen as a result of this project
to be Rs. 500,000.
Required: Discuss the accounting treatment.
Solution: The in-process research and development is not recognised in Company Y’s financial
statements (IAS 38 prohibits the recognition of internally generated brands).
From the Company X group viewpoint the in-process research and development is a purchased asset.
Part of the consideration paid by Company X to buy Company Y was to buy the knowhow resulting from
the project and it should be recognised in the consolidated financial statements at its fair value of Rs.
500,000.

Question 8. [Continued] [ICAP CAF 5 Study Support Material]

Continuing the previous example, Company X owns 100% of Company Y and has recognised an
intangible asset of Rs. 500,000 as a result of the acquisition of the company Y.
Company Y has spent a further Rs. 150,000 on the research and development project since the date of
acquisition. This amount has all been expensed as the IAS 38 criteria for capitalising costs incurred in the
development phase of a project have not been met.
Required: Discuss the accounting treatment.
Solution: The Rs. 150,000 expenditure is not recognised in Company Y’s financial statements (IAS 38
prohibits the recognition of internally generated brands).
From the Company X group viewpoint, further work on the in-process research and development
project is research and the expenditure of Rs. 150,000 must be expensed.

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Question 9. [ICAP CAF 5 Study Support Material]

Zouq Inc. is a multinational company. As part of its vision to expand its business in South Asia, it
purchased a 90% share of a locally incorporated company, Momin Limited. Following are the brief
details of the acquisition:

Momin Limited has an established line of products under the brand name of “Badar”. On behalf of Zouq
Inc., a firm of specialists has valued the brand name at Rs. 100 million with an estimated useful life of 10
years at January 1, 20X4. It is expected that the benefits will be spread equally over the brand’s useful
life.
An impairment test of goodwill and brand was carried out on December 31, 20X4 which indicated an
impairment of Rs. 50 million in the value of goodwill.
An impairment test carried out on December 31, 20X5 indicated a decrease of Rs. 13.5 million in the
carrying value of the brand.
Required: Prepare the ledger accounts for goodwill and the brand, showing initial recognition and all
subsequent adjustments.

Question 10. [ICAP CAF 5 Study Support Material]

During the year ended 31 December 20X7, following transactions were made by Zebra Limited (ZL):
On 1 April 20X7 ZL acquired a licence for operating a TV channel for Rs. 86.3 million out of which Rs. 50
million was paid immediately. The balance amount is payable on 1 April 20X9. A mega social media and
print media campaign was launched to promote the channel at a cost of Rs. 10 million. The transmission
of the channel started on 1 August 20X7.
The license is valid for 5 years but is renewable every five years at a cost of Rs. 35 million. Since the
renewal cost is significant, the management intends to renew the license only once and sell it at the end
of 8 years.
In the absence of any active market, the management has estimated that residual value of the license
would be Rs. 15 million and Rs. 20 million at the end of 5 years and 8 years respectively.
Applicable discount rate is 10% p.a.
Required: Discuss how these transactions should be recorded in ZL’s books of accounts for the year
ended 31 December 20X7.
Solution: These transactions should be recorded in ZL’s books of accounts for the year ended 31
December 20X7 as follows:
Since a part of the payment for the license has been deferred beyond normal credit terms so the license
will be initially recognised at cash price equivalent of Rs. 80 million i.e. Rs. 50 million plus Rs. 30 million
(i.e. present value of Rs. 36.3 million discounted at 10% for 2 years.)

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The advertisement cost of Rs. 10 million incurred on launching of the channel cannot be included in the
cost of the license and will be charged to Profit and loss account.
Since the renewal cost is significant so the useful life of the license will be restricted to the original 5
years only.
The residual value of the license will be assumed to be zero since there is no active market for the
license and there is no commitment by third party to purchase the license at the end of useful life.
The amortization for the year will be Rs. 12 million [(80 – 0) × 1/5 ×9/12] calculated from 1 April 20X7
when the license was available for use:
Unwinding of interest expense of Rs. 2.25 million (30 × 10% × 9/12) shall be recorded with increasing the
liability of payable for license with same amount.

Question 11. [Change from indefinite to finite life] [AAFR Past Paper – Summer 2010, Q6, 12 marks]
In 2001, the management of Comfort Shoes Limited planned to acquire an international trademark to
boost its sales and enter into the international market. In this respect, the management carried out a
market survey and analysed the information obtained to initiate the process. The relevant information is
as follows:
(i) The cost incurred on the survey and related activities during the year 2001 amounted to
Rs. 1 million.
(ii) An agreement was finalised and the company acquired the trademark effective Jan 1, 2002.
According to the agreement Rs. 5 million were paid on signing of the agreement & Comfort Shoes
was required to pay 1% of sale proceeds of the related products on yearly basis. The analysis
carried out at that time indicated that the trademark would have an indefinite useful life.
(iii) The company has developed many new models under this trademark and successfully marketed
them in the country as well as in international markets. However, in 2008 the company faced
unexpected competition and had to discontinue the exports. It was estimated that due to
discontinuation of exports, net cash inflows for the foreseeable future, would reduce by 30%. As
a result the management was of the view that as of December 31, 2008 the carrying value of the
trademark had reduced to 90%.
(iv) Due to continuous inflation and flooding of markets with very low-priced shoes, it was decided in
Dec 2009 that use of the trademark would be discontinued with effect from Jan 1, 2011.
Required:
(a) Explain how the above transactions should have been accounted for in the years 2001 to 2007
according to International Financial Reporting Standards (IFRSs).
(b) Prepare a note to the financial statements for the year ended December 31, 2009 in accordance
with the requirements of IFRSs. Show comparative figures.

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Solution:
In accordance with the IAS transactions related to the trademark as given in the question should be
accounted for as explained below:
(i) As the costs and benefits of the trade mark cannot be measured reliably, and it was not even decided
at that time to buy the trademark, the cost of Rs. 1 million incurred in 2001 to carry out market survey
should have been expensed out in the year 2001.
(ii) In 2002, the rights to use the trademark for the company’s products have been obtained and costs
and benefits of the trademark were measured reliably. Therefore, initially the trademark should have
been accounted for as an intangible asset at a cost of Rs. 5 million.
At that time the trademark was estimated to have indefinite useful life as there was an expectation that
it will contribute to net cash inflows indefinitely. Therefore, the trademark should not have been
amortised.
However, the trademark should have been tested for impairment and the cost should have been
reduced, if required.
Trademark fee payable at 1% of annual sales should have been treated as a periodical cost and charged
to expense in the year of sales.

Question 12. [ICAP CAF 5 Study Support Material]

Toby entered into the following transactions during the year ended 31 December 2015. The directors of
Toby wish to capitalise all assets wherever possible.

On 1 January Toby acquired the net assets of George for Rs. 105,000. The assets acquired had the
following book and fair values.

(i) The patent expires at the end of 2022. The goodwill arising from the above had a recoverable
value at the end of 2015 of Rs. 7,000.
(ii) On 1 April Toby acquired a brand from a competitor for Rs. 50,000. The directors of Toby have
assessed the useful life of the brand as five years.
(iii) During the year Toby spent Rs. 40,000 on developing a new brand name. The development was
completed on 30 June. The useful life of this brand has been assessed as eight years.
(iv) The directors of Toby believe that there is total goodwill of Rs. 2 million within Toby and that
this has an indefinite useful life.

Required: Prepare the note to the financial statements for intangible assets as at 31 December 2015.

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Question 13. [Goodwill, patent, research and development expenditure] [CFAP 1 – Dec 15, 16 marks]
Beta Foods Limited (BFL) is in process of finalizing its consolidated financial statements for the year ended 30 June
2015. Following information pertains to BFL’s intangible assets.

(i) Value of intangible assets as at 30 June 2013:

Goodwill Patents
Rs. in million
Cost 1,500 400
Accumulated amortization / impairment 300 160

(ii) On 1 July 2013, BFL acquired the entire shareholdings of Gamma Enterprises (GE) for Rs. 5,400 million.
The value of patents, development expenditure and other net assets of GE on the date of acquisition was
Rs. 2,100 million, Rs. 48 million and Rs. 1,430 million respectively.

The break-up of development expenditure was as follows:

Products Rs. in million

A – 214 25
B - 917 23
Total 48

(iii) Research and development expenditure during the year ended 30 June 2014 and 2015 was as follows:

Research Development
Year Product Name
Rs. in million
A – 214* - 8
2014
B – 917 10 45
2015 B – 917 - 50
*because of certain reasons the management had decided to abandon this project in May 2014.
(iv) Trial production of B-917 commenced in March 2015. Net cost of trial production up to 30 June 2015
amounted to Rs. 22 million.
(v) Patents are amortized over their remaining useful life of 10 years on straight line method.
(vi) Recoverable amounts of assets having indefinite life, determined as a result of impairment testing, were
as follows:

2015 2014
Rs. in million
Goodwill 2,800 2,550
Product B-917 160 65

Required: Prepare a note on intangible assets, for inclusion in BFL’s consolidated financial statements for the year
ended 30 June 2015 in accordance with the requirements of International Financial Reporting Standards.

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IAS 38: INTANGIBLE ASSETS - ICAP PAST PAPER QUESTIONS

Question No. 3 of Spring 2006, 14 marks
Following information has been extracted from the books of Sayyarah Limited.
i) The company, to curb the sharp decline in sales of its products 'Y' and 'Z', paid Rs. 1.7 million to a
consulting company for improvement in the design of the products, if possible.
ii) On the basis of consultant's report, production of ‘Z’ was discontinued. The consultant had
suggested three new designs for 'Y'. One of them was selected and company incurred Rs. 0.65
million on new moulds and patented the design at a cost of Rs. 0.3 million. 60% of the fee payable
to the consultant is directly attributable to ‘Y’.
iii) Manufacturing license of product 'Z' is expiring on June 30, 2008 and has a book value of Rs. 0.5
million. This license is not transferable.
iv) The company paid Rs. 1.0 million to an agency for an advertisement campaign for product 'Y' that
increased the company's sales substantially and there is a strong evidence that it will also bring
net cash flow of Rs. 6.5 million in the next year. Thereafter its impact will be insignificant.
v) Product 'T' is one of the top brands of the company and bears a good market reputation. The
brand is currently being reported at zero value in the financial statements despite the fact that
the company incurred Rs. 3 million on setting up a brand development department exclusively for
the said item. This year company has a firm offer for the said brand amounting to Rs. 12 million
from another financially sound company.
Required: Suggest accounting treatment with brief reasons, in respect of each of the above information.

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Question No. of Autumn 2007, 15 marks

Focus Limited is engaged in manufacturing multimedia projectors. The company spends heavily on
research and development to introduce improvements in the existing products.
A free lance researcher Mr. Talent sent a conceptual paper to the company on development of a new type
of projector which will significantly enhance the life and quality of the product.
An agreement was reached between Mr. Talent and the company whereby Mr. Talent agreed to conduct
and supervise the research and development process at a lump sum remuneration of Rs. 8 million.
However, in case the research was unsuccessful, he agreed to reduce his remuneration to a time based
salary of Rs. 2,000 per hour.
The process of research commenced from July 2006 and the following costs were incurred upto June 30,
2007.

Required: Discuss the accounting treatment of each of the above costs incurred by the company in the
light of International Accounting Standard 38 ‘Intangible Assets’.

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Question No. 1 of Spring 2009, 15 marks

Zouq Inc. is a multinational company. As part of its vision to expand its business in South Asia, it purchased
majority shares in a locally incorporated company, Momin Limited. Following are the brief details of the
acquisition:

Momin Limited has an established line of products under the brand name of “Badar”. On behalf of Zouq
Inc., a firm of specialists has valued the brand name at Rs. 100 million with an estimated useful life of 10
years at January 1, 2007. It is expected that the benefits will be spread equally over the brand’s useful life.
An impairment test of goodwill and brand was carried out on December 31, 2007 which indicated an
impairment of Rs. 50 million in the value of goodwill. However, impairment test carried out on December
31, 2008 indicated an increase of Rs. 30 million in the carrying value of goodwill and a decrease of Rs. 13.5
million in the carrying value of the brand.
Required:
(a) What are the requirements of International Accounting Standards relating to amortization of
intangible assets having finite life?
(b) Prepare the ledger accounts of the Goodwill and the Brand, showing initial recognition and all
subsequent adjustments.

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Question No. 5 of Spring 2011, 16 marks

Star-Bright Pharmaceutical Limited (SPL), a listed company, purchased a brand on January 1, 2005 at a
cost of Rs. 382 million. It has incurred a substantial amount on further development of the brand, in
subsequent years.
It is the policy of SPL to amortize the development expenditures which meet the recognition criteria as
given in IAS-38 ‘Intangible Assets’, over a period of ten years. The amortization commences when the
development expenditures first meet the recognition criteria. However, it was discovered during the year
2010 that the development expenditure incurred after acquisition had erroneously been written-off to
the profit and loss account, details of which are as follows:

The draft financial statements (before correction of error) show that retained earnings as at December
31, 2010 was Rs. 1,950 million (2009: Rs. 1,785 million).
Required: In accordance with the requirements of International Financial Reporting Standards, prepare
relevant extracts of the Statement of Financial Position along with the note on intangible assets after
incorporating the required corrections. (Ignore tax)

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Question No. 4 of Spring 2012, 16 marks

(a) Discuss the criteria that should be used while recognizing intangible assets arising from research and
development work. (05 marks)

(b) Raisin International (RI) is planning to expand its line of products. The related information for the year
ended 31 December 2011 is as follows:
(i) Research and development of a new product commenced on 1 January 2011. On 1 October 2011, the
recognition criteria for capitalization of an internally generated intangible asset were met. It is estimated
that the product would have a useful life of 7 years. Details of expenditures incurred are as follows:

(ii) The right to manufacture a well-established product under a patent for a period of five years was
purchased on 1 March 2011 for Rs. 17 million. The patent has an expected remaining useful life of 10
years. RI has the option to renew the patent for a further period of five years for a sum of Rs. 12 million.
(iii) RI has acquired a brand at a cost of Rs. 2 million. The cost was incurred in the month of June 2011.
The life of the brand is expected to be 10 years. Currently, there is no active market for this brand.
However, RI is planning to launch an aggressive marketing campaign in February 2012.
(iv) In September 2010, RI developed a new production process and capitalized it as an intangible asset at
Rs. 7 million. The new process is expected to have an indefinite useful life. During 2011, RI incurred further
development expenditure of Rs. 3 million on the new process which meets the recognition criteria for
capitalization of an intangible asset.
Required: In the light of International Financial Reporting Standards, explain how each of the above
transaction should be accounted for in the financial statements of Raisin International for the year ended
31 December 2011. (11 marks)

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Question No. 7 of Spring 2013, 12 marks

(a) On 01 January 2012, Top Foods Limited (TFL) acquired manufacturing rights of an assorted range of
juices and ice creams from a well-known multinational company for Rs. 50 million.
Following are the relevant clauses of the agreement executed between the two companies:
▪ The agreement is valid for five years and is renewable for another five years at a nominal price.
▪ The manufacturing rights are not transferable and cannot be sub-let.
After erection of its plant, TFL started manufacturing the products on 01 July 2012. Due to intense
competition, the new products were not able to achieve the desired sale in the first six months of their
launching.
Required:
Explain with reasons how TFL should have accounted for the above payment on:
(i) 01 January 2012
(ii) 31 December 2012 (08)

(b) On 01 January 2012, Matchless Enterprises Limited (MEL) acquired research data along with partially
developed product design from a company for Rs. 2 million (Research costs – Rs. 0.5 million, development
costs – Rs. 1.5 million).
The product design was handed over to the production department on 01 November 2012. Subsequent
to acquisition, MEL incurred Rs. 0.7 million on research and Rs. 2.5 million on the development/finalization
of the product design. It is expected that this product design would provide economic benefits to the
company for next five years.
Required:
Prepare journal entries to record the above transactions. (04)

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Question No. 5 of Spring 2014, 14 marks

Zain Pharma Limited (ZPL) owns patents of branded products A and B. ZPL uses cost model to account for
its intangible assets. It is policy of the company to amortise the cost on the basis of total estimated
revenue earned over the life of the patents. The following information is available:

However, in 2013 the management identified that upto the year ended 31 December 2012, the cost of
patents had erroneously been amortised on the basis of estimated useful life.
Required:
Prepare accounting entries relating to the patents, for the year ended 31 December 2013 in accordance
with the International Financial Reporting Standards.

Question No. 8 of Autumn 2015, 7 marks

Opal Limited (OL) commenced research work on a new product on 1 July 2013 and entered the
development phase on 1 July 2014. In this respect, the following expenses were incurred and debited to
capital work in progress.

* Purchased on 1 January 2014, having estimated useful life of five years.

Criteria for recognition of the internally generated intangible asset have been met. The commercial
production was started from 1 January 2015. It is estimated that the related product would have a shelf
life of 10 years.
Required:
Explain accounting treatment of the above in the financial statements for the year ended 30 June 2015 in
the light of International Financial Reporting Standards.

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Question No. 5 of Autumn 2016, 16 marks

Following information pertains to International Associates Limited (IAL):
(i) Intangible assets as at 30 June 2015 were as follows:

(ii) Details of expenses incurred on a project to improve IAL’s existing production process are as
under:

Expenses were incurred evenly during the above period. On 30 September 2015, it was
established that the project is commercially viable. The new process became operational with
effect from 1 April 2016 and it is anticipated that it will generate cost savings of Rs. 10 million per
annum for a period of 10 years.
(iii) On 1 August 2015, IAL entered into an agreement to acquire an ERP software which would replace
its existing accounting software. The new software became operational on 1 April 2016. IAL
incurred following expenditure in respect of the ERP software:

ERP software has an estimated useful life of 15 years. However, IAL expects to use it for a period
of 10 years. The existing accounting software has become redundant and is of no use for the
company.
(iv) During the year ended 30 June 2016, IAL spent Rs. 10 million on development of a new brand.
Useful life of the brand is estimated as ten years.
(v) The license appearing in IAL’s books was issued by the government for an indefinite period.
However, on 1 January 2016 the Government introduced a legislation under which the existing
license would have to be renewed after ten years.
(vi) IAL uses cost model to value its intangible assets and amortises them on straight-line basis.
Required: Prepare a note on ‘intangible assets’ for inclusion in IAL’s financial statements for the year
ended 30 June 2016 in accordance with International Financial Reporting Standards.

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Question No. 3 of Autumn 2017, 10 marks

On 1 July 2016, Sunshine Limited (SL) acquired four licenses namely A, B, C and D for a period of ten years.
The following information is available in respect of these licenses:
(i)

(ii) The renewal would allow SL to use the licenses for another five years.
(iii) SL uses the revaluation model for subsequent measurement of its intangible assets.
(iv) An independent valuer has estimated the value of license ‘D’ at Rs. 130 million.
Required: Determine the amounts that should be recognised in respect of the licenses in the statement
of financial position and statement of profit or loss for the year ended 30 June 2017.

Question No. 7(i) of Spring 2018, 6 marks

Draft financial statements of Tulip Limited (TL) for the year ended 31 Dec 2017 show the following:

While reviewing the draft financial statements, following matters have been noted:
(i) TL commenced development of a new product on 1 January 2017. Following directly attributable
costs have been incurred upto the launching date of 1 October 2017 and have been capitalized as
intangible asset:

The recognition criteria for capitalization of internally generated intangible assets was met on 1
March 2017. All costs have been incurred evenly during the period except equipment which was
purchased specifically for this product on 1 January 2017.
TL estimated that useful life of this new product will be 10 years. However, TL had not charged
any amortization in 2017.
Required: Determine the revised amounts of total assets, total liabilities and net profit, after incorporating
the impact of above adjustment(s), if any.

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Question No. 4 of Autumn 2018, 14 marks

Apple Limited (AL) is in the process of finalizing its consolidated financial statements for the year ended
30 June 2018. Following information pertains to the Group's intangible assets:
(i) As on 30 June 2017, revalued amount of AL’s license and related revaluation surplus were Rs. 450
million and Rs. 30 million respectively.
(ii) On 1 July 2017 AL acquired entire shareholding of Mango Limited (ML) for Rs. 1,950 million. Fair
values of net assets appearing in ML’s books on acquisition date are given below:

In respect of acquisition of ML, following information is also available:

▪ Till acquisition date, ML had incurred research & development cost of Rs. 80 million on
product 'ABC'. ML had not recognised this as an asset because criteria for recognition of the
internally generated intangible asset was met on 1 July 2017. On this date, AL estimated that
the fair value of research and development work on ABC was Rs. 95 million.
▪ On acquisition date, fair value of ML's customer list was assessed at Rs. 20 million.
(iii) ML incurred following expenditures on this project from 1 July 2017 till ABC’s launching date i.e.
1 May 2018.

(iv) As on 1 July 2017, the fair value of AL's own customer list was assessed at Rs. 35 million.
(v) As on 1 July 2017, remaining useful life of all intangible assets except goodwill was 10 years.
(vi) On 31 March 2018, ML sold one of its software for Rs. 110 million.
(vii) Group follows the revaluation model for license whereas cost model is used for other intangible
assets.
(viii) As on 30 June 2018:
▪ fair value of licence was assessed at Rs. 350 million.
▪ goodwill of ML has been impaired by 20%.
Required: Prepare a note on intangible assets, for inclusion in AL's consolidated financial statements for
the year ended 30 June 2018 in accordance with the requirements of IFRSs.
(‘Total’ column is not required)

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Question No. 8 of Autumn 2019, 15 marks

Zinc Limited (ZL), a broadcasting company, uses revaluation model for subsequent measurement of its
intangible assets, wherever possible. Following information pertains to ZL’s intangible assets:
(i) On 1 January 2018, ZL bought an incomplete research and development project from Bee Tech at its
fair value of Rs. 90 million. The purchase price was analysed as follows:

Subsequent expenditures incurred on this project are as follows:

Recognition criteria for capitalization of development was met on 1 March 2018. All costs are incurred
evenly from 1 January 2018 till project completion date i.e. 31 August 2018. It is expected that newly
developed technology will provide economic benefits to ZL for the next 10 years.
On 31 December 2018, ZL received an offer of Rs. 170 million for its developed technology.
(ii) On 31 December 2018, ZL launched its new website for online streaming of TV shows, movies and web
series. The website’s content is also used to advertise and promote ZL’s products. The website was
developed internally and met the criteria for recognition as an intangible asset. Directly attributable
costs incurred for the website are as follows:

(iii) During 2018, the licensing authority intimated that broadcasting license of one of ZL’s channels will
not be further renewed.
ZL had obtained this license for indefinite period on 1 January 2012 by paying Rs. 150 million, subject
to renewal fee of Rs. 0.3 million at every five years. Upto last year, this license was expected to
contribute to ZL’s cash inflows for indefinite period.
As on 31 December 2018, the recoverable amount of this license was assessed as Rs. 105 million.
Required: In accordance with the requirements of IFRSs, prepare a note on intangible assets, for inclusion in
ZL’s financial statements for the year ended 31 December 2018 in respect of the above intangible assets.
(‘Total’ column is not required)

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Question No. 6 of Autumn 2020, 15 marks

Qabil Limited (QL) is in process of finalizing its financial statements for the year ended 31 December 2019.
Following information pertains to QL’s intangible assets:

(i) Intangible assets as at 31 December 2018 were as follows:

(ii) Cost incurred on development of product design was capitalised in 2018. The competition for the
product is increasing. QL has estimated the following net cash inflows from the product:

Pre-tax and post-tax discount rates are 12% and 10% respectively.
(iii) On 1 January 2019, QL entered into an agreement to replace existing ERP software with a new
ERP software at a cost of Rs. 360 million. According to the agreement, 40% payment was made
on signing of the contract while the remaining amount was paid evenly over customization and
installation period which completed on 31 October 2019.
The entire cost of project was financed through a running finance from Honehaar Bank at mark-
up of 15% per annum. The software became operational on 1 November 2019. QL expects to use
it for a period of 9 years.
The existing ERP software will be continued till 31 December 2020.
(iv) On 1 January 2019, QL acquired a licence for Rs. 600 million for a period of 5 years. QL made an
initial payment of Rs. 100 million and the remaining amount will be paid in two equal instalments
on 1 January 2020 and 2021. Cash price equivalent of the license is Rs. 520 million.
On expiry of 5 years, the license is renewable for further five years at an insignificant cost of Rs.
15 million. QL intends to renew the license and sell it at the end of 8th year.
In the absence of any active market, QL has estimated that residual value of the license would be
Rs. 80 million and Rs. 60 million at the end of 8th year and 10th year respectively.
Required: Prepare a note on ‘Intangible assets’ for inclusion in QL’s financial statements for the year
ended 31 December 2019 in accordance with the requirements of IFRSs.

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Question No. 3 of Spring 2021, 8 marks

Dove Limited (DL) commenced development of a new product on 1 January 2020. In this regard, following
expenditures have been incurred:

DL has also incurred directly attributable salaries and overheads of Rs. 5 million and Rs. 1.5 million
respectively in each month over the development period of new product.
The recognition criteria for capitalization of internally generated intangible asset was met on 1 April 2020
and commercial production of the product was commenced from 1 November 2020.
Required: Compute the cost of the new product for initial measurement. Also discuss the reason(s) for
ignoring any of the above expenditures in the computation.

Solution:

Cost of product: Rs. in million

- Pilot plant 40
- Fee to register patent 15
- Cost of manufacturing the samples (32 – 20) 12
- Salaries and administrative overheads [(5 + 1.5) × 7] 45.5
112.5
Reasons for ignoring cost:

Description Rs. in million Reasons

Evaluation of possible This is part of research and therefore should not be

2
alternatives capitalized.

Pre-production Since this cost was incurred before meeting of

17
prototypes recognition criteria, this should be charged to P & L.

This is selling cost and therefore should not be

Brand building 16
capitalized.

Since salaries and overheads from January 2020 to

19.5
Salaries and overheads March 2020 were incurred before meeting of
[(5 + 1.5) × 3]
recognition criteria, this should be charged to P & L.

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Question No. 1 of Autumn 2021, 7 marks

Ajwa Limited (AL) is engaged in the business of manufacturing and trading of consumer goods. On 1 July
2021, AL launched its own website for online sale of its products. The website was developed internally
which met the criteria for recognition as an intangible asset on 1 May 2021. Directly attributable costs
incurred for the website are as follows:

*All costs were incurred evenly throughout the mentioned period.

Required: Compute the cost of the website for initial measurement. Also discuss the reason(s) for not
inclusion of any of the above costs in the computation.
Solution:

Cost of website: Rs. in million

- Salaries and general overheads (6/6 × 2) 2
- Development of the content 7
- Registering website with search engines 1
10

Defining hardware and This activity relates to planning phase (which is similar in nature to
software specifications research phase) so should be expensed out.

Salaries and general overheads of Rs. 4 million from January 2021

Salaries and general overheads to April 2021 should be expensed out as incurred before meeting
recognition criteria.

This is operating expense which is of recurring nature so should be

Annual fees for hosting website
expensed out.

This is not eligible cost for capitalization so should be expensed

Employees training costs
out.

Discount offers for logging on This is promotional activity and relates to post development so
the website should be expensed out or adjusted from transaction price.

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Question No. 4 of Spring 2022, 9 marks

The following transactions pertain to Amused Limited (AL):
(i) In 2020, AL started development of a new product. The recognition criteria for capitalization of
internally generated intangible asset was met on 1 January 2021. On this date, AL started
development of a plant which completed in 3 months. It is pilot plant for testing the new product
and is not of a scale economically feasible for commercial production. AL incurred cost of Rs. 3
million and Rs. 7 million on design and construction of plant respectively. AL expects to operate
the plant for two years till end of development phase. During 2021, AL incurred Rs. 5 million in
operating the pilot plant.
(ii) On 1 March 2021, AL acquired a patent with indefinite life in exchange of its old equipment and
cash consideration of Rs. 25 million. The fair values of the patent and equipment were assessed
at Rs. 57 million and Rs. 35 million respectively. On the date of exchange, the equipment had a
carrying value of Rs. 30 million. AL believes that its future cash flows will change as a result of this
exchange. AL incurred cost of Rs. 2 million for transferring the title of the patent to its name.
(iii) On 1 June 2021, the government granted a license to AL free of cost to import raw material upto
10 tons from international market for its intended use. The license is non-transferable. There are
no further conditions attached by the government. The fair value of the license is Rs. 50 million.
Required: Explain how each of the above transactions should be accounted for in the financial statements
of AL for the year ended 31 December 2021, in accordance with the requirements of IFRSs.
Solution:
(i) Cost incurred on pilot plant should be recorded as intangible as it falls under development
activities. As criteria for capitalizing development cost has been met, all cost (i.e. designing,
constructing and operating) incurred on pilot plant should be capitalized as an intangible.
Amortization will begin once development activity ends and commercial production starts over
the life of product.
(ii) This exchange has a commercial substance and future cash flows are expected to change as a
result of this exchange. Therefore, the exchange should be recognized at fair value. As fair value
of both assets exchanged is given, the exchange should be recorded at the fair value of equipment
given. So, the patent should be recorded at Rs. 60 million i.e. sum of fair value of equipment given
up (Rs. 35 million) and cash consideration (Rs. 25 million). Further, cost of transferring title of Rs.
2 million should be added to cost of patent. No amortization will be charged on patent due to
indefinite life. However, the patent will be tested for impairment annually.
(iii) Grant of license by government should be treated as government grant. The license can be
recorded as intangible asset at its fair value of Rs. 50 million. Government grant so recognized
should be amortized to P&L over the life of license. Alternatively, intangible asset can be recorded
at a nominal amount. AL should select an accounting policy in this regard and apply it consistently.

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Question No. 2 of Autumn 2022, 8 marks

The following transactions pertain to Sphere Limited (SL) for the year ended 30 June 2022:
(i) On 1 July 2021, SL acquired a license against cash consideration of Rs. 50 million. SL incurred
cost of Rs. 3 million which includes refundable taxes of Rs. 1 million for transferring the title to
its name.
The license is valid for five years but is renewable every five years at a significant cost of Rs. 40
million. SL intends to renew the license only once and then sell the license at the end of ten
years.
SL estimates that residual value of the license would be Rs. 12 million and Rs. 9 million at the
end of five years and ten years respectively.
(ii) On 1 July 2021, SL decided to develop a website for advertising and promotion of its products.
SL believes that website would enhance the brand value of the products and would also be used
for providing general information about SL to the public.
On 1 September 2021, SL internally initiated development of the website which was completed
on 31 January 2022. Directly attributable costs incurred by SL for developing website were as
follows:
▪ Rs. 2 million for planning the website in September 2021.
▪ Rs. 7 million for acquisition of the web servers in October 2021.
▪ Rs. 3 million for content development equally in November and December 2021.
▪ Rs. 1 million for annual website hosting fees (valid till 31 January 2023) paid in January 2022.
Required: Discuss how the above transactions should be dealt with in the SL’s books for the year ended
30 June 2022, in accordance with the IFRSs.
Solution:
(i) The license should be recognised as intangible asset at initial cost of Rs. 52 million (50+2). The
transfer fee being directly attributable cost should be included while refundable tax of Rs. 1
million should not be included in cost.
The useful life of license will be restricted to the original five years as the renewal cost of Rs. 40
million is significant which should be considered separate intangible at the time of renewal. The
residual value of license at the end of five years as zero because there is no commitment by 3rd
party to purchase the license and there is no active market for the license. The amortization for
the year should be Rs. 10.4 million (52/5).
(ii) As per IAS 38, Rs. 5 million (2+3) for planning and content development should be expensed out.
Website is developed primarily for promoting and advertising SL’s products and services. So, SL
will not be able to demonstrate how it will generate probable future economic benefits.
Rs. 7 million incurred for acquisition of the web servers should be capitalized under property,
plant and equipment and depreciated over useful life.
Since webhosting fees is paid for one year, Rs. 0.42 (1/12×5) million will be expensed out while
Rs. 0.58 million will be recorded as prepayment.

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Question No. 9 of Autumn 2023, 19 marks

The following information pertains to the intangible assets of Hadero Limited (HL):
(i) On 1 May 2022, HL acquired an eight year license at a cost of Rs. 174 million. HL plans to use the
license for six years. Licenses are traded in an active market. As on 31 December 2022, the fair
value of a new license valid for eight years is Rs. 192 million, while older licenses sell at a fair value
of new license value less Rs. 2 million for each month the license has already been used.
(ii) On 1 July 2022, HL acquired operation management software at a cost of Rs. 410 million. HL also
incurred a cost of Rs. 20 million for consulting charges to select and evaluate the appropriate
software in alignment with HL’s needs.
HL expects that indefinite life can be achieved if HL incurs future expenditures to enhance its
performance standards by integrating ‘artificial intelligence’ into this software. Without such
expenditures, the software is projected to become technologically obsolete in five years.
After the acquisition of the new software, the existing software would henceforth serve limited
purposes. The existing software was acquired for Rs. 240 million, and as on 31 December 2021,
Rs. 126 million had been amortized, based on a useful life of ten years.
On 31 December 2022, HL has estimated the value in use of the existing software to be Rs. 58
million. This valuation has been computed using cash flows projected over the revised remaining
useful life of two years.
(iii) During the year 2022, it was discovered that the entire cost of Rs. 1,050 million incurred on
‘product development’ has been recorded as intangible asset without considering the following
pertinent facts:
▪ The product development was commenced on 1 August 2021. Up till the launch date of 1
October 2022, the following directly attributable costs were incurred:

▪ The recognition criteria for capitalization of internally generated intangible assets was met on
1 February 2022. All costs have been incurred evenly during the period except the equipment
which was purchased specifically for this product development on 1 September 2021. The
useful life of the developed product is estimated at eight years.
(iv) HL uses the revaluation model for the subsequent measurement of its intangible assets, wherever
possible, and accounts for revaluation using the net replacement value method. Depreciation and
amortisation are charged using the straight line basis.
Required: Prepare the notes on ‘Intangible assets’ and ‘Correction of error’ for inclusion in HL’s financial
statements for the year ended 31 December 2022, in accordance with the requirements of IFRSs.

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Question No. 4 of Spring 2024, 9 marks

The following information pertains to the intangible assets of Irresistible Limited (IL):
(i) IL started a research and development project for a new product Alpha, on 1 February 2023. Up
till the launch date of 1 December 2023, the following directly attributable costs were incurred
on Alpha:

Though the development activities started on 1 May 2023, the recognition criteria for the
capitalization of internally generated intangible assets were met on 1 June 2023. All costs have
been incurred evenly during the period mentioned against each cost. The useful life of Alpha is
estimated to be six years.
(ii) On 1 July 2023, IL launched its new web site for online sale of its products. The web site was
developed internally and met the criteria for recognition as an intangible asset. Directly
attributable costs incurred for the web site are as follows:

It is estimated that the web site would be technologically obsolete in 4 years; however, IL plans
to incur additional expenditures on the web site to incorporate new technologies, which will
enable IL to use the web site for 8 years.
Required: Prepare a note on ‘Intangible assets’ for inclusion in IL’s financial statements for the year ended
31 December 2023, in accordance with the requirements of IFRSs. (‘Total’ column is not required)

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Question No. 1 of Spring 2025, 8 marks

The following information pertains to two intangible assets of Oud Limited (OL):
(i) On 1 January 2023, broadcasting rights were acquired for Rs. 250 million. While the expected
period of cash generation from the acquisition date was 8 years, the rights were legally valid for
only 5 years.
On 1 January 2024, OL got an option to renew these rights for an additional 5 years. However, this
option was not available at the time of acquisition. OL immediately exercised this option by paying
a significant cost of Rs. 80 million.
(ii) On 1 January 2023, a trademark was acquired for Rs. 300 million, with a useful life of 8 years and
a residual value of Rs. 50 million. The revalued amounts and residual values based on an active
market are as follows:

Other information:
▪ OL applies the cost model for broadcasting rights and the revaluation model for trademark.
▪ Both assets are amortized on a straight-line basis.
▪ Maximum possible amount is transferred from the revaluation surplus to retained earnings on an
annual basis.
Required: Prepare the relevant extracts (including comparative figures) from OL’s statement of profit or
loss and other comprehensive income for the year ended 31 December 2024 and statement of financial
position as of that date. (Notes to the financial statements are not required)

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IAS-38
INTANGIBLE ASSETS
DEFINITION - INTANGIBLE ASSETS

An intangible asset is an identifiable, non-monetary asset without physical substance.

Identifiable Non-monetary asset Without physical substance

An asset is identifiable if it is either: An intangible asset must meet Some intangible assets may be
is separable (can be the definition of “Asset” i.e. control contained in or on a physical
exchanged, rented, sold or over a resource and existence of substance such as a
transferred separately); or future economic benefits. ompact disc (in case of
arises from contractual or other An entity controls an asset if the computer software),
legal rights, either from contract, entity has the power to obtain the legal documentation (in case
legislation etc. In this case, the future economic benefits flowing of a licence or patent) or
asset does not need to be from the underlying resource and film.
separable. to restrict the access of others to
Intangible assets may have
those benefits.
secondary physical element.
Examples of intangibles But, the physical element of the
asset is secondary to its intangible
Computer software. Copyright. License. Marketing right. component, i.e. the knowledge
Patent. Customer list. Franchise. Customer/supplier relationship. embodied in it.

RECOGNITION CRITERIA INITIAL MEASUREMENT OF INTANGIBLE ASSETS

An intangible should be recognized if: The initial measurement of an intangible asset depends on how you
acquired the asset. An intangible asset may be acquired in following
ways:
It is probable that future economic Acquired or Purchased Separately
benefits attributable to the asset Acquired in Exchange of Another Asset
will flow to the entity; and Acquired by way of Government Grant
Internally Generated Intangibles (Other than Goodwill)
The cost of the asset can be Internally Generated Goodwill
measured reliably. Acquired in Business Combination

(1) INTANGIBLE ASSET ACQUIRED OR PURCHASED SEPARATELY

COST = Purchase Price + Directly Attributable Costs

Purchase price Examples of directly attributable costs:

plus import duties & Costs of employee benefits arising directly
non-refundable taxes, from bringing the asset to its working condition;
after deducting trade Professional fees (e.g. legal or consulting fees)
discounts & rebates arising directly from bringing the asset to its
working condition;
Posts of testing whether the asset is functioning
Deferred Payment properly.
Examples of costs that are NOT directly
If payment for an intangible asset is attributable costs:
deferred beyond normal credit terms, its
cost is the cash price equivalent. Costs of introducing a new product/service
(including advertising/promotional activities);
The difference between the cash price
Costs of conducting business in a new location
equivalent and the total payment is
or with a new class of customer (including costs
recognized as interest over the period of
of staff training);
credit
Administration and other general overhead
costs.
Complied by: Murtaza Quaid, ACA

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IAS-38
INTANGIBLE ASSETS
INITIAL MEASUREMENT OF INTANGIBLE ASSETS

(2) INTERNALLY GENERATED INTANGIBLES (OTHER THAN GOODWILL)

In case of internally generated intangible, assess the generation of the asset into:

Research Phase Development Phase

Research is original and planned investigation Development is the application of research findings
undertaken with the prospect of gaining new or other knowledge to a plan or design for the
scientific or technical knowledge and production of new or substantially improved
understanding. materials, devices, products, processes, systems or
Examples of research activities are: services before the start of commercial production
or use.
- activities aimed at obtaining new
knowledge; Examples of development activities are:
- Design, construction & testing of pre-production
- the search for, evaluation and final selection
or pre-use prototypes & models;
of, applications of research findings or other
knowledge; - Design of tools, jigs, moulds & dies involving
new technology;
- the search for alternatives for materials, devices,
products, processes, systems or services; and - Design, construction & operation of a pilot plant
that is not of a scale economically feasible for
- the formulation, design, evaluation and final
commercial production; and
selection of possible alternatives for new or
improved materials, devices, products, - Design, construction & testing of a chosen
processes, systems or services. alternative for new or improved materials,
devices, products, processes, systems or services.
In the research phase, an entity cannot
demonstrate that an intangible asset exists that In development phase, an entity can identify
will generate probable future economic benefits. an intangible asset & demonstrate that the
Therefore, expenditure on research phase is asset will generate future economic benefits.
expense out. Therefore, expenditure on development phase
is capitalised if it meets the capitalization
criteria.
Past expenses not to be recognised Otherwise, this expenditure is expensed out.
as an asset
Expenditure incurred prior to the criteria being
met can not be capitalized retrospectively. Capitalization Criteria for Expenditure
in Development Phase

Acquired R&D project An intangible asset arising from development

Acquired research and development project shall be recognised if all criteria are met:
(in-process) would be recognized as intangible a. Technical feasibility of completing the
if the project meets the definition of an intangible asset
intangible asset. b. Intention to complete the intangible asset
and use/sell it.
Subsequent Expenditure on acquired R&D c. Ability to use/sell the intangible asset.
Research or development expenditure incurred d. Intangible asset will generate probable
after the acquisition of in-process R&D project future economic benefits.
acquired separately, shall be accounted for in e. Availability of adequate technical, financial
accordance with IAS 38 rules on research and and other resources to complete and to
development expenditure as explained earlier. use/sell the intangible asset.
f. Ability to reliably measure the expenditure
during the development phase.

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IAS-38
INTANGIBLE ASSETS

INITIAL MEASUREMENT OF INTANGIBLE ASSETS

(3) INTANGIBLE ASSET ACQUIRED IN EXCHANGE OF ANOTHER ASSET

Intangible asset may be acquired in exchange for another asset. The cost of the intangible asset
acquired will be:
Fair value of the asset given up ± Cash paid (received);
Fair value of the acquired asset, if it is more clearly evident;
Carrying amount of the asset given up ± Cash paid (received), if:
- Exchange transaction lacks commercial substance or
- Fair value of neither the asset received nor the asset given up is reliably measurable.

(4) INTANGIBLE ASSET ACQUIRED BY WAY OF GOVERNMENT GRANT

An intangible asset may be acquired free of charge, or for nominal consideration, by way of a
government grant. For example, a government may grant;
- airport landing rights,
- licences to operate radio or television stations,
- import licences or quotas or
- rights to access other restricted resources.
Both the intangible asset and the grant may be initially recognized at fair value.
Alternatively, intangible asset may be initially recognized at a nominal amount plus any expenditure
that is directly attributable to preparing the asset for its intended use.

(5) INTANGIBLE ASSET ACQUIRED IN BUSINESS COMBINATION

An intangible asset acquired in a business combination is recognized at its fair value at the
acquisition date.
Such intangible is recognizedseparately from goodwill (even if acquiree had not recognized it).

(6) INTERNALLY GENERATED GOODWILL

Internally generated brands, mastheads, publishing titles, customer lists and similar items shall
not be recognised as intangible assets.
Expenditure on above items cannot be distinguished from the cost of developing the business
as a whole.
Therefore, such items are not recognised as intangible assets.
Internally generated goodwill is not recognised as an asset because it is not an identifiable resource
(i.e. it is not separable nor does it arise from contractual or other legal rights) controlled by the entity
that can be measured reliably at cost.

Complied by: Murtaza Quaid, ACA

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IAS-38
INTANGIBLE ASSETS
SUBSEQUENT MEASUREMENT OF INTANGIBLE ASSETS

An entity shall choose either the cost model or the revaluation model as its accounting policy:

REVALUATION MODEL COST MODEL

Fair value xxxx Fair value xxxx

Less. Accumulated Amortization (xxxx) Less. Accumulated Amortization (xxxx)
Less. Accumulated Impairment (xxxx) Less. Accumulated Impairment (xxxx)
Carrying Amount xxxx Carrying Amount xxxx

Revaluation of Intangible Asset Lower of:

Historical Cost; or
Revaluation Surplus – OCI Recoverable Amount
Historical
Cost
Revaluation Gain / (Loss) – P/L Historical Cost
Carrying Amount of an asset (After amortization)
as if it had never been revalued / impaired.
Recoverable Amount

Revaluation Model for Intangible Assets Higher of : (i) Value in Use; or

(ii) Fair Value less Cost to sell
For revaluation under IAS 38, fair value shall be
measured by reference to an active market. Active market valuation
If an intangible is carried under revaluation
model, all other assets in its class shall also be It is uncommon for an active market to
accounted for using the same model, unless exist for an intangible, but this may happen.
there is no active market for those assets. An active market may exist for freely
An active market is a market in which transferable taxi licences, fishing licences or
transactions for the asset or liability take place production quotas.
with sufficient frequency & volume to provide
However, an active market cannot exist for
pricing information on an ongoing basis.
brands, newspaper mastheads, music and
If an intangible in a class of revalued intangibles,
film publishing rights, patents or
cannot be revalued because there is no active
trademarks, because such asset is unique.
market for this asset, the asset shall be carried
at cost model. If FV of a revalued intangible can no longer
be measured by reference to an active
Revaluations shall be made with such regularity
market, the CA of the asset shall be its
that the carrying amount of the asset does not
revalued amount at the date of the last
differ materially from its FV.
revaluation less any subsequent acc.
Frequency of revaluations depends on the
amortisation & impairment losses.
volatility of the FV of the intangible assets.
If an active market no longer exists for an
Measurement under Revaluation Model
intangible, it is an indicator of impairment.
The revaluation model does not allow
If FV of intangible is measured by reference
revaluation of intangible that have not
to an active market at a subsequent date,
previously been recognised as assets e.g.
the revaluation model is applied from that
internally generated brand.
date.
The revaluation model is applied after an asset
has been initially recognised at cost.
Also, revaluation model may be applied to an
asset that was received by way of a government
grant and recognised at a nominal amount.
Complied by: Murtaza Quaid, ACA

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IAS 41 AGRICULTURE

AT A GLANCE
IN THIS CHAPTER:
The objective of IAS 41 is to prescribe the accounting treatment
and disclosures related to agricultural activity.
AT A GLANCE
The key definitions are agricultural activity, biological asset
SPOTLIGHT and agricultural produce. Agricultural activity is the
management by an entity of the biological transformation of
1. Introduction biological assets for sale, into agricultural produce, or into
additional biological assets. A biological asset is a living animal
2. Recognition and measurement or plant. Agricultural produce is the harvested product of the
entity’s biological assets. IAS 41 prescribes, among other
3. Disclosure things, the accounting treatment for biological assets during
the period of growth, degeneration, production, and
4. Comprehensive Examples procreation, and for the initial measurement of agricultural
produce at the point of harvest. It requires measurement at
5. Objective Based Q&A fair value less costs to sell from initial recognition of biological
assets up to the point of harvest, other than when fair value
STICKY NOTES cannot be measured reliably on initial recognition.
IAS 41 is applied to agricultural produce, which is the harvested
product of the entity's biological assets, only at the point of
harvest. Thereafter, IAS 2 Inventories or another applicable
Standard is applied.
IAS 41 requires that a change in fair value less costs to sell of a
biological asset be included in profit or loss for the period in
which it arises.
IAS 41 requires that an unconditional government grant
related to a biological asset measured at its fair value less cost
to sell be recognised as income when, and only when, the
government grant becomes receivable. If a government grant is
conditional, an entity should recognise the government grant
as income when, and only when, the conditions attaching to the
government grant are met.

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1 INTRODUCTION
1.1 Scope [IAS 41: 1 to 4]
IAS 41 Agriculture covers the following agricultural activities:
• biological assets, except for bearer plants;
• agricultural produce at the point of harvest; and
• government grants for agriculture (in certain situations).
IAS 41 does not apply to:
• the harvested agricultural product (IAS 2 Inventory or another applicable Standard applies);
• land relating to the agricultural activity (IAS 16 or IAS 40 applies);
• bearer plants related to agricultural activity (however, IAS 41 does apply to the produce on those bearer
plants).
• intangible assets related to agricultural activity (IAS 38 Intangible assets applies).
The table below provides examples of biological assets, agricultural produce, and products that are the result of
processing after harvest:

Biological assets Agricultural produce Products that result from processiong after harvest

Sheep Wool Yarn, carpet etc.

Trees in a timber plantation Felled trees Logs, lumber

Dairy cattle Milk Cheese

Cotton plants Harvested cotton Thread, clothing etc.

Sugarcane Harvested cane Sugar

Tobacco plants Picked leaves Cured tobacco

Tea bushes Picked leaves Tea

Fruit tress Picked fruit Processed fruit

Oil palm Picked fruit Palm oil

Pigs Carcass Sausages

Grape vines Picked grapes Wine

Rubber trees Harvested latex Rubber products

 Example 01:
A farmer has a field of lambs (‘biological assets’).
As the lambs grow they go through biological transformation.
As sheep they are able to procreate and lambs will be born (additional biological assets) and the wool from the
sheep provides a source of revenue for the farmer (‘agricultural produce’).
Once the wool has been sheared from the sheep (‘harvested’), IAS 2 requires that it be accounted for as regular
inventory.

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 Example 02:
Fatima Limited has a forest asset. The total value of the group’s forest assets is Rs.3,400 million comprising:

Rs. in million
Freestanding trees 2,500
Land under trees 500
Roads in forests 400
3,400

Required:
Show how the forests would be presented in the financial statements.
 ANSWER:
Fatima Limited
Extracts of Statement of Financial Position as at 31 December 20X8

Rs. in million
Non-current assets
Property, plant and equipment: Land under trees 500
Forest roads 400
Biological assets: Freestanding trees 2,500
3,400

1.2 Definitions [IAS 41: 5]

“Biological asset” is a living animal or plant. Examples include sheep, cows, plant and trees, etc.
A “group of biological assets” is an aggregation of similar living animals or plants. Examples include herd of
cows, orchard of fruit trees, etc.
“Harvest” is the detachment of produce from a biological asset or the cessation of a biological asset’s life
processes. Examples include milking the cows, slaughtering the cows, picking fruit from trees and cutting trees
for wood logs.
“Agricultural produce” is the harvested produce of the entity’s biological assets. Example include milk and/or
meat obtained from cows and fruit and/or wood logs obtained from trees.
“Costs to sell” are the incremental costs directly attributable to the disposal of an asset, excluding finance costs
and income taxes. Examples include commission to brokers, non-refundable transfer taxes and duties.
1.3 Biological transformation [IAS 41: 5 & 7]
Biological transformation comprises the processes of:
• Growth (an increase in quantity or improvement in quality of an animal or plant e.g. lambs grow into sheep,
trees grow);
• Degeneration (a decrease in the quantity or deterioration in quality of an animal or plant e.g. death, old age,
cut down);
• Production (getting agricultural produce such as latex, tea leaf, wool, and milk); and
• Procreation (creation of additional living animals or plants e.g. birth of new animals) that cause qualitative
or quantitative changes in a biological asset.

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1.4 Agricultural activity [IAS 41: 5 & 6]

Agricultural activity is the management by an entity of the biological transformation and harvest of biological
assets
• for sale; or
• for conversion into agricultural produce; or
• into additional biological assets.
 Example 03:
Discuss whether IAS 41 shall be applied in each of the following circumstances:
i. A zoo has bought two lions and one tiger for exhibition in zoo cages for earning ticket revenue.
ii. Peacock kept by a restaurant in their open dining area to attract more customers.
iii. Mules kept for transportation of luggage of tourists by a company which provides camping and hiking
services to foreign tourists.
iv. A small business using horses in horse-wagons for tourists to travel around historical places.
v. Parrots kept for breeding by a bird shop so that their offspring can be sold.
vi. Horses kept in stable for breeding and to be trained and sold later.
 ANSWER:
Although all circumstances indicate the existence of biological assets i.e. living animals, the item (i) to (iv) do not
fall under the scope of IAS 41 as those biological assets are not for agricultural activity.
IAS 41 shall be applied on item (v) and (vi) since these biological assets relate to agricultural activity (i.e. for sale
or for having additional biological assets by breeding).
Agricultural activity covers a diverse range of activities; for example, raising livestock, forestry, annual or
perennial cropping, cultivating orchards and plantations, floriculture and aquaculture (including fish farming).
Certain common features exist within this diversity
a) Capability to change. Living animals & plants are capable of biological transformation;
b) Management of change. Management facilitates biological transformation by enhancing, or at least
stabilising, conditions necessary for the process to take place (for example, nutrient levels, moisture,
temperature, fertility, and light). Such management distinguishes agricultural activity from other activities.
For example, harvesting from unmanaged sources (such as ocean fishing and deforestation) is not
agricultural activity; and
c) Measurement of change. The change in quality (for example, genetic merit, density, ripeness, fat cover,
protein content, and fibre strength) or quantity (for example, progeny, weight, cubic metres, fibre length or
diameter, and number of buds) brought about by biological transformation or harvest is measured and
monitored as a routine management function.

1.5 Bearer plants [IAS 41: 5 to 5C]

IAS 16 applies to the bearer plants. A bearer plant is a living plant that:
a) is used in the production or supply of agricultural produce;
b) is expected to bear produce for more than one period; and
c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

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When bearer plants are no longer used to bear produce, they might be cut down and sold as scrap, for example,
for use as firewood.
Produce growing on bearer plants is a biological asset. IAS 41 is applied on such produce.
The following are not bearer plants (IAS 41 is applied):
a) plants cultivated to be harvested as agricultural produce (e.g. trees grown for use as lumber);
b) plants cultivated to produce agricultural produce and more than a remote likelihood that the entity will also
harvest and sell the plant as agricultural produce, other than as incidental scrap sales (e.g., trees that are
cultivated both for their fruit and their lumber);
c) annual crops (e.g., maize and wheat).
Note that there is no animal-equivalent of bearer plant. Thus, cows kept for milk only are within the scope of IAS
41.

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2 RECOGNITION AND MEASUREMENT

2.1 Recognition [IAS 41: 10 & 11]
An entity shall recognise a biological asset or agricultural produce when, and only when:
a) the entity controls the asset as a result of past events;
b) it is probable that future economic benefits associated with the asset will flow to the entity; and
c) the fair value or cost of the asset can be measured reliably.
In agricultural activity, control may be evidenced by, for example, legal ownership of cattle and the branding or
otherwise marking of the cattle on acquisition, birth, or weaning.
The future benefits are normally assessed by measuring the significant physical attributes.
 Example 04:
XYZ Limited owns a large area of farmland nearby a wild forest. Employees of XYZ Limited have noticed that a
herd (or a parade) of wild elephants is living permanently on the farmland of XYZ Limited. If sold in international
market, the whole herd can fetch a fair value less costs to sell of Rs. 58 million.
Required:
How should XYZ Limited recognise the herd of elephants in its financial statements?
 ANSWER:
It is unlikely that XYZ Limited controls these wild animals and/or able to sell them and obtain the future
economic benefits. Therefore, XYZ Limited should not recognise the herd of elephants in its financial statements.
2.2 Measurement [IAS 41: 12 to 25]
2.2.1 Biological asset
A biological asset shall be measured on initial recognition and at the end of each reporting period at its fair value
less costs to sell, except where the fair value cannot be measured reliably.
 Example 05:
Adeel Limited (AL) operates a goat breeding farm. AL sells goats to local meat businesses and goats-milk to
cosmetics companies. They also use goat milk for making premium cheese for sale. On 1 March 20Y2, AL bought
10 goats for Rs. 25,000 each (i.e. fair value) from a nearby market. The market broker charges 2% commission
from buyer and 3% from seller on each transaction.
On 15 June 20Y2, two kids were born having fair value of Rs. 7,000 each.
On 30 June 20Y2, the year-end of AL, each goat has a fair value of Rs. 33,000 and each kid has a fair value of Rs.
9,000.
Required:
Calculate the cost of purchase and the amount at which the above biological assets should be measured at initial
recognition and on 30th June 20Y2.
 ANSWER:
The cost of 10 goats purchased:
[10 goats x Rs. 25,000 x 102%] = Rs. 255,000
Measurement at initial recognition (at fair value less costs to sell):
[10 goats x Rs. 25,000 x 97%] = Rs. 242,500
[2 goat kids x Rs. 7,000 x 97%] = Rs. 13,580

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Measurement at year-end (at fair value less costs to sell):

[10 goats x Rs. 33,000 x 97%] = Rs. 320,100
[2 goat kids x Rs. 9,000 x 97%] = Rs. 17,460

2.2.2 Agricultural produce

Agricultural produce harvested from an entity’s biological assets shall be measured at its fair value less costs to
sell at the point of harvest. Such measurement is the cost at that date when applying IAS 2 Inventories or another
applicable Standard.
 Example 06:
Kashif Limited (KL) operates a goat breeding farm. KL sells goats to local meat businesses and goats-milk to
cosmetics companies. They also use goat milk for making premium cheese for sale.
During the year ended 30 June 20Y2, KL could get 980 litre of milk which had fair value less costs to sell of Rs.
170 per litre on the day goats were milked.
The 900 litre of milk was sold to cosmetics companies for Rs. 160,000 and remaining 80 litre was converted into
making cheese which was later sold for Rs. 24,000. KL had to incur a cost of Rs. 5,000 to convert the milk into
cheese.
Required:
Briefly discuss the accounting treatment of milk obtained from goats.
 ANSWER:
The harvested milk shall be recognised at Rs. 166,600 (980 litres x Rs. 170 per litre) at the point of harvest. This
amount will be deemed cost of inventory of milk subsequently. The excess of sale price over this cost of inventory
shall result in profit in the statement of comprehensive income of KL.

2.2.3 Biological assets attached to land

Biological assets are often physically attached to land (for example, trees in a plantation forest).
There may be no separate market for biological assets that are attached to the land, but an active market may
exist for the combined assets, that is, the biological assets, raw land, and land improvements, as a package. An
entity may use information regarding the combined assets to measure the fair value of the biological assets. The
fair value of raw land and land improvements may be deducted from the fair value of the combined assets to
arrive at the fair value of biological assets.
 Example 07:
ABC Limited has a fruit orchard over fifteen acres area of land. The separate value of orchard from the land could
not be determined, however, combined value of land and orchard has been determined to be Rs. 336 million. The
similar agricultural land (but without any crop or orchard) in the area is valued at Rs. 10 million per acre.
Required:
Advise ABC Limited as to how they may value their fruit orchard.
 ANSWER:
Use the combined fair value of the land and orchard, less the estimated fair value of land. So the orchard’s fair
value might be determined at Rs. 186 million (i.e. Rs. 336 million – Rs. 10 million x 15 acres).

2.2.4 Grouping of assets

The fair value measurement may be facilitated by grouping biological assets or agricultural produce according
to significant attributes; for example, by age or quality as used in the market as a basis for pricing.

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2.2.5 Future contract prices

Future contract prices are not necessarily relevant in measuring fair value because fair value reflects the current
market conditions in which market participant buyers and sellers would enter into a transaction. The fair value
is not adjusted because of existence of such contract. IAS 37 is applied if such contract is onerous.

2.2.6 Using cost as fair value

Cost may sometimes approximate fair value, particularly when:
• little biological transformation has taken place since initial cost incurrence (for example, for seedlings
planted immediately prior to the end of a reporting period or newly acquired livestock); or
• the impact of the biological transformation on price is not expected to be material (for example, for the initial
growth in a 30‑year pine plantation production cycle).

2.3 Gains and losses [IAS 41: 26 to 29]

2.3.1 Biological assets

A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell and from a change
in fair value less costs to sell of a biological asset shall be included in profit or loss for the period in which it arises.
A loss may arise on initial recognition of a biological asset, because costs to sell are deducted in determining fair
value less costs to sell of a biological asset. A gain may arise on initial recognition of a biological asset, such as
when a calf is born.
 Example 08:
Adeel Limited (AL) operates a goat breeding farm. AL sells goats to local meat businesses and goats-milk to
cosmetics companies. They also use goat milk for making premium cheese for sale. On 1 March 20Y2, AL bought
10 goats for Rs. 25,000 each (i.e. fair value) from a nearby market. The market broker charges 2% commission
from buyer and 3% from seller on each transaction.
On 15 June 20Y2, two goat kids were born having fair value of Rs. 7,000 each.
On 30 June 20Y2, the year-end of AL, each mature goat has now fair value of Rs. 33,000 and each goat kid has fair
value of Rs. 9,000.
Required:
Journal entries.
 ANSWER:

Debit Credit
Date Particulars
Rs. Rs.
1 Mar 20Y2 Biological assets [10 goats x Rs. 25,000 x 97%] 242,500
Loss on initial recognition (PL) 12,500
Bank [10 goats x Rs. 25,000 x 102%] 255,000
15 Jun 20Y2 Biological assets [2 goat kids x Rs. 7,000 x 97%] 13,580
Gain on initial recognition (PL) 13,580
30 Jun 20Y2 Biological assets W1 81,480
Gain on re-measurement (PL) 81,480

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W1: Gain on re-measurement of Biological assets Rs.

At year end
[10 goats × Rs. 33,000 × 97%] 320,100
[2 goat kids x Rs. 9,000 x 97%] 17,460
337,560
Already measured at [Rs. 242,500 + 13,580] (256,080)
81,480

2.3.2 Agricultural Produce

A gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell shall be included
in profit or loss for the period in which it arises.
A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.
 Example 09:
Kashif Limited (KL) operates a goat breeding farm. KL sells goats to local meat businesses and goats-milk to
cosmetics companies. They also use goat milk for making premium cheese for sale.
During the year ended 30 June 20Y2, KL could get 980 litre of milk which had fair value less costs to sell of Rs.
170 per litre on the day goats were milked.
The 900 litre of milk was sold to cosmetics companies for Rs. 160,000 and remaining 80 litre was converted into
making cheese which was later sold for Rs. 24,000. KL had to incur a cost of Rs. 5,000 to convert the milk into
cheese.
Required:
Journal entries (perpetual inventory system).
 ANSWER:

Debit Credit
Sr. # Particulars
Rs. Rs.
(i) Milk (agricultural produce) [980 litres x Rs. 170] 166,600
Gain on harvest (PL) 166,600
(ii) Milk inventory 166,600
Milk (agricultural produce) 166,600
(iii) Cash/Receivables 160,000
Revenue: Milk 160,000
Cost of sales 153,000
Milk inventory [900 litres x Rs. 170] 153,000
(iv) Cheese inventory 18,600
Cash/Bank (conversion cost) 5,000
Milk inventory [80 litres x Rs. 170] 13,600
(v) Cash/Receivables 24,000
Revenue: cheese 24,000
Cost of sales 18,600
Cheese inventory 18,600

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2.4 Inability to measure fair value reliably [IAS 41: 30 to 33]

There is a presumption that fair value can be measured reliably for a biological asset. The presumption can be
rebutted only on initial recognition for a biological asset for which quoted market prices are not available and
for which alternative fair value measurements are determined to be clearly unreliable.
In such a case, that biological asset shall be measured at its cost less any accumulated depreciation and any
accumulated impairment losses. The entity should consider application of IAS 2, IAS 16 and/or IAS 36.
Once the fair value of such a biological asset becomes reliably measurable, an entity shall measure it at its fair
value less costs to sell.
The presumption can be rebutted only on initial recognition. An entity that has previously measured a biological
asset at its fair value less costs to sell continues to measure the biological asset at its fair value less costs to sell
until disposal.
In all cases, an entity measures agricultural produce at the point of harvest at its fair value less costs to sell. IAS
41 reflects the view that the fair value of agricultural produce at the point of harvest can always be measured
reliably.

2.5 Government grants related to biological asset [IAS 41: 34 to 38]

Biological assets Unconditional grant

measured at fair It shall be recognised in profit or loss when, and only when, the government grant
value less cost to becomes receivable.
sell
Conditional grant
(IAS 41 is
applicable) Such grant (including when a government grant requires an entity not to engage in
specified agricultural activity) shall be recognised in profit or loss when, and only
when, the conditions attaching to the government grant are met.
Partial recognition for conditional grants
Terms and conditions of government grants vary. For example, a grant may require an
entity to farm in a particular location for five years and require the entity to return all
of the grant if it farms for a period shorter than five years. In this case, the grant is not
recognised in profit or loss until the five years have passed. However, if the terms of the
grant allow part of it to be retained according to the time that has elapsed, the entity
recognises that part in profit or loss as time passes.
Biological assets The grant shall be recognised in accordance with IAS 20.
measured at cost
or bearer plants

 Example 10:
Multan Limited (ML) operates a large cow and buffalo dairy farm. On 1 January 20Y2, ML received a government
grant of Rs. 15 million on the condition that ML adopts organic cattle feed system and continues to do so for five
years. If ML discontinues organic cattle feed system any time during five years, it will have to repay the whole
amount of grant.
ML has already implemented organic feed system and it is reasonably certain that ML will meet the conditions
of grant. ML year end is 31 December. ML measures all its biological assets at fair value less costs to sell.
Required:
Briefly discuss the recognition of government grant in the financial statements of ML.
 ANSWER:
ML shall recognise the grant of Rs. 15 million in profit or loss on 31st December 2026 only when the conditions
attaching to the government grant are met.

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 Example 11:
Peshawar Limited (PL) operates a large cow and buffalo dairy farm. On 1 April 20Y2, PL received a government
grant of Rs. 15 million on the condition that PL adopts organic cattle feed system and continues to do so for next
five years. If PL discontinues organic cattle feed system any time during five years, it will have to repay the
proportionate amount of grant.
PL has already implemented organic feed system and it is reasonably certain that PL will meet the conditions of
grant. PL year end is 31 December. PL measures all its biological assets at fair value less costs to sell.
Required:
Briefly discuss the recognition of government grant in the financial statements of PL.
 ANSWER:
PL shall recognise the grant of Rs. 3 million (i.e. Rs. 15 million / 5 years) in profit or loss each year on 31 st
December from 20Y2 to 20Y7 as the time passes provided that PL is complying the conditions of the government
grant.

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3 DISCLOSURE
3.1 General [IAS 41: 40 to 45]
An entity shall disclose the aggregate gain or loss arising during the current period on initial recognition of
biological assets and agricultural produce and from the change in fair value less costs to sell of biological assets.
An entity shall provide a description (narrative or quantified) of each group of biological assets. An entity is
encouraged to provide a quantified description of each group of biological assets, distinguishing between
consumable and bearer biological assets or between mature and immature biological assets, as appropriate.
An entity discloses the basis for making any such distinctions.

Group Type Explanation

Consumable Consumable biological assets are those that are to be harvested as agricultural produce
biological assets or sold as biological assets. Examples include livestock intended for the production of
meat, livestock held for sale, fish in farms, crops such as maize and wheat, produce on a
bearer plant and trees being grown for lumber.
Bearer biological Bearer biological assets are those other than consumable biological assets; for example,
assets livestock from which milk is produced and fruit trees from which fruit is harvested.
Mature biological Mature biological assets are those that have attained harvestable specifications (for
assets consumable biological assets) or are able to sustain regular harvests (for bearer
biological assets).

3.2 Reconciliation [IAS 41: 50 to 52]

An entity is required to present a reconciliation of changes in the carrying amount of biological assets between
the beginning and the end of the current period.
The reconciliation shall include:
a) the gain or loss arising from changes in fair value less costs to sell (Separate disclosure of physical change
and price change is encouraged but not required);
b) increases due to purchases;
c) decreases attributable to sales and classification as held for sale;
d) decreases due to harvest;
e) increases resulting from business combinations;
f) net exchange differences; and
g) other changes.
 Example 12:
Nawabpur Farming Limited (NFL) owned a dairy herd. On 1st January 20Y2, the herd had 100 animals that were
two years old and 50 newly born calves. On 31 December 20Y2 (year-end), a further 03 calves were born. None
of the herd died during the period. NFL incurred total farm maintenance cost of Rs. 1.2 million.
Relevant fair value less costs to sell (per animal) were:

1st January 20Y2 31 December 20Y2

Rupees
Newly born calves 30,000 50,000
One year old animals 45,000 60,000
Two year old animals 65,000 75,000
Three year old animals 75,000 80,000

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Required:
Prepare reconciliation of change in fair value (price change and physical change) and extracts of financial
statements for the year ended 31st December 20Y2.
 ANSWER:
Reconciliation

Rs. 000 Rs. 000

On 1st January 20Y2
2 year old [100 x Rs. 65] 6,500
Newly born [50 x Rs. 30] 1,500
8,000
Increase due to price change*
2 year old [100 x (Rs. 75 - 65)] 1,000
Newly born [50 x (Rs. 50 - 30)] 1,000
2,000
Increase due to physical change**
2 year old to 3 year old [100 x (Rs. 80 - 75)] 500
Newly born to 1 year old [50 x (Rs. 60 - 50)] 500
Newly born [3 x Rs. 50] 150
1,150
On 31 December 20Y2
3 year old [100 x Rs. 80] 8,000
1 year old [50 x Rs. 60] 3,000
Newly born [3 x Rs. 50] 150
11,150

*age at beginning of period or on initial recognition

** prices at year-end
Statement of financial position (extracts) as at 31 December 20Y2

Rs. 000
Non-current assets
Biological assets 11,150

Statement of profit or loss (extracts ) for the year ended 31 December 20Y2

Rs. 000
Income
Gain on measurement of biological assets [2,000 + 1,150] 3,150
Expenses:
Maintenance cost of herd (1,200)

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3.3 Other information [IAS 41: 46, 49 & 53]

If not disclosed elsewhere in information published with the financial statements, an entity shall describe:
a) the nature of its activities involving each group of biological assets; and
b) non‑financial measures or estimates of the physical quantities of:
i. each group of the entity’s biological assets at the end of the period; and
ii. output of agricultural produce during the period.
An entity shall disclose:
a) the existence and carrying amounts of biological assets whose title is restricted, and the carrying amounts
of biological assets pledged as security for liabilities;
b) the amount of commitments for the development or acquisition of biological assets; and
c) financial risk management strategies related to agricultural activity.
Agricultural activity is often exposed to climatic, disease and other natural risks. Examples of such an event
include an outbreak of a virulent disease, a flood, a severe drought or frost, and a plague of insects. If an event
occurs that gives rise to a material item of income or expense, the nature and amount of that item are disclosed
in accordance with IAS 1.

3.4 Additional disclosure when fair value cannot be measured reliably [IAS 41: 54 to 56]
If an entity measures biological assets at cost model, the following are disclosed:
a) a description of the biological assets;
b) an explanation of why fair value cannot be measured reliably;
c) if possible, the range of estimates within which fair value is highly likely to lie;
d) the depreciation method used;
e) the useful lives or the depreciation rates used; and
f) the gross carrying amount and the accumulated depreciation (and impairment losses) at the beginning and
end of the period.
g) Any gain or loss recognised on disposal (related assets to be disclosed separately in reconciliation).
In addition, the reconciliation shall include the following amounts:
a) impairment losses;
b) reversals of impairment losses; and
c) depreciation.
If the fair value becomes reliably measurable during the current period, an entity shall disclose for those
biological assets:
a) a description of the biological assets;
b) an explanation of why fair value has become reliably measurable; and
c) the effect of the change.

3.5 Government grant [IAS 41: 57]

An entity shall disclose the following related to agricultural activity covered by IAS 41:
a) the nature and extent of government grants recognised in the financial statements;
b) unfulfilled conditions and other contingencies attaching to government grants; and
c) significant decreases expected in the level of government grants.

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4 COMPREHENSIVE EXAMPLES
 Example 13:
Smooth Road Limited (SRL) had a stock of 2,000 cows on 1 January 20X9.
On 1 May 20X9, SRL purchased 750 cows at fair value of Rs. 56,000 per cow. Further Rs. 2 million were incurred
to transport the cows to the farm.
On 1 August 20X9, SRL imported cattle feed of Rs. 24.6 million against 70% payment. SRL also paid 5% non-
refundable taxes. The feed is specially designed to provide vital nutrients to cows that keep them healthy and
improve the quality of their produce. At year-end, 30% of the amount is payable whereas 40% of the feed is
unused.
Following average fair values per cow are available:

1-Jan-X9 1-May-X9 31-Dec-X9 Average for the year

Rs. 50,000 Rs. 56,000 Rs. 61,000 Rs. 57,000

Auctioneers charge a 2% commission on fair value from seller. Further, there is a government levy of 3% at the
time of purchase and 4% at the time of sale on fair value.
Required:
Prepare journal entries in SRL's books to record the above information for the year ended 31 December 20X9.
 ANSWER:

Debit Credit
Date Description
Rs. in '000
1-May-X9 Biological Assets [750 cows × Rs. 56,000×94%] 39,480
Loss on initial recognition (PL) 3,780
Bank [750 cows × Rs. 56,000× 103%] 43,260
1-May-X9 Carriage expense 2,000
Cash / Bank 2,000
1-Aug-X9 Cattle feed expense [Rs. 24.6m × 105%] 25,830
Payable [24.6m × 30%] 7,380
Cash/Bank (Bal.) 18,450
31-Dec-X9 Biological Assets (W1) 24,205
P & L / Gain on re-measurement 24,205
31-Dec-X9 Cattle feed inventory [Rs. 25.83 x 40%] 10,332
Cattle feed expense 10,332
W1: Gain on re-measurement of Biological assets Rs. in '000
Closing carrying value [2,750 cows × Rs. 61,000 × 94%] 157,685
Opening [2,000 cows × Rs. 50,000 × 94%] 94,000
Purchase on 1-May-20X9 39,480
(133,480)
24,205

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 Example 14:
The Dairy Company (TDC) owns three farms and has a stock of 3,200 cows. During the year ended 30 June 20X5,
300 animals were born, all of which survived and were still owned by TDC at year-end.
Of those, 225 are infants whereas 75 are nine month old having market values of Rs. 26,000 and Rs. 53,000 per
animal respectively. The incidental costs are 2% of the transaction price.
Required:
Discuss how the gain in respect of the new born cows should be recognised in TDC’s financial statements for the
year ended 30 June 20X5. (Show all necessary computations)
 ANSWER:
The new born cows are biological assets and should be measured at fair value less costs to sell both on initial
recognition and at each reporting date.
The gains on initial recognition and the gains from change in this value should be recognised in profit or loss for
the period in which it arises. The total gains to be recognised in the year ended 30 June 20X5 is as follows:
Rupees
New born [26,000 × 225 × (100%-2%)] 5,733,000
9 month old [53,000 × 75 × (100% - 2%)] 3,895,500
9,628,500

 Example 15:
Maria Limited has provided following information from its financial records:
Rs. million
Initial recognition of biological assets (on acquisition at start of 20X8) 600
Fair value of biological assets as at 31 December 20X8 700
Increase in fair value of biological assets due to physical growth during 20X9 100
Increase in fair value of biological assets due to price fluctuations during 20X9 80
Decrease in fair value of biological assets due to harvest of agriculture produce (The fair 56
value of harvested agriculture produce at point of harvest was Rs. 60 million)
The costs to sell are negligible. No agriculture produce was harvested in 20X8 and the agriculture produce
harvested during 20X9 has not been sold yet.
Required:
Show how these values would be incorporated into the statement of financial position and statement of
comprehensive income at December 31, 20X9 (including comparative).
 ANSWER:

Maria Limited

Statement of financial position (Extracts) 20X9 20X8

As at 31 December 20X9 Rs. in million
Non-current asset: Biological assets [700+100+80–56] 824 700
Current assets: Inventory 60
For the year ended 31 December 20X9
Fair value gain on biological assets [824 – 700] and [700 – 600] 124 100
Fair value gain on initial recognition of agricultural produce 60 -

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 Example 16:
With reference to IAS 41, identify whether each of the following statements is TRUE or FALSE:
i. Both fish farming and ocean fishing are agricultural activities.
ii. IAS 41 does not apply on bearer plant; however, it applies on produce growing on bearer plant.
iii. A biological asset should initially be measured at cost of purchase.
iv. A biological asset should subsequently be measured at fair value.
v. The gain or loss on subsequent re-measurement of a biological asset should be taken to profit and loss
account.
vi. Commission to brokers as well as advertising cost would be classified as cost to sell when valuing agricultural
produce upon harvest.
vii. All government grants related to biological assets are accounted for under IAS 41.
viii. Once wool is extracted from the sheep, subsequent processing of wool into carpets is accounted for under
IAS 2.
 ANSWER:

(i) False (ii) True

(iii) False (iv) False
(v) True (vi) False
(vii) False (viii) True

 Example 17:
Mishal Limited, a public limited company, operates a large dairy farm. At December 31, 20X8, the herds are:
• 150,000 cows (3 years old), all purchased on or before January 1, 20X8
• 10,000 heifers, average age 2 years, purchased on January 1, 20X8
• 75,000 heifers, average age 1.5 years, purchased on July 1, 20X8
No animals were born or sold in the year.

The unit fair value less cost to sell were Rs.

1-year-old animal at December 31, 20X8: 32,000
2-year-old animal at December 31, 20X8: 45,000
1.5-year-old animal at December 31, 20X8: 36,000
3-year-old animal at December 31, 20X8: 50,000
1-year-old animal at January 1, 20X8: 30,000
1-year-old animal at July 1, 20X8: 30,000
2-year-old animal at January 1, 20X8: 40,000

Required:
Prepare the reconciliation of biological assets from 1 January 20X8 to 31 December 20X8, separately indicating
the price change and physical change.

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 ANSWER:

Reconciliation of biological assets: 01 January 20X8 to 31 December 20X8

Rs. million
Fair value less cost to sell at January 1, 20X8
Cows 150,000 × 40,000 6,000
Purchased
Heifers 1 Jan 10,000 × 30,000 300
Heifers 1 July 75,000 × 30,000 2,250
2,550
Increase due to price change
150,000 × (45,000 – 40,000) 750
10,000 × (32,000 – 30,000) 20
75,000 × (32,000 – 30,000) 150
920
Increase due to physical change
150,000 × (50,000 – 45,000) 750
10,000 × (45,000 – 32,000) 130
75,000 × (36,000 – 32,000) 300
1,180
Fair value less cost to sell 31 December 20X8
150,000 × 50,000 7,500
10,000 × 45,000 450
75,000 × 36,000 2,700
10,650

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5 OBJECTIVE BASED Q&A

1. To which of the following items does IAS 41 Agriculture apply?
i. A change in fair value of a herd of animals relating to the unit price of the animals.
ii. Logs held in a wood yard.
iii. Farm land which is used for growing vegetables.
iv. The cost of developing a new type of crop seed which is resistant to tropical diseases.
a) All four
b) (i) only
c) (i) and (ii) only
d) (ii) and (iii) only

2. IAS 41 should be applied to account for the following when they relate to agricultural activity:
i. Biological assets.
ii. Agricultural produce at the point of harvest.
iii. Certain government grants.
iv. Land related to agricultural activity.
v. Intangible assets related to agricultural activity.
a) (i)
b) (i) & (ii)
c) (i), (ii) & (iii)
d) (i), (ii) , (iii) & (iv)

3. Agricultural activity is the management of biological transformation of biological assets:

i. for sale
ii. into agricultural produce.
iii. into additional biological assets.
a) (i)
b) (i) & (ii)
c) (i), (ii) & (iii)
d) (ii) & (iii)

4. Identify whether the following items would be accounted for under IAS 41 Agriculture or not.
Dairy cattle
Milk (at the point of harvest)
Cheese made from the (above) milk
a) All three
b) Dairy cattle and Milk only
c) Milk and Cheese only
d) Dairy cattle and Cheese only

5. Agricultural activity covers a diverse range of activities; for example:

i. Raising livestock
ii. Forestry
iii. Annual or perennial cropping
iv. Cultivating orchards and plantations
v. Food processing

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a) (i)
b) (i), (ii) & (v)
c) (i), (ii), (iii) & (v)
d) (i), (ii), (iii) & (iv)

6. Fazal Limited owns a herd of cows recorded at Rs. 36 million on 1 January 20X9. At 31 December 20X9, these
cows have a fair value of Rs. 50 million. A commission of 4% would be payable upon sale.
What is the correct accounting treatment for the cows at 31 December 20X9 according to IAS 41?
a) Hold at Rs. 36 million
b) Re-measure to Rs. 50 million, taking gain of Rs. 14 million to the profit or loss
c) Re-measure to Rs. 48 million, taking gain of Rs. 12 million to other comprehensive income
d) Re-measure to Rs. 48 million, taking gain of Rs. 12 million to the profit or loss

7. An entity should record a biological asset, or agricultural produce, only when:

i. The entity controls the asset, as a result of past events.
ii. Future benefits, associated with the asset, will flow to the entity.
iii. The fair value, or cost, of the asset can be measured reliably.
a) (i)
b) (i), (ii)
c) (i), (ii), & (iii)
d) None of the above

8. IAS 41 applies to:

a) change in fair value of a herd of livestock
b) logs held for sale in a wood yard
c) cost of developing a new type of crop seed
d) cost of making irrigation system having life of more than 1 year

9. Pluto Limited owned a one-year old herd of cattle on 1 January, recognised in the financial statements at Rs. 140
million. At 31 December, the fair value of a two-year-old herd of cattle is Rs. 170 million. Costs to sell are still
estimated to be Rs. 5 million for the whole herd.
What is the correct accounting treatment for the cattle at 31 December according to IAS 41 Agriculture?
a) Revalue to Rs. 165 million, taking gain of Rs. 25 million to other comprehensive income
b) Revalue to Rs. 165 million, taking gain of Rs. 25 million to the statement of profit or loss
c) Revalue to Rs. 170 million, taking gain of Rs. 30 million to other comprehensive income
d) Revalue to Rs. 170 million, taking gain of Rs. 30 million to the statement of profit or loss

10. Which two of the following treatments for recognition of government grant related to biological asset measured
at its fair value less cost to sell are correct?
a) An unconditional grant is recognised in profit or loss when, and only when the grant becomes receivables
b) An unconditional grant is recognised in profit or loss only when, and only when the grant is received
c) A conditional grant is recognised in profit or loss when, and only when the conditions attaching to the grant
are met
d) A conditional grant is recognised in profit or loss when, and only when the grant is received

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11. A grant related to a biological asset measured at cost because ‘fair value less cost to sell’ could not be measured
reliably, should be recorded as income:
a) In accordance with IAS 41
b) In accordance with IAS 20
c) When the grant becomes receivable
d) When the conditions of grant are met

12. A gain (or loss) may arise on initial recognition of a biological asset:
i. Because estimated cost to sell are deducted in determining ‘fair value less cost to sell’ of a biological asset
ii. When a calf is born
iii. As a result of harvesting
a) (i)
b) (i) & (ii)
c) (i), (ii) & (iii)
d) None of these

13. An unconditional grant related to a biological asset measured at its ‘fair value less cost to sell’ should be recorded
as income:
a) Only when cash is received
b) Only when the grant becomes receivable
c) Only when the goods are sold
d) Only when it is expected that grant may be received

14. Wool Limited (WL) started its business on 1 April 20X5.

On 1 April 20X5, WL purchased a flock of sheep for Rs. 100 million. At 31 March 2016, the flock was valued at Rs.
120 million. Every time animals are sold there is a 5% commission fee payable to the district municipal
corporation.
No further sheep was purchased or sold during the year.
During the year, the wool sheared by WL had “fair value less cost to sell” of Rs. 8 million.
At which amount the flock of sheep should be presented in financial statement of WL as at 31 March 2016?
a) Rs. 100 million
b) Rs. 95 million
c) Rs. 120 million
d) Rs. 114 million

15. Wool Limited (WL) started its business on 1 April 20X5.

On 1 April 20X5, WL had a flock of sheep carried at Rs. 100 million. At 31 March 20X6, the flock was valued at Rs.
120 million. Every time animals are sold there is a 5% commission fee payable to the district municipal
corporation.
No further sheep was purchased or sold during the year.
During the year, the wool sheared by WL had “fair value less cost to sell” of Rs. 8 million.
Calculate the total income of WL in respect of its agriculture activity for the year ended 31 March 20X6.
a) Rs. 8 million
b) Rs. 14 million
c) Rs. 22 million
d) Rs. 36 million

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16. Maria Limited (ML) bought oil palm garden for Rs. 150 million (includes Rs. 120 million for land) on 1 January
20X9. The garden is expected to give agriculture produce for next three years before re-plantation process.
On 31 December 20X9, the year end, the fair value of garden is Rs. 22 million (excluding land). Estimated cost to
sell are Rs. 2 million.
Land has fair value of Rs. 130 million on 31 December 20X9.
ML uses cost model for items under scope of IAS 16 and ‘fair value less cost to sell’ for items under scope of IAS
41.
What is the total amount of non-current assets to be presented in statement of financial position of ML as at 31
December 20X9?
a) Rs. 150 million
b) Rs. 140 million
c) Rs. 120 million
d) Rs. 20 million

17. Cow Limited (CL) owned cattle recorded in the financial statements at Rs. 10.5 million on 1 January 20X4.
At 31 December 20X4 the cattle have a fair value of Rs. 13 million. If CL sold the cattle, commission of 2% would
be payable.
What is the gain to be recognised in profit or loss for the period ended at 31 December 20X4 according to IAS 41
Agriculture?
a) Rs. 10.5 million
b) Rs. 13 million
c) Rs. 2.5 million
d) Rs. 2.24 million

18. A herd of fifty 3-year old animals was held on 1 January 20X3. On 1 July 20X3 ten 3.5-year-old animal were
purchased for Rs. 40,000 each.
The fair values less estimated cost to sell were:
• 3-year-old animal at 1 January 20X3 Rs. 32,000
• 3.5-year-old animal at 1 July 20X3 Rs. 40,000
• 4-year-old animal at 31 December 20X3 Rs. 43,000
Calculate the amount that will be taken to the statement of profit or loss for the year ended 31 December 20X3.
a) Rs. 400,000
b) Rs. 580,000
c) Rs. 980,000
d) Rs. 2,000,000

19. IAS 41 is applied to agricultural produce:

a) before the harvest
b) at the point of harvest
c) after the harvest
d) before, during and after the harvest

20. A conditional grant related to a biological asset measured at its ‘fair value less estimated cost to sell’ should be
recorded as income:
a) over the period in which conditions would be fulfilled
b) only when the grant becomes receivable
c) only when the conditions are met
d) over the life of related biological asset

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21. Government grants related to ‘Bearer plants’ are accounted for under:
a) IAS 41
b) IAS 20
c) IAS 16
d) IAS 41 and IAS 20

22. Which of the following statements is/are correct?

i. Ocean fishing is an agricultural activity.
ii. Biological assets are never depreciated.
a) Only (I) is correct
b) Only (II) is correct
c) Both are correct
d) None is correct

23. Which of the following is NOT required to be measured at fair value less costs to sell even if fair value is
measurable?
a) Biological assets at initial recognition
b) Biological assets at the end of each reporting period
c) Agricultural produce at the point of harvest
d) Agricultural produce at the end of each reporting period

24. On 1 January 2021, a herd of 20 animals of 1-year old was recorded at Rs. 800,000. On 1 July 2021, 10 animals of
1.5 years old were purchased for Rs. 50,000 each. On 31 December 2021, the fair value less costs to sell of 1-year
and 2-year animals were Rs. 60,000 and Rs. 70,000 respectively. Calculate the amount that will be taken to profit
or loss for the year ended 31 December 2021.
a) Rs. 500,000
b) Rs. 1,000,000
c) Rs. 1,300,000
d) Rs. 800,000

25. Government grant related to a biological asset measured at its cost less any accumulated depreciation is
accounted for under:
a) IAS 20
b) IAS 16
c) IAS 41
d) IAS 41 and IAS 20

26. Which TWO of the following assets require the application of IAS 41?
a) Animals kept by zoo for earning ticket revenue
b) Parrots kept by a restaurant to attract more customers
c) Birds kept for sale by a pet shop
d) Hens kept by a poultry farm

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27. Beautiful Limited (BL) operates a large dairy farm. In 2022, BL received a government grant of Rs. 30 million on
the condition that BL adopts an organic cattle feed system and continues to do so for the next five years. If BL
discontinues the organic cattle feed system at any time during five years, BL will have to repay the entire amount
of the grant immediately. In 2024, the entire grant becomes repayable due to non-compliance by BL.
The amount taken to BL’s statement of profit or loss for the year ending 31 December 2024 upon repayment of
government grant would be:
a) Rs. 18 million
b) Rs. 12 million
c) Rs. 30 million
d) Nil

28. Alpha Livestock Limited (ALL) operates a goat-breeding farm. ALL sells goats to local meat businesses and goats-
milk to cosmetics companies. On 1 March 2024, ALL bought 40 goats for Rs. 51,000 each (i.e., at fair value of Rs.
50,000 and 2% commission) from a nearby market. The market broker also charges 3% commission from the
seller on each transaction.
The amount to be charged to profit or loss upon initial recognition would be:
a) Nil
b) Rs. 100,000
c) Rs. 40,000
d) Rs. 60,000

29. Which of the following statements is/are correct?

i. Bearer biological assets are those that are harvested as agricultural produce or sold as biological assets.
ii. Consumable biological assets include fruit trees from which fruit is harvested.
a) Only (I) is correct
b) Only (II) is correct
c) Both (I) and (II) are correct
d) None is correct

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ANSWERS
01. (b) The logs will be classed as inventory. The land will be classed as property, plant and equipment.
The development costs will be treated as an intangible asset.
02. (c) Land is not biological asset and IAS 38 applies to intangible assets relating to agricultural activity,
for example, license for a dairy business.
03. (c) All three are part of agriculture activity.
04. (b) The cheese will be a product which is the result of processing after harvest, so will be outside the
scope of IAS 41 Agriculture.
05. (d) Food processing is outside scope of agriculture activity.

AT A GLANCE
06. (d) Re-measure to Rs. 48 million, taking gain of Rs. 12 million to the profit or loss
07. (c) All three are required recognition criteria.
08. (a) Change in fair value of a herd of livestock
09. (b) Agriculture should be revalued to fair value less costs to sell, with the gain or loss being shown in
the statement of profit or loss.
10. (a) and (c) An unconditional grant is recognised in profit or loss when, and only when the government grant
becomes receivables
A conditional grant is recognised in profit or loss when, and only when the conditions attaching
to the grant are met
11. (b) IAS 20 applies in this case.

SPOTLIGHT
12. (b) The gain (or loss) at the time of harvesting arises on initial recognition of agricultural produce (as
opposed to initial recognition of biological assets).
13. (b) Unconditional grant is recognised when it becomes receivable under IAS 41
14. (d) Biological assets = 120 x 95% = Rs. 114 million
15. (c) Gain on biological assets = (120 x 95%) – 100 = Rs. 14 million
Agriculture produce at point of harvest = Rs. 8 million
Total Rs. 22 million
16. (b) Land Rs. 120 million (cost)

STICKY NOTES
Oil palms Rs. 30 million – Rs. 10 million depreciation = Rs. 20 million
Total Rs. 140 million
Oil palms are bearer plants and therefore, IAS 16 is applicable.
17. (d) (Rs. 13 million x 98%) – 10.5 = Rs. 2.24 million
18. (b)
Rs.
As at 1 January 50 animals x Rs. 32,000 1,600,000
Purchased 10 animal x Rs. 40,000 400,000
2,000,000
Gain (balancing figure) 580,000
As at 31 December 60 animals x Rs. 43,000 2,580,000

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19. (b) At the point of harvest

20. (c) Only when conditions are met
21. (b) IAS 20
22. (d) None is correct
23. (d) Agricultural produce at the end of each reporting period
24. (d) Working:
Rs.
1 Jan 2021 20 One-year old 800,000
1 Jul 2021 10 One-and-half-years old x 50,000 500,000
Gain in profit or loss (balancing) 800,000
31 Dec 2021 30 two-year old x 70,000 2,100,000

25. (a) IAS 20

26. (c) and (d) Birds kept for sale by a pet shop
Hens kept by a poultry farm
27. (d) Nil
28. (b) Cost of purchase Rs. 51,000 x 40 goats = Rs. 2,040,000
Initial recognition Rs. 50,000 x 97% x 40 goats = Rs. 1,940,000
Loss on initial recognition = Rs. 100,000
29. (d) None is correct

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STICKY NOTES

Key definitions
1. Agricultural activity is the management by an entity of the biological transformation
and harvest of biological assets for sale or for conversion into agricultural produce
or into additional biological assets.
2. Biological transformation comprises the processes of growth, degeneration,
production, and procreation that cause qualitative or quantitative changes in a
biological asset.
3. A biological asset is a living animal or plant.
4. Agricultural produce is the harvested produce of the entity’s biological assets.
5. Harvest is the detachment of produce from a biological asset or the cessation of a
biological asset’s life processes.
6. A bearer plant is a living plant that:
(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than one period; and
(c) has a remote likelihood of being sold as agricultural produce, except for
incidental scrap sales.

Recognition and measurement

Recognition An entity shall recognise a biological asset or agricultural produce when,
and only when:
(a) the entity controls the asset as a result of past events;
(b) it is probable that future economic benefits associated with the
asset will flow to the entity; and
(c) the fair value or cost of the asset can be measured reliably.
Measurement The following are required to be measured at fair value less costs to sell:
• Biological assets at initial recognition
• Biological assets at the end of each reporting period
• Agricultural produce at the point of harvest.
Gain and losses on measurement and re-measurement are recognised in
profit or loss.
Government For biological assets measured at fair value less costs to sell:
grant • Unconditional grant is recognised in PL.
• Conditional grant is recognised in PL when conditions are met.
For other biological asset
• IAS 20 applies for government grants

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IAS 41: Agriculture - Practice Questions Compiled by: Murtaza Quaid

IAS 41: AGRICULTURE - PRACTICE QUESTIONS

Question 1. [Example 2 of IAS 41 illustrative examples]

A herd of 10 animals 2 year old was held at 1 January 20X1. One animal aged 2.5 years was purchased on
1 July 20X1 for 108, and one animal was born on 1 July 20X1. No animals were sold or disposed of during
the period. Per-unit fair values less estimated point-of-sale costs were as follows: - $
▪ 2 year old animal at 1 January 20X1 100
▪ Newborn animal at 1 July 20X1 70
▪ 2.5 year old animal at 1 July 20X1 108
▪ Newborn animal at 31 December 20X1 72
▪ 0.5 year old animal at 31 December 20X1 80
▪ 2 year old animal at 31 December 20X1 105
▪ 2.5 year old animal at 31 December 20X1 111
▪ 3 year old animal at 31 December 20X1 120
Required: Determine the change in fair value less point of sale expenses between the portion to physical
changes and the portion attributable to price changes between the two dates mentioned above?

Question 2. [CFAP 1 Past paper, Win 2015, Q5(a), 6 marks]

(i) Briefly explain the term “biological asset” and state when a biological asset is recognised in the financial
statements under the International Financial Reporting Standards. (03)
(ii) The Dairy Company (TDC) owns three farms and has a stock of 3,200 cows. During the year ended 30
June 2015, 300 animals were born, all of which survived and were still owned by TDC at year-end. Of
those, 225 are infants whereas 75 are nine month old having market values of Rs. 26,000 and Rs. 53,000
per animal respectively. The incidental costs are 2% of the transaction price.
Required: In accordance with the requirements of the International Financial Reporting Standards, discuss
how the gain in respect of the new born cows should be recognized in TDC’s financial statements for the
year ended 30 June 2015. (Show all necessary computations) (03)

IQ School of Finance

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IAS 41: Agriculture - Practice Questions Compiled by: Murtaza Quaid

IAS 41: AGRICULTURE – ICAP PAST PAPER QUESTIONS

Question No. 1 of Spring 2020, 8 marks
Rocky Road Limited (RRL) had a stock of 2,000 cows on 1 January 2019.
On 1 May 2019, RRL purchased 750 cows at fair value of Rs. 56,000 per cow. Further Rs. 2 million were
incurred to transport the cows to the farm.
On 1 August 2019, RRL imported cattle feed of USD 150,000 against 70% payment. RRL also paid 5%
custom duty on import. The feed is specially designed to provide vital nutrients to cows that keep them
healthy and improve the quality of their produce. At year-end, 30% of the amount is payable whereas 40%
of the feed is unused.
Following average fair values per cow are available:

1-Jan-19 1-May-19 31-Dec-19 Average for the year

Rs. 50,000 Rs. 56,000 Rs. 61,000 Rs. 57,000

Auctioneers charge a 2% commission on fair value from seller. Further, there is a government levy of 3%
at the time of purchase and 4% at the time of sale on fair value.
Following exchange rates are available:

Date 1-Aug-19 31-Dec-19 Average - Aug-Dec Average for the year

1 USD Rs. 164 Rs. 152 Rs. 157 Rs. 159

Required: Prepare journal entries in RRL's books to record the above information for the year ended 31
December 2019.

Question No. 1 of Spring 2021, 8 marks

With reference to IAS 41, identify whether each of the following statements is TRUE or FALSE:
(i) Both fish farming and ocean fishing are agricultural activities.
(ii) IAS 41 does not apply on bearer plant; however, it applies on produce growing on bearer plant.
(iii) A biological asset should initially be measured at cost of purchase.
(iv) A biological asset should subsequently be measured at fair value.
(v) The gain or loss on subsequent re-measurement of a biological asset should be taken to profit and
loss account.
(vi) Commission to brokers as well as advertising cost would be classified as cost to sell when valuing
agricultural produce upon harvest.
(vii) All government grants related to biological assets are accounted for under IAS 41.
(viii) Once wool is extracted from the sheep, subsequent processing of wool into carpets is accounted
for under IAS 2.

IQ School of Finance

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IAS 41: Agriculture - Practice Questions Compiled by: Murtaza Quaid

Question No. 5 of Spring 2025, 8 marks

Gaultier Limited (GL) is engaged in agricultural activities, including cultivation of fruit orchards and the
growth of seasonal crops. GL follows IFRSs in preparing its financial statements. The following transactions
and events occurred during the year ended 31 December 2024:
(i) On 1 January 2024, GL planted 50,000 apple saplings, expecting them to mature and start
producing apples in five years. The initial cost of planting (including land preparation, labour,
irrigation, and fertilizers) amounted to Rs. 20 million. GL also incurred Rs. 5 million in up-keeping
costs, which were necessary for the healthy growth of the trees.
The apple trees are expected to have a productive life of 20 years and are not expected to have
any residual value at the end of their useful life. The fair value of the saplings as of 31 December
2024 was estimated at Rs. 28 million.
(ii) During 2024, GL planted wheat crops over 100 hectares of farmland. GL incurred Rs. 8 million in
planting and cultivation costs, including land preparation, seeds, fertilizers, irrigation and labour.
Harvesting was done in October 2024, yielding a total of 300,000 kg of wheat. At the point of
harvest, the fair value of wheat was Rs. 100 per kg.
By 31 December 2024, GL sold 72% of the wheat at an average price of Rs. 125 per kg. The fair
value of the remaining wheat as of 31 December 2024 was estimated at Rs. 120 per kg.
(iii) In November 2024, GL planted corn crops over 80 hectares of farmland. GL incurred Rs. 4 million
in planting and cultivation costs, including land preparation, seeds, fertilizers, irrigation and
labour.
The corn crop is expected to be ready for harvest in March 2025. As of 31 December 2024, the
fair value of the unharvested corn crop was estimated at Rs. 5.5 million.
(iv) On 1 July 2024, GL received a government grant of Rs. 10 million to promote farming in a particular
location. The grant requires GL to repay the entire grant if GL farms at the location for less than
three years. GL is expected to farm at the location for three years.
Required: Prepare the relevant extracts from GL’s statement of profit or loss and other comprehensive
income for the year ended 31 December 2024 and statement of financial position as of that date.

IQ School of Finance

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IAS 1 PRESENTATION
OF FINANCIAL STATEMENTS

AT A GLANCE
IN THIS CHAPTER:
IAS 1 provides guidance on overall requirements for financial
AT A GLANCE statements, including:
• General features of financial statements such as fair
SPOTLIGHT
presentation, compliance with IFRS, going concern, accrual
basis of accounting, materiality and aggregation, offsetting,
1. Introduction
frequency of reporting, comparative information and
consistency of presentation;
2. General features
• Structure of financial statements;
3. Statement of financial position
• Minimum requirements for their content; and
4. Statement of comprehensive • the current/non-current distinction.
income
According to IAS 1, a complete set of financial statements
5. Statement of changes in equity comprises:
• a statement of financial position as at the end of the period;
6. Notes to the financial statements
• a statement of profit or loss and other comprehensive
7. Comprehensive Examples income for the period;
• a statement of changes in equity for the period;
8. Objective Based Q&A
• a statement of cash flows for the period;
STICKY NOTES • notes, comprising significant accounting policies and other
explanatory information.
The standard lists the minimum content to be presented in each
of the above-mentioned financial statements and the content
that is either presented in the statement or in the notes, except
for the statement of cash flows (IAS 7 applies).
IAS 1 requires that the notes shall contain a statement of
compliance with IFRSs, summary of significant accounting
policies, disaggregation for the amounts presented in the
financial statements and other disclosures.

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1 INTRODUCTION
1.1 Key definitions [IAS 1: 7]
“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.
“International Financial Reporting Standards (IFRSs)” are Standards and Interpretations issued by the
International Accounting Standards Board (IASB). They comprise:
a) International Financial Reporting Standards;
b) International Accounting Standards;
c) IFRIC Interpretations; and
d) SIC Interpretations.
Information is “material” if omitting, misstating or obscuring it could reasonably be expected to influence
decisions that the primary users of general purpose financial statements make on the basis of those financial
statements, which provide financial information about a specific reporting entity.

1.2 Purpose of financial statements [IAS 1: 9]

Financial statements are a structured representation of the financial position and financial performance of an
entity.
The objective of financial statements is to provide information about the financial position, financial performance
and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial
statements also show the results of the management’s stewardship of the resources entrusted to it. To meet this
objective, financial statements provide information about an entity’s:
a) assets;
b) liabilities;
c) equity;
d) income and expenses, including gains and losses;
e) contributions by and distributions to owners in their capacity as owners; and
f) cash flows.
This information, along with other information in the notes, assists users of financial statements in predicting
the entity’s future cash flows and, in particular, their timing and certainty.

1.3 Complete set of financial statements [IAS 1: 10 & 11]

A complete set of financial statements comprises:
a) a statement of financial position as at the end of the period;
b) a statement of profit or loss and other comprehensive income for the period;
c) a statement of changes in equity for the period;
d) a statement of cash flows for the period;
e) notes, comprising significant accounting policies and other explanatory information;
An entity may use titles for the statements other than those used in IAS 1. For example, an entity may use the
title ‘statement of comprehensive income’ instead of ‘statement of profit or loss and other comprehensive
income’.
An entity shall present with equal prominence all of the financial statements in a complete set of financial
statements.

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1.4 Comparative information [IAS 1: 10, 38, 38A & 40A]

Comparative information in respect of the preceding period is also required. An entity shall include comparative
information for narrative and descriptive information if it is relevant to understanding the current period’s
financial statements.
An entity shall present, as a minimum, two statements of financial position, two statements of profit or loss and
other comprehensive income, two separate statements of profit or loss (if presented), two statements of cash
flows and two statements of changes in equity, and related notes.
An additional (third) statement of financial position as at the beginning of the preceding period is also required
when an entity:
a) applies an accounting policy retrospectively (IAS 8); or
b) makes a retrospective restatement of items in its financial statements (IAS 8); or
c) reclassifies items in its financial statements (IAS 1).

1.5 Identification of the financial statements [IAS 1: 49 to 51]

An entity shall clearly identify the financial statements and distinguish them from other information in the same
published document.
IFRSs apply only to financial statements, and not necessarily to other information presented in an annual report,
a regulatory filing, or another document. Therefore, it is important that users can distinguish information that is
prepared using IFRSs from other information that may be useful to users but is not the subject of those
requirements.
An entity shall clearly identify each financial statement and the notes. In addition, an entity shall display the
following information prominently, and repeat it when necessary for the information presented to be
understandable:
a) the name of the reporting entity or other means of identification, and any change in that information from
the end of the preceding reporting period;
b) whether the financial statements are of an individual entity or a group of entities;
c) the date of the end of the reporting period or the period covered by the set of financial statements or notes;
d) the presentation currency, as defined in IAS 21; and
e) the level of rounding used in presenting amounts in the financial statements.

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2 GENERAL FEATURES
2.1 Fair presentation [IAS 1: 15 & 18]
Financial statements must present fairly the financial position, financial performance and cash flows of an entity.
Fair presentation requires the faithful representation of the effects of transactions, other events and conditions
in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in
the Conceptual Framework.
The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements
that achieve a fair presentation.
An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or
by notes or explanatory material.

2.2 Compliance with IFRSs [IAS 1: 16]

An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such
compliance in the notes. An entity shall not describe financial statements as complying with IFRSs unless they
comply with all the requirements of IFRSs.

2.3 Departure from IFRSs [IAS 1: 19, 20 & 23]

In the extremely rare circumstances, management might conclude that compliance with a requirement in an IFRS
would be so misleading that it would conflict with the objective of financial statements set out in the Conceptual
Framework.
The entity shall depart from that requirement if the relevant regulatory framework requires, or otherwise does
not prohibit, such a departure and the entity shall disclose:
a) that management has concluded that the financial statements present fairly the entity’s financial position,
financial performance and cash flows;
b) that it has complied with applicable IFRSs, except that it has departed from a particular requirement to
achieve a fair presentation;
c) the title of the IFRS from which the entity has departed, the nature of the departure, including the treatment
that the IFRS would require, 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 Conceptual Framework, and the
treatment adopted; and
d) for each period presented, the financial effect 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 the requirement, the entity shall, to the maximum
extent possible, reduce the perceived misleading aspects of compliance by disclosing:
a) the title of the IFRS in question, the nature of the requirement, and 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 set out in the Conceptual Framework; and
b) 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.

2.4 Going concern [ IAS 1: 25 & 26]

When preparing financial statements, management shall make an assessment of an entity’s ability to continue as
a going concern. An entity shall prepare financial statements 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.

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In assessing whether the going concern assumption is appropriate, management takes into account all available
information about the future, which is at least, but is not limited to, twelve months from the end of the reporting
period.

Management’s assessment Impact

Entity is going concern Prepare the financial statements on going concern basis.
Entity is going concern but there is Prepare the financial statements on going concern basis.
significant doubt upon the entity’s Disclose the uncertainties causing such significant doubt.
ability to continue as a going concern.
Entity is not a going concern. Prepare the financial statements on alternative basis (e.g. liquidation
accounting).
Disclose:
The fact that entity is not a going concern.
The basis on which financial statements have been prepared.
The reason why the entity is not regarded as going concern.

2.5 Other issues [IAS 1: 27, 29, 30 & 32]

Accrual basis An entity shall prepare its financial statements, except for cash flow information,
using the accrual basis of accounting.
Separate An entity shall present separately each material class of similar items.
presentation due to An entity shall present separately items of a dissimilar nature or function unless they
materiality are immaterial.
Aggregation If a line item is not individually material, it is aggregated with other items either in
those statements or in the notes.
An item that is not sufficiently material to warrant separate presentation in those
statements may warrant separate presentation in the notes.
Offsetting An entity shall not offset assets and liabilities or income and expenses, unless
required or permitted by an IFRS.

The following table summarises examples on offsetting:

Offsetting of: IFRSs Example

Income and Required IFRS 15 requires revenue (income) to be reflected net of the discount or
expenses rebate (expense).
Permitted Gain or loss on disposal of non-current assets may be presented on net
basis reflecting the substance of transaction.
Not permitted Revenue from sale of inventory and related cost of sales must be
presented separately.
Assets and Permitted Grant related to assets may be presented either separately or may be
liabilities deducted from carrying amount of the related asset.
Not permitted Income tax payable to FBR and sales tax refundable from FBR cannot be
offset as tax legislation does not allow payment of these on net basis and
presentation on net basis would not reflect the substance of the
transactions.

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2.6 Frequency of reporting [IAS 1: 36 & 37]

An entity shall present a complete set of financial statements (including comparative information) at least
annually. When an entity changes the end of its reporting period and presents financial statements for a period
longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial
statements:
a) the reason for using a longer or shorter period, and
b) the fact that amounts presented in the financial statements are not entirely comparable.
Normally, an entity consistently prepares financial statements for a one‑year period. However, for practical
reasons, some entities prefer to report, for example, for a 52‑week period and such practice is not prohibited
under IAS 1.

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3 STATEMENT OF FINANCIAL POSITION

3.1 Presented in the statement [IAS 1: 54 & 55]
The statement of financial position shall include line items that present the following amounts:
a) property, plant and equipment (IAS 16);
b) investment property (IAS 40);
c) intangible assets (IAS 38);
d) financial assets excluding amounts shown under (e), (h) and (i) (IFRS 9);
e) investments accounted for using the equity method (IAS 28);
f) biological assets (IAS 41);
g) inventories (IAS 2);
h) trade and other receivables (IFRS 15/IFRS 9);
i) cash and cash equivalents (IFRS 9);
j) trade and other payables (IFRS 15/IFRS 9);
k) provisions (IAS 37);
l) financial liabilities excluding amounts shown under (j) and (k) (IFRS 9);
m) liabilities and assets for current tax (IAS 12);
n) deferred tax liabilities and deferred tax assets (IAS 12);
o) issued capital and reserves attributable to owners.
Note: Some of above items will be covered at a later stage of your studies.
An entity shall present additional line items (including by disaggregating the line items listed above), headings
and subtotals in the statement of financial position when such presentation is relevant to an understanding of
the entity’s financial position.

3.2 Presented either in the statement or in the notes [IAS 1: 77 & 78]
An entity shall disclose, either in the statement of financial position or in the notes, further subclassifications of
the line items presented, classified in a manner appropriate to the entity’s operations.
The detail provided in subclassifications depends on the requirements of IFRSs and on the size, nature and
function of the amounts involved. The disclosures vary for each item, for example:
a) items of property, plant and equipment are disaggregated into classes in accordance with IAS 16;
b) receivables are disaggregated into amounts receivable from trade customers, receivables from related
parties, prepayments and other amounts;
c) inventories are disaggregated, in accordance with IAS 2 Inventories, into classifications such as merchandise,
production supplies, materials, work in progress and finished goods;
d) provisions are disaggregated into provisions for employee benefits and other items; and
e) equity capital and reserves are disaggregated into various classes, such as paid‑in capital, share premium
and reserves.

3.3 Current/non‑current distinction [IAS 1: 60 & 61]

An entity shall present current and non‑current assets, and current and non‑current liabilities, as separate
classifications in its statement of financial position except when a presentation based on liquidity provides
information that is reliable and more relevant. When that exception applies, an entity shall present all assets and
liabilities in order of liquidity.

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Whichever method of presentation is adopted, an entity shall disclose the amount expected to be recovered or
settled after more than twelve months for each asset and liability line item that combines amounts expected to
be recovered or settled:
a) no more than twelve months after the reporting period, and
b) more than twelve months after the reporting period.

3.3.1 Assets [IAS 1: 56 & 66]

An entity shall classify an asset as current when:
a) it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
b) it holds the asset primarily for the purpose of trading;
c) it expects to realise the asset within twelve months after the reporting period; or
d) the asset is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the reporting period.
An entity shall classify all other assets as non‑current.
 Example 01:
X Limited uses small amounts of platinum in its production process. It has the following two assets at its financial
year ended 31 December 20X4.
Inventory: this is slow-moving and is expected to be sold during 20X6;
Fixed deposit: this matures on 30 June 20X6.
Required:
Explain whether these assets are current or non-current at year-end.
 ANSWER:
Both assets are expected to be realised in 20X6 which is well after the 12 months period from reporting date of
31 December 20X4:
a) However, the inventory would be classified as current because inventory forms part of the operating cycle
and thus it meets one of the criteria to be classified as current.
b) The fixed deposit is cash but since it only matures in 20X6, it is restricted from being used within the 12
month after the reporting date. It is not expected to be realised within 12 months of reporting date, it is not
held mainly for the purpose of being traded and it is not held within the normal operating cycle. Thus the
fixed deposit fails to meet any of the four criteria to be classified as current and must thus be classified as
non-current.
An entity shall not classify deferred tax assets (liabilities) as current assets (liabilities).

3.3.2 Liabilities [IAS 1: 69, 72 & 76]

An entity shall classify a liability as current when:
a) it expects to settle the liability in its normal operating cycle;
b) it holds the liability primarily for the purpose of trading;
c) the liability is due to be settled within twelve months after the reporting period; or
d) it does not have an unconditional right to defer settlement of the liability for at least twelve months after the
reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by
the issue of equity instruments do not affect its classification.
An entity shall classify all other liabilities as non‑current.

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 Example 02:
A company has a financial year end of 31 December. On 31 October Year 1, it took out a bank loan of Rs. 50
million. The loan principal is repayable as follows:
• Rs. 20 million on 31 October Year 3
• Rs. 30 million on 31 October Year 4
Required:
Briefly state the classification of above loan as current and non-current (with amounts) from 31 December Year
1 to 3.
 ANSWER:
As at 31 December Year 1
The full bank loan of Rs. 50 million will be a non-current liability
As at 31 December Year 2
A current liability of Rs. 20 million repayable on 31 October Year 3 and a non-current liability of Rs. 30 million
repayable on 31 October Year 4.
As at 31 December Year 3
Current liability of Rs. 30 million
An entity classifies its financial liabilities as current when they are due to be settled within twelve months after
the reporting period, even if:
a) the original term was for a period longer than twelve months, and
b) an agreement to refinance, or to reschedule payments, on a long‑term basis is completed after the reporting
period and before the financial statements are authorised for issue.
In respect of loans classified as current liabilities, the following events after the year-end would not affect the
classification of liabilities:
a) refinancing on a long‑term basis;
b) rectification of a breach of a long‑term loan arrangement; and
c) the granting by the lender of a period of grace to rectify a breach of a long‑term loan arrangement ending at
least twelve months after the reporting period.

3.4 Share capital [IAS 1: 79]

An entity shall disclose the following, either in the statement of financial position or the statement of changes in
equity, or in the notes:
a) for each class of share capital:
i. the number of shares authorised;
ii. the number of shares issued and fully paid, and issued but not fully paid;
iii. par value per share, or that the shares have no par value;
iv. a reconciliation of the number of shares outstanding at the beginning and at the end of the period;
v. the rights, preferences and restrictions attaching to that class including restrictions on the distribution
of dividends and the repayment of capital;
vi. shares in the entity held by the entity or by its subsidiaries or associates; and
vii. shares reserved for issue under options and contracts for the sale of shares, including terms and
amounts; and
b) a description of the nature and purpose of each reserve within equity.

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3.5 Format
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 illustration below is based
on that illustrative statement of financial position.

Statement of financial position of ABCD Entity (an individual entity)

As at 31 December 20XX
Non-current assets Rs. million
Property, plant and equipment 205
Investment property 10
Intangible assets 7
Investments / financial assets 6
228
Current assets
Inventories 18
Trade and other receivables 16
Other current assets 3
Cash and cash equivalents 4
41
269
Equity
Share capital 50
Other components of equity 32
Retained earnings 61
143
Non-current liabilities
Long term borrowings / financial liabilities 30
Deferred tax liability 8
Long term provisions 27
65
Current liabilities
Trade and other payables 13
Short term borrowings / bank overdraft 20
Current portion of long term borrowings 10
Current tax payable 11
Short term provisions 7
61
269

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 Example 03:
The following information has been extracted from the draft financial statements of Shaheen Limited (SL) for the
year ended 31 December 2014:

Statement of Financial Position as at 31 December 2014

Equity and Liabilities Rs. million Assets Rs. million

Share capital (Rs. 100 each) 1,200 Property, plant and equipment 1,876
Retained earnings 618 Patents 28
Trade payables 645 Trade receivables (net) 630
Accruals 395 Inventory 503
Tax payable 215 Prepayments & other receivables 23
Cash and bank balances 13
3,073 3,073
Additional information:
i. Closing inventory includes damaged goods costing Rs. 3 million which can be sold for Rs. 2.5 million after
repair and repacking at a cost of Rs. 0.4 million.
ii. In December 2014, SL settled an old outstanding liability of Rs. 6 million by paying Rs. 4.5 million. The
payment was debited to trade payables. The said liability had been written back prior to 2014.
iii. Fair value and value in use of patents as at 31 December 2014 amounted to Rs. 25 million and Rs. 27 million
respectively.
iv. Due to increasing bad debts, the management is of the view that allowance for doubtful debts need to be
increased from 3% to 5% of trade receivables.
Required:
Prepare a Statement of Financial Position as at 31 December 2014 in accordance with the International Financial
Reporting.
 ANSWER:
Shaheen Limited
Statement of financial Position
As on 31 December 2014
Rs. m
Non-current assets
Property, plant and equipment 1,876.00
Patents [28 - 1] 27.00
1,903.00
Current assets
Stock-in-trade [503 - 0.90] 502.10
Trade receivables [630 - 12.99] 617.01
Prepayments & other receivables 23.00
Cash and bank balances 13.00
1,155.11
3,058.11

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Rs. m
Share capital and reserves
Share Capital 1,200.00
Retained earnings [618 – 19.39 W1] 598.61
1,798.61
Current liabilities
Trade and other payables [645 + 395 + 4.5] 1,044.50
Current tax payable 215.00
1,259.50
3,058.11

W1: Impacts of Adjustments on profit / retained earnings Rs. m

Write down to NRV [3 - (2.5 - 0.4)] (0.90)
Payment of written back liability (4.50)
Impairment of patents [28 - 27] (1.00)
Increase in doubtful debts [630 / 97% x 2%] (12.99)
(19.39)

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4 STATEMENT OF COMPREHENSIVE INCOME

4.1 Definitions [IAS 1: 7]
“Profit or loss” is the total of income less expenses, excluding the components of other comprehensive income.
“Other comprehensive income” comprises items of income and expense (including reclassification
adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs.
“Total comprehensive income” is the change in equity during a period resulting from transactions and other
events, other than those changes resulting from transactions with owners in their capacity as owners.

4.2 Single statement versus two statements [IAS 1: 10A, 88 & 91]
An entity may present a single statement of profit or loss and other comprehensive income, with profit or loss
and other comprehensive income presented in two sections. The sections shall be presented together, with the
profit or loss section presented first followed directly by the other comprehensive income section.
An entity may present the profit or loss section in a separate statement of profit or loss. If so, the separate
statement of profit or loss shall immediately precede the statement presenting comprehensive income, which
shall begin with profit or loss.
An entity shall recognise all items of income and expense in a period in profit or loss unless an IFRS requires or
permits otherwise.

4.3 Presentation in the statement [IAS 1: 81A]

The statement of profit or loss and other comprehensive income (statement of comprehensive income) shall
present, in addition to the profit or loss and other comprehensive income sections:
a) profit or loss;
b) total other comprehensive income;
c) comprehensive income for the period, being the total of profit or loss and other comprehensive income.
If an entity presents a separate statement of profit or loss it does not present the profit or loss section in the
statement presenting comprehensive income.

4.4 Presentation either in the statement or in the notes [IAS 1: 82 & 85]
In addition to items required by other IFRSs, the profit or loss section or the statement of profit or loss shall
include line items that present the following amounts for the period:
a) revenue, presenting separately interest revenue and other revenue:
b) finance costs;
c) tax expense;
An entity shall present additional line items (including by disaggregating the line items listed above), headings
and subtotals in the statement(s) presenting profit or loss and other comprehensive income when such
presentation is relevant to an understanding of the entity’s financial performance.

4.5 Analysis of expenses [IAS 1: 99 to 104]

Expenses should be analysed. Either of two methods of analysis may be used:
• according to the function of the expense; or
• according to the nature of expenses.
IAS 1 states that entities should choose the method that provides the more relevant or reliable information.
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.

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4.5.1 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’.

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)
Profit before tax 910
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).

4.5.2 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.
Statement of comprehensive income – Expenses analysed by nature Rs. m
Revenue 7,200
Other income 300
7,500
Changes in inventories of finished goods and work-in-progress
(reduction = expense, increase = negative expense) 90
Raw materials and consumables used 1,200
Staff costs (employee benefits expense) 2,000
Depreciation and amortisation expense 1,000
Other expenses 2,300
6,590
Profit before tax 910

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4.6 Material items [IAS 1: 97 & 98]

When items of income or expense are material, an entity shall disclose their nature and amount separately.
Circumstances that would give rise to the separate disclosure of items of income and expense include:
a) write‑downs of inventories to net realisable value or of property, plant and equipment to recoverable
amount, as well as reversals of such write‑downs;
b) restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring;
c) disposals of items of property, plant and equipment;
d) disposals of investments;
e) discontinued operations;
f) litigation settlements; and
g) other reversals of provisions.

4.7 Format
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).

XYZ Entity: Statement of comprehensive income (single statement)

For the year ended 31 December 20XX Rs. million

Revenue 678

Cost of sales (250)

Gross profit 428

Other income 12

Distribution costs (66)

Administrative expenses (61)

Other expenses (18)

Finance costs (24)

Profit before tax 271

Taxation (50)

Profit for the year 221

Other comprehensive income

Gains on revaluation (PPE & intangible assets) 24

Gains on valuation of investments (at fair value through OCI) 22

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

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 267

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 Example 04:

The trial balance of Larry Limited as 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.

i. Inventories on 31 December 2015 amounted to Rs. 127 million.
ii. Current tax of Rs. 75 million is to be accrued.
iii. The loan is repayable by equal annual instalments over three years.
Required:
Prepare a 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.

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 ANSWER:
Larry Limited
Statement of profit or loss for the year ended 31 December 2015

Rs. in million
Revenue 3,304
Cost of sales (2,542 + 118 – 127 closing inventory) (2,533)
Gross profit 771
Other income 20
Distribution costs (175)
Administrative expenses (342)
Profit before tax 274
Income tax expense (75)
Profit for the period 199

Larry Limited
Statement of financial position
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 and liabilities
Equity
Share capital 400
Retained earnings (1,562 + 199) 1,761
2,161
Non-current liabilities
Long-term borrowings (18 – 6 current portion) 12
Current liabilities
Trade and other payables 86
Current portion of long-term borrowing (18 / 3 years) 6
Current tax payable 75
167
Total equity and liabilities 2,340

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 Example 05:
Barry Limited has prepared the following draft financial statements for your review:

Statement of profit or loss for year to 31st August 2015

Rs. 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)

Distribution costs (900)

Depreciation (4,250)

Interest expense (350)

6,700

Statement of financial position as at 31st August 2015

Rs. 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

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Rs. 000
Equity and liabilities
Equity shares of Rs. 1 each 21,000
Share premium 2,000
Revaluation surplus 5,000
Accumulated profit 14,000
42,000
Current liabilities 5,300
Non-current liabilities
8% Debentures 2019 5,200
Total equity and liabilities 52,500

Additional information
i. 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 -

ii. 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 for the buildings have increased by Rs.
300,000. Barry Limited adopts a policy of transferring the revaluation surplus included in equity to retained
earnings as it is realised.
iii. Staff costs comprise 70% factory staff, 20% general office staff and 10% goods delivery staff
iv. An analysis of depreciation charge shows the following:

Rs. in ‘000
Buildings (50% production, 50% administration) 1,000
Plant and machinery 2,550
Fixtures and fittings (30% production, 70% administration) 700

Required:
Prepare the following information in a form suitable for publication for Barry Limited’s financial statements for
the year ended 31st August 2015:
• Statement of comprehensive income
• Statement of financial position

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 ANSWER:
Barry Limited
Statement of comprehensive income
For the year ended 31st August 2015
Rs. in ‘000
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 -
Profit after tax 6,700
Other comprehensive income
Gain on revaluation 5,000
Total comprehensive income 11,700
Barry Limited
Statement of financial position
As at 31st August 2015
ASSETS Rs. in 000
Non-current assets
Property, plant and equipment (W2) 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
Capital and reserves
Equity shares 21,000
Share premium 2,000
Retained earnings 14,000 + 300 14,300
Revaluation surplus 5,000 – 300 4,700
42,000
Non-current liabilities
Borrowings 5,200
5,200
Current liabilities
Trade and other payables 5,300
5,300
52,500

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W1: Allocation of expenses Cost of sales Admin Distribution

Rs. 000

Raw materials consumed 9,500

Manufacturing overheads 5,000

Increase in inventories (1,400)

Staff costs (70%/20%/10%) 3,290 940 470

Distribution costs 900

Depreciation

Building (50%/50%) 500 500

Plant and machinery 2,550

Fixtures and fittings (30%/70%) 210 490

19,650 1,930 1,370

W2: Property, plant and equipment including CWIP

Plant & Fixtures &

Land Buildings CWIP Total
machinery fittings

Cost/ Valuation Rs. 000

At 1 Sept 2014 10,000 9,000 20,100 10,000 400 49,500

Additions - - - - 50 50

Transfer from CWIP - - 450 - (450) -

Revaluation-cancel - (3,000) - - - (3,000)

Revaluation (gain) 1,000 4,000 5,000

At 31 Aug 2015 (A) 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 (B) - 1,000 6,550 4,400 - 11,950

Net book value

At 31 Aug 2015 (A-B) 11,000 9,000 14,000 5,600 - 39,600

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 Example 06:
The following trial balance has been extracted from the books of accounts of Oscar Limited as at 31 March 2015.

Rs. in ‘000

Dr Cr

Administrative expenses 210

Share capital 600

Receivables 470

Bank overdraft 80

Loan 180

Distribution costs 420

Non-current investments 560

Investment income 100

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

Additional information
i. Inventory at 31 March 2015 was valued at Rs. 150,000.
ii. The income tax charge based on the profits on ordinary activities is estimated to be Rs. 74,000.
iii. The loan is of short term nature and interest of Rs. 16,000 needs to be accrued which shall be paid along with
repayment of loan.
iv. There were no purchases or disposals of fixed assets during the year.
Required:
Prepare Oscar Limited’s 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.

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 ANSWER:
Oscar Limited
Statement of profit or loss for the year ended 31 March 2015

Rs. in ‘000
Sales 2,010
Cost of sales (140 + 960 – 150) (950)
Gross profit 1,060
Distribution costs (420)
Administrative expenses (210)
Operating profit 430
Finance cost (16)
Investment income 100
Profit before tax 514
Income tax (74)
Profit after tax 440

Oscar Limited
Statement of financial position as at 31 March 2015

Assets
Non-current assets
Property, plant and equipment 750 – 220 530
Investments 560
1,090
Current assets
Inventory 150
Receivables 470
620
1,710
Equity and liabilities
Share capital 600
Retained earnings 180 + 440 profit – 120 dividend 500
1,100
Current liabilities
Trade payables 260
Current tax payable 74
Bank overdraft 80
Short term loan 180 + 16 196
610
1,710

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 Example 07:
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 42,000

Loan interest paid 1,500

Revenue 338,300

Investment income 2,000

Leasehold property at cost 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 94,000

Share capital 280,000

Share premium 20,000

Retained earnings at 1 October 2014 19,300

6% Loan notes (issued on 1 Oct 2014) 50,000

Inventory at 30 September 2015 23,700

Trade receivables 76,400

Trade payables 34,100

Bank 12,100

830,700 830,700

The following notes are relevant

i. Other plant and equipment is depreciated at 20% per year by the reducing balance method. The leasehold
property has a 25-year life and is amortised at a straight-line rate. All depreciation of property, plant and
equipment should be charged to cost of sales.
ii. The accrual for income tax for the year ended 30 September 2015 has been estimated at Rs. 18 million.
Required:
Prepare a statement of profit or loss for Clifton Pharma Limited for the year to 30 September 2015 and a
statement of financial position (balance sheet) for Clifton Pharma Limited as at 30 September 2015.

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 ANSWER:
CLIFTON PHARMA LIMITED
Statement of profit or loss
For the year ended 30 September 2015
Rs. 000
Sales 338,300
Cost of sales W1 (174,000)
Gross profit 164,300
Other income (investment income) 2,000
Operating expenses (42,000)
Finance cost 50,000 x 6% (3,000)
Profit before tax 121,300
Taxation (18,000)
Profit after tax 103,300
CLIFTON PHARMA LIMITED
Statement of Financial Position
As at 30 September 2015
Assets Rs. 000
Non-current assets
PPE [250,000 – 40,000 – 10,000 W1) + (197,000 – 47,000 - 30,000 W1) 320,000
Investments 94,000
414,000
Current assets
Inventory 23,700
Receivables 76,400
Bank 12,100
112,200
526,200
Equity & Liabilities
Capital & Reserves
Share Capital 280,000
Share premium 20,000
Retained Earnings (19,300 + 103,300) 122,600
422,600
Non-Current liabilities
6% loan notes 50,000
50,000
Current liabilities
Trade payables 34,100
Interest payable 50,000 x 6% = 3,000 – 1,500 1,500
Income tax payable 18,000
53,600
526,200

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W1: Cost of sales Rs. 000

As given in the trial balance 134,000
Depreciation of plant and equipment: 20%  (197,000 – 47,000) 30,000
Amortisation of leasehold property: 250,000/25 years 10,000
174,000

 Example 08:
The following trial balance relates to Sarhad Sugar Limited at 30 September 2015:

Dr Cr
Rs. 000
Leasehold property – at valuation 1 Oct 2014 (note (i)) 50,000
Plant and equipment – at cost (note (i)) 76,600
Plant and equipment – accumulated depreciation at 1 Oct 2014 24,600
Capitalised development expenditure – at 1 Oct 2014 (note (ii)) 20,000
Development – accumulated amortisation at 1 Oct 2014 6,000
Closing inventory at 30 September 2015 20,000
Trade receivables 43,100
Bank 1,300
Trade payables 29,300
Revenue (note (i)) 300,000
Cost of sales 204,000
Distribution costs 14,500
Administrative expenses 21,900
Interest on bank borrowings 1,000
Equity dividend paid 6,000
Research and development costs (note (ii)) 8,600
Share capital 70,000
Retained earnings at 1 October 2014 24,500
Revaluation surplus (Leasehold property) 10,000
465,700 465,700

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 company’s policy is to revalue
its property at each year end and at 30 September 2015 it was valued at Rs. 43 million.
On 1 October 2014 an item of plant was disposed of for Rs. 2.5 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 (and any losses) of all non-current assets is charged to cost of sales.

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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. 1.4 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. The directors have estimated the accrual for income tax for the year ended 30 September 2015 at Rs. 11.6
million.
Required:
Prepare the statement of profit or loss for the year ended 30 September 2015 and the statement of financial
position as at 30 September 2015. (notes to the financial statements are not required).
 ANSWER:
SARHAD SUGAR LIMITED
Statement of profit or loss
For the year ended 30 September 2015
Rs. 000
Sales 300,000 – 2,500 disposal correction 297,500
Cost of sales W1 (225,400)
Gross profit 72,100
Distribution cost (14,500)
Admin expenses (21,900)
Finance cost (1,000)
Profit before tax 34,700
Taxation (11,600)
Profit after tax 23,100
SARHAD SUGAR LIMITED
Statement of Financial Position
As at 30 September 2015
Assets Rs. 000
Non-current assets
Property, plant and equipment W2 81,400
Intangible Asset W3 14,800
96,200
Current assets
Inventory 20,000
Receivables 43,100
63,100
159,300

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Rs. 000
Equity & Liabilities
Capital & Reserves
Share Capital 70,000
Revaluation reserve 10,000 – 4,500 W2 5,500
Retained Earnings (24,500 + profit 23,100 – dividend 6,000 ) 41,600
117,100
Current liabilities
Trade payables 29,300
Bank overdraft 1,300
Income tax payable 11,600
42,200
159,300

W1: Cost of sales Rs. 000

Per trial balance 204,000
Depreciation leasehold property 50,000 / 20 years 2,500
Depreciation plant and equipment [(76,600 – 8,000) – (24,600 – 4,000)] x 20% 9,600
Research & Development expensed 1,400 + 800 x 3 months (Note 2) 3,800
Amortisation of development costs 20,000 x 20% 4,000
Loss on disposal of plant (8,000 – 4,000) – 2,500 1,500
225,400

W2: Property plant and equipment Rs. 000

Leasehold property 50,000
Depreciation 50,000 / 20 years (2,500)
Revaluation loss (4,500)
43,000
Plant and equipment 76,600 – 24,600 52,000
Disposal 8,000 – 4,000 (4,000)
Depreciation (52,000 – 4,000) x 20% (9,600)
38,400
81,400

W3: Intangible asset (development) Rs. 000

As per trial balance 20,000 – 6,000 14,000
Amortisation during the year 20,000 x 20% (4,000)
Further capitalisation 800 x 6 months (Note 2) 4,800
14,800

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Tutorial 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.4.8 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.1.4 million plus three months’ development costs of Rs. 2.4 million (800 x 3 months) (i.e.
those incurred before 1 April 2015) are treated as an expense.
 Example 09:
Following is the summarised trial balance of Moonlight Pakistan Limited (MPL), a listed company, for the year
ended December 31, 2017:

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, 2017 758 -
Cash and bank 354 -
Cost of sales 1,784 -
Selling expenses 220 -
Administrative expenses 250 -
Financial charges 210 -
Accumulated depreciation: Building (January 1, 2017) - 400
Accumulated depreciation: Plants (January 1, 2017) - 670
Ordinary shares of Rs. 10 each fully paid - 1,200
Retained earnings as at January 1, 2017 - 510
12% Long term loan - 1,600
Salaries payable - 8
Trade payables - 566
Right subscription received - 420
Revenue - 3,608
8,982 8,982

Additional Information
i. The land and buildings were acquired on January 1, 2013. The cost of land was Rs. 600 million. On January
1, 2017 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. MPL does not transfer effect of incremental depreciation within the equity on annual basis.
ii. Plant is depreciated at 20% per annum using the reducing balance method.
iii. On March 31, 2017 MPL made a bonus issue of one share for every six held. The issue has not been recorded
in the books of account yet. Right shares were issued on September 1, 2017 at Rs. 12 per share. The proceeds
of right issue were credited to ‘right subscription received account’.

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iv. 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, 2015.
v. Some of the salary sheets were omitted from calculation and now salaries payable is to be increased from
Rs. 8 million to Rs. 23 million. Salaries expense is allocated to production, selling and administration
expenses in the ratio of 60%: 20% : 20%.
vi. The tax charge for the current year after making all related adjustments is estimated at Rs. 65 million.
Required:
In accordance with the IFRS, prepare the statement of Financial Position as of December 31, 2017 and statement
of profit or loss for the year then ended.
 ANSWER:
Moonlight Pakistan Limited
Statement of Financial Position
As at December 31, 2017

Non-current assets Rs. in million

Property, plant and equipment W2 3,472
Current assets
Stocks in trade 758
Trade receivables 702
Cash and bank 354
1,814
5,286
EQUITY
Share Capital 1,200 + 1200 x 1/6 + 420 x 10/12 1,750
Share premium (420 x 2/12) 70
Retained earnings 510 – 200 bonus issue + 566 profit 876
Revaluation surplus 240
2,936
LIABILITIES
Non-current liabilities
Long term loan 1,600
1,600
Current liabilities
Trade and other payables (566 + 8 + 96 + 15) 685
Income tax payable 65
750
5,286

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Moonlight Pakistan Limited

Statement of profit or loss

For the year ended December 31, 2017 Rs. million

Sales 3,608
Cost of sales W1 (2,149)
Gross profit 1,459
Selling expenses W1 (252)
Administrative expenses W1 (270)
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

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 W2 287 - -
Additional salaries (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, 2017 600 2,000 2,104 4,704
Accumulated depreciation - (400) (670) (1,070)
600 1,600 1,434 3,634
Revaluation (1,840 - (2,000 - 400 )) - 240 - 240
Depreciation (1,840/16); 1,434 x 20% - (115) (287) (402)
600 1,725 1,147 3,472

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5 STATEMENT OF CHANGES IN EQUITY

5.1 Presented in the statement [IAS 1: 106]
The statement of changes in equity includes the following information:
a) total comprehensive income for the period;
b) for each component of equity, the effects of retrospective application or retrospective restatement
recognised in accordance with IAS 8; and
c) for each component of equity, a reconciliation between the carrying amount at the beginning and the end of
the period, separately (as a minimum) disclosing changes resulting from:
i. profit or loss;
ii. other comprehensive income; and
iii. transactions with owners in their capacity as owners, showing separately contributions by and
distributions to owners.

5.2 Presented either in the statement or in the notes [IAS 1: 106A & 107]
For each component of equity an entity shall present, either in the statement of changes in equity or in the notes,
an analysis of other comprehensive income by item.
An entity shall present, either in the statement of changes in equity or in the notes, the amount of dividends
recognised as distributions to owners during the period, and the related amount of dividends per share.

5.3 Format
An illustrative format is given below:
PQR Entity: Statement of changes in equity
For the year ended 31 December 20X9

Share Share Revaluation Retained

capital premium surplus earnings Total

Rs. m Rs. m Rs. m Rs. m Rs. m

Balance at 1 Jan 20X9 (reported) 200 70 80 510 860

Change in accounting policy - - - (60) (60)

Balance at 1 Jan 20X9 (restated) 200 70 80 450 800

Issue of share capital 80 100 180

Dividend payments (90) (90)

Total comprehensive income 12 155 167

Transfer (incremental depreciation) (8) 8 -

Balance at 31 December 20X9 280 170 84 523 1,057

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 Example 10:
The trial balance of Mingora Imports Limited at 31 December 2015 is as follows:

Dr Cr
Rupees in million
Patent rights 60
Work-in-progress inventory, 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 340
Receivables 420
Trade payables 92
Sundry expenses 294
Accumulated profits, 1 January 2015 121
Investments 100
2,633 2,633

The following information is also relevant.

i. Closing inventories of finished goods are valued at Rs. 180 million. Work-in-progress inventory has
increased to Rs. 140 million.
ii. The patent rights relate to a computer program with a three year lifespan.
iii. 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.
iv. An allowance for bad debts (irrecoverable debts) of 5% is to be created.
v. The computed current tax of Rs. 120 million has not yet been recognised yet.
Required:
Prepare a statement of Comprehensive Income (analysing expenses by nature) for the year ended 31 December
2015, Statement of Changes in Equity and a statement of financial position as at that date.

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 ANSWER:

MINGORA IMPORTS

Statement of profit or loss for the year ended 31 December 2015

Rs. m

Sales 1,740

Change in inventories of WIP & FG (140 - 125) + (180 - 155) 40

Staff cost (260 + 360) (620)

Depreciation & Amortization W1 (42)

Other expenses (44 + 294 + (420 x 5%)) (359)

Profit before tax 759

Taxation (120)

Profit after tax 639

Other comprehensive income

Gain on revaluation of buildings [360 – (300-60)] 120

120

Total comprehensive income 759

MINGORA IMPORTS

Statement of changes in equity for the year ended 31 December 2015

Share Revaluation Retained

Total
Capital surplus Earnings

Rs. million

At 31 December 2014 600 121 721

Total comprehensive income 120 639 759

Dividends paid (125) (125)

Transfer [120 / 30 years] (4) 4 -

At 31 December 2015 600 116 639 1,355

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MINGORA IMPORTS
Statement of Financial Position as at 31 December 2015

Assets Rs. m
Non-current assets
PPE (300 – 60 + 120 – 12 W1) + (50 – 20 – 10 W1) 368
Intangible assets (60 – 20 W1) 40
Investments 100 100
508
Current assets
Inventory (180 + 140) 320
Trade receivables (420 – 21) 399
Cash 340
1,059
1,567

Equity & Liabilities

Capital & Reserves
Share Capital 600
Revaluation reserves 116
Retained Earnings 639
1,355
Current liabilities
Trade & other payables 92
Income tax payable 120
212
1,567

W1: Depreciation and amortisation Rs. m

Buildings 360 / 30 years 12

Computers 50 / 5 years 10

Patents 60 / 3 years 20

42

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 Example 11:
The following trial balance related to Yasir Industries Limited (YIL) for the year ended June 30, 2017:

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, 2016) 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 - 22.20
10% redeemable preference shares - 40.00
Debentures – 80.00
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, 2017) - 40.25
Acc. depreciation – Machines (June 30, 2017) – 48.60
Acc. amortization – Software (June 30, 2017) - 12.00
Trade receivables 66.00 -
889.30 889.30

Additional Information
i. On June 30, 2017 a customer returned goods sold earlier invoiced at Rs. 27 million. Neither the return nor
the inventory received has been accounted for yet. The sale has been made at cost plus 20%. The value of
inventories at June 30, 2017 was Rs. 42 million other than the goods returned as afore-mentioned.
ii. A fraud of Rs. 30 million was discovered in October 2016. A senior employee of the company, who left earlier,
had embezzled the funds from YIL’s bank account. The chances of recovery are remote. The amount is
presently appearing in the suspense account.
iii. On January 1, 2017 YIL issued debenture certificates which are repayable in 2020. Interest is paid on these
at 12% per annum. Financial charges comprise bank charges and bank commission.

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iv. On July 1, 2016, the leasehold property having a useful life of 40 years was revalued at Rs. 238 million.
Neither revaluation nor tax adjustment in this regard has been made in the books. 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.
v. The accrual for current taxation for the year ended June 30, 2017 after making all the above adjustments is
estimated at Rs. 16.5 million.
Required:
Prepare the statement of financial position as of June 30, 2017, statement of profit or loss for the year ended June
30, 2017, and statement of changes in equity for the year then ended.
 ANSWER:
Yasir Industries Limited
Statement of Comprehensive Income
For the year ended 30 June 2017

Rs m
Revenue 472.40 – 27 445.4
Cost of sales W1 (250.72)
Gross profit 194.68
Selling expense (19.80 + 1.25 W3 x 20%) (20.05)
Administrative expenses (40 + 1.25 W3 x 30%) (40.38)
Operating profit 134.25
Loss due to fraud (30)
Finance costs W2 (9.10)
Profit before tax 95.15
Income tax expense (16.5)
PROFIT FOR THE YEAR 78.65

Other Comprehensive Income

Gain on revaluation of fixed assets W4 42.5
TOTAL COMPREHENSIVE INCOME 121.15

Yasir Industries Limited

Statement of Changes in Equity
For the year ended 30 June 2017

Share Retained Revaluation Total

Capital earnings surplus
Rs. m Rs. m Rs. m Rs. m
At July 01, 2016 120 10.20 - 130.20
Total comprehensive income 78.65 42.5 121.15
Transfer 1.25 (1.25) -
At June 30, 2017 120 90.1 41.25 251.35

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Yasir Industries Limited

Statement of Financial Position
As at 30 June 2017

EQUITY AND LIABILITIES Rs. m

Share capital and reserves
Share capital 120
Revaluation Surplus 41.25
Retained earnings 90.1
251.35
Non-current liabilities
10% redeemable preference shares 40
Debentures 80
120
Current liabilities
Trade and other payables (30.40+22.20) 52.6
Interest accrued W2 4.8
Preference dividend payable W2 4
Bank overdraft 13.25
Current tax payable 16.5
91.15
Total equity and liabilities 462.5

ASSETS
Non-current assets
Property, plant and equipment 231 W4 + (168.6 – 48.60) 351
Intangible assets (Software) 20-12 8
359
Current assets
Stock-in-trade 42 + (27 x 100/120) 64.5
Trade debts 66 – 27 39
103.5
Total assets 462.5

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W1: Cost of sales Rs. m

Opening inventory 38.9
Purchases 175.7
Less: closing inventory 42 +(27 x 100/120) (64.5)
Direct labour 61
Manufacturing overheads (as given) 39
Additional depreciation due to revaluation [1.25 W3 x 50%] 0.62
250.72

W2: Finance costs Rs. m

As given 0.30
Interest on debentures Rs. 80 x 12% x 6/12 4.8
Dividend on redeemable Preference shares Rs. 40 x 10% 4
9.1

W3: Leasehold property Rs. m

As given [230 – 40.25] 189.75
Add back: Annual depreciation charged on cost [230 / 40 years] 5.75
195.5
Revaluation gain (balancing) 42.5
Revalued amount as at 1 July 2016 238
Depreciation 238 / 34 years (7)
Carrying amount on 30 June 2017 231

Remaining useful life 40 years – [(Rs. 40.25 – 5.75) / 5.75] 34 years

Additional (incremental) depreciation 7 – 5.75 1.25

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6 NOTES
6.1 Definitions & structure [IAS 1: 7, 112 &113]
“Notes” contain information in addition to that presented in the statement of financial position, statement(s) of
profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows. Notes
provide narrative descriptions or disaggregation of items presented in those statements and information about
items that do not qualify for recognition in those statements.
The notes shall:
a) present information about the basis of preparation of the financial statements and the specific accounting
policies used;
b) disclose the information required by IFRSs that is not presented elsewhere in the financial statements; and
c) provide information that is not presented elsewhere in the financial statements, but is relevant to an
understanding of any of them.
An entity shall, as far as practicable, present notes in a systematic manner. In determining a systematic
manner, the entity shall consider the effect on the understandability and comparability of its financial
statements. An entity shall cross‑reference each item in the statements of financial position and in the
statement(s) of profit or loss and other comprehensive income, and in the statements of changes in equity
and of cash flows to any related information in the notes.

6.2 Disclosure of accounting policies [IAS 1: 117]

An entity shall disclose its significant accounting policies comprising:
a) the measurement basis (or bases) used in preparing the financial statements; and
b) the other accounting policies used that are relevant to an understanding of the financial statements.

6.3 Other disclosures [IAS 1: 137 & 138]

An entity shall disclose in the notes:
a) 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
b) the amount of any cumulative preference dividends not recognised.
An entity shall disclose the following, if not disclosed elsewhere in information published with the financial
statements:
a) the domicile and legal form of the entity, its country of incorporation and the address of its registered office
(or principal place of business, if different from the registered office);
b) a description of the nature of the entity’s operations and its principal activities;
c) the name of the parent and the ultimate parent of the group; and
d) if it is a limited life entity, information regarding the length of its life.

6.4 Regulatory framework for accounting in Pakistan

In Pakistan, companies are required to follow the requirements of Companies Act, 2017 (specifically, fourth and
fifth schedule), when preparing and presenting their financial statements.
In case of conflict between requirements of law and requirements of IFRSs, the requirements of law shall prevail.
The requirements of regulatory framework for accounting in Pakistan shall be covered at a later stage of your
studies.

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7 COMPREHENSIVE EXAMPLES
 Example 12:
The following balances have been extracted from the trial balance as at 30 June 2014 of Zee Trading Limited
(ZTL):

Debit Credit
Description
------- Rs. in 000 -------

Sales 80,000

Other income 5,300

Opening inventory 4,000

Purchases 33,400

Selling and distribution expenses 15,000

Administrative expenses 9,700

Financial charges 8,698

Investment at cost 6,800

Trade receivables 10,000

Allowance for doubtful debts 380

The following matters need to be considered in finalizing the financial statements of ZTL:
i. As per store records, closing inventory as at 30 June 2014 amounted to Rs. 8,500,000.
Physical inventory taken on 1 July 2014 revealed the following information:
• Value of goods found short by Rs. 1,500,000 (abnormal loss).
• Goods costing Rs. 860,000 are obsolete. Their estimated net realizable value is Rs. 600,000.
ii. Selling and distribution expenses include trade discounts allowed to customers amounting to Rs. 4,000,000.
iii. In June 2014, ZTL received Rs. 810 million, net of 10% tax, cash dividend on its investments and the amount
received was credited to other income.
iv. ZTL maintains an allowance for doubtful debts at 5% of trade receivables.
v. Accrual for tax expense of Rs. 6,452 is to be recorded.
Required:
Prepare ZTL’s statement of comprehensive income for the year ended 30 June 2014 in accordance with IFRSs.

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 ANSWER:
Zee Trading Limited
Statement of comprehensive income
For the year ended 30 June 2014

Rs. 000

Sales [80,000 - 4,000] 76,000

Cost of sales W1 (29,160)

Gross profit 46,840

Selling and distribution expenses [15,000 - 4,000 + 120*] (11,120)

Administrative expenses [9,700 + 1,500] (11,200)

Operating profit 24,520

Finance cost (8,698)

Other income [5,300 + (810 /90 x 10)] 5,390

Profit before tax 21,212

Taxation (6,452)

Profit for the year 14,760

Other comprehensive income 0

Total comprehensive income 14,760

W1: Cost of Sales Rs. 000

Opening Inventory 4,000

Purchases [33,400 - 1,500] 31,900

Less: Closing inventory [8,500 – 260 – 1,500] (6,740)

29,160

*10,000 x 5% = 500 – 380 = 120

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 Example 13:
The following trial balance pertains to Hadi Limited (HL) for the year ended 31 December 2016:

Description Debit Credit

------- Rs. in ‘000 -------
Capital work-in-progress 145,000
Plant and machinery – at cost 305,000
Trade receivables 61,400
Stock-in-trade 79,600
Cash and bank 33,444
Cost of sales 78,664
Administrative expenses 37,636
Ordinary share capital (Rs. 10 each) 241,000
Retained earnings 104,175
Accumulated depreciation – Plant and machinery 53,250
Trade payables 60,912
10% long term loan 75,000
Allowance for bad debts 5,000
Sales 201,407
740,744 740,744

While finalizing the financial statements of HL from the above trial balance, the following issues have been noted:
i. No depreciation has been charged in the current year. Depreciation is provided at 10% per annum using the
straight line method.
ii. A machine which was purchased on 1 January 2015 for Rs. 25 million was traded-in, on 1 July 2016 for a new
and more sophisticated machine. The disposal was not recorded and the new machine was capitalised at Rs.
15 million being the net amount paid to supplier. The trade-in allowance amounted to Rs. 20 million.
iii. HL maintains an allowance for doubtful debts at 6% of trade receivables. On 1 February 2017, a customer
owing Rs. 10 million at year-end was declared bankrupt. HL estimates that 20% of the amount would be
received on liquidation.
iv. The long term loan of Rs. 75 million was obtained on 1 January 2016, to finance the capital work-in-progress.
HL correctly capitalised the finance cost on such loan in accordance with IAS-23 ‘Borrowing cost’.
v. On 1 January 2016, HL started research and development work for a new product. On 1 May 2016, the
recognition criteria for capitalization of internally generated asset was met. The product was launched on 1
November 2016.
HL incurred Rs. 20 million from commencement of research and development work till launching of the
product and charged it to cost of goods sold. It is estimated that the useful life of this new product will be 20
years. It may be assumed that all costs accrued evenly over the period.
On 31 December 2016, the recoverable amount of the development expenditure was Rs. 10 million. For tax
purposes, research and development costs are allowed to be amortized over 10 years.
vi. The accrual of income tax has been estimated at Rs. 8,153,000.
Required:
Prepare statement of comprehensive income for the year ended 31 December 2016 in accordance with the
requirements of International Financial Reporting Standards.

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 ANSWER:
Hadi Limited
Statement of comprehensive income
For the year ended 31 December 2016

Rs. 000
Sales 201,407
Cost of sales [78,664 + 29,500 - 20,000] (88,164)
Gross profit 113,243
Administrative expenses W1 (55,090)
Profit before tax 58,153
Taxation (8,153)
Profit for the year 50,000
Other comprehensive income 0
Total comprehensive income 50,000

W1: Administrative expenses Rs. 000

As given 37,636
Loss on disposal W2 1,250
Bad debts W3 8,000
Reversal of doubtful debts W3 (1,796)
Research expense W4 8,000
Amortisation of development costs W4 100
Impairment of development costs W4 1,900
55,090

W2: Plant & Machinery 10% Straight line basis Rs. 000
Cost [305,000 - 15,000] 290,000
Less: Accumulated dep. (53,250)
WDV on 1 January 2016 236,750
Addition [15,000 + 20,000] 35,000
Disposal (21,250)
.
Depreciation (disposed) [25,000 x 10% x 6/12] 1,250
Depreciation (addition) [35,000 x 10% x 6/12] 1,750

Depreciation (other) [(290,000-25,000) x 10%] 26,500

(29,500)
WDV on 31 December 2016 221,000

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Asset Disposal Rs. 000

Cost 1 January 2015 25,000
Depreciation 2015 [25,000 x 10%] (2,500)
WDV on 1 January 2016 22,500
Depreciation upto June [25,000 x 10% x 6/12] (1,250)
WDV on disposal 21,250
Disposal proceeds Trade-in-allowance (20,000)
Loss (gain) on disposal 1,250

W3: Bad and doubtful debts Rs. 000

Bad debts written off [10,000 x 80%] 8,000

Closing allowance [(61,400 – 8,000) x 6%] 3,204

Less: Opening balance (5,000)
Reversal (1,796)

W4: Research and development Rs. 000

Incorrect charge in cost of sales 20,000
Less: research expense (administrative expenses) [20,000 x 4/10] (8,000)
Development costs 12,000
Less: Amortisation (administrative expenses) [12,000 / 20 x 2/12] (100)
Carrying amount 11,900
Less: recoverable amount 10,000
Impairment loss (administrative expenses) 1,900

 Example 14:
The following balances have been extracted from the trial balance of Mint Lemonade Limited (MLL) as at 31
December 2019:

Rs. in million
Trade receivables 1,200
Capital work in progress 910
Allowance for bad debts as on 1 January 2019 44
Sales 2,500
Cost of goods sold 1,320
Research and development 180
Dividend receivable 10
Administrative expenses 302
Selling and distribution expenses 200
Finance cost 48
Dividend income 30
Other income 86

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While finalizing the financial statements of MLL, the following issues have been noted:
i. Trade receivables include a balance of Rs. 40 million which needs to be written off. MLL maintains an
allowance for doubtful debts at 5% of trade receivables.
ii. Capital work in progress includes interest cost of Rs. 84 million on specifically acquired bank loan during the
year. However, interest of Rs. 16 million earned by investing surplus funds available from the bank loan has
been included in other income.
iii. Research and development represents cost incurred for a new product started on 1 February 2019. The
recognition criteria for capitalization of internally generated intangible asset was met on 1 May 2019. The
product was launched on 31 October 2019. It is estimated that the useful life of this new product will be 5
years. It may be assumed that all costs were incurred evenly over the period.
iv. Office building of ML had net book value of Rs. 900 million on 31 December 2018 with remaining useful life
of 12 years. During 2019, MLL decided to opt revaluation model for its building. Consequently, fair value of
building at start of 2019 was determined at Rs. 1,200 million. Such revaluation has not yet been accounted
for. Depreciation on office building under cost model has already been recorded in the books.
v. The estimate for accrual of income tax is Rs. 167.24 million.
Required:
Prepare MLL’s statement of profit or loss and other comprehensive income for the year ended 31 December
2019.
 ANSWER:
Mint Lemonade Limited
Statement of comprehensive income
For the year ended 31 December 2019

Rs. m
Sales 2,500
Cost of sales (1,320)
Gross profit 1,180
Administrative expenses W1 (391)
Selling and distribution expenses W2 (254)
Operating profit 535
Finance cost (48)
Other income [30 + 86 - 16 (ii)] 100
Profit before tax 587
Taxation (167.24)
Profit for the year 419.76
.
Other comprehensive income:
Gain on revaluation 300
300
Total comprehensive income 719.76

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W1: Administrative expense Rs. m

Trial balance 302
R&D Expense [180 x 3/9 months] 60
Amortisation of Development costs [180 x 6/9 = 120 / 5 x 2/12] 4
Additional depreciation on building [300 / 12 years] 25
391

W2: Selling & Distribution Expense Rs. m

Trial balance 200
Bad debts 40
Doubtful debts [(1,200 - 40) x 5% - 44] 14
254

 Example 15:
Following is the summarised trial balance of ABC Limited as at 30 June 2014:

Rs. in million
Sales 737
Stock at 1 July 2013 75
Purchases 301
Manufacturing expenses 240
Selling and marketing expenses 28
Administrative expenses 51
Factory building – cost at 1 July 2013 200
Machines – cost at 1 July 2013 280
Factory building – accumulated depreciation at 1 July 2013 50
Machines – accumulated depreciation at 1 July 2013 87
Advance income tax 4
Debtors 117
Cash and bank 51
Creditors 83
Share capital 300
Unappropriated profit at 1 July 2013 90
1,347 1,347
Additional information:
i. Depreciation on factory building and machines are provided on reducing balance method @ 10% and 15%
per annum respectively. 60% depreciation on factory building and 100% depreciation on machines are
charged to cost of sales. The balance depreciation is charged to administrative expenses
ii. On 31 May 2014, a fully depreciated machine was sold for Rs. 3 million. The sale proceeds were received on
5 July 2014. No entries have been made in respect of these transactions.

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iii. Debtors include an amount of Rs. 28 million owed by a customer who experienced cash flow problems prior
to the year-end. The company has agreed to accept Rs. 18 million in full and final settlement of the debt. Four
other debtors aggregating Rs. 5 million are required to be written off.
iv. Income tax liability for the year ended 30 June 2014 is estimated at Rs. 25 million.
v. On 20 June 2014 an advance of Rs. 12 million was received under a contract for supply of goods in August
2014. The advance was credited to sales.
vi. Closing stock at 30 June 2014 amounted to Rs. 114 million. It included stock costing Rs. 20 million whereas
the related invoice was booked on 4 July 2014.
vii. In June 2014, a competitor developed a new product which has affected ABC’s ability to sell one of its
products at its normal price of Rs. 160. It is estimated that to sell the product, the company needs to offer a
discount of 25%. 150,000 units of that product were in hand as on 30 June 2014 at a cost of Rs. 120 per unit.
Its selling costs are estimated at Rs. 20 per unit.
Required:
Prepare the statement of comprehensive income for the year ended 30 June 2014 and the statement of financial
position as at that date in accordance with International Financial Reporting Standards.
 ANSWER:
ABC Limited
Statement of comprehensive income for the year ended 30 June 2014
Rs. in million
Sales 737 – 12 advance 725
Cost of sales 75 + 301 + 240 + (9+29 Dep) – 114 closing + 20 purchases + 3 write down (563)
Gross profit 162
Selling and marketing expense (28)
Administrative expenses 51 + 6 depreciation + 15 bad debts (72)
Other income (gain on disposal) 3
Profit before tax 65
Income tax expense (25)
Profit for the year 40
Statement of financial position as at 30 June 2014
ASSETS Rs. in million
Non-current assets
Property, plant and equipment 343 – 44 Depreciation 299

Current assets
Stock 114 – 3 write down 111
Debtors 117 – 15 102
Other receivable (disposed asset) 3
Cash and bank 51
267
566

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EQUITY AND LIABILITIES Rs. in million

Owner's equity
Share capital 300
Un-appropriated profit (90+40) 130
Total equity 430

Current liabilities
Creditors 83 + 20 unrecorded invoice 103
Income tax payable 25 – 4 advance 21
Advance from customer 12
136
Total equity and liabilities 566

W1: Depreciation on factory building [200 – 50] x 10% = 15 [9 Cost of sales and 6 in Admin expenses]
W2: Depreciation on machinery [280-87] x 15% = 29
W3: Bad debts 28 – 18 = 10 + 5 = 15
W4: Write down of inventory
Cost of product (150,000 x Rs. 120) = 18
NRV of product (150,000 x[ ((Rs. 160×75%) – Rs. 20)] = 15
Write down = 3
 Example 16:
Following is the summarised trial balance of Eagles Limited (EL) as at 30 June 2015:

Debit Credit
Rs. in ‘000’ Rs. in ‘000’
Plant 2,500 Acc. depreciation at 1 July 2014
Equipment 700 – Plant 1,000
Stock as on 1 July 2014 1,500 – Equipment 270
Trade debtors 1,300 Provision for obsolete stock at 1 July 45
2014
Cash and bank 1,759 Provision for bad debts at 1 July 2014 48
Purchases 6,987 Capital 2,500
Salaries & wages 843 Accumulated profits 960
Warehouse rent 740 Trade creditors 1,545
Repair and maintenance 500 Revenue 10,706
Utilities expenses 400 Other income 425
Insurance expenses 300 Accruals at 1 July 2014
Bad debt written off 30 – Repairs & maintenance 45
Obsolete inventory written off 40 – Utilities expenses 55
17,599 17,599

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Additional Information:
i. The sales return of Rs. 390,000 has not been recorded yet. The goods returned have been received but not
included in physical count of inventory at year-end. EL sells such goods at a mark-up of 30% on cost.
ii. Other income includes proceed from sale of an equipment amounting to Rs. 100,000 received on 31
December 2014. The cost and written down value of the equipment at 1 July 2014 were Rs. 200,000 and Rs.
70,000 respectively.
iii. Plant and equipment are depreciated at the rate of 10% and 15% respectively on straight line basis.
iv. Cost of stock on 30 June 2015 was Rs. 1,400,000, having net realizable value of Rs. 1,450,000. This does not
include inventory given in (i) above.
v. The management estimates that:
• 5% of trade debts would not be recovered.
• 3% of the stock is obsolete.
vi. Current warehouse rent is Rs. 600,000 per annum which was paid in advance on 1 October 2014.
vii. Following bills for expenses were received but not entered in books:

Rs. in ‘000’
Repair and maintenance 56
Utilities expenses 67

viii. The company revalued its non-current assets on 31 December 2014. Valuer has suggested following fair
values:

Rs. in ‘000’
Plant 1,650
Equipment 175

ix. The tax charge for the current year after making all related adjustments is estimated at Rs. 200,000.
x. No entry has been made in respect of disposal, revaluation and depreciation of fixed assets. [Transfer for
incremental depreciation is to be ignored]
Required:
Prepare statement of financial position as at 30 June 2015 and statement of comprehensive income for the year
ended 30 June 2015.
 ANSWER:

Eagles Limited

Statement of comprehensive income for the year ended 30 June 2015

Rs. 000
Sales 10,706 – 390 return 10,316
Cost of goods sold 1,500 + 6,987 – 45 – 300 W1 – 1,400 + 51 W6 + 348 W8 (7,141)
Gross profit 3,175
Other income 425 – 55 correction 370
3,545

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Rs. 000
Operating expenses
843 + 740 + 500 + 400 + 300 +30 + 40 – 2.5 W5 – 150 W7 + 23 increase in accrual (2,723.5)
Loss on revaluation W8 (147)
Profit before tax 674.5
Taxation (200)
Profit after tax 474.5

Other comprehensive Income

Gain on revaluation W8 275
Total comprehensive income 749.5

Eagles Limited
Statement of Financial Position as at 30 June 2015

Non-current assets Rs. 000

Property, plant and equipment
2,500 + 700 – 1,000 – 270 – (200 – 145) – 348 W8 + 275 W8 – 147 W8 1,655

Current assets
Inventory 300 W1 + 1,400 - 51 W6 1,649
Trade Receivables [1,300 – 390 return] less 45.5 864.5
Prepaid rent W7 150
Cash & Bank 1,759
4,422.5
6,077.5
Equity & Liabilities
Capital and reserves
Share Capital 2,500
Revaluation reserve 275
Accumulated profit 960 + 474.5 SPL 1434.5
4,209.5
Current liabilities
Trade payables 1,545
Accrued Expenses 56 +67 123
Income tax payable 200
1,868
6,077.5

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W1: Cost of goods returned 390 x 100/130 = 300

W2: Accumulated depreciation[01 July 2014 200 – 70 WDV = Rs. 130 + for six months 200 x 15% x 6/12 = Rs. 145
W3: Correction in other income Rs. 100 recorded already – correct gain 45 = Rs. 55
W4: Trade debtors: 1,300 – 390 = 910; Closing Allowance @ 5% = 910 @ 5% = 45.5
W5: Decrease in provision = 48 – 45.5 = 2.5
W6: Obsolete inventory 1,400 + 300 W1 = 1,700; Closing Allowance @ 3% = 1,700 @ 3% = 51
W7: Prepaid rent (600/12 x 3 months) = 150

Disp. Other
Plant TOTAL
W8 – Depreciation, Disposal & Revaluation Equip. Equip.
Cost 1 July 2014 2,500 200 500 3,200
Accumulated depreciation 1 July 2014 (1,000) (130) (140) (1,270)
1,500 70 360 1,930
Depreciation up to 31 December 2014 10%, 15% (125) (15) (38) (178)
Disposal of equipment 200 – 145 (55) (55)
1,375 0 322 1,697
Revaluation gain / (loss) balancing 275 (147) 128
Revalued value on 31 December 2014 1,650 175 1,825
Depreciation up to 30 June 2015 (See life below) (150) (20) (170)
Carrying amount 1,500 0 155 1,655
Total useful life [1/10%] ; [1/15%] 10 years 6.7 years
Remaining life on 31.12. 2014 [CA/Cost x total life] 5.5 years 4.3 years
 Example 17:
Following is the trial balance of Mateen Limited as at 30 June 2016 :

Debit Credit
-------- Rupees --------
Sales 6,892,000
Purchases 4,124,000
Administrative expenses 1,855,000
Distribution costs 549,000
Property, plant and equipment
Cost 1,750,000
Accumulated depreciation at 30 June 2015 350,000
Inventories at 30 June 2015 344,000
Un-appropriated profit at 30 June 2015 330,000
Share capital 2,000,000
Cash in hand 22,000
Cash at bank 14,000
Bank loan 500,000
Trade receivables 2,255,000
Trade and other payables 826,000
Provision for bad debts at 30 June 2015 15,000
10,913,000 10,913,000

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The following additional information is available:

i. Sales return of Rs. 70,000 has not been recorded yet. The goods had a cost of Rs. 47,000. The goods are not
included in cost and net realisable value of inventories given below.
ii. Cost of inventories at 30 June 2016 amounted to Rs. 365,000. The net realizable value of the inventories was
Rs. 350,000.
iii. Administrative expenses include rent of office building amounting to Rs. 700,000. 70% of the rental amount
should be allocated to cost of sales and 30% to administrative expenses.
iv. Prepaid administrative expenses and accrued distribution costs at 30 June 2016 amounted to Rs. 131,000
and Rs. 176,000 respectively.
v. Property, plant and equipment are depreciated at 10% per annum using reducing balance method.
Depreciation on addition is provided from the month in which the asset is acquired while no depreciation is
charged in the month in which the asset is disposed of. Depreciation should be allocated between cost of
sales and administrative expenses in the ratio of 80:20 respectively. On 10 January 2016, a generator which
was purchased on 1 July 2012 for Rs. 100,000 was traded-in for a new generator. The disposal was not
recorded and the generator was capitalized at Rs. 500,000 being the net amount paid to supplier after
adjusting trade-in allowance of Rs. 35,000. The cost of installation of the generator amounting to Rs. 30,000
was debited to administrative expenses.
vi. Bank loan was taken on 1 October 2015 and carries interest at 8% per annum. The loan is repayable on 30
September 2016.
vii. Trade receivables amounting to Rs. 5,000 are required to be written off. Bad debts are estimated at 4% of
the trade receivables.
viii. Income tax liability for the year ended 30 June 2016 is estimated at Rs. 40,000.
Required:
Prepare the following:
a) Statement of comprehensive income for the year ended 30 June 2016; and
b) Statement of financial position as at 30 June 2016.
 ANSWER:

Statement of comprehensive income for the year ended 30 June 2016

Rupees
Revenue 6,892,000 – 70,000 6,822,000
COS 4,124,000 + 344,000 – 47,000 – 350,000 + 490,000 + 91,684 (4,652,684)
Gross profit 2,169,316
Admin exp.
1,855,000 – 490,000 – 131,000 + 34,255 – 30,000 + 22,921 + 5,000 + 72,200 (1,338,376)
Distribution costs 549,000 + 176,000 (725,000)
Profit from operations 105,940
Finance cost (30,000)
Profit before tax 75,940
Income tax expense (40,000)
Profit for the period 35,940

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Statement of financial position

As at 30 June 2016

Rupees

Assets

Non-current assets

PPE 1,750,000 – 350,000 – 34,255 + 30,000 – 114,605 [see working 4] 1,281,140

Current assets

Inventories 47,000 + 350,000 397,000

Trade receivables
[2,250,000 – 70,000 – 5,000] – [15,000 + 72,200 W3] 2,092,800

Prepaid admin expenses 131,000

Cash and bank 22,000+14,000 36,000

3,937,940

Equity and liabilities

Share Capital 2,000,000

Retained earnings (330,000 + 35,940) 365,940

2,365,940

Current liabilities

Bank loan 500,000

Trade and other payables 826,000 + 176,000 1,002,000

Taxation 40,000

Bank interest payable W2 30,000

3,937,940

W1: To be allocated to COS from AE Rs. 700,000 x 70% = Rs. 490,000

W2: Accrual of interest (500,000×8%×9÷12) = Rs. 30,000
W3: Doubtful debts [2,255,000 – 70,000 – 5,000] x 4% = 87,200 – 15,000 opening = 72,200

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Dep. for the

Rupees
W3: Depreciation and loss on disposal year
Property, plant & equipment as per trial balance 1,750,000
Less: Cost of generator disposed of (A) (100,000)
Less: Cost of generator purchased during the year (500,000)
Cost of PPE used throughout the year 1,150,000
Less: Opening balance of Acc. Dep. (350,000)
Add: Opening balance of Acc. Dep. relating to disposed of generator
[100,000 – (100,000 × 0.9 × 0.9 × 0.9)] (B) 27,100
WDV of PPE used throughout the year 827,100
Depreciation for the year (827,100×10%) (82,710) 82,710
Addition:
New generator 500,000
Old generator – trade-in-allowance 35,000
Installation charges 30,000
565,000
Depreciation on additions (565,000 ×10% × 6/12) (28,250) 28,250
536,750
Depreciation on disposed of generator - 3,645
[(100,000 – 27,100) × 10% × 6/12] (C)
1,281,140 114,605

Loss on disposal [(A– B– C) – 35,000] 34,255

 Example 17:
Following is the trial balance of Younus Limited (YL) as on 30 June 2017:

Debit Credit
Particular Particular
Rs. in ‘000 Rs. in ‘000
PPE 200,000 Share capital (Rs. 10 each) 35,000
Receivables and advances 13,000 Un-appropriated profit 66,820
Office rent 1,120 5% Bank loan 52,000
Opening stock 54,000 Trade payables 10,000
Taxation (advance tax) 6,000 Acc. dep. – 30 June 2017 120,000
Cash and bank 40,000 Sales 240,000
Purchases 170,000
Selling expenses 20,000
Administrative expenses 17,000
Financial charges 2,700
523,820 523,820

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The following additional information is available:

i. On 1 July 2016 engine of a delivery truck seized and was replaced at a cost of Rs. 2 million on the next day.
Rs. 1.2 million was paid in cash whereas the remaining amount was adjusted against the trade in value of the
seized engine. The payment was charged to selling expenses.
The delivery truck was purchased on 1 July 2010. The cost of the delivery truck is Rs. 5 million of which
approximately Rs. 1 million is attributable to the seized engine. Delivery trucks are depreciated over their
useful life of 10 years.
ii. Certain goods despatched on 28 June 2017 reached YL’s warehouse on 2 July 2017.
Break-up of the amount paid against these goods is as follows:

Rs. in ‘000
20% advance to supplier 500
Insurance in transit 50
Delivery charges 100
The above amounts are appearing under the head ‘Receivables and advances’.
iii. Cost of stock in hand as on 30 June 2017 is Rs. 50 million.
iv. During the year, YL gave free samples to certain customers. The selling price and gross profit on these goods
was Rs. 5.4 million and 20% of cost respectively. No adjustment has been made in the books in this regard.
v. Office rent pertains to the period from July 2016 to December 2017 and is inclusive of an upward revision of
10% with effect from 1 January 2017.
vi. Bank loan was obtained on 1 July 2015. The principal is repayable in 20 equal quarterly instalments. The
principal along with interest is paid on the first day of the next quarter.
vii. Tax expense for the year is Rs. 7.7 million.
Required:
Prepare statement of financial position as at 30 June 2017 and statement of profit or loss for the year ended 30
June 2017 in accordance with International Financial Reporting Standards.
 ANSWER:
Younus Limited
Statement of Profit or Loss
For The Year Ended June 30, 2017

Rs. 000
Sales 240,000
Cost of sales 54,000 + 170,000 – 50,000 – 4,500 (169,500)
Gross profit 70,500
Other income (Gain on disposal) 400
70,900
Administration cost 17,000 + 1,120 – 385 (17,735)
Selling & distribution expense 20,000 – 1,200 + 400 + 4,500 (23,700)
Financial charges2,700 + 650 (3,350)
Profit before tax 26,115
Income tax expense (7,700)
Profit for the year 18,415

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Younus Limited
Statement of Financial Position
As at June 30, 2017

Rs. 000
Non – current assets
PPE 200,000 – 120,000 + 1,600 – 400 81,200

Current assets
Inventory 50,000 + 2,650 52,650
Receivable and advances 13,000 – 650 12,350
Prepaid rent 385
Cash and bank 40,000
105,385
186,585
Capital and Liabilities
Share capital 35,000
Un- appropriated profit (66,820 + 18,415) 85,235
120,235
Non – current liabilities
Bank loan [52,000-16,000] 36,000

Current liabilities
Trade payables 10,000 + 2,000 12,000
Current portion of bank loan 52,000 x 4 Quarters / 13 remaining Quarters 16,000
Income tax payable 7,700 – 6,000 advance 1,700
Interest payable 650
30,350
186,585

W1: NBV of old PPE given in exchange 1,000 – (1,000 x 10% x 6 years) = 400
W2: Depreciation impact of correction of error 2,000 – 400 = 1,600 / 4 years remaining life = Rs. 400
W3: Payable for inventory in transit 500 / 20%] – 500 advance = Rs. 2,000
W4: Inventory in transit 2,000 + 650 = Rs. 2,650
W5: Cost of free samples 5,400 x 100 /120 = Rs. 4,500
W6: Prepaid rent 1,120 / [0.5 year + (1 +10% year)]= 700 per year x 6/12 = 350 + 10% = 385
W7: Accrued interest 52,000 x 5% x 3/12 = Rs. 650

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8 OBJECTIVE BASED Q&A

1. Which one of the following would not necessarily lead to a liability being classified as a current liability?
a) The liability is expected to be settled in the course of the entity's normal operating cycle
b) The liability has arisen during the current accounting period
c) The liability is held primarily for the purpose of trading
d) The liability is due to be settled within 12 months after the end of the reporting period

2. Which one of the following would be shown in the 'other comprehensive income' section of the statement of
profit or loss and other comprehensive income?
a) A revaluation gain on an investment property
b) Profit on sale of an investment
c) Receipt of a government grant
d) Gain on revaluation of a factory building

3. Which of the following are not items required by IAS 1 Presentation of Financial Statements to be shown on the
face of the statement of financial position?
a) Inventories
b) Provisions
c) Government grants
d) Intangible assets

4. How does IAS 1 define the 'operating cycle' of an entity?

a) The time between acquisition of assets for processing and delivery of finished goods to customers
b) The time between delivery of finished goods and receipt of cash from customers
c) The time between acquisition of assets for processing and payment of cash to suppliers
d) The time between acquisition of assets for processing and receipt of cash from customers

5. Where are equity dividends paid presented in the financial statements?

a) As a deduction from retained earnings in the statement of changes in equity
b) As a liability in the statement of financial position
c) As an expense in profit or loss
d) As a loss in 'other comprehensive income'

6. Inappropriate accounting policies are rectified by:

a) Disclosure of the accounting policies used
b) Notes
c) Explanatory material
d) None of above

7. Each component of the financial statements shall be identified clearly. In addition, the following information
shall be displayed prominently:
i. The name of the reporting undertaking
ii. The name of chief accountant
iii. Whether the financial statements cover the individual undertaking, or a group

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iv. The SFP date, or the period covered by the financial statements, whichever is appropriate to that component
of the financial statements
v. the presentation currency
vi. the level of rounding used in presenting amounts in the financial statements
a) All of above
b) All of above except (iii)
c) All of above except (ii)
d) All of above except (v)

8. Which of the following is appropriate statement regarding compliance with IFRSs?

a) These financial statements have been prepared in accordance with most of IFRSs
b) These financial statements have been prepared in accordance with all the IFRSs except IAS 8 and IAS 2
c) These financial statements have been prepared in accordance with IFRSs
d) These financial statements have been prepared in accordance with selected IFRSs

9. An entity’s year end is June 30, 2019 when it has a long-term loan due on February 29, 2020. The loan is
refinanced on July 20, 2019 and now it will be repaid on April 30, 2025.
This loan shall be presented as:
a) Current liability
b) Non-current liability
c) Equity
d) Contingent liability

10. An entity’s year end is June 30, 2019. It breached a condition of loan and it is now payable on demand. However,
on June 30, 2019, the lender agrees not to demand payment as a consequence of the breach prior to June 30,
2020 giving at least 12 months grace to rectify the breach.
This loan shall be presented as:
a) Current liability
b) Non-current liability
c) Equity
d) Contingent liability

11. The judgement on whether additional items are presented separately is based on an assessment of:
i. The nature and liquidity of assets
ii. The function of assets
iii. The amounts, nature and timing of liabilities
iv. The space available in the financial statements
a) (i) and (ii)
b) (i) and (iv)
c) (ii) and (iii)
d) (i), (ii) and (iii)

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12. Which of the following statements are correct according to IAS 1?

i. Profit or loss is the total of income less expenses, including the components of other comprehensive income.
ii.An entity shall present with equal prominence all of the financial statements in a complete set of financial
statements.
a) (i) only
b) (ii) only
c) (i) and (ii) both
d) Neither (i) nor (ii)

13. Which of the following statements are correct according to IAS 1?

i. All financial statements are prepared using the accrual basis of accounting.
ii. The entity shall reclassify comparative amounts unless reclassification is impracticable.
a) (i) only
b) (ii) only
c) (i) and (ii) both
d) Neither (i) nor (ii)

14. Which of the following statements are correct according to IAS 1?

i. An entity need not provide a specific disclosure required by an IFRS if the information is not material.
ii. Measuring assets net of valuation allowance is not offsetting.
a) (i) only
b) (ii) only
c) (i) and (ii) both
d) Neither (i) nor (ii)

15. Which of the following statements are correct according to IAS 1?

i. Statement of comprehensive income may be presented as a single statement or in two statements, displaying
profit or loss and other comprehensive income separately.
ii. Analysis of expense in profit or loss may be presented using a classification based on their nature or their
function.
a) (i) only
b) (ii) only
c) (i) and (ii) both
d) Neither (i) nor (ii)

16. On January 1, 2015 Yasir Limited issued debenture certificates of Rs. 80 million which are repayable along with
interest in 2020. The interest rate is 10% per annum and is payable at redemption.
At which amount these debentures should be presented in statement of financial position as at June 30, 2015
under the heading non-current liabilities?
a) Rs. 80 million
b) Rs. 84 million
c) Rs. 88 million
d) None of above

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17. On January 1, 2015 Yasir Limited issued debenture certificates of Rs. 80 million which are repayable at par in
2020. The interest rate is 10% per annum. The interest is payable half yearly on July 1 and January 1 each year
until redemption.
At which amount these debentures should be presented in statement of financial position as at June 30, 2015
under the heading non-current liabilities?
a) Rs. 80 million
b) Rs. 84 million
c) Rs. 88 million
d) None of above

18. On 1 January 2016, Hadi Limited (HL) started research and development work for a new product. On 1 May 2016,
the recognition criteria for capitalization of internally generated asset was met. The product was launched on 1
November 2016.
HL incurred Rs. 20 million from commencement of research and development work till launching of the product
and charged it to cost of goods sold. It is estimated that the useful life of this new product will be 20 years. It may
be assumed that all costs accrued evenly over the period.
On 31 December 2016, the recoverable amount of the development expenditure was Rs. 10 million.
For the year ended 31 December 2016, what amount should be transferred from cost of goods sold to
administrative expenses?
a) Rs. 8 million
b) Rs. 10 million
c) Rs. 12 million
d) Rs. 20 million

19. Manahil Limited (ML) is preparing its financial statements for the reporting period ending on December 31,
2024. ML has a loan liability that was originally for a term of three years. However, as of the reporting date, the
loan is due to be settled within twelve months. An agreement to refinance the loan on a long-term basis is
completed on February 15, 2025, before the financial statements are authorized for issue. How should ML classify
the loan liability in its financial statements for the reporting period ending December 31, 2024?
a) Classify the loan liability as non-current, as the original term was for a period longer than twelve months.
b) Classify the loan liability as non-current, as the agreement to refinance was completed before the financial
statements were authorized for issue.
c) Classify the liability as current, as refinancing has not been completed within 30 days of the end of reporting
period.
d) Classify the liability as current, as refinancing after the end of reporting period does not affect the
classification of liabilities.

20. Hadi Limited (HL) trial balance as at 31 December 2016 reflects the following:

Debit Credit
Rs. 000 Rs. 000
Capital work-in-progress 145,000
Plant and machinery – at cost 305,000
Accumulated depreciation 53,250

No depreciation has been charged in the current year. Depreciation is provided at 10% per annum using the
straight-line method

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A machine which was purchased on 1 January 2015 for Rs. 25 million was traded-in, on 1 July 2016 for a new
and more sophisticated machine. The disposal was not recorded, and the new machine was capitalized at Rs. 15
million being the net amount paid to supplier. The trade-in allowance amounted to Rs. 20 million.
Calculate the amount of depreciation to be charged for the year ended 31 December 2016, in respect of above?
a) Rs. 26,500,000
b) Rs. 27,750,000
c) Rs. 28,250,000
d) Rs. 29,500,000

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ANSWERS
01. (b) The fact that a liability has arisen during the current accounting period does not make it a current
liability. The other options would all lead to classification as a current liability.

02. (d) The revaluation gain on the factory will be presented under 'other comprehensive income'. The other
items will be recognised in profit or loss. Note that gains on investment properties go through profit or
loss.

03. (c) Inventories, provisions and intangible assets are shown separately. There is no such requirement for
government grants.

04. (d) The time between acquisition of assets for processing and receipt of cash from customers

05. (a) Equity dividends are presented in the statement of changes in equity.

06. (d) An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting
policies used or by notes or explanatory material.

07. (c) The name of chief accountant is not required.

08. (c) The statement must be explicit and unreserved.

09. (a) Refinancing or rescheduling after the year-end does not change classification.

10. (b) The loan is not payable in twelve months due to grace period.

11. (d) The availability of space is not reason for any additional item. If any disclosure is necessary, the space
is created.

12. (b) Other comprehensive income is not part of profit or loss.

13. (b) Statement of cash flows is not prepared under accrual basis of accounting.

14. (c) Both statements are correct.

15. (c) Both statements are correct.

16. (b) Rs. 80 million + Rs. 80 million x 10% x 6 /12 = Rs. 84 million
The interest will be included in debentures amount as it is payable at redemption.

17. (a) The interest is payable on July 1, 2015 and shall be presented as current liabilities.

18. (b) Research 20 million x 4/10 months = Rs. 8 million

Amortisation 12 million /20 years x 2/12 = Rs. 0.1 million
Impairment 11.9 million – 10 million = Rs. 1.9 million
Total Rs. 10 million

19. (d) Classify the liability as current, as refinancing after the end of reporting period does not affect the
classification of liabilities.
.

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20. (d)
Rs. 000
On addition 35,000 x 10% x 6/12 1,750
On disposed 25,000 x 10% x 6/12 1,250
Opening (other) 26,500
305,000 – 25,000 – 15,000 = 265,000 x 10% x 12/12
Total 29,500
.

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STICKY NOTES

Minimum items to be presented in statement of financial position

1. property, plant and equipment
2. investment property
3. intangible assets
4. Financial assets
5. investments accounted for using the equity method
6. biological assets
7. inventories
8. trade and other receivables
9. cash and cash equivalents
10. trade and other payables
11. provisions
12. financial liabilities
13. liabilities and assets for current tax
14. deferred tax liabilities and deferred tax assets
15. issued capital and reserves attributable to owners.

Minimum items to be presented in statement of comprehensive income

1. Profit or loss
2. Total other comprehensive income
3. Comprehensive income for the period.

Minimum items to be presented in statement of changes in equity

1. Total comprehensive income
2. Effect of retrospective application and/or retrospective restatement.
3. Reconciliation for each component of equity separately disclosing changes from:
• Profit or loss
• Other comprehensive income
• Transaction with owners (issue of shares, dividend)

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Notes to the financial statements

The notes shall:
• present information about the basis of preparation of the financial statements and the
specific accounting policies used;
• disclose the information required by IFRSs that is not presented elsewhere in the
financial statements; and
• provide information that is not presented elsewhere in the financial statements, but is
relevant to an understanding of any of them.

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











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Presents a snapshot of a company's financial condition at a specific

point in time. It includes
 Assets (what the company owns),
 Liabilities (what it owes), and
 Shareholders' equity (the difference between assets and liabilities).

Shows a company's revenues, expenses, and net income or loss over a

specific period, such as a quarter or a year. It indicates the profitability
of the business.

Demonstrates the changes in shareholders' equity accounts, including

details of share capital, retained earnings, dividends, and any other
changes affecting equity.

Displays the inflows and outflows of cash and cash equivalents over a
period of time, categorizing activities into operating, investing, and
financing activities. It helps assess a company's ability to generate cash
and its liquidity.

Provides additional information and explanations about the items

presented in the main financial statements.

 Share Capital XXX XXX  Property, Plant and Equipment XXX XXX
 Share Premium XXX XXX  Intangible Assets XXX XXX
 Retained Earnings XXX XXX  Investment Property XXX XXX
 Revaluation Surplus XXX XXX
 General Reserves XXX XXX
 Trade Receivable XXX XXX
 Inventory XXX XXX
 Prepayments XXX XXX
 Long Term Loan XXX XXX  Cash and Bank XXX XXX

 Bank Overdraft XXX XXX

 Trade Payable XXX XXX

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Revenue / Sales XXXX XXXX

Less. Cost of Sales (XXX) (XXX)
Gross Profit XXXX XXXX
Less. Administrative Expenses (XXX) (XXX)
Less. Selling Expense (XXX) (XXX)
Less. Interest Expense (XXX) (XXX)
Less. Other Expense (XXX) (XXX)
Add. Other Income XXXX XXXX

Tax Expense (XXX) (XXX)

Revaluation gain on Property, Plant and Equipment XXXX XXXX

As at 1 Jan 2022 XXXX XXXX XXXX XXXX XXXX

Cash dividend (Final 2021) - - - (XXX) -
Bonus dividend (Final 2021) XXXX - - (XXX) -
Right issue of shares XXXX - XXXX - -
Transaction costs on issue - - (XXX) - -
Cash dividend (Interim 2022) - - - (XXX) -
Bonus dividend (Interim 2022) XXXX - - (XXX) -

 Profit after tax - - - XXXX -

 Other comprehensive income - - - - XXXX
Transfer (incremental dep) - - - XXXX (XXX)
Preference dividend 10% - - - (XXX) -
As at 31 Dec 2022 XXXX XXXX XXXX XXXX XXXX

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 Equity is defined as the residual interest in the assets of the entity after deducting all
its liabilities.
 Equity is presented in statement of financial position and consists of:
a) Share capital
 Ordinary share capital
 Preference share capital (irredeemable)
b) Capital (non-distributable) reserves Capital reserves are reserves that
 Share premium are not regarded free for
distribution by way of dividend.
 Revaluation surplus
c) Revenue (distributable) reserves
 Retained earnings
 General reserves
 Other specific reserves created out of retained earnings (Dividend
equalization reserves)

 The term “share capital” refers to the amount of money the owners of a company have
invested in the business as represented by ordinary and irredeemable preference shares.
 Ordinary shares entitles an investor to own a part of ownership in
the company. The shareholders are given voting rights, rights to
attend the annual general meetings, dividends, and bonus shares
from the company. Most companies issue only this type of share
capital.

 The preference shareholders are given preference over ordinary

shareholders while paying dividends and repaying the amount of
capital at the time of liquidation of the company.
 Dividend payments for preference shareholders are often fixed and
due to this preference shares are often seen as a less risky investment,
although payments are likely to be lesser than ordinary dividend
when company is performing well.
 Preference shares are of two types:
 are treated as
equity share capital.
 are classified as
liability as entity has obligation to settle the amount after a
certain time.

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 Capital reserves are reserves that are not regarded free for distribution by way of dividend.
Two most common capital reserves are share premium and revaluation surplus.
 The excess of issue price (i.e. the total amount a company received
for shares) over par value of a company’s shares is called “share
premium”. For example, if a share having par value of Rs. 10 is
issued for Rs, 12 then Rs. 2 is the share premium.
 The Companies Act, 2017 (Section 81) prescribes that the share
premium account may be used:
 To write-off the preliminary expenses;
 To write-off the expenses (commission, discount) of issue of
shares;
 In providing for the premium payable on the redemption of any
redeemable preference shares
 For issue of bonus shares

 The result of an upward revaluation of a non-current asset is a

'revaluation surplus'. The amount accumulated in revaluation surplus
is non-distributable, as it represents unrealised profits on the
revalued assets. The revaluation surplus may diminish if an asset
which had previously been revalued upwards is devalued later.
Revaluation surplus is transferred to retain earnings in case of
disposal of asset and/or incremental depreciation.

 Revenue reserve means reserve that is normally regarded as available for distribution
including:
 Retained earnings comprise the earnings (profits and gains less
expenses and losses) that the company retains within the business,
i.e. part of profits that has not been paid out as dividends or
transferred to any other reserve. A debit balance on the retained
earnings account indicates that the company has accumulated losses.

 General reserve is the amount kept aside from the company’s profit
during its normal operation to meet future needs. i.e., contingencies,
strengthening the company’s financial position, increasing working
capital, paying dividends to the shareholders, offsetting specific
future losses, etc. Usually, a transfer to general reserves from
retained earnings is made with approval of board of directors.

 Dividend equalization reserve is a specific reserve created out of

retained earnings to ensure dividends remain stable irrespective of
changes in earnings.

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 Each share has a nominal value that is stated on it and it is called par value (or face value or stated value).
Market value of shares (i.e. the price at which shares are traded at stock exchange or otherwise) is usually
higher than par value.
 It is common to issue shares to existing shareholders in proportion to their existing shareholdings and such
share issue is called right issue. Shares are often issued above par value but at discount on market price.

Debit: Bank XXX

Credit: Share Capital XXX

Debit: Bank XXX

Credit: Share Capital XXX
Credit: Share Premium XXX

Debit: Bank XXX

Debit Share premium / Retained earnings ** XXX
Credit: Share Capital XXX

Debit Share premium / Retained earnings** XXX

Credit: Bank XXX
** Transaction costs and discount on share issue are never directly charged to profit or loss. Usually, the share premium account is
debited, and the retained earnings are debited only if there is no balance or not enough balance in share premium account.

 A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free additional shares to
existing shareholders in proportion to their existing shareholding. For example, a company may give one
bonus share for every five shares held.
 Bonus issue is always at par value and it does not involve any cash inflows. A company may decide to
distribute bonus shares as an alternative to paying cash dividends and thus avoiding the cash outflow.
 The company converts some of its reserves (share premium or retained earnings or both) into extra share
capital. The journal entry is:
Debit Share premium / Retained earnings XXXX
Credit Share capital XXXX
 In case bonus issue is made as dividend, retained earnings are debited.
 In case of bonus issue other than as dividend, it is common to utilise the balance of share premium account
first.

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 Dividend is the distribution of profits to shareholders. Dividend must be recognised only when it is
declared (i.e. approved by relevant authority). The dividend is usually paid within few days of its
declaration.
 Many companies pay dividends in two stages during the course of their accounting year:

 This dividend is declared during the year by board of directors and it

is recognised immediately in the same year as no further approval is
needed. It is common to declare interim dividend with half-yearly
accounts.

 This is dividend calculated after the end of a financial year based on

the company's annual profits. It is proposed by directors but must be
declared (approved) by shareholders in their meeting in the
following year.
 Therefore, final dividend of year 2022 shall be declared and
recognised in year 2023. Shareholders may accept, reject or reduce
the amount of dividend as proposed by directors but cannot
increase it.

 The journal entries for recognising dividends are:

Debit: Retained Earning XXX

Credit: Bank / Dividend Payable XXX

Debit: Retained Earning XXX

Credit: Share Capital XXX

 Preference shares are of two types:

 are treated
as equity share capital.
Debit: Retained Earnings XXXX
Credit: Bank / Dividend payable XXXX

 are classified as
liability as entity has obligation to settle the amount after a
certain time.
Debit: Interest Expense – P/L XXXX
Credit: Bank / Dividend payable XXXX
 The dividend on preference shares may be cumulative or non-cumulative
 Such dividend for the period need to be taken into account
irrespective of whether declared or not.
 Any unpaid cumulative dividends pass to future years and
have to be paid out before dividends for ordinary
shareholders.

 Such dividend for the period need to be taken into account

only for the amount of dividend declared for the period.

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 A transfer from one reserve to another may also be made. The following transfers are
common:

Debit: Revaluation Surplus XXXX

Credit: Retained Earning XXXX

Debit: Revaluation Surplus XXXX

Credit: Retained Earning XXXX

Debit: Retained Earnings XXXX

Credit: General Reserves XXXX

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IAS 1: Statement of Changes in Equity Compiled by: Murtaza Quaid

IAS 1: STATEMENT OF CHANGES IN EQUITY

(Practice Questions)

Question 1. [ICAP CAF 1 Study Text]

Adeel Limited (AL) had following equity balances as on 1st January 2023:

On 16 April 2023, AL made a 20% right issue at par value. Issue costs of Rs. 1 million were also incurred.
Required: Journal entries.

Question 2. [ICAP CAF 1 Study Text]

Aqeel Limited (AL) had following equity balances as on 1st January 2023:

On 16 August 2023, AL made a right issue of 1 for 4 shares already held at Rs. 150 per share. Issue costs
of Rs. 5 million were also incurred.
Required: Journal entries.

Question 3. [ICAP CAF 1 Study Text]

Arma Limited (AL) had following equity balances as on 1st January 2023:

On 11 December 2023, AL issued 300,000 shares at Rs. 90 each after obtaining necessary approvals from
regulatory authorities. Issue costs of Rs. 2 million were also incurred.
Required: Journal entries.

IQ School of Finance

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IAS 1: Statement of Changes in Equity Compiled by: Murtaza Quaid

Question 4. [ICAP CAF 1 Study Text]

Jazib Limited (JL) had following equity balances as on 1st January 2023:

On 5 February 2023, JL made a bonus issue of 1 for 5 shares already held.

Required: Journal entries.

Question 5. [ICAP CAF 1 Study Text]

Ghalib Limited (GL) had following equity balances as on 1st January 2023:

On 24 October 2023, GL declared a bonus dividend of 20%.

Required: Journal entries.

Question 6. [ICAP CAF 1 Study Text]

Maria Limited (ML) had following equity balances as on 1st January 2023:

The following detail of dividends declared is available:

*Declared with half yearly accounts by directors on 17th August each year.
**Declared by shareholders on 25th April of following year.
Required: Journal entries for recognising dividend for the year ended 31 December 2023.

IQ School of Finance

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IAS 1: Statement of Changes in Equity Compiled by: Murtaza Quaid

Question 7. [ICAP CAF 1 Study Text]

Zahra Limited (ZL) had following equity balances as on 1st January 2023:

The preference shareholders are entitled to 12% cumulative dividend in arrears. However, no dividend
was declared or paid during the year.
Required: Journal entries for recognising dividend for the year ended 31 December 2023.

Question 8. [ICAP CAF 1 Study Text]

The following information relate to Multan Limited (ML):
(i) ML disposed of a land on 3rd January 2023. This land had a carrying amount of Rs. 85 million
(using revaluation model) and was purchased at a cost of Rs. 36 million few years ago.
(ii) ML revalued its motor vehicles on 1st January 2023 and a revaluation surplus of Rs. 50 million
was recognised at this date. The motor vehicles had remaining useful life of 5 years on this date
and are being depreciated using straight line method.
(iii) ML has determined its profit for the year ended 31 December 2023 at Rs. 75 million after all the
necessary adjustments. The board of directors have approved a transfer 20% of profit to general
reserves.
Required: Journal entries involving transfers between reserves. Journal entries for disposal or gain (loss)
on revaluation are not required.

IQ School of Finance

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IAS 1: Statement of Changes in Equity Compiled by: Murtaza Quaid

Question 9. [ICAP CAF 1 Study Text]

The equity of SMS Limited as on December 31, 2019 is as follows:

The company also made a bonus issue of 2 shares for 1 already during the year.
Required: Prepare statement of changes in equity of SMS Limited for the year ended on December 31,
2019.

IQ School of Finance

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IAS 1: Statement of Changes in Equity Compiled by: Murtaza Quaid

Question 10. [ICAP CAF 1 Study Text]

M&K Limited (MKL) is in the business of manufacturing and sale of yarn products. MKL’s year-ends on 31
December.
Below is the relevant information given:

MKL revalued non-current assets on December 31, 2017 resulting in revaluation surplus of Rs. 1.5
million. Remaining useful life of the assets is 10 years and MKL has a straight line method for
depreciation.
The board of directors of MKL has implemented policy of transferring 5% of annual profits to general
reserves each year.
Following events have taken place in year 2018 and 2019:
(i) On March 31, 2018, MKL issued right shares (one right share against five ordinary shares held)
for Rs. 20 per share.
(ii) The board of directors of MKL approved interim dividend of Rs. 2.25 per share for the half year
ended June 30, 2018.
(iii) Profit for the year ended December 31, 2018 is Rs. 10.25 million
(iv) The board of directors recommended final dividend for the year 2018 of Rs. 4.25 per share on
February 15, 2019, which was duly approved by the shareholders on March 21, 2019.
(v) The board of directors approved bonus shares of 20% of the outstanding shares on June 30,
2019 which were duly credited in shareholders account on August 31, 2019.
(vi) The board of directors approved interim cash dividend of Rs. 1.25 per share for the third quarter
ended September 30, 2019.
(vii) Profit for the year ended December 31, 2019 is Rs. 12.5 million.
(viii) The board of directors recommended final dividend for the year 2019 of Rs. 5 per share on
February 15, 2020, which was duly approved by the shareholders on March 21, 2020.
Required: Prepare statement of changes in equity for the year ended December 31, 2019 (including
comparatives). The column for total is not required.

IQ School of Finance

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IAS 1: Statement of Changes in Equity Compiled by: Murtaza Quaid

Question 11. [ICAP CAF 1 Study Text]

ABC Industries Limited is in the business of manufacturing and sale of Cars. The company’s year-ends on
31 December.
Below is the relevant information given:

The board of directors of ABC Industries Limited has implemented policy of transferring 5% of annual
profits to general reserves each year.
Following events have taken place in year 2018 and 2019:
(i) The board of directors recommended final dividend for the year ended December 31, 2017 of
Rs. 5 per share on February 15, 2018, whereas shareholders only approved Rs. 4 per share on
March 31, 2018.
(ii) On 30 April 2018, the company issued 5 million shares for Rs. 25 each.
(iii) The board of directors approved interim dividend of Rs. 1 per share for the third quarter ended
September 30, 2018.
(iv) Profit for the year ended December 31, 2018 is Rs. 130.25 million.
(v) The board of Directors recommended final dividend for the year ended December 31, 2018 of
Rs. 4.25 per share on February 15, 2019, shareholders have approved it and have asked to
increase it to Rs. 6 per share in their meeting held on March 31, 2019.
(vi) The board of directors approved bonus shares of 10% of the outstanding shares on June 30,
2019.
(vii) The board of directors approved interim dividend of Rs. 1.5 per share for the third quarter
ended September 30, 2019.
(viii) Profit for the year ended December 31, 2019 is Rs. 175 million.
(ix) The board of directors of the company recommended final dividend for the year ended
December 31, 2019 of Rs. 5.5 per share on February 15, 2020, which was duly approved by the
shareholders on March 31, 2020.
Required: Prepare statement of changes in equity for the year ended December 31, 2019 (including
comparatives). The column for total is not required.

IQ School of Finance

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IAS 1: Statement of Changes in Equity Compiled by: Murtaza Quaid

Question 12. [ICAP CAF 1 Study Text]

The following information pertains to draft financial statements of Pak Ocean Limited (POL) for the year
ended 31 December 2018.

Cash dividend @ 18% for the year ending 2017 was declared in March 2018.
Bonus issue declared during the year ended 31 December 2018:
▪ Interim(declared with half yearly accounts) 10%
▪ Final 25%
On 30 November 2018, POL issued 25% right shares to its ordinary shareholders at Rs. 120 per share.

Required: Prepare the statement of changes in equity for the year ended December 31, 2018 for Pak
Ocean Limited.

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Question 13. [ICAP CAF 1 Study Text]

For the purpose of preparation of statement of changes in equity for the year ended 31 December 2017,
Daffodil Limited (DL) has extracted the following information:

The asset which was revalued upward in previous years has been sold on 15 October 2017.
Details of share issues:
▪ 25% right shares were issued on 1 May 2016 at Rs. 18 per share.
▪ A bonus issue of 10% was made on 1 April 2017 as final dividend for 2016.
▪ 50 million right shares were issued on 1 July 2017 at Rs. 15 per share.
▪ A bonus issue of 15% was made on 1 September 2017 as interim dividend.
Share capital and reserves as at 31 December:

Required: Prepare DL’s statement of changes in equity for the year ended 31 December 2017 along with
comparative figures. The column for total is not required.

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Question 14. [ICAP CAF 1 Study Text]

Kashif Construction Limited (KCL), a public listed company, is in the process of finalizing its accounts for the year ended
31 December 2023. The following information is available:
(i) Share capital and reserves as at 1 January 2022 were as follows:

The preference shareholders are entitled to the cumulative preference dividend of 10% which becomes due on 31
December each year.
(ii) The details share issued for cash consideration are as follows:
▪ A right issue of 20% at Rs. 18 per share on 30 May 2022. Transaction costs of Rs. 3 million were also incurred.
▪ A right issue of 1 for 8 shares already held at a premium of Rs. 11 per share on 10 June 2023. Transaction
costs of Rs. 4 million were also incurred.
(iii) The total comprehensive income for the years ended 30 June 2022 and 2023 are as follows:

Revaluation was carried on 1st January 2022 for the first time; the related assets had remaining useful life of 5
years. Another revaluation of same assets was carried on 1st January 2023, however, there is no change in useful
life. KCL transfers revaluation surplus to retained earnings on annual basis.
(iv) The details of cash dividend and bonus issues of ordinary shares (as dividend) declared and paid during the three
years are as follows:

*in August with dispatch of half-yearly accounts

** In April when annual general meeting of shareholders was held
(v) KCL follows a policy of transferring 10% of its profit after tax to general reserve.
Required: Prepare statement of changes in equity for the year ended 30 June 2023, along with comparatives.

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IAS 1: STATEMENT OF CHANGES IN EQUITY

(ICAP Past Paper Questions)
Question No. 1 of Autumn 2019, 7 marks
The following information pertains to Wednesday Limited (WL) for the year ended 30 June 2019:
(i) Shareholders' equity as at 1 July 2018:

(ii) On 30 November 2018, WL issued 30% right shares at a premium of Rs. 120 per share.
(iii) Cash dividend and bonus shares for the last two years:

(iv) Profit for the year amounted to Rs. 95 million.

(v) Revaluation surplus arising during the year amounted to Rs. 35 million whereas transfer of
incremental depreciation for the year was Rs. 9 million.
Required: Prepare WL’s Statement of Changes in Equity for the year ended 30 June 2019.
(Column for total and comparative figures are not required)

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Question No. 1 of Spring 2021, 8 marks

Following information pertains to Astrazenca Limited (AL):
(i) Shareholders' equity as on 1 January 2020:

(ii) Profit and transfer of incremental depreciation as per the draft financial statements for the year
ended 31 December 2020 amounted to Rs. 45 million and Rs. 5 million respectively.
(iii) Dividends for the last two years:

(iv) AL uses revaluation model for subsequent measurement of its land and buildings only. The
revalued amounts of land and buildings have been assessed at 31 December 2020 but not
incorporated in draft financial statements. The relevant details are as under:

Required: Prepare AL’s statement of changes in equity for the year ended 31 December 2020.
(Column for total and comparative figures are not required)

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



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 To prescribe the criteria and accounting treatment of

And their changes And their changes And their correction

 
 

are the specific principles, bases, conventions, rules and practices

applied by an entity in preparing and presenting financial statements.
An accounting policy may relate to:
 Recognition criteria (e.g. capitalising borrowing costs in the cost of qualifying
asset rather than charging it as an expense);
 Measurement basis (e.g. measuring investment property applying either cost
model or fair value model); or
 Presentation (e.g. presenting deferred government grant related to asset either
separately or by deducting from carrying amount of related asset).

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1. When an IFRS specifically applies to a transaction, event or

condition, the accounting policies applied to that item shall
be determined by applying the IFRS.
2. In absence of an IFRS that is applicable specifically, the management shall
use its judgement in developing and applying an accounting policy.
In making such judgement, the management should consider following
sources:
a) IFRS dealing with similar and related issues; and
b) Conceptual Framework for Financial Reporting; and
c) Recent pronouncement of other standard-setting bodies (to the extent
not in conflict with afore-mentioned sources).

Accounting policies should be applied consistently

for similar transactions unless required or permitted
by IFRSs.

New policy results in more

Required by new IFRS reliable & relevant information
to users of financial statements
(voluntary change)

Transition provision in
new IFRS
If the new IFRS does not
include any transitional
provisions

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The initial application

Change in accounting policy shall be applied
of revaluation model under IAS 16 or
retrospectively (as if the new accounting policy had always IAS 38 shall be dealt in accordance
been applied) except to the extent that it is impracticable with IAS 16 or IAS 38 respectively, and
to determine either period specific effects or cumulative not in accordance with IAS 8.
effect of change.
Retrospective application has three steps:
a) Apply new policy in current period (e.g., year 2023 is current period).
b) Apply new policy in comparative period as if the new accounting policy had always been
applied (e.g., year 2022 is comparative period presented).
c) For periods before the comparative period, adjust the opening balances of earliest comparative
period of each affected component of equity and related asset or liability as if the new
accounting policy had always been applied (e.g., opening balances of year 2022 shall be
adjusted).

When it is impracticable to determine the period specific effects, the entity shall apply the new
accounting policy retrospectively from the earliest date practicable.
When it is impracticable to determine the cumulative effect, (at the beginning of the current
period), of applying a new accounting policy to all prior periods, the entity shall adjust the
comparative information to apply the new accounting policy prospectively from the earliest date
practicable.

are monetary amounts in

financial statements that are subject to
measurement uncertainty.  Provision for bad debts
 Provision for warranty
Some items in financial statements are measured repairs
in a way that involves measurement uncertainty
i.e. monetary amounts that cannot be observed  Method of depreciation
directly and must instead be estimated. The use  Useful Life
of reasonable estimates is an essential part of  Residual Value
preparation of financial statements and does not
undermine their reliability.

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 An accounting estimate may need revision if changes occur in the

circumstances on which the accounting estimate was based or as a result
of new information or more experience. A change in accounting
estimate does not relate to prior periods is not correction of prior
period error.
 When it is difficult to distinguish a change in an accounting policy from a
change in an accounting estimate, the change is treated as a change in
accounting estimate.

 In the current reporting period Recognising the effect of the change in the
 In the current and future reporting accounting estimate in the current and future
periods periods affected by the change.

The effect of change in an accounting estimate relating to profit or loss

shall be recognised prospectively by including it in profit or loss in:
a) The period of change if the change affects that period only; or
b) The period of change and future periods if the change affects
both.

To the extent that a change in an accounting estimate gives rise to

changes in assets and liabilities, or relates to an item of equity, it shall
be recognised by adjusting the carrying amount of the related asset,
liability or equity item in the period of change.

The nature and amount of a change in an accounting estimate that has

an effect in the current period or is expected to have an effect in
future periods, except for the effect on future periods when it is
impracticable (disclose this fact if this is the case) to estimate that
effect.

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An entity shall include comparative information for narrative and descriptive

information if it is relevant to understanding the current period’s financial statements.
An entity shall present, as a minimum,
 two statements of financial position,
 two statements of profit or loss and other comprehensive income,
 two statements of cash flows and
 two statements of changes in equity, and related notes.

An additional (third) statement of financial position as at the beginning of the

preceding period is also required when an entity:
a) applies an accounting policy retrospectively (IAS 8); or
b) makes a retrospective restatement of items in its financial statements (IAS 8); or
c) reclassifies items in its financial statements (IAS 1).

Rules / Principles / Bases Amount determined based on selected basis

or some pattern of future consumption

 FIFO to Weighted Average  Provision for bad debts

 Cost model to Fair value model (IAS 40)  Method of depreciation
 Useful Life

Retrospectively Prospectively

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 Prior period errors are omissions from, and

misstatements in, the entity’s financial
statements for one or more prior periods
arising from a failure to use, or misuse of,
reliable information that:
 was available when financial statements for
those periods were authorised for issue;
and
 could reasonably be expected to have been
obtained and taken into account in the
preparation and presentation of those
financial statements.
 Such errors include the effects of mathematical mistakes, mistakes in
applying accounting policies, oversights or misinterpretations of facts,
and fraud.

Information is if omitting, misstating or obscuring it could reasonably be

expected to influence decisions that the primary users of financial statements make on
the basis of those financial statements, which provide financial information about a
reporting entity.

Yes No

an entity shall correct material prior period

In the
errors in the first set of financial statements authorised current
for issue after their discovery by: reporting
 restating the comparative amounts for the prior period(s) period
presented in which the error occurred; or
 if the error occurred before the earliest prior period presented,
restating the opening balances of assets, liabilities and equity for
the earliest prior period presented.

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When it is impracticable to determine the period-specific effects of an error

on comparative information for one or more prior periods presented, the
entity shall restate the opening balances of assets, liabilities and equity for
the earliest period for which retrospective restatement is practicable (which
may be the current period).

When it is impracticable to determine the cumulative effect, at the

beginning of the current period, of an error on all prior periods, the entity
shall restate the comparative information to correct the error prospectively
from the earliest date practicable.

An entity shall disclose the following:

a) the nature of the prior period error;
b) for each prior period presented, to the extent practicable, the amount of the
correction for each financial statement line item and EPS (if IAS 33 is applicable);
c) the amount of the correction at the beginning of earliest prior period presented;
and
d) if retrospective restatement is impracticable for a particular prior period, the
circumstances that led to the existence of that condition and a description of
how and from when the error has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.

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IAS 8 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES

AND ERRORS (PRACTICE QUESTIONS)

Question 1. [CAF 1: FAR 1 – ICAP Study Text]

Whether the following are changes in accounting policies, changes in accounting estimates or prior
period errors:
i. An entity changed its accounting for land and buildings from cost model to revaluation model.
ii. The useful life of plant was revised downwards following impairment loss.
iii. The depreciation method for furniture was changed from straight line method to reducing
balance method.
iv. The cost formula used for valuation of inventories was changed from FIFO to weighted average.
v. It was discovered that last year company’s inventory sheets were under-casted.
vi. It was discovered that actual NRV of inventory was much lower than expected.
vii. Presentation changed from current/non-current to order of liquidity in statement of financial
position.

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Question 2. [Change in Accounting Policy] [CAF 1: FAR 1 – ICAP Study Text]

Following information have been extracted from the financial statements of Kashif Engineering Limited
(KEL) for the year ended 31 December 2024:

*Relates to property, plant and equipment and investment property

To provide more relevant and reliable information about investment property, it has been decided to
change the measurement basis for investment property from cost model to fair value model.
The only investment property of KEL is a building purchased on 1 January 2021 at a cost of Rs. 150
million. 60% of the cost represents building component having estimated useful life of 20 years and
residual value of Rs. 10 million. The depreciation is included in the above draft financial statements. The
fair value of the investment property has increased by 6% in each year since acquisition.
Required: Prepare the extracts (including comparative amounts) of:
(a) Statement of financial position of KEL as at 31 December 2024.
(b) Statement of profit or loss of KEL for the year ended 31 December 2024.
(c) Statement of changes in equity (retained earnings column) of KEL for the year ended 31
December 2024.

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Question 3. [Correction of Error] [Illustrative example 1 of IAS 8]

During 2002, Beta Co discovered that some products that had been sold during 2001 were incorrectly
included in inventory at 31 December 2001 at Rs. 6,500.

The draft profit and loss (before rectification) is as follow:

2002 (Draft) 2001 (Reported)

Amount in Rs.
Sales 104,000 73,500
Cost of sales (86,500) (53,500)
Profit for the year 17,500 20,000

Share capital at year end 5,000 5,000

Retaining earning at start of the year 40,000 20,000
Profit for the year 17,500 20,000
Retaining earning at end of the year 57,500 40,000
Required: Prepare the following:
(i) Profit and loss account
(ii) Statement of changes in equity
(iii) Note for restatement of error

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Question 4. [Change in Accounting Estimate and Correction of Prior Period Error]

[CAF 5 Past Paper, Autumn 2017, Q6, 17 marks]
Following information has been extracted from the draft financial statements of Marvellous Limited
(ML) for the year ended 30 June 2017:
Statement of Financial Position

2017 2016
Rs. in million
Property, plant and equipment 700 612
Retained Earnings 275 240

Statement of Profit or Loss

2017 2016
Rs. in million
Profit for the year 65 85

The following matters are under consideration of the management:

▪ It was identified that ML’s had incorrectly charged Rs. 36.75 million as maintenance expense,
incurred on installation of the plant. The plant was available for use on 1 July 2014 and had been
depreciated on straight line basis over a useful life of four years.
▪ In view of significant change in the expected pattern of economic benefits from an item of the
equipment, it has been decided to change the depreciation method from reducing balance to
straight line. The equipment was purchased on 1 July 2015 at a cost of Rs. 80 million having
estimated useful life of 5 years and residual value of Rs. 16 million. The depreciation at the rate of
27.5% on reducing balance method is included in the above draft financial statements.
The following balances pertain to ML’s statement of financial position as on 30 June 2015:

Rs. in million
Property, plant and equipment 650
Retained Earnings 180

Required: Prepare extracts from the following (including comparative figures) for the year ended 30
June 2017:
(a) Statement of financial position
(b) Statement of profit or loss
(c) Statement of changes in equity
(d) Note on correction of error

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Question 5. [CAF 5 Past Paper, Spring 2016, Q7, 10 marks]

The following information has been taken from the financial statements of Asif Engineering Limited
(AEL) for the year ended 31 December 2015:

In the above financial statements, AEL has recognised consumption of spare parts as expense. AEL has
now decided to change its above policy and classify consumption of spares having useful life of more
than one year as capital spares under property, plant and equipment.
Following information pertains to capital spares consumed during the past three years:

Depreciation on these parts is to be charged using straight line method over its useful life.
Required: In accordance with the requirements of International Financial Reporting Standards, prepare
the revised extracts (including comparative figures) of the following:
(a) Statement of financial position as at 31 December 2015 (04)
(b) Statement of comprehensive income for the year ended 31 December 2015 (03)
(c) Statement of changes in equity for the year ended 31 December 2015 (03)

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Question 6. [CAF 5 Past Paper, Autumn 2012, Q4, 20 marks]

Wonder Limited (WL) is engaged in the manufacturing and sale of textile machinery. Following are the
draft extracts of the statement of financial position and the income statement for the year ended 30
June 2012:
Statement of Financial Position

2012 2011
Rs. in million
Property, plant and equipment 189 130
Retained Earnings 198 108

Income Statement

2012 2011
Rs. in million
Profit for the year 90 78

Following additional information has not been taken into account in the preparation of the above
financial statements:
(i) Cost of repairs amounting to Rs. 20 million was erroneously debited to the machinery account
on 1 October 2010. The estimated useful life of the machine is 10 years.
(ii) On 1 July 2011, WL reviewed the estimated useful life of its plant and revised it from 5 years to 8
years. The plant was purchased on 1 July 2010 at a cost of Rs. 70 million.
Depreciation is provided under the straight line method.
Required: Prepare relevant extracts (including comparative figures) for the year ended 30 June 2012
related to the following:
(i) Statement of financial position
(ii) Income statement
(iii) Statement of changes in equity
(iv) Note on Correction of error
(v) Note on Change in accounting estimate

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Question 7. [CAF 5 Past Paper, Spring 2009, Q6, 11 marks]

Mohani Manufacturing Limited is engaged in manufacturing of spare parts for motor car assemblers.
The audited financial statements for the year ended December 31, 2007 disclosed that the profit and
retained earnings were Rs. 21 million and Rs. 89 million respectively. The draft financial statements for
the year show a profit of Rs. 15 million. However, following adjustments are required to be made:

(i) The management of the company has decided to change the method for valuation of raw
materials from FIFO to weighted average. The value of inventory under each method is as
follows:

(ii) In 2007, the company purchased a plant for Rs. 100 million. Depreciation on plant was recorded
at Rs. 25 million instead of Rs. 10 million. This error was discovered after the publication of
financial statements for the year ended December 31, 2007. The error is considered to be
material.

Required: Required: Produce an extract showing the movement in retained earnings, as would appear in
the statement of changes in equity for the year ended December 31, 2015 (including comparative
amounts).

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Question 8. [CAF 5 Past Paper, Autumn 2016, Q4, 18 marks]

Chand Paints Limited (CPL) is engaged in the manufacturing of chemicals and paints. In April 2016 it was
discovered that certain errors had been made in the financial statements for the year ended 30 June
2015. The errors were corrected in 2016. The details are as follows:

The share capital and un-appropriated profit of CPL as on 1 July 2014 was Rs. 10,400 million and Rs.
19,089 million respectively.
The details of dividend declared are as follows:

Required:
(i) Prepare a correction of error note to be included in the financial statements for the year ended 30
June 2016. (10)
(ii) Prepare the statement of changes in equity for the year ended 30 June 2016. (08)

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Question 9. [CAF 1 – ICAP Study Text]

Retained earnings column extracted from the draft statement of changes in equity of Zahidi Limited (ZL)
for the year ended 31 December 2020, is as follows:

On 1 January 2018, ZL had acquired a building at cost of Rs. 200 million and had rented it out on the
same day for three years. On 31 December 2020, the tenant vacated the building and ZL decided to
transfer its head office to such building.
The finance manager was considering the reporting implications of change in use of the building. He
came to know that the building has erroneously been reported as property, plant and equipment since
inception and was being depreciated on straight line basis over 20 years. The fair value of the building
has increased by 10% in each year since acquisition.
ZL follows cost model for property, plant and equipment and fair value model for investment property.
Required: Prepare the following extracts from ZL’s financial statements for the year ended 31 December
2020 in accordance with IFRSs:
(a) Correction of error note
(b) Retained earnings column as would appear in the statement of changes in equity.
(Show comparative figures)

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Question 10. [CAF 5 Past Paper, Spring 2018, Q1, 14 marks]

For the purpose of preparation of statement of changes in equity for the year ended 31 December 2017,
Daffodil Limited (DL) has extracted the following information:

Additional information:
(i) Details of share issues:
▪ 25% right shares were issued on 1 May 2016 at Rs. 18 per share. The market price per share
immediately before the entitlement date was also Rs. 18 per share.
▪ A bonus issue of 10% was made on 1 April 2017 as final dividend for 2016.
▪ 50 million right shares were issued on 1 July 2017 at Rs. 15 per share. The market price per
share immediately before the entitlement date was Rs. 25 per share.
▪ A bonus issue of 15% was made on 1 September 2017 as interim dividend.
(ii) After preparing draft financial statements, it was discovered that depreciation on a plant costing
Rs. 700 million has been charged @ 25% under reducing balance method, from the date of
commencement of manufacturing i.e. 1 July 2014. However, the plant was available for use on 1
February 2014.
(iii) Share capital and reserves as at 31 December:

Required: Prepare DL’s statement of changes in equity for the year ended 31 December 2017 along with
comparative figures. (Ignore taxation)

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Question 11. [CAF 5 Past Paper, Autumn 2019, Q5(ii), 9 marks]

Coal Limited (CL) is preparing its financial statements for the year ended 30 June 2019. Following
information is available:
(ii) During the year, it was discovered that due to some calculation error in excel sheet, fair value of
CL’s office building was taken incorrectly as Rs. 460 million instead of Rs. 360 million. Resultantly,
the building was recorded based on incorrect revaluation amount in CL’s financial statements for
the year ended 30 June 2017.
This building was acquired on 1 July 2015 for Rs. 500 million and then revalued for the first time
on 30 June 2017.
CL follows revaluation model for subsequent measurement of its building classified as property,
plant and equipment and charges depreciation over its useful life of 10 years using straight line
method. CL accounts for revaluation on net replacement value method and transfers the
maximum possible amount from the revaluation surplus to retained earnings on an annual basis.
As on 30 June 2019, the revalued amount of building has been determined at Rs. 320 million.
Required: Prepare extracts from CL’s statement of financial position and related notes to the financial
statements for the year ended 30 June 2019 alongwith comparative figures for the above.
(Note on Property, plant and equipment is not required)

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Question 12. [CAF 1 – ICAP Study Text]

Supreme Cement Company Limited (SCCL) is in process of finalization of its accounts for the year ended
31 December 2012. The following information is available:
(i) Shareholders’ equity as at 31 December 2011 and 2010 consisted of:

(ii) The total comprehensive income for the years ended 31 December 2010, 2011, and 2012
(unaudited) was Rs. 4,240 million, Rs. 4,944 million and Rs. 5,090 million respectively.
(iii) During the year ended 31 December 2012 it was observed that machinery purchased on 01 July
2011 for Rs. 350 million, was erroneously debited to stock-in-trade instead of property, plant
and equipment. SCCL depreciates machinery at the rate of 20% per annum on the reducing
balance method. No adjustment has been made yet in respect of this error. SCCL uses perpetual
inventory method.
(iv) Cash dividends and bonus dividends declared during the last three years are as follows:

*Declared at the time of announcement of half-yearly financial results.

(v) Right shares were issued on 30 November 2012 in the ratio of 4 right shares for every 5 shares
held by the shareholders of the company. The right issue was made at Rs. 18 per share
Required: Prepare the statement of changes in equity for the year ended 31 December 2012.
(including comparative figures, total column is not required).

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Question 13. [CAF 1 – ICAP Study Text]

The following information pertains to draft financial statements of Pak Ocean Limited (POL) for the year
ended 31 December 2014:

(i) Installation of an assembly plant was completed in December 2012 at a cost of Rs. 60 million
and it was ready for use on 1 February 2013. However, depreciation for the year ended 31
December 2013 amounting to Rs. 4.5 million was worked out from the date of production i.e. 1
April 2013. The additional depreciation of Rs. 1 million was included in the depreciation expense
for the year ended 31 December 2014, in an attempt to correct the error.
(ii) Shareholders’ equity as at 1 January 2013 was as follows:

(iii) On 30 November 2014, POL issued 25% right shares to its ordinary shareholders at Rs. 120 per
share.
(iv) Cash dividend and bonus dividend declared during the last three years:

*Declared with half-yearly accounts.

**Not entitled to cash dividends declared on the same day.
Required: Prepare statement of changes in equity for the year ended 31 December 2014.
(including comparative figures, total column is not required).

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IAS 8 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING

ESTIMATES AND ERRORS
[FAR 1 - ICAP PAST PAPER QUESTIONS]

Question No. 8 of Spring 2022, 17 marks

Chand Limited (CL) was incorporated on 1 January 2020 with an authorized share capital of Rs. 500 million
comprising of 50 million shares.
(i) Details of shares issued are as follows:
▪ On 1 March 2020, CL issued 20 million shares at Rs. 18 each.
▪ On 1 October 2020, CL issued 15% bonus shares. The market price per share immediately before
the announcement of bonus was Rs. 24 per share.
▪ On 1 September 2021, CL issued 40% right shares at a premium of Rs. 12.5 per share. The market
price per share immediately before the entitlement date was Rs. 33 per share.
(ii) Following information has been extracted from CL’s draft financial statements:

(iii) After the preparation of draft financial statements for the year ended 31 December 2021, it was
discovered that installation cost of Rs. 12 million relating to a plant capitalized on 1 August 2020 was
wrongly expensed out. The plant is subsequently measured using cost model and is being depreciated
@ 20% per annum on reducing balance method.
Required:
a) Prepare CL’s statement of changes in equity for the year ended 31 December 2021 along with
comparative figures. (Column for total is not required) (09)
b) Compute CL’s basic and diluted earnings per share to be disclosed in the statement of profit or loss
for the years ended 31 December 2021 and 2020. (08)

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Question No. 7 of Spring 2023, 15 marks

Roman Limited (RL) has extracted the following information for the purpose of preparation of statement
of changes in equity for the year ended 31 December 2022:

Additional information:
(i) On 1 February 2021, a bonus issue of 10% was made as final dividend for 2020.
(ii) On 15 May 2021, RL issued right shares for Rs. 20 per share. Right shares were issued in a proportion
of 1 right share for every 4 ordinary shares held. Transaction cost of Rs. 0.5 per share was also
incurred.
(iii) On 1 May 2022, an item of property, plant and equipment was disposed of at its carrying value. An
amount of Rs. 75 million was remaining in the revaluation surplus account in respect of this item’s
previous revaluations.
(iv) On 1 July 2022, 50 million irredeemable preference shares having par value Rs. 10 each were issued
at Rs. 15 per share.
(v) In October 2022, an interim 5% cash dividend on all shares was made.
(vi) The revalued amount of RL’s head office building was determined as Rs. 400 million as on 31
December 2021. However, revaluation was not incorporated as the change in revalued amount was
considered to be temporary by RL’s management. The head office building had a carrying value of
Rs. 350 million on 31 December 2021 and had a remaining useful life of 10 years. A revaluation loss
of Rs. 24 million was recorded on 31 December 2019 on its previous revaluation.
(vii) Share capital and reserves as at 1 January:

Required: Prepare RL’s statement of changes in equity for the year ended 31 December 2022 along with
comparative figures. (Column for total is not required)

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Question No. 1 of Autumn 2023, 9 marks

The retained earnings column, extracted from the draft statement of changes in equity of Puffer Limited
(PL) for the year ended 31 December 2022, is as follows:

The following changes have not been incorporated into the draft financial statements of PL:
(i) PL has decided to change the method for valuation of inventory from ‘first-in, first-out’ (FIFO) to
the weighted average. The value of inventory under each method has been determined as follows:

(ii) In view of increasing bad debts, PL has decided to double the provision for doubtful receivables.
The balance of provision for doubtful receivables prior to this change were as follows:

(iii) PL has also decided to recognise all borrowing costs incurred in a year as an expense. Previously,
borrowing costs related to qualifying assets were capitalised as part of the cost of that asset. Total
borrowing costs incurred during the years 2022 and 2021 amounted to Rs. 87 million and Rs. 95
million, respectively. Of these, Rs. 53 million and Rs. 38 million were capitalised in the cost of head
office building in 2022 and 2021, respectively. The construction of the building is expected to
complete in 2023.
Required:
(a) Briefly discuss how the above changes should be incorporated in PL’s financial statements. (03)
(b) Prepare the retained earnings column as would appear in PL’s statement of changes in equity for the
year ended 31 December 2022, in accordance with IFRSs. (06)

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Question No. 7 of Spring 2024, 20 marks

Financial statements of Bard Limited (BL) for the year ended 31 December 2023 are under preparation.
During the review of the draft financial statements of BL, the following matters have been identified:
(i) Statement of changes in equity was not prepared in the draft financial statements. In this respect,
the following details have been gathered:
▪ Share capital and reserves as at 1 January:

▪ BL’s profit for the year 2023 (draft), 2022 and 2021 were Rs. 575 million, Rs. 477 million and
Rs. 321 million respectively.
▪ Final dividend for the year ended 31 December 2021 comprised of 15% cash dividend and
10% bonus shares. The bonus issue was made from share premium, and the shares were
issued in April 2022 after payment of cash dividend.
▪ A bonus issue of 25% was made in July 2023 as interim dividend.
▪ 40 million right shares were issued in October 2023 at Rs. 18 per share. Transaction costs of
Rs. 3 million were also incurred.
(ii) On 1 January 2020, BL had received a government grant of Rs. 600 million to acquire a
manufacturing plant. However, the grant was treated as income on receipt.
The manufacturing plant was acquired at a total cost of Rs. 1,000 million on 1 January 2020. It was
estimated to have a useful life of 8 years and residual value of Rs. 100 million.
(iii) BL had decided to adopt the revaluation model from 1 January 2023 for subsequent measurement
of land and buildings included in property, plant and equipment. However, this change has not
been accounted for in the draft financial statements.
The following information pertains to BL’s property, plant and equipment:

On 1 November 2023, BL sold 40% of its land.

Depreciation on buildings has been recorded using straight line method. BL transfers the
maximum possible revaluation surplus to retained earnings.
Required: Prepare BL’s statement of changes in equity along with comparative figures for the year ended
31 December 2023. (The column of total is not required)

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Question No. 5 of Autumn 2024, 8 marks

Pipri Limited (PL) constructed a warehouse at a cost of Rs. 102 million, which was completed on 30 June
2022. The warehouse has a useful life of 12 years. Upon completion, 95% of the warehouse was rented
out, while the remaining 5% was allocated for PL's administrative use. The warehouse’s design prohibits
the sale of these portions separately.
On 1 July 2023, PL discovered that the warehouse's cost mistakenly included abnormal wastage of Rs. 6
million in March 2022. PL corrected this error immediately and also changed the warehouse’s subsequent
measurement to the fair value model.
On 1 April 2024, PL started using the entire warehouse for its inventory storage. The fair values of the
warehouse on various dates are as follows:

Other information:
(i) Depreciation is applied using the straight-line method.
(ii) All items of property, plant and equipment are subsequently measured using the cost model.
Required: Prepare the journal entries with narrations to be recorded in the books of PL during the year
ended 30 June 2024. (Show relevant computations)

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Question No. 5 of Spring 2025, 10 marks

The retained earnings column, extracted from the draft statement of changes in equity, prepared by a
junior accountant, of Versace Limited (VL) for the year ended 31 December 2024, is as follows:

The following changes have not been incorporated in the draft financial statements of VL:
(i) It was identified that inventory items costing Rs. 28 million that had been sold during 2023, were
included in the closing inventory as at 31 December 2023. VL uses the periodic inventory method.
(ii) It was decided to change the measurement basis of investment property from the cost model to
fair value model to provide more relevant and reliable information.
The only investment property owned by VL is a building purchased on 1 April 2021 at a cost of Rs. 750
million, with 30% of the cost allocated to the land element. Depreciation has been charged at 5% per
annum under the reducing balance method and is included in the above draft financial statements. The
fair value of the investment property at the end of 2021, 2022, 2023 and 2024 amounted to Rs. 770
million, Rs. 805 million, Rs. 790 million and Rs. 815 million respectively.
Required: Prepare the retained earnings column as would appear in VL’s statement of changes in equity
for the year ended 31 December 2024 in accordance with IFRSs. (Show comparative figures)

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IAS 7 requires all entities to prepare a statement of cash flows as an integral

component of financial statements for each period to present information in a
statement of cash flows to reflect changes in an entity’s cash and cash equivalents
during the period.
All entities need cash, regardless of how different their principal revenue-producing
activities might be, to conduct their operations, to pay their obligations, and to
provide returns to their investors. Users of an entity’s financial statements are
interested in how the entity generates and uses cash and cash equivalents.
Therefore, understanding cash inflows and outflows is important

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comprises  are short-term,

 Cash in hand; highly liquid investments that are
readily convertible to cash. For
 Cash in Bank; e.g. Prize Bonds etc.
 Demand deposits; and
 Not all investments are cash
 Bank overdraft
equivalents. An investment
normally qualifies as a cash
equivalent only when it has a
short maturity for e.g. 3 months
or less.
 Equity shares are cash
equivalents

are the principal are the acquisition and are activities that result
revenue-producing activities of the entity disposal of long-term assets and other in changes in the size and composition of
and other activities that are not investing or investments not included in cash the contributed equity and borrowings of
financing activities. equivalents. the entity.
Examples of cash flows from operating Examples of cash flows arising from Examples of cash flows arising from
activities are: investing activities are: financing activities are:
 cash receipts from the sale of goods and  cash payments to acquire or construct  cash proceeds from issuing shares;
the rendering of services; property, plant and equipment,
intangibles and other long-term assets;  cash proceeds from issuing debentures,
 cash receipts from royalties, fees,  cash receipts from sales of property, loans, bonds, mortgages and other
commissions and other revenue; plant and equipment, intangibles and short-term or long-term borrowings; and
 cash payments to suppliers for goods other long-term assets;  cash repayments of amounts borrowed.
and services;  cash payments to acquire equity or debt
instruments of other entities:
 cash payments to and on behalf of
employees; and  cash receipts from sales of equity or debt
instruments of other entities:
 cash payments or refunds of income  cash advances and loans made to other
taxes parties; and
 cash receipts from the repayments of
advances and loans made to other
parties.

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Profit (loss) before tax XXX / (XXX)  Purchase of non-current assets* (XXX)
Adjustments:  Proceeds from disposal of non-current assets* XXX
 Depreciation XXX  Purchase of short-term investments (XXX)
 Amortisation of government grant (XXX)  Disposal proceeds of short-term investments XXX
 Bad and doubtful debts expense (recovery or reversal) XXX / (XXX)  Receipt of grant related to assets XXX
 Loss (gain) on disposal of non-current assets XXX / (XXX)  Receipt of investment income / rental
XXX
 FV Loss (gain) on investment property XXX / (XXX) income / interest /dividend
 Impairment (reversal) loss XXX / (XXX) Net cash outflow from (used in) investing activities XXX / (XXX)
 Revaluation (reversal) loss (recognised in PL) XXX / (XXX)
 Rent income / investment income (XXX)
 Finance costs XXX  Proceeds from issue of shares XXX
Operating profit (loss) XXX / (XXX)  Dividend paid (XXX)
Working capital changes:  Repayment of long-term and short-term borrowings (XXX)
 Inventories decrease /(increase) XXX / (XXX)  Long-term and short-term borrowings obtained XXX
 Trade receivables decrease /(increase) XXX / (XXX) Net cash inflow from (used in) financing activities XXX / (XXX)
 Prepayments decrease /(increase) XXX / (XXX)
 Trade payables increase / (decrease) XXX / (XXX) Net increase (decrease) in cash and cash equivalents XXX / (XXX)
 Increase / (decrease) in Advance from customers XXX / (XXX) Cash and cash equivalent at the beginning of the year XXX
 Accrued expenses increase / (decrease) XXX / (XXX) Cash and cash equivalent at the end of the year XXX
Cash generated from (used in) operations XXX / (XXX)
Interest paid (XXX) *includes property, plant and equipment, investment
property, long term investments and long-term deposits etc.
Income taxes paid (XXX)
Net cash inflow from (used in) operating activities XXX / (XXX)

Cash received from customers XXX  Proceeds from issue of shares XXX
Cash paid to suppliers / vendors / employees (XXX)  Dividend paid (XXX)
Cash generated from (used in) operations XXX / (XXX)  Repayment of long-term and short-term (XXX)
Interest paid (XXX) borrowings
Income taxes paid (XXX)  Long-term and short-term borrowings obtained XXX
Net cash inflow from (used in) operating activities XXX / (XXX) Net cash inflow from (used in) financing activities XXX / (XXX)

Net increase (decrease) in cash and cash equivalents XXX / (XXX)

 Purchase of non-current assets* (XXX) Cash and cash equivalent at the beginning of the year XXX
 Proceeds from disposal of non-current assets* XXX Cash and cash equivalent at the end of the year XXX
 Purchase of short-term investments (XXX)
 Disposal proceeds of short-term investments XXX
 Receipt of grant related to assets XXX
 Receipt of investment income / rental
XXX
income / interest /dividend
Net cash outflow from (used in) investing activities XXX / (XXX)
*includes property, plant and equipment, investment
property, long term investments and long-term deposits etc.

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Cash flows from interest and dividends received and paid shall each be disclosed separately. Each
shall be classified in a consistent manner from period to period as either operating, investing or
financing activities.
Each of these items may be classified in either of the following two ways:

Interest paid (expensed or

because it is deducted because they are costs
capitalised in accordance
in determining profit or loss. of obtaining financial resources.
with IAS 23)
because they represent because it is deducted
Interest received
returns on investment. in determining profit or loss.
because they represent because it is deducted
Dividend received
returns on investment. in determining profit or loss.
in order to assist users
because they are costs to determine the ability of entity
Dividend paid
of obtaining financial resources. to pay dividends out cash
generated from operations.

on income shall be separately disclosed and shall be classified as cash

flows from operating activities unless they can be specifically identified with financing and
investing activities.

A statement of cash flows (alongwith other financial statements) enables users to evaluate:
a) the changes in net assets of an entity,
b) its financial structure (including its liquidity and solvency); and
c) its ability to affect the amounts; and
d) timing of cash flows in order to adapt to changing circumstances and opportunities.

Historical cash flow information is used as an indicator of the amount, timing and certainty of
future cash flows
a) in checking the accuracy of past assessments of future cash flows;
b) in examining the relationship between profitability and net cash flow and the impact of
changing prices; and
c) in comparability of the reporting of operating performance by different entities because it
eliminates the effects of using different accounting treatments for the same transactions and
events.

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Cash flows are classified by operating, investing and financing activities as each of these
classifications provide useful information from different perspective:

It is a key indicator of the extent to which the operations of the entity have
generated sufficient cash flows to repay loans, maintain the operating capability of
Operating the entity, pay dividends and make new investments without recourse to external
activities sources of financing. Information about the specific components of historical
operating cash flows is useful, in conjunction with other information, in forecasting
future operating cash flows.

Investing These cash flows represent the extent to which expenditures have been made for
activities resources intended to generate future income and cash flows.

Financing It is useful in predicting claims on future cash flows by providers of capital to the
activities entity.

Businesses must have sufficient cash; otherwise they cannot survive.

 A business may be incurring losses but may still survive if it has sufficient cash or has access to
other liquid assets.
 A profitable business may not survive if it is unable to pay its obligations when they fall due,
because it does not have enough cash or access to other liquid assets.
The fundamental purpose of being in business is to generate profit, as this will increase the owners'
wealth. Profitability relates to the long-term performance of the business and indicates that over
the long term a business will generate cash. In the short term, the business' viability is determined
by its ability to generate cash. However, as a statement of profit or loss is prepared on an accrual
basis, the profit for the year is unlikely to correlate with the movement in the company's bank
balance. Therefore, understanding cash inflows and outflows is important.

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Each financial statement, individually and in combination with other financial statements and other
information, provides useful information that helps users of financial statements to make informed
decisions. A balance between profitability and liquidity (cash balance) is required, a huge cash balance does
not usually indicate good management as this could have been invested to earn more profits. In particular,
following points should be considered:
 The amount and composition of net assets of an entity changes due to income and expenses (statement
of profit or loss) and cash flows (statement of cash flows). Both statements are relevant but provide
different aspects of information.
 Many decision-making models and valuation models rely on present value of the future cash flows
generated by an entity e.g. NPV and IRR. Historical cash flow information can be useful to check the
accuracy of past assessments and development of future assessments.
 Profitability is an important performance measure, and this information is provided by statement of
profit or loss, liquidity information is also important, and this information is provided by statement of
cash flows in conjunction with statement of financial position.
 Cash flows are necessary to survive in short term but in long term business must be profitable to
survive. Entities often forego short term benefits for long term major benefits e.g. sales on credit
usually earns higher profit margin as compared to cash sales.
 The cash flow is not affected by different accounting policies and estimates, and this makes cash flow
information more comparable, and consequently, less vulnerable to manipulation.

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IAS 7: STATEMENT OF CASHFLOWS [Practice Questions]

Question 1. [Indirect Method]

Hot Sauce Limited summarised final accounts are as follows:
Statement of financial position

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Statement of comprehensive income for year ended 31 December 2015

The following information is also available:

(1) The only new loan raised during the year was a five-year bank loan amounting to Rs. 65,000.
(2) Interest charged during the year was Rs. 156,000. Interest accrued was Rs. 24,000 last years and
Rs. 54,000 this year.
(3) Depreciation charged during the year amounted to Rs. 401,000.
(4) During the year plant which originally cost Rs. 69,000 was disposed of for Rs. 41,000.
(5) During the year the company issued 200,000 new shares.
(6) Dividend payments during the year were Rs. 230,000.
Required: Prepare a statement of cash flows for Hot Sauce Limited for the year ended 31 December
2015.

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Question 2. [Indirect Method]

The statement of financial position of Quetta Track Limited as at 30 June was as follows:

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Statement of comprehensive income (extracts)

Additional Information:
▪ Equipment of carrying amount Rs.250,000 was sold at the beginning of 2015 for Rs.350,000. This
equipment had originally cost Rs.1,000,000.
▪ In recent years, no dividends have been paid.
Required: Prepare a statement of cash flows, under the indirect method, for the year ended 30 June
2015.

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Question 3. [Indirect Method]

The following are the summarized accounts of Mardan Software Limited
Statement of financial position at 31 December

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Statement of comprehensive income (extracts) for the year ended 31 December 2015

Further information:
(1) Plant and equipment with a carrying amount of Rs184,000 was disposed of for Rs.203,000, whilst
a new item of plant was purchased for Rs312,000
(2) Fixtures and fittings with a carrying amount of Rs100,000 were disposed of for Rs95,000;
(3) Depreciation recognized on fixtures and fittings amounted to Rs 351,000.
(4) Dividend for the year was declared during the year. Dividend payable in the statements of
financial position at each year end relate to dividends declared in that year but not paid over to
shareholders by the reporting date.
Required: Prepare a statement of cash flows for the year ended 31 December 2015 in accordance with
IAS 7: Statement of cash flows.

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Question 4. [Indirect Method]

The statements of financial position of Tarbela Traders Limited at the end of two consecutive financial
years were:
Statements of financial position at 31 December

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Profit for the year ended 31 December 2015 is Rs.3,570,000 (after accounting for):

The written down value of the assets at date of disposal was:

Interest accrued on 31 December 2015 is Rs. 400,000 (2014: Nil).

Required: Prepare a statement of cash flows for the year ended 31 December 2015.

Question 5. [Provision for doubtful debt]

The following data relates to Adeel Software Limited (ASL):

Bad debts of Rs. 8 million were also written off during the year.
Required: Present the relevant information in statement of cash flows of ASL for the year ended 31
December 2021 using indirect method by:
a) Presenting change in gross receivables
b) Presenting change in net receivables

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Question 6. [Direct and Indirect Method]

The following information has been extracted from the financial statements of Hopper Limited for the
year ended 31 December 2017:

Extracts from the statement of financial position:

Depreciation expense of Rs. 25,000 is included in profit or loss.

Required: Using the above information, prepare cash flows from operating activities section of
statement of cash flows for Hopper Limited using:
a) Indirect method
b) Direct method

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Question 7. [Direct and Indirect Method]

The following information has been extracted from the financial statements of Trango Limited for the
year ended 31 December 2015:

Statement of comprehensive income for the year ended 31 December 2015

Following items are included in profit or loss:

▪ Depreciation expense of Rs. 46,000
▪ Loss on disposal of non-current assets of Rs. 9,000. The asset disposed of had a carrying amount of
Rs. 31,000 at the time of the sale.

Required: Present the cash flows from operating activities as they would be presented in a statement of
cash flows using:
a) Indirect method
b) Direct method

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Question 8. [Direct and Indirect Method]

The following information has been extracted from the draft financial information of Nardone Limited.

Statement of comprehensive income for the year ended 31 December 2015

Statement of financial position as at 31 December

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Note on Non-Current Assets

Included within distribution costs is Rs. 4,000 relating to the loss on a disposal of a non-current asset.
Dividend of Rs. 52,000 was declared and paid during the year.
Required: Prepare a statement of cash flows for Nardone Limited for the year ended 31 December 2015.

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Question 9. [Direct and Indirect Method]

Following are the extracts from the financial statements of Universal Limited (UL) for the year ended 30
June 2017:
Statement of financial position as on 30 June 2017

Statement of profit or loss for the year ended 30 June 2017

Additional information:
i. 60% of sales were made on credit.
ii. UL maintains a provision for doubtful receivables at 6%. During the year, trade receivables of Rs. 7
million were written off.

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iii. Depreciation expense for the year was Rs. 22.5 million. 70% of the depreciation was charged to cost
of sales.
iv. Other income comprises of:
▪ gain of Rs. 3 million on disposal of vehicles for Rs. 12 million;
▪ maintenance income of Rs. 8 million; and
▪ discount of Rs. 10 per debenture which were redeemed during the year.
Required: Prepare UL’s statement of cash flows for the year ended 30 June 2017 using direct method
and indirect method.

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IAS 7: STATEMENT OF CASHFLOWS [ICAP Past Papers]

Question 4(b) of Spring 2015, 20 marks

Following is the draft balance sheet of XYZ Limited as at 31 December 2014 which was prepared by its
accountant:

Additional information:
(i) Profit before tax and income tax expenses for the year amounted to Rs. 275 million and Rs. 13
million respectively.
(ii) Balances as at 31 December 2013 were as under:

The company follows a policy of maintaining provision for bad debts equal to 5% of account
receivables.
(iii) The bank loan was obtained on 1 January 2014 and carries interest @ 9% per annum.
(iv) XYZ uses straight line method for depreciation. Rates of depreciation are as under:

Full month’s depreciation is provided in the month of acquisition but no depreciation is charged in the
month of disposal. Depreciation for the year 2014 has already been provided.
On review the CFO has discovered the following:

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▪ A machine with list price of Rs. 50 million was purchased on 1 January 2014. An amount of Rs. 30
million had been paid in cash whereas Rs. 20 million were adjusted against trade-in of a machine
costing Rs. 40 million and having a book value of Rs. 25 million. The transaction was recorded by
debiting the plant and machinery account by Rs. 30 million i.e. the net amount paid to the supplier.
▪ One of the company's customers became bankrupt during the year. Rs. 5 million out of total debt of
Rs. 25 million were recovered from him. Balance has to be written off.
Required: Prepare a statement of cash flow as at 31 December 2014.

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Question 6 of Spring 2016, 18 marks

Following are the extracts from income statement of Quality Enterprises (QE) for the year
ended 31 December 2015 and its statement of financial position as at that date, together with
some additional information:
Income statement for the year ended 31 December 2015

Statement of financial position as at 31 December 2015

Additional information:
(i) During the year, movements in property, plant and equipment include:
▪ Depreciation amounting to Rs. 5,280,000.
▪ Machinery having a carrying amount of Rs. 2,481,000 was sold for Rs. 3,440,000.
▪ Factory building was revalued from a carrying amount of Rs. 5,963,000 to Rs. 8,000,000.
▪ An office building which had previously been revalued, was sold at its carrying amount of Rs.
2,599,000.
(ii) The owner of QE withdrew Rs. 300,000 per month. The amounts were debited to unappropriated
profit.
(iii) Trade debts written off during the year amounted to Rs. 200,000. The provision for bad debts as at
31 December 2015 was Rs. 400,000 (2014: Rs. 550,000)
(iv) The interest on bank loan is payable on 30th June every year. The bank loan was received on 1
November 2015. Interest for two months has been accrued and included in trade and other
payables.

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(v) Other income includes investment income of Rs. 398,000. As at 31 December 2015, trade and other
receivables included investment income receivable amounting to Rs. 96,000 (2014: Rs. 80,000).
Required: Prepare a statement of cash flows for Quality Enterprises for the year ended 31 December
2015, using the indirect method.

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Question 6 of Spring 2017, 12 marks

The statement of financial position of Liaquat Industries as at 31 December 2016 is as follows:

The following information has been extracted from income statement:

Additional information:
(i) Details of gain on sale of fixed assets are as follows:

The loss on disposal of equipment represents the WDV of the equipment. The amount of
insurance claim received, amounting to Rs. 30,000 was erroneously credited to accumulated
depreciation.
(ii) Repairs to building amounting to Rs. 50,000 were erroneously debited to building account on 31
December 2016.
(iii) Transfers from capital work in progress to building amounted to Rs. 1,200,000.
(iv) The owner withdrew Rs. 150,000 per month.
Required: Prepare statement of cash flows for the year ended 31 December 2016, in accordance with
IAS – 7 using indirect method.

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Question 3 of Spring 2018, 15 marks

Following information pertains to Nadir Limited:
Extract from statement of profit or loss for the year ended 31 December 2017

Extract from statement of financial position as on 31 December 2017

Other information:
(i) Shares issued during the year were as follows:
▪ 10% bonus shares in March 2017.
▪ Right shares in July 2017.
(ii) During the year, a plant costing Rs. 9,500,000 and having a book value of Rs. 5,200,000 was
disposed of for Rs. 4,800,000 of which Rs. 1,800,000 are still outstanding.
(iii) Depreciation for the year amounted to Rs. 7,350,000.
(iv) Financial charges for the year amounted to Rs. 1,100,000. Accrued financial charges as on 31
December 2017 amounted to Rs. 112,000 (2016: Rs. 48,000).
(v) Provision for doubtful trade receivables is maintained at 5%.
Required: Prepare statement of cash flows for the year ended 31 December 2017, in accordance with
IAS 7 ‘Statement of Cash Flows’ using indirect method.

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Question 7 of Spring 2019, 14 marks

Junior Accountant of Drum Limited has prepared the following statement of cash flows for
the year ended 31 December 2018:
Statement of Cash Flows

Junior Accountant informed you that he has taken the difference of opening and closing balances of
each balance sheet item and classified each difference as either operating, investing or financing cash
flows. He further informed that the statement is tied up with the cash balances appearing in the balance
sheet. He has ignored the following information:
(i) Depreciation on building and equipment amounted to Rs. 480,000 and Rs. 810,000 respectively.
(ii) During the year, an equipment costing Rs. 560,000 and having a book value of Rs. 310,000 was
sold for Rs. 440,000.
(iii) Provision for doubtful debts was increased by Rs. 140,000.
(iv) Dividend amounting to Rs. 700,000 was paid during the year.
(v) Interest and tax expenses for the year amounted to Rs. 378,000 and Rs. 650,000 respectively.
(vi) Trade and other payables as at 31 December 2018 included Rs. 950,000 for purchase of land and
building.
Required: Prepare statement of cash flows for the year ended 31 December 2018, in accordance with
IAS 7 ‘Statement of Cash Flows’ using indirect method.

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Question 5 of Autumn 2019, 19 marks

Following are the extracts from the financial statements of Sunday Traders Limited (STL) for the year
ended 30 June 2019:

Statement of financial position as on 30 June 2019

Statement of profit or loss for the year ended 30 June 2019

Additional information:
(i) 72% of sales were made on credit.
(ii) Depreciation expense for the year amounted to Rs. 750 million which was charged to distribution
and administrative cost in the ratio of 3:1.
(iii) Distribution cost includes:
▪ Rs. 40 million in respect of loss on disposal of equipment. The written down value at the time
of disposal was Rs. 152 million.
▪ impairment loss on vehicles amounting to Rs. 24 million.
(iv) Loan instalments (including interest) of Rs. 1,984 million were paid during the year.

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(v) Other income comprises of:

▪ increase in fair value of investment property amounting to Rs. 220 million.
▪ rent received from investment property amounting to Rs. 184 million.
(vi) During the year, STL issued right shares at premium.
Required: Prepare STL’s statement of cash flows for the year ended 30 June 2019 using direct method.

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Question 6 of Autumn 2020, 17 marks

Statement of financial position of Taxila Limited (TL) as on 30 June 2020 is as follows:

Additional information:
(i) Equipment having fair value of Rs. 240 million was acquired by issuing 2 million shares.
(ii) As a result of revaluation carried out on 30 June 2020, property, plant and equipment was
increased by Rs. 80 million out of which Rs. 35 million was credited to profit and loss
account.
(iii) During the year, fully depreciated items of property, plant and equipment costing Rs. 36
million were sold for Rs. 8 million out of which Rs. 3 million is still outstanding.
(iv) Depreciation on property, plant and equipment for the year amounted to Rs. 290 million.
(v) An investment property was acquired for Rs. 180 million. TL applies cost model for
subsequent measurement of its investment property.
(vi) Financial charges for the year amounted to Rs. 45 million. Trade and other payables include
accrued financial charges of Rs. 12 million (2019: Rs. 17 million).
(vii) Short-term investments amounting to Rs. 35 million are readily convertible to cash (2019:
Rs. 20 million). Investment income for the year amounted to Rs. 6 million.
Required: Prepare TL’s statement of cash flows for the year ended 30 June 2020 in accordance with the
requirements of IFRSs.

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Question 6 of Autumn 2021, 16 marks

Following are the extracts from the financial statements of Saguaro Limited (SL) for the year ended 30
June 2021:

Other information:
(i) SL declared a final dividend of 10% on 30 September 2020 which was paid in December 2020.
(ii) 20 million shares were issued in May 2021.
(iii) Insurance claim was related to plant and machinery destroyed in April 2020. The plant had cost
and book value of Rs. 63 million and Rs. 42 million respectively.
(iv) During the year, SL disposed of equipment having cost and net book value of Rs. 75 million and
Rs. 35 million respectively.
(v) Current portion of long-term loans include accrued interest of Rs. 5 million. (2020: Rs. 1 million)
(vi) Trade payables include an amount of Rs. 14 million payable against capital work in progress.
Required: Prepare SL’s statement of cash flows for the year ended 30 June 2021.

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Question 2 of Spring 2022, 8 marks

Following information pertains to Dahl Limited (DL):
Summarized statement of financial position as at 31 December 2021

Additional information:
(i) Final dividend was paid in respect of year 2020 amounting to Rs. 3.4 million.
(ii) Additions to property, plant and equipment during the year amounted to Rs. 14 million.
(iii) Tax expense for the year amounted to Rs. 2.4 million. Tax payable as at 31 December 2021
amounted to Rs. 1 million (2020: Rs. 0.2 million)
Required: Prepare DL’s statement of cash flows for the year ended 31 December 2021.

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Question 7 of Autumn 2022, 15 marks

Following is the statement of financial position of Quicken Limited (QL) as at 30 June 2022:

Additional information:
(i) During the year, land and building were revalued for the first time, resulting in a surplus of Rs.
150 million and incremental depreciation of Rs. 15 million.
(ii) Depreciation on building charged to profit or loss amounted to Rs. 72 million.
(iii) During the year, vehicles having book value of Rs. 8 million were sold for Rs. 11 million received
in cash. Further, sale proceeds of Rs. 6 million of another vehicle (book value Rs. 7 million)
disposed of in May 2021 were received in August 2021.
(iv) Vehicles costing Rs. 51 million were purchased during the year of which Rs. 12 million is still
unpaid.
(v) Inventories as at 30 June 2022 included work in process inventories of Rs. 96 million (2021: Rs.
80 million) which are not available for sale.
(vi) Interest on loan for the year amounted to Rs. 48 million of which Rs. 14 million was capitalised
in the cost of a building constructed during the year.
(vii) Following dividends were announced for the year ended 30 June 2022 and 2021:

Required: Prepare QL’s statement of cash flows for the year ended 30 June 2022.

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Question No. 7 of Autumn 2023, 18 marks

The following is the statement of financial position of Dolphin Limited (DL) as at 30 June 2023:

Additional information:
(i) The interest payment for the year amounted to Rs. 700 million, of which Rs. 300 million has been
capitalised in capital work-in-progress.
(ii) The transfer from capital work-in-progress to property, plant and equipment amounted to Rs. 550
million.
(iii) An old machine costing Rs. 520 million with a book value of Rs. 350 million was traded-in for a
new machine costing Rs. 600 million on payment of Rs. 200 million.
(iv) DL acquired an investment property costing Rs. 300 million, of which Rs. 125 million is still unpaid.
DL applies fair value model for subsequent measurement of its investment properties.
(v) The provision for doubtful trade receivables at 30 June 2023 was estimated at 8% (2022: 5%).
(vi) During the year, DL issued 10% bonus shares. Subsequently, a right issue was also made.
(vii) The tax charge for the year amounted to Rs. 750 million at 30% of profit before tax.
(viii) DL classifies dividends and interest payments in a way that keeps ‘cash flows from operating
activities’ higher.
Required: Prepare DL's statement of cash flows for the year ended 30 June 2023.

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Question No. 8 of Autumn 2024, 18 marks

The draft financial statements of Lyallpur Limited (LL) are presented below:
Statement of financial position as at 31 December 2023

Statement of profit or loss for the year ended 31 December 2023

Additional information:
(i) 10 million shares were issued in consideration for the purchase of machinery having a fair value
of Rs. 150 million.
(ii) Equipment with a cost of Rs. 35 million and accumulated depreciation of Rs. 21 million was sold
at a gain of Rs. 5 million.
(iii) The fair value model was applied for the subsequent measurement of investment property.
During the year, the fair value of the investment property was decreased by Rs. 40 million, and
rent amounting to Rs. 25 million was received from the investment property.
(iv) Bad debts amounting to Rs. 36 million were written off, while bad debts previously written off,
amounting to Rs. 15 million, were recovered.
Required: Prepare LL’s statement of cash flows for the year ended 31 December 2023 using the direct
method.

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Question No. 2 of Spring 2025, 6 marks

As the Finance Manager at Dior Limited (DL), you have recently welcomed Fatima for a three-month
internship. You assigned her the task of developing a deeper understanding of the statement of cash flows
by studying DL’s and other companies’ recent financial statements. She has now presented the following
queries for clarification:
(i) The loss on the disposal of a machine has been added in cash flows from operating activities, even
though its cash effect is already reflected in investing activities.
(ii) Interest payable is component of working capital, yet change in interest payable is not reflected
in the changes in working capital.
(iii) Repairs and maintenance on the office building are related to property, plant and equipment and
should be categorized under investing activities. However, they do not appear in the cash flow
statement at all.
Required: Briefly respond to the queries raised by Fatima.

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INCOMPLETE RECORDS

AT A GLANCE
IN THIS CHAPTER:
Small businesses frequently encounter challenges where
financial data is incomplete or compromised due to lack of
AT A GLANCE
keeping proper accounting records or unforeseen events like
theft, asset destruction, or loss of records. In such scenarios,
SPOTLIGHT
reconstructing accounts becomes essential to re-establish
financial accuracy and support effective decision-making.
1. Introduction
Regardless of the root cause, accountants are tasked with
2. Techniques to tackle incomplete piecing together available information, such as scattered
records invoices or fragmented bank statements, to compile financial
statements or calculate missing figures. This chapter
3. Comprehensive Examples introduces crucial techniques for managing incomplete
records, focusing on bridging gaps in financial data by
4. Objective Based Q&A establishing connections among the elements of financial
statements. Fundamental accounting practices, such as
STICKY NOTES analysing opening and closing balances of ledger accounts, are
central to this process.
The methods covered also include summarising cash and bank
transactions to identify discrepancies arising from cash
misappropriation or unexplained withdrawals. Furthermore,
the application of markup on cost and profit percentages is
explored to estimate financial metrics like revenue and gross
profit, enabling learners to address scenarios involving
incomplete or inconsistent sales records.
Additionally, the use of the accounting equation to ascertain
equity and the application of the business equation to calculate
profit or drawings during the period, or net assets at specific
points in time prove vital in reconstructing reliable financial
records.

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1 INTRODUCTION
1.1 The challenge of incomplete records
Incomplete records, as the term suggests, are accounting records where information is missing.
Problems of incomplete records may arise with small businesses where the owner of the business has not kept
up-to-date accounting records or does not have a double entry book-keeping system (i.e. keeping only single
entry bookkeeping records). He might simply keep invoices or receipts for expenses and copies of invoices to
customers. In addition, details of bank transactions can be obtained from a bank statement or other banking
records.
The task of the accountant is to use these invoices, receipts and banking records, together with other information
obtained from the business owner, to prepare financial statements for the year (and in particular a statement of
comprehensive income, which provides a basis for calculating the taxable income of the business owner from his
or her business).
Other circumstances that cause problems include loss of records because of some kind of disaster, for example a
fire in the office. Another scenario is where records have not been maintained because a dishonest employee has
stolen cash or inventory.
Whatever the cause of the problem the accountant’s task involves piecing together information that is available
in order to produce a set of financial statements or to calculate missing figures.

1.2 Dealing with exam questions

Questions on incomplete records are a good test of knowledge and understanding of book-keeping and
accounting. The task is often to identify the missing figures that the incomplete records do not provide.
Typical exam questions’ requirement include:
• Calculating missing figures of inventory / cash /sales / profit etc.
• Preparing complete financial statements (with partial data available).
• Calculating the amount of fraud / defalcation / theft / loss by fire etc.
• Objective based questions (often require to calculate missing figures).
Possible approaches to establishing missing numbers include:
• establishing the value of assets and liabilities to calculate the business capital, particularly opening capital
at the start of the financial period by applying accounting equation or business equation.
• using memorandum accounts, for receivables or payables, to calculate the sales or purchases for the period.
• using a memorandum account for bank and cash transactions, to establish a missing figure for cash receipts
or cash payments, such as a missing figure for cash taken from the business by the owner as drawings.
• Using cost structures (gross profit percentage or mark-up) to establish a cost of sales, or a missing figure
such as the value of inventory stolen or lost in a fire.
• Accounts of income and expenses carrying opening or closing accrual or prepayment balances.

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2 TECHNIQUES TO TACKLE INCOMPLETE RECORDS

2.1 Preparing ledger accounts for missing information
When there are incomplete records, a memorandum account can be used to calculate a ‘missing’ figure, such as
a figure for sales or purchases and expenses in the period. A memorandum account is not part of proper ledger
accounting system, it is just prepared as working for determining missing amounts as balancing figure.
Usually, following ledger accounts are useful in this regard:

Ledger account Key points

Receivables Mostly used where credit sales or total sales are to be determined unless the same can be
calculated using mark-up/margin equations. It is important to consider impact of bad debts
information carefully.

Payables Mostly used where credit purchases or total purchases are to be determined unless the
same can be calculated using mark-up/margin and cost of sales equations

Expenses The following memorandum expense account based on concepts of accrual and
prepayments is useful:

EXPENSES

Particulars Rs. Particulars Rs.

b/d (prepaid) XX b/d (payable) XX

Cash paid XX Expense (balancing) XX

c/d (payable) XX c/d (prepaid) XX

XX XX
.

Income The following memorandum income account based on concepts of accrual and
prepayments is useful:

INCOME

Particulars Rs. Particulars Rs.

b/d (receivable) XX b/d (advance) XX

Income (balancing) XX Cash received XX

c/d (advance) XX c/d (receivable) XX

XX XX
.

Cash/Bank This account is relevant:

account To find missing figure of any specific payment or receipt
To find opening or closing balance of cash or bank

Bank If bank statement information is given, it may be necessary to prepare reconciliation to

reconciliation determine cash at bank figure.

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 Example 01:
The following data relates to AB Traders:

Opening receivables Rs. 240,000

Closing receivables Rs. 280,000
Cheques received from credit customers Rs. 1,450,000
Cash received from customers for cash sales Rs. 560,000

Required:
Calculate total sales.
 Answer:
The receivable account may be prepared for determining credit sales as follows:

Receivables
Rs. Rs.
b/d 240,000 Bank 1,450,000
Sales (credit) [balancing] 1,490,000 c/d 280,000
1,730,000 1,730,000

Total sales = Credit sales Rs. 1,490,000 + cash sales Rs. 560,000 = Rs. 2,050,000
Alternatively, total sales may be determined using receivable account if we include cash sales in the ledger as
well.

Receivables
Rs. Rs.
b/d 240,000 Bank 1,450,000
Sales (total) [balancing] 2,050,000 Cash 560,000
c/d 280,000
2,290,000 2,290,000

 Example 02:

Part (a):
Calculate sales for the period from the following information.

Rs. 000
Receivables at the start of the period 2,400
Receivables at the end of the period 1,800
Cash received from customers 12,500
Bad debt written off 200

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Part (b):
Calculate sales for the period from the following information.

Rs. 000

Receivables at the start of the period 2,400

Receivables at the end of the period 1,800

Cash received from customers 12,500

Bad debt to be written off 200

 Answer:

Part (a)

Receivables

Rs. 000 Rs. 000

b/d 2,400 Cash 12,500

Bad debts 200

Sales (balancing) 12,100 c/d 1,800

14,500 14,500

Part (b)

Receivables

Rs. 000 Rs. 000

b/d 2,400 Cash 12,500

Sales (balancing) 11,700 c/d [1,800 – 200] 1,600

14,100 14,100

 Example 03:
The following data relates to AB Traders:

Opening trade payables Rs. 120,000

Closing trade payables Rs. 140,000

Cheques issued to suppliers Rs. 725,000

Cash paid for purchases Rs. 280,000

Required:
Calculate total Purchases.

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 Answer:
The payable account may be prepared for determining credit purchases as follows:

Payables
Rs. Rs.
Bank 725,000 b/d 120,000
c/d 140,000 Purchases (credit) 745,000
865,000 865,000

Total purchases = Credit purchases Rs. 745,000 + cash purchases Rs. 280,000 = Rs. 1,025,000
Alternatively, total purchases may be determined using payable account if we include cash purchases in the
ledger as well.

Payables
Rs. Rs.
Bank 725,000 b/d 120,000
Cash 280,000
c/d 140,000 Purchases (total) 1,025,000
1,145,000 1,145,000

 Example 04:
CD Traders has two shops (both on rent). The following information is relevant:

1 Jan 31 Dec
Prepaid rent (Shop 1) Rs. 15,000 Rs. 18,000
Rent payable (Shop 2) Rs. 20,000 Rs. 24,000

Total rent paid during the year was Rs. 480,000.

Required:
Calculate rent expense.
 Answer:
Rent expense account (memorandum) may be prepared as follows:

Rent
Rs. Rs.
b/d (prepaid) 15,000 b/d (payable) 20,000
Cash 480,000 Profit or loss (expense) 481,000
c/d (payable) 24,000 c/d (prepaid) 18,000
519,000 519,000

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 Example 05:
EF Traders provides services on commission basis. The following information is relevant:

1 Jan 31 Dec
Commission Receivable Rs. 30,000 Rs. 36,000
Commission received in advance Rs. 20,000 Rs. Nil

Total cash received on account of commission during the year was Rs. 970,000.
Required:
Calculate commission income.
 Answer:
Commission income account (memorandum) may be prepared as follows:

Commission
Rs. Rs.
b/d (receivable) 30,000 b/d (advance) 20,000
Profit or loss (income) 996,000 Cash 970,000
c/d (advance) 0 c/d (receivable) 36,000
1,026,000 1,026,000

 Example 06:
Calculate drawings for the period from the following information.

Rs. 000
Cash in hand at the beginning of the year 100
Bank balance at the beginning of the year 2,400
Cash in hand at the end of the year 150
Bank balance at the end of the year 5,200
Receipts from customers 51,700
Payments to employees 3,400
Payments to suppliers 38,200

 Answer:
A combined account for cash and bank is appropriate as data for cash and bank receipt is not available separately:

Cash & Bank

Rs. 000 Rs. 000
b/d (cash) 100 Payables 38,200
b/d (bank) 2,400 Salaries 3,400
Receipts from customers 51,700 Drawings (balancing) 7,250
c/d (cash) 150
c/d (bank) 5,200
54,200 54,200

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 Example 07:
GH Traders has bank balance (as per bank statement) of Rs. 86,000.
Unpresented cheques of Rs. 12,000 and uncredited cheques of Rs. 15,000 are outstanding.
Required:
Calculate cash at bank as to be presented in statement of financial position.
 Answer:
Bank reconciliation statement

Rs.
Balance as per bank statement 86,000
Less: Unpresented cheques (12,000)
Add: Uncredited cheques 15,000
Balance as per cash book (in SFP) 89,000

 Example 08:
IJ Traders has bank overdraft (as per bank statement) of Rs. 6,000.
Unpresented cheques of Rs. 4,000 and uncredited cheques of Rs. 15,000 are outstanding.
Required:
Calculate cash at bank as to be presented in statement of financial position.
 Answer:
Bank reconciliation statement

Rs.
Balance as per bank statement (6,000)
Less: Unpresented cheques (4,000)
Add: Uncredited cheques 15,000
Balance as per cash book (in SFP) 5,000

Note: Rs. 5,000 bank balance shall be presented under the heading current assets. If the answer was in negative,
it would indicate bank overdraft and shall be presented under the heading current liabilities.

2.2 Using equations for missing information

Use of certain equations is also useful to determine missing information in the financial statements:

Equation Details
Accounting This is often used to calculate opening equity.
equation Equity = Total assets – Total liabilities
Opening statement of financial position prepared on the basis of estimated values is often
called “statement of affairs” of the entity.
Business This represents movement in equity.
equation Closing equity = Opening equity + Capital invested + Profit – Drawings
Cost of sales Cost of sales = Opening inventory + Purchases (net) – Closing inventory
Property, plant Net book value (opening) = NBV at end x 100 / (100 – Dep%)
& equipment Depreciation = NBV at end x Dep% / (100 – Dep%)

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 Example 09:
A sole trader does not keep any accounting records, and you have been asked to prepare a statement of
comprehensive income and statement of financial position for the financial year just ended. To do this, you need
to establish the opening capital of the business at the beginning of the year.
You obtain the following information about assets and liabilities at the beginning of the year:
Rs. 000
Motor van (carrying amount) 1,600
Bank overdraft 560
Cash in hand 50
Receivables 850
Trade payables 370
Payables for other expenses 90
Inventory 410
Required:
Calculate the capital of the business as at the beginning of the year.
 Answer:
Total assets = 1,600,000 + 50,000 + 850,000 + 410,000 = Rs. 2,910,000
Total Liabilities = 560,000 + 370,000 + 90,000 = Rs. 1,020,000
Equity = Total Assets – Total Liabilities
Equity = 2,910,000 – 1,020,000 = Rs. 1,890,000
 Example 10:
The accountant for a sole trader has established that the total assets of the business at 31 December Year 4 were
Rs. 376,000 and total liabilities were Rs. 108,000.
Checking the previous year’s financial statements, he was able to establish that at 31 December Year 3 total assets
were Rs. 314,000 and total liabilities were Rs. 87,000.
During Year 4 the owner has taken out drawings of Rs. 55,000.
In December Year 4 the owner had been obliged to input additional capital of Rs. 25,000.
Required:
What was the profit of the business for the year to 31 December Year 4?
 Answer:
Equity (Year 4) = Total Assets – Total Liabilities = 376,000 – 108,000 = Rs. 268,000
Equity (Year 3) = Total Assets – Total Liabilities = 314,000 – 87,000 = Rs. 227,000
Closing equity = Opening equity + Capital invested + Profit - Drawings
268,000 = 227,000 + 25,000 + Profit – 55,000
Profit = Rs. 71,000
 Example 11:
A business had opening inventory of Rs. 50,000 and closing inventory of Rs. 70,000. Its Cost of sales have been
calculated as Rs. 900,000.
Required:
Calculate the amount of purchases from the above information.

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 Answer:
Cost of sales = Opening inventory + Purchases – Closing inventory
900,000 = 50,000 + Purchases – 70,000
Purchases = Rs. 920,000
 Example 12:
An entity has plant with a net carrying amount of Rs. 720,000 as on 31 December 2021. It charges depreciation
@20% using reducing balance method.
Required:
Calculate the amount of depreciation expense for the year ended 31 December 2021 and carrying amount of the
plant on 1 January 2021.
 Answer:
Depreciation = NBV at end x Dep% / (100 – Dep%)
Depreciation = Rs. 720,000 x 20 / 80
Depreciation = Rs. 180,000
NBV (beginning) = NBV at end x 100 / (100 – Dep%)
NBV (beginning) = Rs. 720,000 x 100 / 80
NBV (beginning) = Rs. 900,000

2.3 Mark-up and margin percentages

The mark up or margin percentages of profit can be used to determine sales, cost of sales or profit.

Type Details
Mark up Markup is the percentage increase in price above the cost of product. Sometimes, this is
incorrectly referred to as margin on cost.
100 100 + 𝑚𝑎𝑟𝑘𝑢𝑝
𝐶𝑜𝑠𝑡 = 𝑆𝑎𝑙𝑒𝑠 × 𝑆𝑎𝑙𝑒𝑠 = 𝐶𝑜𝑠𝑡 ×
100 + 𝑚𝑎𝑟𝑘𝑢𝑝 100
Margin Margin is the percentage of profit on the selling price. Sometimes, this is incorrectly
referred to as mark-up on selling price.
100 − 𝑚𝑎𝑟𝑔𝑖𝑛 100
𝐶𝑜𝑠𝑡 = 𝑆𝑎𝑙𝑒𝑠 × 𝑆𝑎𝑙𝑒𝑠 = 𝐶𝑜𝑠𝑡 ×
100 100 − 𝑚𝑎𝑟𝑔𝑖𝑛

 Example 13:
An entity’s sales is Rs. 2,700,000 and it sells at cost plus 25%.
Required:
Calculate cost of sales figure.
 Answer:
100
𝐶𝑜𝑠𝑡 = 2,700,000 × = 𝑅𝑠. 2,160,000
100 + 25
 Example 14:
An entity’s cost of sales is Rs. 2,160,000 and it sells at cost plus 25%.
Required:
Calculate the amount of sales.

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 Answer:
100 + 25
𝑆𝑎𝑙𝑒𝑠 = 2,160,000 × = 𝑅𝑠. 2,700,000
100
 Example 15:
An entity’s sales is Rs. 2,700,000 and it sells at 20% margin.
Required:
Calculate Cost of Sales figure.
 Answer:
100 − 20
𝐶𝑜𝑠𝑡 = 2,700,000 × = 𝑅𝑠. 2,160,000
100
 Example 16:
An entity’s cost of sales is Rs. 2,160,000 and it sells at 20% margin.
Required:
Calculate the amount of sales.
 Answer:
100
𝑆𝑎𝑙𝑒𝑠 = 2,160,000 × = 𝑅𝑠. 2,700,000
100 − 20

2.4 Multiple cost structures

A further challenge arises when an entity has multiple cost structures. This possible circumstances include:
• The entity has different products with different mark up and margin%.
• The entity has different mark up and margin % for cash and credit sales.
• The entity changed mark-up and margin during the period.
• The entity sold some of goods on special discount / special scheme.
• The entity sold some goods below normal selling price due to damage etc.
In such case, a columnar table may be made for each cost structure with available information and then gaps
should be filled using markup and margin formulas.
 Example 17:
KL Traders has total sales of Rs. 3,000 million. The company sells three products.

Product A: 60% of sales are of this product which is sold at a mark-up of 20%.

Product B: It is sold at a margin of 30%. The cost of goods sold relating to this product is Rs. 462
million.

Product C: This product earns gross profit equal to 10% of its sales price. The gross profit on this
product during the year was Rs. 54 million.

Required:
Prepare sales, cost of sales and gross profit workings for each product and in total for the business of KL Traders.

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 Answer:
First step would be to make columns for three products and fill in the available information:

Product A Product B Product C Total

Rs. m % Rs. m % Rs. m % Rs. m
Sales 1,800 120 100 100 3,000
Cost of sales 100 (462) 70 90
Gross profit 20 30 54 10

Based on above information, we can calculate following amounts:

Product A: Cost of sales = Sales 1,800 x 100 / 120 = Rs. 1,500m
Product B: Sales = Cost of sales 462 x 100 / 70 = Rs. 660
Product C: Sales = Gross profit 54 x 100 / 10 = Rs, 540
After incorporating the above amounts, the table would be like this:

Product A Product B Product C Total

Rs. m % Rs. m % Rs. m % Rs. m
Sales 1,800 120 660 100 540 100 3,000
Cost of sales (1,500) 100 (462) 70 90
Gross profit 20 30 54 10

Now, by calculating totals and balancing amount, whole table can be completed as follows:

Product A Product B Product C Total

Rs. m % Rs. m % Rs. m % Rs. m
Sales 1,800 120 660 100 540 100 3,000
Cost of sales (1,500) 100 (462) 70 (486) 90 (2,448)
Gross profit 300 20 198 30 54 10 552

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3 COMPREHENSIVE EXAMPLES
 Example 18:
A fire on 31 March destroyed some of the inventory of a company, and its inventory records were also lost. The
following information is available.
The company makes a standard gross profit of 30% on its sales.
Rs.
Inventory at 1 March 127,000
Purchases for March 253,000
Sales for March 351,000
Inventory in good condition at 31 March 76,000

Required:
What was the cost of the inventory lost in the fire?
 Answer:
Using margin equation, cost of sales shall be calculated:
100 − 30
𝐶𝑜𝑠𝑡 = 351,000 × = 𝑅𝑠. 245,700
100
Using COS equation, closing inventory shall be calculated:
COS = Opening inventory + Purchases – Closing inventory
245,700 = 127,000 + 253,000 – closing inventory
Closing inventory = Rs. 134,300

Rs.
Inventory as should have been 134,300
Inventory in good condition 76,000
The inventory lost in fire (difference) 58,300

 Example 19:
Part (a)
A business makes all of its sales at a mark-up of 25%. During the year sales totalled Rs.98,000 and purchases
were Rs.71,000. The inventory at the start of the year was valued at Rs.10,200.
Required:
What was the value of the closing inventory at the end of the year?
Part (b)
A business has the following assets and liabilities at the start and end of March.

1 March 31 March
Rs. Rs.
Trade receivables 6,100 7,400
Trade payables 3,900 3,500

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The summarised bank statements for the year showed the following figures:
• Bankings for the month were Rs.78,500
• Payments to suppliers for the month were Rs.49,700
• The owner banks her takings from the till each month but before doing so in March she took Rs. 5,000 for
her own use.
Required:
What are the sales for the year?
Part (c)
An accountant has prepared the following list of the assets and liabilities of a business, but has forgotten to enter
the cash balance.

Rs.
Trade payables 4,900
Inventory 9,300
Non-current assets 98,900
Capital 97,200
Bank loan 15,700
Receivables 16,800
Bank ?

Required:
What is the missing figure for 'Bank'?
 Answer:
Part (a)

Rs.
Sales 98,000
Less: Cost of sales
Opening inventory 10,200
Purchases 71,000
Closing inventory (balancing) (2,800)
Rs. 98,000 x 100/125 (78,400)
Gross profit 19,600

Part (b)

Trade receivables
b/d 6,100 Bank (78,500 + 5,000) 83,500
Sales (balancing) 84,800 c/d 7,400
90,900 90,900

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Part (c)

Assets Rs.
Non-current assets 98,900
Inventory 9,300
Receivable 16,800
Bank -
125,000

Equity & Liabilities

Capital 97,200
Bank loan 15,700
Trade payables 4,900
Bank overdraft (balancing) 7,200
125,000

 Example 20:
Part (a)
A greengrocer made sales during the month of Rs.49,200. Opening inventory amounted to Rs.3,784 and month-
end inventory was Rs.5,516. During the month he purchased for cash goods which cost Rs.38,632.
Required:
Determine the gross profit and calculate the gross profit percentage as a percentage of sales value.
Part (b)
A rival has made sales of Rs.50,100 at a fixed mark-up of 25%. Closing inventory was valued at Rs.5,438 and he
purchased goods during the month amounting to Rs.38,326.
Required:
Determine the value of the opening inventory.
Part (c)
A local store makes sales at a fixed gross profit of 10% on sales value. Sales during the month amounted to
Rs.186,460; closing inventory was Rs.16,800 and represents an increase of 25% over the value of the opening
inventory.
Required:
Determine the cost of purchases during the month.
 Answer:

Part (a)

Percentage Rupees
Sales 100% 49,200
Cost of sales (3,784 + 38,632 – 5,516) (75%) (36,900)
Gross profit (12,300/49,200 x 100) 25% 12,300

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Part (b)
Opening inventory W1 = Rs. 7,192

W1 – Calculation of opening inventory Rs.

Sales 50,100
Less: Cost of sales
Opening inventory (balancing) 7,192
Purchases 38,326
Closing inventory (5,438)
Rs. 50,100 x 100 /125 (40,080)
Gross profit 10,020

Part (c)
Purchases W1 = Rs. 171,174

W1 – Calculation of purchases Rs.

Sales 186,460
Less: Cost of sales W2
Opening inventory (16,800 x 100/125) 13,440
Purchases (balancing) 171,174
Closing inventory (16,800)
186,460 x 90% (167,814)
Gross profit 18,646

 Example 21:
Irum is a sole trader. She does not keep a full set of accounting records but does keep some records of
transactions and documents. She has asked you to prepare her accounts for the year ended 31 December 2015.
You have been given a list of the assets and liabilities of the business at the start and end of the year.

Assets and liabilities At 1 Jan 2015 At 31 Dec 2015

Rs.000 Rs.000
Trade receivables 5,500 6,100
Trade payables 2,800 3,500
Inventory 10,400 ?

Irum has no idea what her inventory value was at 31 December as that she did not count or value her inventory
at the year-end.
She has also been given you a summary of her bank statements for the year.
Summary of bank statements

Receipts Rs.000 Payments Rs.000

1 Jan Balance b/d 1,620 To suppliers 42,800
Bankings 65,400 For expenses 9,300
Living expenses 10,400
31 Dec Balance c/d 4,520

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You have also been able to gather the following information from Irum:
i. Irum banks her takings from the till each week but before doing so pays Rs.50,000 to her employees and
takes Rs.30,000 herself. The business operates for 50 weeks each year.
ii. The till always has a cash float of Rs.100,000.
iii. The sales of the business are both cash and credit sales and are all made at a mark-up of 40%.
Required:
a) Calculate sales for the year.
b) Calculate the value of the closing inventory at 31 December 2015.
 Answer:

Part (a)
Sales for the year W1 = Rs. 70,000

W1 - Trade receivables
b/d 5,500 Cash W2 69,400
Sales (balancing) 70,000 c/d 6,100
90,900 90,900

W2 – Cash
b/d 100 Bank 65,400
Trade receivables (bal.) 69,400 Salaries (50 x 50) 2,500
Drawings (30 x 50) 1,500
c/d 100
69,500 69,500

Part (b)
Closing inventory W1 = Rs. 3,900

W1 – Calculation of closing inventory Rs.

Sales 70,000
Less: Cost of sales
Opening inventory 10,400
Purchases W2 43,500
Closing inventory (balancing) (3,900)
Rs. 70,000 x 100 /140 (50,000)
Gross profit 20,000

W2 - Trade payables
Bank 42,800 b/d 2,800
c/d 3,500 Purchases (balancing) 43,500
46,300 46,300

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 Example 22:
Rakaposhi Traders (RT) was unable to retrieve complete information required to prepare its statement of profit
or loss due to a computer virus attack. In order to compute profit for the year ended 31 December 2019, RT has
gathered the following information:
i. List of all assets and liabilities as on 1 January 2019:

Liabilities Rs. 000 Assets Rs. 000

Creditors 310 Furniture - net 460

Accrued rent 33 Inventories 200

Debtors 170

Cash in hand 37

Cash at bank 85

343 952

ii. Inventories increased by 30% during the year.

iii. Credit sales during the year amounted to Rs. 2,500,000. Collections from debtors amounted to Rs. 2,400,000
out of which Rs. 300,000 were received in cash. A debtor’s balance of Rs. 15,000 is irrecoverable.
iv. Balance as per bank statement as on 31 December 2019 amounted to Rs. 90,000. However, it does not
include a cheque of Rs. 40,000 deposited on 31 December 2019.
v. Following information has been collected from the counterfoils of cheque books:

Rs. 000

Payment to creditors 1,375

Drawings 275

Salaries 600

Cash withdrawn for office use 120

vi. Cash in hand as at 31 December 2019 amounted to Rs. 50,000. Details of cash sales and cash payments
(expenses, payment to creditors and cash purchases) are not available.
vii. On 1 April 2019, the owner brought into the business a vehicle having a market value of Rs. 360,000.
viii. Creditors’ closing balance of Rs. 425,000 was determined from account statements obtained from the
creditors.
ix. Rent amounting to Rs. 23,000 was outstanding as on 31 December 2019.
x. Depreciation is charged at 10% on fixed assets.
Required:
Compute the net profit or net loss for the year ended 31 December 2019.

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 Answer:
Rakaposhi Traders
Net profit/(loss) for the year ended 31 December 2019

Rs. 000

Closing net assets (W-1) 994

Opening net assets 952–343 (609)

Increase in net assets 385

Drawings for the year 275

Additional investment for the year (360)

Net profit for the year 300

W-1: Closing net assets Rs. 000

Furniture – net 460×0.90 414

Vehicle – net 360–(360×0.1×9÷12) 333

Inventories 200×1.3 260

Debtors 170+2,500–2,400–15 255

Cash at bank 90+40 130

Cash in hand 50

1,442

Creditors 425

Rent accrued 23

(448)

994

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 Example 23:
Tahir retired from his employment abroad and returned to this country, where he purchased a small kiosk.
He took over the business on 1 July 2014, acquiring the existing inventory at a valuation of Rs.1,142,000. The rest
of the purchase price was apportioned as to Rs.1,500,000 for fixtures and fittings and the balance for goodwill.
The following day he acquired a second-hand computer and accounts package at a price of Rs. 80,000.
Unfortunately, Tahir made an error when printing his year-end accounts causing him to lose all data except for
a printed summary listing of payments from the till. Other than this, the only records available were his bank
statements and a number of vouchers. Surplus cash was banked during the year.
A summary of his bank account for the year ended 30 June 2015 shows the following.

Rs.000 Rs.000

Cash introduced 5,000 Purchase of business 3,192

Bankings from shop 16,427 Purchase of accounts computer 80

Loan from mother (long-term) 1,000 Rent (15 months to 30 September 2015) 500
(interest at 5% pa)

Rates (9 months to 31 March 2015) 84

Electricity 92

Purchases for resale 14,700

Private cheques 1,122

Balance 30 June 2015 2,657

22,427 22,427

The computer print-out was as follows:

Rs.000

Cash purchases for resale 1,606

Staff wages 742

Sundry shop expenses 156

Cash drawings 520

On 30 June 2015 inventory, measured at cost, amounted to Rs.1,542,000, amounts due from customers
Rs.74,000, and cash in hand amounted to Rs.54,000.
Depreciation is to be recognised on fixtures and fittings and computers at a rate of 10%.
Accounts outstanding on 30 June 2015 were purchases of Rs.470,000 and rates of Rs.120,000 for the year ended
31 March 2016.
Required:
Prepare Tahir’s statement of comprehensive income for the year ended 30 June 2015 and a statement of financial
position at that date.

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 Answer:
Tahir
Statement of comprehensive income for the year ended June 30, 2015

Rs. 000 Rs. 000

Sales W1 19,579
Less: Cost of goods sold
Opening Stock 1,142
Purchases 1,606 W2 + 15,170 W3 16,776
Closing Stock (1,542) (16,376)
Gross profit 3,203
Less: Expenses
Rent (500 – (500x3/15)) (400)
Rates (84 + (120x3/12) 30) (114)
Electricity (92)
Staff salaries (742)
Sundry expenses (156)
Interest on loan (1,000 x 5%) (50)
Depreciation (1,580 x 10%) (158) (1,712)
Net profit 1,491

Tahir
Statement of financial position as at June 30, 2015

Assets Rs. 000 Rs. 000

Non-current assets
Goodwill (3,192 – 1,142 – 1,500) 550
Furniture & fixtures (1,500 + 80 - 158) 1,422 1,972

Current assets
Inventory 1,542
Trade Receivables 74
Prepaid rent (500 x 3/15) 100
Bank 2,657
Cash 54 4,427
6,399

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Equity & Liabilities Rs. 000 Rs. 000

Capital and reserves
Capital 5,000
Add: profit 1,491
Less: drawings [1,122 + 520] (1,642) 4,849

Non-current liabilities
Loan from mother 1,000

Current liabilities
Trade payables 470
Accrued rates (120 x 3/12) 30
Accrued interest (1,000 x 5%) 50 550
6,399

Workings:

W1 - Trade receivables
b/d - Cash W2 19,505
Sales (bal.) 19,579 c/d 74
19,579 19,579

W2 – Cash
b/d - Purchases 1,606
Trade receivables (bal.) 19,505 Wages 742
Expenses 156
Drawings 520
Bank 16,427
c/d 54
19,505 19,505

W3 - Trade payables
Bank 14,700 b/d -
c/d 470 Purchases (bal.) 15,170
15,170 15,170

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 Example 24:
Following information pertains to Alpha Traders (AT) for the year ended 31 December 2017:
i. 60% goods are sold for cash to walk-in customers at list price. Remaining goods are sold to corporate
customers on credit at a trade discount of 2% on list price. They only pay through cheques.
ii. Balances extracted from AT’s records:

31-Dec-2017 31-Dec-2016
--------- Rs. in ‘000 ---------
Furniture and fittings – net ? 10,175
Stock-in-trade 14,500 12,300
Trade debtors – gross 5,900 4,400
Prepaid rent 180 145
Cash in hand 430 750
Trade creditors 9,700 8,500
Accrued salaries 310 460

iii. All furniture and fittings were purchased on 1 July 2015 and are depreciated using straight-line method at
5% per annum.
iv. Provision for doubtful debts is maintained at 4%. During the year, balances totalling Rs. 260,000 were
written-off.
v. Summarised bank statement:

Deposits Rs. 000 Withdrawals Rs. 000

Opening balance 9,800 Utilities 1,400
Corporate customers 34,240 Rent, rates and taxes 2,100
Cash 56,380 Repairs & maintenance 2,800
Insurance claim 5,500 Cash 6,320
Return outward 2,170 Creditors 87,200
Delivery charges recovered 330 Delivery truck (second hand) 2,300
Miscellaneous expenses 1,300
Closing balance 5,000
108,420 108,420

vi. Cash payments for the year:

Rs. in ‘000
Salaries 6,500
Repairs & maintenance 500
Drawings ?

vii. Insurance claim represents cost of goods lost in transit during the year.
viii. A cheque of Rs. 300,000 issued on 15 December 2017 against rent, has not yet been presented whereas
cheque from a debtor, deposited on 31 December 2017 amounting to Rs. 3,200,000 is not appearing in the
bank statement.

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ix. Creditors are paid through cheques only. Payments made to creditors include:
• Rs. 48,000,000 after availing discount of 4%.
• A cheque of Rs. 1,900,000 issued to a supplier in December 2016. No discount was allowed by the
supplier on this payment.
x. The delivery truck was purchased on 1 March 2017. Prior to use, the truck was repaired at a cost of Rs.
260,000. The repair work was completed on 31 March 2017. The amount is included in payment for repairs
and maintenance above. Depreciation on delivery truck is charged on a straight-line basis at 12.5% per
annum.
Required:
Prepare the following:
a) Statement of profit or loss for the year ended 31 December 2017.
b) Statement of financial position as on 31 December 2017.
 Answer:
Part (a) Alpha Traders

Statement of profit or loss for the year ended 31 December 2017 Rs. 000
Sales 39,200 W1 + 60,000 W3 99,200
Cost of sales
Opening inventory 12,300
Purchases 88,500 W2 – 2,170 Return outwards – 5,500 abnormal loss 80,830
Closing inventory (14,500)
(78,630)
Gross profit 20,570
Other income
Delivery charges 330
Discount received W2 2,000
2,330
Expenses
Rent exp. +145 Op. Prepaid – 180 Cl. Prepaid + 2,100 Bank + 300 cheque 2,365
Salaries – 460 Op. accrued + 310 Cl. Accrued + 6,500 cash 6,350
Depreciation – Furniture and Fittings 10,175 / 92.5% x 5% 550
Bad debts 260
Doubtful debts [5,900 x 4%] – [4,400 x 4%] 60
Abnormal loss 5,500 – 5,500 insurance claim received -
Utilities 1,400
Repair & maintenance 2,800 bank + 500 cash – 260 related to Truck 3,040
Miscellaneous expenses 1,300
Depreciation – Delivery Truck 2,560 SFP x 12.5% x 9/12 240
(15,565)
Net Profit 7,335

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Part (b) Alpha Traders

Statement of financial position as on 31 December 2017 2017 2016

Rs. 000 Rs. 000
Non-current assets
Furniture and Fittings (net) 10,175 – 550 SPL 9,625 10,175
Delivery Truck (net) [2,300+260=2,560 – 240 SPL 2,320 -
11,945
Current assets
Stock in trade 14,500 12,300
Prepaid rent 180 145
Receivable [5,900 – 236 SPL] & [4,400 – 176 SPL] 5,664 4,224
Bank [5,000 – 300 issued + 3,200 deposit] & [9,800 – 1,900 LY] 7,900 7,900
Cash in hand 430 750
28,674
40,619 35,494

Equity
Capital 26,534
Net profit 7,335
Drawings W3 (3,260)
30,609 26,534 (bal.)
Current liabilities
Trade creditors 9,700 8,500
Salaries payable 310 460
10,010
40,619 35,494

W1 Receivables
Particulars Rs. 000 Particulars Rs. 000
b/d 4,400 Bank 34,240
Sales (Credit) (bal.) 39,200 Bank (Un-credited cheque) 3,200
Bad debts 260
c/d 5,900
43,600 43,600

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W2 Trade creditors
Particulars Rs. 000 Particulars Rs. 000
Bank 87,200 b/d 8,500
Bank (Cheque related to last year) (1,900) Purchases (bal.) 88,500
Discount 48,000 /96 x 4 2,000
c/d 9,700
97,000 97,000

W3 Cash
Particulars Rs. 000 Particulars Rs. 000
b/d 750 Bank 56,380
Bank 6,320 Salaries 6,500
Sales (cash) * 60,000 Repair and maintenance 500
Drawings (bal.) 3,260
c/d 430
67,070 67,070

*Credit sales Rs. 39,200 W1 x 100 / 98 = Rs. 40,000 at list price x 60 /40 = Rs. 60,000 on cash
 Example 25:
Following is the balance sheet of Ashfaq as at 30 June 2013:

Owner's equity / Liabilities Rupees Assets Rupees

Ashfaq’s capital 4,396,600 Motor car 2,000,000

Creditors 1,102,000 Furniture 1,000,000

Accrued rent 20,000 Stock-in-trade 1,805,000

Loan taken from a friend 27,900 Debtors 350,000

Prepaid insurance 15,000

Balance at bank 360,600

Cash in hand 15,900

5,546,500 5,546,500

Ashfaq needs to submit his Trading and Profit and Loss Account for the year ended 30 June 2014 and Balance
Sheet as of that date to his bankers in order to obtain an overdraft facility.
He has not maintained proper books of account of the business but has provided you the following information:
i. He purchased goods from a single supplier who allows a discount of 3% on goods purchased in excess
of Rs.3,000,000 in a year. The discount for the year ended 30 June 2014 amounts to Rs.265,800 and would
be received in August 2014.
ii. All goods are sold at cost plus 60%.

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iii. All cash received against sale of goods has been banked with the exception of the following weekly
average cash expenses/drawings:

Rupees

Drawings 30,000

Carriage outward 5,000

Petrol 3,000

Misc. expenses 2,500

iv. Cash in hand on 30 June 2014 amounted to Rs. 26,700.

v. An analysis of Ashfaq’s bank statement revealed the following information:

Receipts Rupees Payments Rupees

Collection from debtors 464,400 Purchase of goods 9,850,700

Cash deposited into bank 13,717,800 Car expenses (for business) 73,000

Rent 42,000

Repayment of loan to friend 27,900

Salaries 1,600,000

Purchase of freehold land 2,500,000

Travelling expenses 40,000

Printing & stationery 46,000

Advertisement 125,000

Insurance 50,000

Truck hire charges 657,000

Misc. expenses 362,300

14,182,200 15,373,900

vi. Depreciation on motor car and furniture is to be provided @ 30% and 15% respectively under the
reducing balance method.
vii. Stock-in-trade on 30 June 2014 amounted to Rs. 702,000.
Required:
Prepare Trading and Profit and Loss Account for the year ended 30 June 2014 and Balance Sheet as on 30 June
2014.

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 Answer:
Ashfaq
Trading and Profit and loss account
For the year ended 30 June 2014

Rs.

Sales 160% 20,315,520

Less: Cost of goods sold

Opening Stock 1,805,000

Purchases W1 11,594,200

Closing Stock (702,000)

100% (12,697,200)

Gross profit 60% 7,618,320

Less: Expenses

Carriage outward 260,000

Petrol 156,000

Car expenses 73,000

Rent (42,000 - 20,000 opening accrual) 22,000

Salaries 1,600,000

Traveling expenses 40,000

Printing & stationary 46,000

Advertisement 125,000

Insurance (50,000 + 15,000 opening prepaid) 65,000

Depreciation (600,000+150,000) 750,000

Truck hire charges 657,000

Misc. expense (362,300 bank + 130,000 cash) 492,300

(4,286,300)

Net profit 3,332,020

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Ashfaq
Balance Sheet as at 30 June 2014

Rs.

Non-current assets

Freehold land 2,500,000

Motor car 2,000,0000 – 600,000 depreciation 1,400,000

Furniture 1,000,000 – 150,000 depreciation 850,000

4,750,000

Current assets

Inventory 702,000

Trade Receivables W3 4,366,520

Cash 26,700

5,095,220

9,845,220

Capital and reserves

Capital 4,396,600

Add: profit 3,332,020

Less: drawings (1,560,000)

6,168,620

Current liabilities

Trade payables W1 2,845,500

Bank overdraft 360,600 + 14,182,200 – 15,373,900 831,100

3,676,600

9,845,220

W1 Creditors a/c

Rupees Rupees
Bank 9,850,700 Balance b/d 1,102,000
Balance c/d 2,845,500 Purchases (W1.1) 11,594,200
12,696,200 12,696,200

W1.1: Rs. 3,000,000 + (Rs.265,800/0.03) =11,860,000 – 265,800 discount = Rs. 11,594,200

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W2 Cash a/c

Rupees Rupees
Balance b/d 15,900 Bank 13,717,800
Cash sales and RA 15,834,600 Drawings (30,000 × 52) 1,560,000
Carriage outward (5,000 × 52) 260,000
Petrol (3,000 × 52) 156,000
Misc. expense (2,500 × 52) 130,000
Balance c/d 26,700
15,850,500 15,850,500

W3 Debtors

Rupees Rupees
Balance b/d 350,000 Bank 464,400
Sales SPL 20,315,520 Cash W2 15,834,600
Balance c/d (balancing) 4,366,520
20,665,520 20,665,520

 Example 26:
Babar had purchased a running business from Razi on 1 January 2014 at a total agreed price of Rs. 960,000.
Babar died on 16 June 2014 and his son Sami took over the business. Sami wants to assess the profitability of the
business and for that purpose he has collected the following information from the records maintained by him
and his father:
i. Correspondence between Babar and Razi has revealed that they had agreed to value the inventory and other
assets of the business at Rs.600,000 and Rs.120,000 respectively. However, in view of Razi’s standing in the
market, the deal had been finalised at a lump sum price of Rs. 960,000 payable in two equal instalments. The
first instalment was paid by Babar from his personal account.
ii. Babar had opened a bank account in the name of the business.
An analysis of the bank statement revealed the following details:

Receipts Rupees
Amount deposited by Babar on 1 January 2014 from his personal account 2,000,000
Day to day collections banked at day end 3,800,000

Payments
Second instalment to Mr. Razi on 31 January 2014 480,000
Purchases 3,150,000
Lease rent 120,000
Electricity 22,000
Furniture purchased on 1 July 2014 25,000

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iii. Babar and Sami kept a notebook which shows that the following payments were made out of daily sale
proceeds before depositing them in the bank:

Rupees
Salaries and EOBI payments 184,300
Purchases 49,500
Sundry shop expenses 35,600
Drawings 192,500

iv. On 31 August 2014, there was a burglary at the warehouse and inventory costing Rs. 50,000 was stolen. Due
to defect in the insurance policy, the insurance company acknowledged the claim of Rs.20,000 only, which
was received on 5 November 2014.
v. On 31 December 2014, stock on hand costed Rs.450,000. Cash in hand, trade creditors and accrued expenses
(electricity) amounted to Rs.34,500, Rs. 82,500 and Rs. 5,200 respectively.
vi. Depreciation on fixtures and fittings is to be provided at the rate of 10% per annum.
Required:
Prepare Trading and Profit and Loss Account for the year ended 31 December 2014 and Balance Sheet as on 31
December 2014.
 Answer:
Babar
Trading and Profit and loss account
For the year ended 31 December 2014

Rs.
Sales W2 4,296,400

Less: Cost of goods sold

Opening Stock (Razi) 600,000
Purchases 3,282,000 W3 – 50,000 abnormal loss 3,232,000
Closing Stock (450,000)
(3,382,000)
Gross profit 914,400
Less: Expenses
Salaries 184,300
Sundry shop expenses 35,600
Lease rentals 120,000
Loss on burglary 30,000
Electricity(22000+5200) 27,200
Depreciation 25,000 x 10% x 6/12 1,250
(398,350)
Net profit 516,050

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Babar
Balance Sheet as at 31 December 2014

Rs.
Non-current assets
Goodwill 960,000 – 600,000 – 120,000 240,000
Furniture 25,000 – 1,250 23,750
263,750
Current assets
Inventory 450,000
Other assets (Razi) 120,000
Bank W1 2,023,000
Cash 34,500
2,627,500
2,891,250

Capital and reserves

Capital 480,000 (to Razi) + 2,000,000 (in bank) 2,480,000
Add: profit 516,050
Less: drawings (192,500)
2,803,550
Current liabilities
Trade payables 82,500
Payable to Razi 480,000 – 480,000 bank 0
Accrued expenses 5,200
87,700
2,891,250

W1 Bank

Rupees Rupees
Capital introduced 2,000,000 Payment of 2nd instalment to Razi 480,000
Cash deposited 3,800,000 Payment for purchases 3,150,000
Cash received from insurance 20,000 Lease payment 120,000
Electricity 22,000
Furniture & Fixtures 25,000
Balance at bank 2,023,000
5,820,000 5,820,000

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W2 Cash

Rupees Rupees
Bank 3,800,000
Sales 4,296,400 Salaries and EOBI 184,300
(Payments for) Purchases 49,500
Sundry shop expenses 35,600
Drawings 192,500
c/d 34,500
4,296,400 4,296,400

W3 Payables

Rupees Rupees
Cash 49,500 b/d 0
Bank 3,150,000 Purchases 3,282,000
c/d 82,500
3,282,000 3,282,000

 Example 27:
On 1 July 2017, Nezam took over a running business namely FC Traders (FCT). Proper books of account are not
maintained for FCT. Following information has been gathered for preparation of statement of profit or loss for
the year ended 30 June 2018:
i. Balances of certain assets and liabilities:

30-Jun-2018 1-Jul-2017
Assets and liabilities ------ Rs. in '000 ------
Equipment ? 4,000
Furniture and fixtures ? 2,500
Trade debtors 1,600 -
Inventory 2,400 2,800
Unused miscellaneous supplies 400 300
Unpaid suppliers’ bills 2,800 1,850
Shop rent payable 400 200
Cash and bank ? 1,000

ii. Summary of bank payments for the year ended 30 June 2018:

Rs. in '000
Suppliers 13,600
Repair and maintenance 950
Shop rent 2,000
Miscellaneous supplies 800
Utilities 1,200

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iii. Payments made out of cash sales before being deposited into the bank:

Rs. in '000
Salaries and wages 1,800
Purchase of inventory 3,000
Part payment of sales commission to riders 90

iv. Unpaid suppliers’ bills as at 30 June 2018 include a bill of Rs. 320,000 which was mistakenly taken at Rs.
230,000.
v. During the year, goods costing Rs. 540,000 were withdrawn by Nezam for personal use.
vi. Inventory as at 30 June 2018 includes goods costing Rs. 250,000 which were badly damaged in an accident
and have no sales value.
vii. Mark-up on goods sold are as follows:

Mark-up on cost
50% of goods – sold on cash counter 35%
20% of goods – sold for cash through riders 40%
30% of goods – sold for credit 45%

viii. The riders are entitled to 3% commission.

ix. Fixed asset at 30 June 2018 are to be depreciated at 10% per annum.
x. Salaries and wages for June 2018 amounting to Rs. 165,000 were paid on 5 July 2018.
Required:
Prepare statement of profit or loss for the year ended 30 June 2018.
 Answer:
FC Traders
Statement of Profit or loss for the year ended 30 June 2018

Rs. 000
Sales at counter [COS x 50% x 135/100] 11,813
Sales on credit [COS x 30% x 145/100] 7,612
Sales through riders [COS x 20% x 140 /100] 4,900
24,325
Cost of sales
Opening inventory 2,800
Purchases 14,640 credit W1 + 3,000 cash – 250 damaged – 540 drawings 16,850
Closing inventory [2,400 – 250 damaged] (2,150)
(17,500)
Gross profit 6,825

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Rs. 000
Expenses
Repair and maintenance 950
Shop rent b/d 200 – 2,000 cash – c/d 400 2,200
Misc. supplies b/d 300 + 800 cash – c/d 400 700
Utilities 1,200
Salaries and wages 1,800 + 165 accrued 1,965
Riders commission [4,900 x 3%] 147
Depreciation 4,000 x 10% + 2,500 x 10% 650
Abnormal loss (damaged stock) 250
(8,062)
Net loss (1,237)

W1: Creditors
Bank 13,600 b/d 1,850
c/d [2,800 + (320 – 230) 2,890 Purchases 14,640
16,490 16,490

 Example 28:
Mr. Razi, a sole proprietor, runs a small business. On 30 June 2015, he realized that his cash and bank balances
have reduced considerably. He suspected that one of his employees is involved in misappropriation. He has
provided you the following information:
Opening balances on 1 July 2014 Rs. in ‘000’
Cash and bank 389
Debtors 1,560
Stock 856
Land 450
Equipment – WDV (purchased on 1 April 2014 at a cost of Rs. 600,000) 585
Creditors 1,348
Accrued expenses: Marketing 30
Utilities 25
Salaries 48
Other miscellaneous 15

Receipts and payments for the period from 1 July 2014 to 30 June 2015 Rs. in ‘000’
Receipts from cash sales 1,728
Receipts from debtors 4,475
Payments made to creditors 4,774
Payments for marketing expenses 205
Payments for utility expenses 240
Payments for salaries 600
Payments for other miscellaneous expenses 107
Equipment (purchased on 1 October 2014) 250
Drawings by Razi 125

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Other information:
i. Razi makes 35% margin on gross sales price. However, during the year, he offered 5% discount on credit
sales and 10% discount on cash sales. 70% of his total sales were on credit.
ii. Actual bills for the year were as follows:

Rs. in ‘000’
Marketing expenses 200
Utility expenses 250
Other misc. expenses 100

iii. Salary of the staff was Rs. 52,000 per month.

iv. Balances of debtors and creditors as on 30 June 2015 were Rs.1,091,000 and Rs.1,195,000 respectively.
v. Closing stock at 30 June 2015 was Rs.1,167,000. It included 150 units costing Rs. 1,500 each which were
damaged and Razi incurred Rs. 900 per unit in July 2015 to bring them into saleable condition.
vi. Razi depreciates equipment on straight line basis at the rate of 10% per annum.
Required:
Prepare income statement for the year ended 30 June 2015 and balance sheet as at 30 June 2015. Also compute
the amount of cash shortage, if any.
 Answer:
Mr. Razi
Income Statement
For the year ended 30 June 2015

Rupees
Sales W1 5,984,000
Cost of Sales
Opening stock 856,000
Purchases (bal.) 4,471,000
Closing stock 1,167,000 – NRV loss W2 13,800 (1,153,200)
[Gross 6,400,000 W1 x 65%] + NRV loss W2 13,800 4,173,800
Gross profit 1,810,200
Marketing expenses W6 (200,000)
Utility expenses W6 (250,000)
Salaries W6 (624,000)
Other misc. expenses W6 (100,000)
Depreciation expense 600,000 x 10% + 250,000 x 10% x 9/12 (78,750)
Loss due to cash shortage 150,000 W5 + 250,000 W3 (400,000)
Net profit 157,450

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Mr. Razi
Balance Sheet
As at 30 June 2015

Rupees
Non-Current Assets
Land 450,000
Office equipment
Cost (600,000 + 250,000) 850,000
Accumulated depreciation (15,000 + 78,750) (93,750)
756,250
1,206,250
Current Assets
Stock [1,167,000-13,800 W2] 1,153,200
Debtors 1,091,000
Bank W4 291,000
2,535,200
Total Assets 3,741,450

Equity
Razi's capital opening 2,374,000
Profit for the year 157,450
Drawings (125,000)
2,406,450

Current Liabilities
Creditors 1,195,000
Accrued expenses W6 140,000
Total Equity and Liabilities 3,741,450

Rupees
Cash misappropriated in debtors W3 250,000
Cash misappropriated in creditors W5 150,000
Cash shortage 400,000

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Workings:
W1: Determination of gross sales revenue and discount allowed

Net sales Discount allowed Gross sales

Cash sales 1,728,000 192,000 1,920,000

(Given) (1,728,000 x 0.1/0.9) (1,728,000+192,000)

Credit sales 4,256,000 224,000 4,480,000

(4,480,000 – 224,000) (4,480,000 x 5%) (1,920,000 x 70 / 30)

Total 5,984,000 416,000 6,400,000

Note: The discount is trade discount in nature.

W2: Adjustment for NRV on damaged stock Rupees

Selling price of damaged stock (1,500 ÷ 0.65) 2,308

Net realizable value (2,308 – 900) 1,408

NRV expense per unit (1,500 – 1408) 92

Total NRV expense (92 x 150 units) 13,800

W3 Debtors

Rupees Rupees

Opening balance 1,560,000 Receipts 4,475,000

Sales (Credit) W1 4,256,000 Cash misappropriated 250,000

Closing balance 1,091,000

5,816,000 5,816,000

W4 Bank

Rupees Rupees
b/d 389,000 Payments made to creditors 4,774,000
Receipts from cash sales 1,728,000 Payment for marketing exp. 205,000
Receipts from debtors 4,475,000 Payment for utility expenses 240,000
Payment for salaries 600,000
Payment for other misc. exp 107,000
Drawing 125,000
Office equipment 250,000
Closing balance 291,000
6,592,000 6,592,000

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W5 Creditors

Rupees Rupees
Payments 4,774,000 Opening balance 1,348,000
Purchases (from COS) 4,471,000
Closing balance 1,195,000 Cash misappropriated 150,000
5,969,000 5,969,000

W6 Accrued expenses

A B C A+B-C
Expense for Accruals Payment during Accruals
the year 01-07-2014 the year 30-06-2015
--------------------------- Rupees ---------------------------
Marketing expenses 200,000 30,000 205,000 25,000
Utility expenses 250,000 25,000 240,000 35,000
Salaries (52,000 x 12) 624,000 48,000 600,000 72,000
Other misc. expenses 100,000 15,000 107,000 8,000
1,174,000 118,000 1,152,000 140,000

 Example 29:
Rahil runs a retail business. He appointed a cashier at a monthly salary of Rs. 13,000 on 1 April 2016. The cashier
did not report for work on 1 July 2016 and it was found that he had left, taking with him the balance in the till.
It had been Rahil's practice to deposit on each weekend the available balance in the till after retaining a float of
Rs.5,000. He maintains record of sales on credit and a file of unpaid invoices in respect of goods purchased by
him.
The following information has been ascertained from the available records:
i. Balance Sheet as on 31 March 2016 was as follows:

Rupees Rupees
Rahil’s capital 233,000 Fixtures and fittings -WDV 161,000
Creditors for goods 159,000 Inventory 111,000
Creditors for expenses 16,000 Debtors 55,000
Cash at bank 76,000
Cash in hand 5,000
408,000 408,000

ii. Following is a summary of the bank statement from 1April to 30 June 2016:

Rupees Rupees
Balance on 1 April 2016 76,000 Payment to suppliers for goods 604,000
Cheques received from customers Rent & other expenses 37,000
29,000
Cash deposited 627,000 Balance on 30 June 2016 91,000
732,000 732,000

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iii. The following amounts were paid from the till:

Rs. per month

Salary to cashier 13,000
Rahil’s drawings 26,000
Petty expenses 5,000

iv. Fixtures and fittings are depreciated at 10% per annum using reducing balance method.
v. Inventory on 1 July 2016 was Rs. 58,000.
vi. Credit sales during the quarter ended 30 June 2016 amounted to Rs.64000 whereas the debtors balances as
on 30 June 2016 amounted to Rs.66,000. However, direct confirmations from debtors showed that
receivables in fact totalled Rs.54,000.
vii. Creditors for goods and expenses had always been paid by cheque. Unpaid invoices for goods on 30 June
2016 totalled Rs.181,000 and creditors for expenses amounted to Rs.13,000. Detailed scrutiny of records
revealed that a cash receipt of Rs.8,000 which had been received against goods returned to a supplier had
not been recorded.
viii. Rahil sells goods at a gross profit margin of 20% on sales.
Required:
a) Prepare a statement showing calculation of the amount of defalcation.
b) Prepare a balance sheet as on 30 June 2016.
Answer:
Part (a)

Statement of amount of defalcation Rs.

Debtors balance short W1 12,000
Cash against purchase return W2 8,000
Cash missing from till W3 44,750
TOTAL 64,750

Part (b)
Balance Sheet of Rahil
As on 30 June 2016

Liabilities Rupees Assets Rupees

Sundry creditors 181,000 Fixtures and fittings (net) 156,975
Expenses owing 13,000
Capital:
Balance on 1 April 2016 233,000
Add: Net profit W4 10,975 Stock in trade 58,000
Less: Drawings (78,000) Sundry debtors 54,000
165,975 Balance at bank 91,000
359,975 359,975

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W1 Debtors

Rupees Rupees
b/d 55,000 Bank (Cheques received) 29,000
Credit sales 3 months 64,000 Cash (bal.) 24,000
Short 66,000 – 54,000 12,000
c/d 54,000
119,000 119,000

W2 Creditors

Rupees Rupees
Purchase return 8,000 b/d 159,000
Bank 604,000 Cash against return 8,000
c/d 181,000 Purchases (bal.) 626,000
793,000 793,000

W3 Cash

Rupees Rupees
b/d 5,000 Bank 627,000
Debtors W1 24,000 Salary 13,000 x 3 month 39,000
Cash sales (note) 774,750 Drawings 26,000 x 3 78,000
Petty expenses 5,000 x 3 15,000
Loss 44,750
803,750 803,750

Note: Total sales 838,750 W4 – 64,000 credit sales = Rs. 774,750 cash sales

W4 Net Profit for 3 months Rs. %

Sales 838,750 100%
Cost of sales
Opening inventory 111,000
Purchases 626,000 – 8,000 returns 618,000
Closing inventory (58,000)
(671,000) 80%
Gross Profit 167,750 20%
Depreciation 161,000 x 10% x 3/12 (4,025)
Salary (39,000)
Petty expenses 16,000 opening - 15,000 paid – 13,000 closing (12,000)
Rent and other expenses (37,000)
Loss due to defalcation (64,750)
10,975

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 Example 30:
Saleem is the owner of S-Mart, a grocery store. His accountant resigned and left on 1 January 2017. Saleem
suspects that the previous accountant was involved in some sort of misappropriation. The information available
with him is as follows:
i. Summary of bank statement:

Receipts Rupees Payments Rupees

Balance as at 1 Jan 2016 250,000 Suppliers 1,807,500
Cheques from debtors 824,000 Salaries 48,000
Cash sales 1,450,000 Rent 72,000
Sale of vehicle on 1 Jan 2016 15,000 Utilities 36,000
Other expenses 24,750
New vehicle on 1 Mar 2016 230,000
Balance as at 31 Dec 2016 320,750
2,539,000 2,539,000

ii. Other balances extracted from the records maintained by the previous accountant:

Particulars 31-Dec-2016 31-Dec-2015

---------- Rupees ----------
Furniture and fixtures – WDV 555,000 550,000
Equipment – WDV 64,000 80,000
Vehicle – WDV 210,000 18,500
Inventory 215,000 250,000
Debtors 340,000 260,000
Advance rent - 3,000
Cash in hand 31,510 45,000
Creditors 354,500 100,000
Salaries payable 22,000 18,000

iii. Before depositing the receipts from cash sales in the bank, Saleem took Rs. 12,000 per month for personal
use. All other payments were made through bank and the debtors settled their accounts through cheques.
iv. The creditors have confirmed the balances due from them. However review of the statement provided by
one of the creditors indicates that goods returned for cash amounting to Rs. 24,000 were not recorded in the
books.
v. Unpaid invoice for furniture purchased during the year for Rs. 45,000 is included in creditors.
vi. The margin on cash sales and credit sales is 20% and 25% respectively. From 1 July 2016, prices to cash
customers were further reduced by 6% due to which quantity sold against cash in the 2nd half of the year
increased by 25% as compared to the first half of the year.
vii. All the debtors confirmed their balances except an amount of Rs. 50,000. On investigation it was found that
the related goods had been issued against fake invoices.
Required:
a) Determine the amount of suspected fraud.
b) Prepare statement of profit or loss for the year ended 31 December 2016.

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 Answer:
Part (a)

Loss due to defalcation Rs.

Cash embezzled through purchase returns (iv) 24,000
Stock embezzled through fake debtors (vii) 50,000 x 75 /100 37,500
Difference in cash W1 50,740
112,240

Part (b)

Statement of profit or loss Rs.

Sales W5 2,485,250
Cost of sales
Opening inventory 250,000
Purchases 1,979,500 W3 – 24,000 return (iv) 1,955,500
Closing inventory (215,000)
(1,990,500)
Gross profit 494,750
Expenses
Rent expenses 72,000 + 3,000 75,000
Utilities 36,000
Other expenses 24,750
Loss on sale of vehicle 18,500 NBV – 15,000 sale proceeds 3,500
Salaries expenses 48,000 – 18,000 + 22,000 52,000
Depreciation – Furniture 550,000 + 45,000 – 555,000 40,000
Deprecation – Equipment 80,000 – 64,000 16,000
Depreciation – Vehicle 230,000 – 210,000 20,000
Loss due to defalcation (part a) 112,240
(379,490)
115,260

W1 Cash Account
Particulars Rs. Particulars Rs.
b/d 45,000 Drawings 12,000 x 12 (iii) 144,000
Sales (on cash) W5 1,631,250 Bank 1,450,000
Difference 50,740
c/d 31,510
1,676,250 1,676,250

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W2 Payables
Particulars Rs. Particulars Rs.
Bank 1,807,500 b/d 100,000
Purchase return 24,000 Cash for return 24,000
c/d 354,500 – 45,000 furniture (v) 309,500 Purchases 2,017,000
2,141,000 2,141,000

W3 Purchases
Particulars Rs. Particulars Rs.
Payables W2 2,017,000 Stock embezzled – Fake RA 37,500
Transfer to COS/SPL 1,979,500
2,017,000 2,017,000

W4 Receivables
Particulars Rs. Particulars Rs.
b/d 260,000 Bank 824,000
Sales (credit) 854,000 c/d 340,000 – 50,000 (vii) 290,000

Cash normal Cash discounted

W5 Credit Total
Qty = x Qty = 1.25x
Sales 750,000 100 881,250 94 854,000 W4 100 2,485,250
COS (600,000) 80 (750,000) 80 (640,500) 75 (1,990,500)
(bal.) (bal.)
Profit 150,000 20 131,250 14 213,500 25 494,750

 Example 31:
Friday Traders (FT) is engaged in the business of supplying Blenders and Juicers. FT purchases its products from
Sigma Electronics. FT is presently negotiating with a bank for a long term loan and has been asked to provide the
latest financial statements. Since FT does not maintain proper accounting records, you are requested to prepare
the financial statements from the following information:
i. Assets and liabilities as on 1 January 2018:

Rs. in '000
Equipment (40% depreciated) 2,490
Stock (stock value of Blenders was double of the Juicers) 3,705
Prepaid rent up to 30 April 2018 280
Trade debtors (only for Blenders) 1,410
Payable to Sigma Electronics 3,600
Salaries payable 98
Bank overdraft 740

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ii. Sales of Blenders are made on credit while Juicers are sold on cash basis.
iii. Upto last year, FT was earning a gross profit of 30% on cost of Blenders and 35% on sale value of Juicers.
With effect from 1 January 2018:
• FT increased sales prices of both the products by 20%; and
• Sigma Electronics increased the prices of Juicers only by 40%.
iv. 60% of the amount of purchases made during the year represents blenders.
v. Summary of bank transactions during the year:

Rs. in '000
Receipts from credit customers 6,570
Payments:
Sigma Electronics 8,850
Insurance for one year starting 1 February 2018 204
Rent 826
Equipment 550
Salaries and wages 685
11,115

vi. Debtors amounting to Rs. 138,000 are considered as irrecoverable.

vii. Rent of the premises was increased by 30% with effect from 1 September 2018.
viii. Following payments were made from cash sales and remaining amounts were deposited into the bank:

Rs. in '000
Repairs and maintenance 186
Salaries and wages 124
Drawings 477
787

ix. Equipment is depreciated at 8% on cost.

x. Some balances ascertained as at 31 December 2018:

Rs. in '000
Stock* – Juicers 975
– Blenders 2,597
Payable to Sigma Electronics 2,420
Salaries payable 134

*Comprises of stock purchased in 2018

Required:
a) Prepare statement of profit or loss account for the year ended 31 December 2018.
b) Prepare statement of financial position as at 31 December 2018.

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 Answer:
Part (a)
Statement of profit or loss for the year ended 31 December 2018

Juicers Blenders
Rs. 000 Rs. 000
Sales
Credit sales – Blenders 4,475×156÷100(W1) 6,981
Cash sales – Juicers Opening stock: 1,235×120÷65(W1) 2,280
Rem.:(3,328-1,235)×120÷91(W1) 2,760
5,040 6,981
Cost of goods sold:
Opening stock 1,235 2,470
Purchases 7,670(W3) in 40:60 3,068 4,602
Closing stock (975) (2,597)
(3,328) (4,475)
Gross profit 1,712 2,506
Total gross profit 4,218
Operating expenses:
Insurance 204×11÷12 187
Rent (70×8)+(91×4) 924
Repair 186
Bad debts written off 138
Salary (124+685)+(134–98) 845
Depreciation – equipment (2,490÷0.6×8%)+(550×8%) 376
(2,656)
Net profit 1,562

W1: POLICIES

Blenders Juicers
Updated Updated with
Previous Updated Previous
with sales sales & cost
Sales 130 156 100 120 120
[130×1.2] [100×1.2]
Cost 100 100 65 65 91
[65×1.4]
Profit 30 56 35 55 29

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W2: Trade debtors (gross)

Rs. 000 Rs. 000
b/d 1,410 Receipts 6,570
Sales 6,981 Write off 138
c/d (balancing) 1,683
8,391 8,391

W3: Trade payables (Sigma Electronics)

Rs. 000 Rs. 000
Bank 8,850 b/d 3,600
c/d 2,420 Purchases (balancing) 7,670
11,270 11,270

Part (b)
Statement of financial position as on 31 December 2018

Rs. in '000
Assets
Non-current assets
Equipment 2,490+550–376 2,664
Current assets:
Stock 975+2,597 3,572
Trade debtors (W-2) 1,683
Prepaid rent 280+826–924 182
Prepaid insurance 204–187 17
5,454
8,118
Equity and liabilities:
Opening capital 2,490+3,705+280+1,410–3,600–98–740 3,447
Net profit 1,562
Drawings (477)
4,532
Current liabilities
Trade payables (W-3) 2,420
Bank overdraft (W-4) 1,032
Salary payable 134
3,586
8,118

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W4: Bank
Rs. 000 Rs. 000
Receipt from debtors 6,570 b/d 740
Amount banked 4,253 Trade payable 8,850
[5,040 – 186 – 124 - 477] Insurance 204
Rent 826
Equipment 550
c/d (balancing) 1,032 Salaries and wages 685
11,855 11,855

 Example 32:
You have been appointed as accountant of Gandhara Enterprises (GE) to replace Nasim who was terminated on
suspicion of fraud. Following information has been compiled for preparation of GE’s financial statements for the
year ended 30 June 2020:
i. Summarised bank statement:

Receipts Rs. 000 Payments Rs. 000

Opening balance 600 Creditors 8,300
Cheques from debtors 7,420 Salaries 900
Cash 2,400 Repair and maintenance 450
Rent 980 Utilities 500
Office furniture 150
Drawings 640
Closing balance 460
11,400 11,400

ii. Other balances worked out from the available records:

Particulars 30-Jun-2020 30-Jun-2019

------- Rs. in '000 -------
Fixed assets – WDV 3,400 3,460
Inventories 750 715
Goods in transit 140 -
Debtors 900 730
Unearned rent 300 450
Cash in hand 48 36
Creditors 895 690
Salaries payable 86 120

iii. All debtors settle their accounts through cheques. All payments are made through cheques except for
average monthly petty expenses of Rs. 25,000.

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iv. Cheques of Rs. 950,000 issued to creditors in the last week of June 2020 were presented in July 2020.
Cheques from debtors amounting to Rs. 860,000 deposited on 30 June 2020 were cleared in July 2020.
v. Goods are sold on cash and credit at cost plus 25% and 30% respectively.
vi. Apart from misappropriating amounts from cash sales, the following matters were also noted in respect of
Nasim’s fraud:
• Physical cash count revealed that cash in hand was Rs. 20,000.
• Fixed assets having written down value of Rs. 65,000 were sold for Rs. 120,000 which was not recorded
in the books.
• Goods in transit represent goods purchased in May 2020. However, in actual there were no goods in
transit.
• Goods costing Rs. 130,000 appearing in the closing inventory sheets were not found physically.
• All the debtors confirmed their balances except for an amount of Rs. 260,000. It was found that the
related goods had been issued against fake invoices.
Required:
a) Determine the amount of suspected fraud.
b) Prepare GE’s statement of profit or loss for the year ended 30 June 2020.
 Answer:

Part (a)

Amount of suspected fraud: Rs. in '000

Difference in cash balance 48–20 28
Proceeds from sale of fixed assets 65+55 120
Fake credit sales invoices 260÷1.3 200
Fake goods in transit 140
Embezzlement through inventory 750–620 130
Cash defalcated from cash sales (W-1) 763
1,381

W1: Cash
Rs. 000 Rs. 000
b/d 36 Petty expenses 25 x 12 300
Cash Sales 3,475 Cash banked 2,400
Cash shortage [48 – 20] 28
Cash defalcated from cash 763
sales (balancing)
c/d 20
3,511 3,511

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Part (b) Gandhara Enterprises

Statement of profit or loss for the year ended 30 June 2020

Rs. 000
Sales – Credit (W-2) 8,190
- Cash [9,080–(8,190÷1.3)] ×1.25 3,475
11,665
Cost of goods sold
Opening inventory 715
Purchases (W-3) 9,455
Goods in transit (140)
Good issues against fake invoices 260÷1.3 (200)
Goods physically not found (130)
Closing stock 750–130 (620)
Cost of sales (9,080)
Gross profit 2,585
Operating expenses
Salaries 86+900–120 866
Utilities 500
Repair and maintenance 450
Petty cash expenses 25×12 300
Depreciation 3,460+150–3,400 210
Loss due to defalcation (a) 1,381
Total operating expenses (3,707)
(1,122)
Rent income 980+450–300 1,130
Gain on disposal of fixed assets 120–65 55
Net profit 63

W2: Debtors
Rs. 000 Rs. 000
b/d 730 Bank 7,420
Credit sales (bal.) 8,190 Uncleared cheques 860
c/d [900 – 260] 640
8,920 8,920

W3: Creditors
Rs. 000 Rs. 000
Bank 8,300 b/d 690
Unpresented cheques 950 Purchases (bal.) 9,455
c/d 895
10,145 10,145

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1. OBJECTIVE BASED Q&A

1. Yusuf does not keep a full set of business records, but the following information is available for the month of June
2019.

Rs. 000

Accounts receivable, 1 June 2019 800

Accounts receivable, 30 June 2019 550

Credit sales 6,800

Cash received from customer (credit) 6,730

Irrecoverable debt written off 40

General allowance for doubtful debts at 30 June 2019 100

Assuming no other transactions, how much discount was allowed to customers during the month?
a) Rs. 240,000
b) Rs. 280,000
c) Rs. 340,000
d) Rs. 380,000

2. Many of the records of Ghalib have been destroyed by fire. The following information is available for the period
under review.
i. Sales totalled Rs. 480,000
ii. Inventory at cost was opening Rs. 36,420, closing Rs. 40,680
iii. Trade payables were opening Rs. 29,590, closing Rs. 33,875
Gross profit for the period should represent a margin of 50%
What was the total for the period of cash paid to suppliers?
a) Rs. 239,975
b) Rs. 315,715
c) Rs. 319,975
d) Rs. 328,545

3. In the year to 31st April 2016, Abdullah’s sales were Rs. 182,000. All of his sales were made at a mark-up of 30%.
His opening inventory value was Rs. 11,800 and his closing inventory value was Rs. 9,700.
What was the value of Abdullah’s purchases in the year to 31 April 2016?
a) Rs. 125,300
b) Rs. 137,900
c) Rs. 140,000
d) Rs. 142,100

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4. The following information is relevant to the calculation of the sales figure for Arif, a sole trader who does not
keep proper accounting records:

Rs.
Opening accounts receivable 29,100
Cash received from credit customers and paid into the bank 381,600
Expenses paid out of cash received from credit customers before banking 6,800
Irrecoverable debts written off 7,200
Refunds to credit customers 2,100
Discounts allowed to credit customers 9,400
Cash sales 112,900
Closing accounts receivable 38,600

The figure which should appear in Arif’s statement of comprehensive income for sales is:
a) Rs. 525,300
b) Rs. 511,700
c) Rs. 529,500
d) Rs. 510,900

5. A sole trader who does not keep full accounting records wishes to calculate her sales revenue for the year.
The information available is:

Rs.
1 Opening inventory 17,000
2 Closing inventory 24,000
3 Purchases 91,000
4 Standard gross profit percentage on sales revenue 40%

Which of the following is the sales figure for the year calculated from these figures?
a) Rs. 117,600
b) Rs. 108,000
c) Rs. 210,000
d) Rs. 140,000

6. Salman is a sole proprietor whose accounting records are incomplete. All the sales are cash sales and during the
year Rs. 50,000 was banked, including Rs. 5,000 from the sale of a business car. He paid Rs. 12,000 wages in cash
from the till and withdrew Rs. 2,000 as drawings. The cash in the till at the beginning and end of the year was Rs.
300 and Rs. 400 respectively. There were no other payments in the month.
What were the sales for the year?
a) Rs. 58,900
b) Rs. 59,100
c) Rs. 63,900
d) Rs. 64,100

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7. There is Rs. 100,000 in the cash till at the year-end at F Ltd, but the accountant has discovered that some cash
has been stolen. At the beginning of the year there was Rs. 50,000 in the cash till and receivables were Rs.
2,000,000. Total sales in the year were Rs. 230,000,000. Accounts receivable at the end of the year were Rs.
3,000,000. Cheques banked from credit sales were Rs. 160,000,000 and cash sales of Rs. 50,000,000 have been
banked.
How much cash was stolen during the year?
a) Rs. 21,050,000
b) Rs. 18,950,000
c) Rs. 19,050,000
d) Rs. 50,000

8. A business operates on a gross margin of 33 ¼ %. Gross profit on a sale was Rs. 800,000 and expenses were Rs.
680,000.
The net profit percentage is
a) 3.75%
b) 5%
c) 11.25%
d) 22.67%

9. A toyshop makes purchases of Rs. 20,248,000 and sales of Rs. 26,520,000. The proprietor’s children take goods
costing Rs. 486,000 without paying for them. Closing stock was valued at its cost of Rs. 2,240,000 and the gross
margin achieved was a constant 30% on sales.
What was the cost of the opening stock?
a) Rs. 556,000
b) Rs. 1,042,000
c) Rs. 2,392,000
d) Rs. 2,878,000

10. Which of the following calculations could produce an acceptable figure for a trader's net profit for a period if no
accounting records had been kept?
a) Closing net assets plus drawings minus capital introduced minus opening net assets
b) Closing net assets minus drawings plus capital introduced minus opening net assets
c) Closing net assets minus drawings minus capital introduced minus opening net assets
d) Closing net assets minus drawings plus capital introduced plus opening net assets

11. On 30 September 2018 part of the inventory of a company was completely destroyed by fire.
The following information is available:

Inventory at 1 September 2018 at cost Rs. 49,800,000

Purchases for September 2018 Rs. 88,600,000

Sales for September 2018 Rs. 130,000,000

Inventory at 30 September 2018 undamaged items Rs. 32,000,000

Standard gross profit percentage on sales 30%

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Based on this information, what is the cost of the inventory destroyed?

a) Rs. 17,800,000
b) Rs. 47,400,000
c) Rs. 15,400,000
d) Rs. 6,400,000

12. Sarim does not keep full accounting records. His last accounts show that his capital balance was Rs. 42,890,000.
At the year end, he calculated that his assets and liabilities were:

Rs. 000

Non-current assets 41,700

Inventory 9,860

Receivables 7,695

Payables 4,194

Bank overdraft 5,537

On reviewing his calculations, you note that he did not include Rs. 258,000 of unpaid invoices for expenses.
What is the value of Sarim’s closing capital?
a) Rs. 49,266,000
b) Rs. 49,544,000
c) Rs. 60,360,000
d) Rs. 60,876,000

13. During the year to 30th November 2015 Amna bought goods for resale at a cost of Rs. 75,550,000. Her inventory
at 1st December 2014 was valued at Rs. 15,740,000. She did not count her inventory at 30th November 2015,
but she knows that her sales for the year to 30th November 2015 were Rs. 91,800,000. All sales were made at a
mark-up of 20%.
Based on the information above, what was the value of Amna’s inventory at 31 November 2015?
a) Rs. 13,630,000
b) Rs. 14,790,000
c) Rs. 16,690,000
d) Rs. 17,850,000

14. On 1 September 2018, Waris had inventory of Rs. 380,000. During the month, sales totalled Rs. 650,000 and
purchases Rs. 480,000. On 30 September 2018 a fire destroyed some of the inventory. The undamaged goods
were valued at Rs. 220,000. The business operates with a standard gross profit margin of 30%.
Based on this information, what is the cost of the inventory destroyed in the fire?
a) Rs. 185,000
b) Rs. 140,000
c) Rs. 405,000
d) Rs. 360,000

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15. You are given the following incomplete and incorrect extract from the Statement of comprehensive income of a
company that trades at a markup of 25% on cost:

Rs. Rs.

Sales 174,258

Less: Cost of goods sold

Opening inventory 12,274

Purchases 136,527

Closing inventory X

(X)

Gross profit X

Having discovered that the sales figure should have been Rs. 174,825 and the purchase returns of Rs. 1,084 and
sales returns of Rs. 1,146 have been omitted, the closing inventory should be:
a) Rs. 8,662
b) Rs. 8,774
c) Rs. 17,349
d) Rs. 17,458

16. Profit is Rs. 1,051,000. Capital introduced is Rs. 100,000. There is an increase in net assets of Rs. 733,000.
What are drawings?
Rs. ___________

17. The bookkeeper of Lego has disappeared. There is no cash in the till and theft is suspected. It is known that the
cash balance at the beginning the year was Rs. 240,000. Since then, total sales have amounted to Rs. 41,250,000.
Credit customers owed Rs. 2,100,000 at the beginning of the year and owe Rs. 875,000 now. Cheques banked
from credit customers have totalled Rs. 2,429,000. Expenses paid from the till receipts amount to Rs. 180,500
and cash receipts of Rs. 9,300,000 have been lodged in the bank.
What is the amount that bookkeeper stole during the period?
Rs. ___________

18. Taiwan Tyres does not keep full accounting records, but the following information is available in respect of
accounting year ended 31st December 2018.

Rs.

Cash purchases in year 3,900,000

Cash paid for goods supplied on credit 27,850,000

Payables at 1st January 2018 970,000

Payable at 31st December 2018 720,000

In the statement of comprehensive income for 2018, figure for purchases will be?
Rs. ___________

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19. Deen has been trading for some time, but he neglected to maintain full accounting. He is able to provide the
following information.
He is owed Rs. 7,900 by his customers.
He has lodged Rs. 120,700 to his bank account since starting his business. This includes his initial capital of Rs.
22,000.
All his sales are made at cost plus 30%
The value of Deen’s sale since he began trading is?
Rs. ___________

20. The diesel fuel included in the inventory at 1 November 2017 was Rs. 12,500,000 and there were invoices wait
for Rs. 1,700,000. During the year to 31 October 2018, diesel fuel bills of Rs. 85,400,000 were paid, and a delivery
worth Rs. 1,300,000 had yet to be invoiced.
At 31 October 2018, the inventory of diesel fuel was valued at Rs. 9,800,000.
The diesel fuel to be charged to the Statement of comprehensive income for the year to 31 October 2018 is:
Rs. ___________

21. In which of the following systems of recording the financial statements reflect true and fair view of an entity and
accounting records are considered to be more accurate?
a) Cash book system
b) Single entry system
c) Double entry system
d) None of the above

22. Statement of financial position produced from incomplete accounting record is commonly known as
a) Statement of financial position
b) Statement of affairs
c) Statement of net assets
d) Statement of financial operations

23. Which of the following businesses usually maintain incomplete accounting record of the business activities?
a) Large businesses
b) Companies
c) Partnership firms
d) Small businesses

24. In single entry system, it is not possible to prepare,

a) Statement of financial position
b) Profit or loss account
c) Trial balance from ledgers
d) Receipt and payment account

25. The opening capital is ascertained by preparing:

a) Cash book
b) Creditors A/c
c) Debtors A/c
d) Opening statement of affairs

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26. Identify the correct formula used to ascertain the closing balance of capital?
a) Closing capital = Opening capital + Net profit – Expenses
b) Closing capital = Opening capital + Net profit + Drawings
c) Closing capital = Opening capital + Net profit – Drawings
d) Closing capital = Opening capital + Revenue – Expenses

27. Net profit is calculated by:

a) Closing capital + Drawings - Fresh capital injected – Opening capital
b) Closing capital – Drawings + Fresh capital injected – Opening capital
c) Closing capital + Drawings + Fresh capital injected + Opening capital
d) None of the above

28. If opening capital = Rs.10 million and closing capital = Rs.20 million. Assuming no drawings during the
accounting period, calculated the net profit or loss for the period?
a) Net profit = Rs.20 million
b) Net loss = Rs.20 million
c) Net profit = Rs.10 million
d) Net loss = Rs.10 million

29. Which one of the following accounts is supposed to be used to get the figure of credit purchases made during
the current accounting period?
a) Debtor account
b) Creditor account
c) Revenue account
d) Expenses account

30. To obtain the amount of credit sales made during an accounting period, which account is generally used in
single entry and incomplete records?
a) Debtor account
b) Creditor account
c) Revenue account
d) Expenses account

31. If Plant (closing balance) = Rs. 8 million, Land (opening balance) = Rs. 5 million and Creditors (opening
balance) = Rs. 1 million then opening capital balance is?
a) Rs.3 million
b) Rs.4 million
c) Rs.5 million
d) Rs.8 million

32. Opening and closing debtors were Rs. 412,800 and Rs. 524,400 respectively. During the year Rs. 2,684,500 was
received from sales after allowing a cash discount of Rs. 17,420. Debts of Rs. 34,840 were written off as bad
during the year. Find out the credit sales during the year?
a) Rs.2,778,680
b) Rs.2,813,520
c) Rs.2,848,360
d) Rs.2,753,670

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33. Opening and closing creditors were Rs. 450,000 and Rs. 700,000 respectively. During the year, Rs. 3,400,000 was
paid to suppliers. Find out the credit purchases during the year?
a) Rs.3,150,000
b) Rs.3,400,000
c) Rs.3,650,000
d) None of the above

34. Staff salary payable for the month end was Rs. 74,540 and Rs. 96,720 as its opening balance. Salary paid during
the period was Rs. 856,420. Find out the accrued salary during the period?
a) Rs.834,240
b) Rs.856,420
c) Rs.861,540
d) Rs.878,600

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ANSWERS
01. (b)
Accounts receivables
Particulars Rs. 000 Particulars Rs. 000
Bal. b/d 1,700 Bad debts 40
Sales 6,800 Cash 6,730
Discount (bal.) 280
c/d 550
7,600 7,600

02. (a)
Accounts payable
Particulars Rs. Particulars Rs.
Cash (bal.) 239,975 b/d 29, 90
c/d 33,875 Purchases 244,260
237,850 237,850

Inventory
Particulars Rs. Particulars Rs.
Bal. b/d 36,420 OS 480,000x0.5 240,000
Purchases (bal.) 244,260 c/d 40,680
280,680 280,680

03. (b)
Inventory
Particulars Rs. Particulars Rs.
Bal. b/d 11,800 COS 182,000/130x100 140,000
Purchases (bal.) 137,900 c/d 9,700
1 9,700 149,700

04. (a) Total sales = Rs. 112,900 + Rs. 412,400 = 525,300

Accounts receivables
Particulars Rs. Particulars Rs.
Bal. b/d 29,100 Bad debts 7,200
Sales (bal.) 412,400 Cash 381,600+6,800 388,400
Refunds 2,100
Discount allowed 9,400
c/d 38,600
443,600 443,6 0

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05. (d) Cost of sales = 17,000 + 91,000 – 24,000 = 84,000

Sales = 84,000/60 x 100 = Rs. 140,000
06. (b) Sales = 64,100 – 5,000 = 59,100
Cash a/c
Particulars Rs. Particulars Rs.
Bal. b/d 300 Bank 50,000
Cash from sales 64,100 Wages 12,000
Drawings 2,000
c/d 400
64,400 64,400

07. (b)
Accounts receivables
Particulars Rs. Particulars Rs.
Bal. b/d 2,000,000 Cash 179,000,000
Sales +230,000,000- 180,000,000 c/d 3,000,000
50,000,000
182,000,000 182,000,000

Cash a/c
Particulars Rs. Particulars Rs.
Bal. b/d 50,000 Bank 210,000,000
160,000,000+50,000,000
Cash sales 50,000,000 Cash stolen 18,950,000
Receivables 179,000,000 c/d 100,000
229,050,000 229,050,000

08. (b) Sales = 800,000 /33.25 x 100 = 2,406,015

Net profit = 800,000 – 680,000 = 120,000
Net profit % = 120,000/2,406,015 x 100 = 5%
09. (b)
Inventory
Particulars Rs. Particulars Rs.
Bal. b/d (bal.) 1,042,000 COS 26,520,000x0.7 18,564,000
Purchases 20,248,000 Drawings 486,000
c/d 2,240,000
21,290,000 21,290,000

10. (a) Profit = Closing net assets + drawings – capital introduced - opening net assets

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11. (c)
Inventory
Particulars Rs. 000 Particulars Rs. 000
Bal. b/d 49,800 COS 130,000x70% 91,000
Purchases 88,600 Destroyed (bal.) 15,400
c/d 32,000
138,400 138,400

12. (a)
Rs. 000
Non-current assets 41,700
Inventory 9,860
Receivables 7,695
Payables (4,194)
Bank overdraft (5,537)
Expense payable (258)
49,266

13. (b)
Inventory
Particulars Rs. 000 Particulars Rs. 000
Bal. b/d 15,740 COS 91,800/120x100 76,500
Purchases 75,550 c/d (bal.) 14,790
91,290 91,290

14. (a)
Inventory
Particulars Rs. Particulars Rs.
Bal. b/d 380,000 COS 650,000x70% 455,000
Purchases 480,000 Lost by fire (bal.) 185,000
c/d 220,000

15. (b)
Rs. Rs.
Sales 174,825 – 1,146 173,679
Less: Cost of goods sold
Opening inventory 12,274
Purchases 136,527 - 1,084 135,443
Closing inventory (bal.) (8,774)
Cost of sales (bal.) 138,943
Gross profit 173,679 /125 x 25 34,736

16. Rs. 418,000 Drawings = Opening capital + Profit + capital introduced – Closing capital
=1,051,000+100,000- 733,000 = Rs. 418,000

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17. Rs. 6,515,500

Cash a/c
Particulars Rs. Particulars Rs.
Bal. b/d 240,000 Bank 9,300,000 + 11,729,000
2,429,000
Cash sales 9,300,000 Expenses 180,500
Receivables 8,885,000 Cash stolen (bal.) 6,515,500
18,425,000 18,425,000

Accounts receivables
Particulars Rs. Particulars Rs.
Bal. b/d 2,100,000 Cash (bal.) 8,885,000
Bank 24,290,000
Sales 41,250,000- 31,950,000 c/d 875,000
9,300,000
34,050,000 34,050,000

18. Rs. 31.5 million Purchases = 27,600,000+3,900,000 = Rs. 31,500,000

Accounts payable
Particulars Rs. Particulars Rs.
Cash 27,850,000 b/d 970,000
c/d 720,000 Purchases 27,600,000
28,570,000 28,570,000

19. Rs. 106,600 Sales = Rs. 7,900+ (120,700 - 22,000) = 106,600

20. Rs. 87.7 million
Diesel Fuel
Particulars Rs. Particulars Rs.
b/d 12,500,000 b/d 1,700,000
Cash 85,400,000 PL 87,700,000
c/d 1,300,000 c/d 9,800,000
99,200,000 99,200,000

21. (c) Double entry system

22. (b) Statement of affairs

23. (d) Small businesses

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24. (c) Trial balance from ledgers

25. (d) Opening statement of affairs

26. (c) Closing capital = Opening capital + Net profit – Drawings

27. (a) Closing capital + Drawings - Fresh capital injected – Opening capital

28. (c) Profit (loss) = Increase (decrease) in capital = Rs. 20m – 10m = Rs. 10m profit

29. (b) Creditor account

30. (a) Debtor account

31. (b) Rs. 5m – Rs. 1m = Rs. 4m

32. (c)
Receivables
Particulars Rs. Particulars Rs.
b/d 412,800 Cash 2,684,500
Sales 2,848,360 Discount allowed 17,420
Bad debts 34,840
c/d 524,400
3,261,160 3,261,160

33. (c)
Creditors
Particulars Rs. Particulars Rs.
Cash 3,400,000 b/d 450,000
c/d 700,000 Purchases 3,650,000
4,100,000 4,100,000

34. (a)
Salaries
Particulars Rs. Particulars Rs.
Cash 856,420 b/d 96,720
c/d 74,540 PL 834,240
930,960 930,960

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STICKY NOTES

PREPARING LEDGER ACCOUNTS FOR MISSING INFORMATION

Ledger Key points
account

Receivables Mostly used where credit sales or total sales are to be determined unless
the same can be calculated using mark-up/margin equations. It is
important to consider impact of bad debts information carefully.

Payables Mostly used where credit purchases or total purchases are to be

determined unless the same can be calculated using mark-up/margin
and cost of sales equations

Expenses The following memorandum expense account based on concepts of

accrual and prepayments is useful:
EXPENSES
Particulars Rs. Particulars Rs.
b/d (prepaid) XX b/d (payable) XX
Cash paid XX Expense (balancing) XX
c/d (payable) XX c/d (prepaid) XX
XX XX
.

Income The following memorandum income account based on concepts of

accrual and prepayments is useful:
INCOME
Particulars Rs. Particulars Rs.
b/d (receivable) XX b/d (advance) XX
Income (balancing) XX Cash received XX
c/d (advance) XX c/d (receivable) XX
XX XX
.

Cash/Bank This account is relevant:

account
• To find missing figure of any specific payment or receipt
• To find opening or closing balance of cash or bank

Bank If bank statement information is given, it may be necessary to prepare

reconciliation reconciliation to determine cash at bank figure.

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USING EQUATIONS FOR MISSING INFORMATION

Equation Details

Accounting This is often used to calculate opening equity.

equation
Equity = Total assets – Total liabilities
Opening statement of financial position prepared on the basis of
estimated values is often called “statement of affairs” of the entity.

Business This represents movement in equity.

equation
Closing equity = Opening equity + Capital invested + Profit –
Drawings

Cost of sales Cost of sales = Opening inventory + Purchases (net) – Closing

inventory

Property, plant Net book value (opening) = NBV at end x 100 / (100 – Dep%)
& equipment
Depreciation = NBV at end x Dep% / (100 – Dep%)

MARK UP AND MARGIN PERCENTAGES

Type Details

Mark up Markup is the percentage increase in price above the cost of product.
Sometimes, this is incorrectly referred to as margin on cost.

100 100 + 𝑚𝑎𝑟𝑘𝑢𝑝

𝐶𝑜𝑠𝑡 = 𝑆𝑎𝑙𝑒𝑠 × 𝑆𝑎𝑙𝑒𝑠 = 𝐶𝑜𝑠𝑡 ×
100 + 𝑚𝑎𝑟𝑘𝑢𝑝 100

Margin Margin is the percentage of profit on the selling price. Sometimes, this is
incorrectly referred to as mark-up on selling price.

100 − 𝑚𝑎𝑟𝑔𝑖𝑛 100

𝐶𝑜𝑠𝑡 = 𝑆𝑎𝑙𝑒𝑠 × 𝑆𝑎𝑙𝑒𝑠 = 𝐶𝑜𝑠𝑡 ×
100 100 − 𝑚𝑎𝑟𝑔𝑖𝑛

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 CAF 1 FAR 2026 EDITION

 Not-for-Profit Organisations (NPOs) do not operate with a profit motive. However, they are also
required to keep proper records of incomes, expenses, assets, and liabilities to provide relevant
information to stakeholders.
 The major sources of income of an NPO is donations / contributions, subscriptions, fee for services,
government funding, grants, etc. The revenue expenditures related to NPOs are quite similar to profit-
oriented organizations e.g. salaries, rent, electricity, repair, maintenance and depreciation etc. These
revenue items are presented in the statement of income and expenditure to determine the surplus or
deficit for the period.
 The statement of financial position is also quite similar to as those of profit-oriented organizations
reflecting non-current assets, current assets, non-current liabilities and current liabilities. However, net
assets (i.e. equity) is presented using fund accounting instead of share capital and reserves.
 Some small NPOs only maintain record of receipt and payments prepared on cash basis and includes
both capital items and revenue items for a period. Using additional information and receipt and
payment account, amounts for accrual based financial statements may be calculated or estimated.
 As NPOs operations and objectives differ significantly from profit-oriented entities, ICAP has issued
‘Accounting Standard for NPOs’ to prescribe the detailed accounting guidance for general and specific
issues relevant to NPOs. This standard is compulsory for NPOs registered as companies as per SECP
directives and is recommended to be applied by other NPOs as well to provide relevant and reliable
information to donors and other stakeholders of NPOs.
 The Accounting standard for NPOs requires use of fund accounting and provides detailed guidance on
revenue recognition of contributions received or receivable by an NPO.

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 CAF 1 FAR 2026 EDITION

 Not-for-Profit Organisations (NPOs) are organisations,

 normally without transferable ownership interests,
 organized and operated exclusively for social, educational,
professional, religious, health, charitable or any other not-for-profit
purpose.

 An NPO’s sponsors, members, contributors and other resource providers

do not, in such capacity, receive any financial return or dividends directly
from the NPO.

 NPOs may be:

 Companies formed under Section 42 of Companies Act, 2017;
 Trusts formed under Trust Act, 1882;
 Societies formed under the Societies Registration Act, 1860; or
 Any other recognizable form of organization giving value to the
groups of people they administer to.

Accounting for Not-for-Profit Organizations (NPOs)

 The primary objective of a profit-oriented entity is to make profit and

maximise shareholders’ wealth while main objective of NPO is to provide
its services effectively by achieving value for money. NPO applies or
intends to apply its profits (commonly referred to as surplus), if any, or
other income in promoting its objects, and prohibits the distribution of
surplus to its members, sponsors, promoters, etc.
 NPOs have income which they raise and costs which must be paid just
like other organisations and although profit is not their objective but they
have to account for their income and costs. NPOs are accountable for
their effectiveness, economy and efficiency in utilising the funds.

 Revenues of NPOs normally arise from donations, government grants and

amount collected through contributions, membership fees, fundraising,
the sale of goods, the rendering of services or the use by others of NPO
resources yielding rent, interest, royalties or dividends.

Accounting for Not-for-Profit Organizations (NPOs)

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 CAF 1 FAR 2026 EDITION

The primary objective of a profit-oriented NPO does not operate for the purpose of
entity is to make profit and maximize making a profit. NPOs exist to fulfill a
shareholders’ wealth. specific social, cultural, or environmental
mission, and their primary objective is to
benefit society in some way.

Profit-oriented entities rely on revenue from NPOs typically rely on donations, grants,
sale of goods/services to generate profits. and other forms of funding to support their
activities.

The profits generated by a profit-oriented NPOs are prohibited from distribution of its
entity is distributed to the owners or profits (i.e. surplus) to its members,
shareholders in the form of dividends or sponsors, promoters, etc. Instead, any
capital gains. surplus funds generated by the organization
are typically reinvested back into the
organization to support its mission & goals.

 Not-for-Profit Organisations (NPOs) do not operate with a profit motive.

However, they are also required to keep proper records of incomes, expenses,
assets, and liabilities to provide relevant information to stakeholders. NPOs are
accountable for their effectiveness, economy and efficiency in utilising the funds.
 Major sources of income of an NPO are:
 Donations,
 Government funding / grants,
• Charging fees from some
 Contributions / Subscription,
patient in a NPO Hospital
 Membership fees, • Shops rented out by Masjid
 Fundraising, • Sale of snacks/drinks in
 Sale of goods or rendering of services, or library’s canteen
 Use by others of NPO resources yielding • Sale of sport goods / drinks
in sports club
rent, interest, royalties or dividends.
 The revenue expenditures related to NPOs are quite similar to profit-oriented
organizations e.g. salaries, rent, electricity, repair, maintenance and depreciation
etc.

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 CAF 1 FAR 2026 EDITION

 Statement of Financial Position / Balance Sheet  Statement of Financial Position / Balance Sheet
 Assets  Assets
 Liabilities  Liabilities
 Equity  Net assets / Accumulated fund / Fund balance
 Statement of Profit and Loss  Statement of Income and Expenditure
 Net Profit  Excess of income over expenditure / Surplus
 Net Loss  Excess of expenditure over income / Deficit
 Statement of Changes in Equity  Statement of Changes in Net Assets
 Statement of Cash Flows  Statement of Cash Flows

Notes to financial statements and supporting schedules to which the financial statements are cross-referenced are an integral part
of such statements.

NPOs use different accounting and business terminology from profit-oriented entities.

Owners / Shareholders Trustees/ sponsors / donors

Net profit Surplus / Excess of income over expenditure

Net loss Deficit / Excess of expenditure over income

Equity / Share capital and equity reserves Accumulated fund / Fund balance

Specific reserve Restricted contribution / fund

 Rent Expense  Subscription

 Non-Current Assets  General Fund
 Salaries Expense  Contribution
 Current  Specific Fund
 Depreciation  Government Grant
 Misc. Exp  Trading Income
 Investment Income
 Non-Current Liabilities
 Current Liabilities

Opening Balance XXX Opening Balance XXX

 Receipts  Payments

Closing Balance XXX Closing Balance XXX

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 CAF 1 FAR 2026 EDITION

 The Institute of Chartered Accountants of Pakistan (ICAP) issued the

‘Accounting Standard for Not-for-Profit Organisations’ (hereinafter referred
to as ‘ASNPO’) and as per Securities and Exchange Commission of Pakistan’s
(SECP) directives, ASNPO is applicable to associations not-for-profit
registered under the company law (e.g. Companies Act, 2017).
 ASNPO is applicable to NPOs registered under the company law i.e. it is
compulsory for such NPOs to comply with requirements of ASNPO in
addition to the requirements of applicable reporting framework e.g. IFRSs.
In case any requirement of ASNPO is/are inconsistent, the requirements of
IFRSs shall prevail.
 NPOs, other than companies, are also recommended to prepare financial
statements in accordance with ASNPO.

 Financial statements of NPOs are prepared primarily using the historical cost
basis of measurement whereby transactions and events are recognised in
financial statements at the amount of cash or cash equivalents paid or
received or the fair value ascribed to them when they took place.
 Financial statements are prepared with capital maintenance measured in
financial terms and with no adjustment being made for the effect on capital
of a change in the general purchasing power of the currency during the
period.

 comprises the collective accounting procedures resulting in a self-balancing set

of accounts for each fund established by legal, contractual or voluntary actions of an NPO.
Elements of a fund can include assets, liabilities, net assets, revenues and expenses (and gains
and losses, where appropriate). Fund accounting involves an accounting segregation, although
not necessarily a physical segregation, of resources.
 Net assets or fund balances may be internally or externally restricted. Internally restricted net
assets or fund balances are often referred to as reserves or appropriations.
 are stipulations imposed that specify how resources must be used. External
restrictions are imposed from outside the NPO, usually by the contributor of the resources.
Internal restrictions are imposed in a formal manner by the NPO itself, usually by resolution of
the board of directors/council/board of trustees.
 An NPO that uses fund accounting in its financial statements should provide a brief description
of the purpose of each fund reported. There are two methods of fund accounting, deferral
method (discussed later in this chapter) and restricted fund method (not examinable). In
practice, most companies use deferral method.

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The funds can be classified into following three categories:

 An endowment fund is a self-balancing set of accounts which reports the

accumulation of endowment contributions. Only endowment
contributions and investment income subject to restrictions stipulating that
it be added to the principal amount of the endowment fund would be
reported as revenue of the endowment fund.
 Allocations of resources to the endowment fund that result from the
imposition of internal restrictions are recorded as inter-fund transfers.

 A restricted fund is a self-balancing set of accounts the elements of which

are restricted or relate to the use of restricted resources. Only restricted
contributions, other than endowment contributions, and other externally
restricted revenue would be reported as revenue in a restricted fund.
 Allocations of resources that result from the imposition of internal
restrictions are recorded as inter-fund transfers to the restricted fund.

 A general fund is a self-balancing set of accounts which reports all

unrestricted revenue and restricted contributions for which no
corresponding restricted fund is presented. The fund balance represents
net assets that are not subject to externally imposed restrictions.

 An NPO may have several categories of income to fund its

operations, for example:
 Fee for services;
 Membership fees /subscriptions;
 Joining Fee / Life Membership Fee
 Contributions and donations;
 Investment income;
 Government funding;
 Profit from running a coffee bar, a canteen or a shop; and
 Fundraising events.

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 CAF 1 FAR 2026 EDITION

 NPOs may charge fee for their service in order to supplement their funding. The fee is usually
lower than commercial charges for the same product or services.

 A healthcare NPO charges Rs. 100 only for each consultation visit by a patient while
commercial hospitals are charging Rs. 1,500 per visit for similar services.
 An educational NPO is charging a fee of Rs. 500 per month per student to provide
affordable education in an under-privileged area.

 Contributions can come from many sources, including individuals, corporations, governments
and other NPOs. Contributions include contributions receivable that meet the criteria for
recognition in the financial statements.
 A is a non-reciprocal transfer to an NPO of cash or other assets or a non-
reciprocal settlement or cancellation of its liabilities.
 (explicit or implicit) on contributions may only be externally imposed. However,
subsequently internal restrictions may be imposed in a formal manner by the organization
itself by directors / trustees.

 A restricted contribution is a contribution subject to externally
imposed stipulations that specify the purpose for which the
contributed asset is to be used.
 An endowment contribution is a type of restricted contribution
subject to externally imposed stipulations specifying that the
resources contributed be maintained permanently, although the
constituent assets may change from time to time.
 An unrestricted contribution is a contribution that is neither a
restricted contribution nor an endowment contribution.

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 CAF 1 FAR 2026 EDITION

 A contribution of materials and services (i.e. assets other than cash) would be measured at
fair value only when:
 the fair value can be reasonably estimated; and
 the materials and services are used in the normal course of the NPO's operations and
would otherwise have been purchased.
 Often these contributions are not recorded because of record-keeping and valuation
difficulties. For example, it may be impractical to record the receipt of contributed services
where the NPO depends heavily on the use of volunteers to provide services. Where
contributed materials and services meet the criteria of fair value measurement, recording their
value would provide useful information.
 Contributed materials and services that are part of a constructed or developed capital asset
(i.e. property, plant and equipment) would be recognised at fair value.

 Contributions include contributions receivable that meet the criteria for recognition in the
financial statements. A contribution receivable should be recognised as an asset when it meets
the following criteria:
a) the amount to be received can be reasonably estimated; and
b) ultimate collection is reasonably assured.
 In particular, recognition of pledge and bequest shall be recognised as follows:
a) A pledge is a promise to contribute cash or other assets to an NPO. Similar to any other
contribution receivable, an uncollected pledge would only be recognised:
 if it meets the above recognition criteria;
 there is reasonable assurance that the NPO will comply with conditions, if any,
attached to the contribution; and
 contribution is not dependant on any contingent event outside NPO’s control.
b) Bequests are often subject to considerable uncertainty surrounding both the timing of the
receipt and the amount that will actually be received. In many cases, the recognition
criteria will not be satisfied and the bequest will not be recognised until it is received.

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 CAF 1 FAR 2026 EDITION

Using the deferral method, the contributions and related income are recognised as follows:

 Recognise as direct increases in net assets in the current period and excluded from revenue. This
Endowment contributions is because endowment contributions will never be available to meet expenses associated with
the organization's service delivery activities.
Restricted contributions for
 Recognise as revenue in current period.
expenses of current period
 Defer and recognise as revenue in the same period(s) as the related expenses are recognised.
Restricted contributions for  When the only restriction on a contribution is that it cannot be used until a particular future
expenses of future periods period, the total amount of the contribution would be recognised as revenue in that future
period, whether or not it has been spent.
 In case of depreciable assets, defer and recognise as revenue on the same basis as the
depreciation/amortisation expense related to the acquired capital assets.
 In case of non-depreciable assets, recognise as direct increase in net assets.
Restricted contributions for
the purchase of capital  In order for a contribution to be accounted for as a contribution restricted for the purchase of a
assets capital asset, the contributor must specify the portion of the contribution that is to be used to
purchase capital assets. If the contributor does not so specify, then the contribution would be
recognised as revenue when spent for the particular purpose covered by the restriction,
regardless of the fact that some of the expenditures may relate to the purchase of capital assets.
 In case debt was incurred to fund expenses of future periods, defer and recognise as revenue in
same period(s) as the related expenses are recognised. In case debt was incurred to fund the
Restricted contributions for purchase of capital asset (depreciable), defer and recognise as revenue on the same basis as the
the repayment of debt depreciation / amortisation expense related to the acquired capital assets. In case debt was
incurred to fund the purchase of capital asset (non-depreciable), recognise as direct increase in
net assets. Otherwise, recognise as revenue in the current period.
Unrestricted contributions  Recognise as revenue in the current period.

Deferred contributions balances should be presented in the statement of financial position outside net assets as liability.

 Many NPOs receive membership fees / subscription that entitles the members of the NPO to
services provided by the NPO.
 At each year end,
 there will be some members who have paid their subscriptions in advance and
 there will be some members are in arrears.
 These are both included as balances brought down and carried down on a single subscription
account.
 Cash received is credited to this account
 The closing balance on the account is transferred to statement of the income and expenditure
(as income for the year).

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Opening Balance XXX Subscription Received – R/P XXX

Subscription Income – I/E XXX Closing Balance – SOFP XXX

Subscription Income – I/E XXX Opening Balance XXX

Closing Balance – SOFP XXX Subscription Received – R/P XXX

B/d – Sub. Receivable XXX B/d – Sub. in Advance XXX

Subscription Income – I/E XXX Subscription Received – R/P XXX

C/d – Sub. in Advance – SOFP XXX C/d – Sub. Receivable – SOFP XXX

 is a sum of money that paid by member in order to become a member of the

NPO.
 is a “once in a life” lump sum amount paid by a member in lieu of
periodic regular subscription to the NPO.
 Joining fee / life membership fee would be recognised over the several years during which
the NPO is expected to provide services to the respective members.
 However, in some circumstances, it may be appropriate to recognise joining fees or entrance
fees in the year in which those fees become due. Therefore, recognition of such fees involves
a considerable degree of judgment on the part of the NPO.

 Membership fees are considered fees for services when members receive services having a
value commensurate with fees paid. In other cases, membership fees may be in substance
contributions.
 An NPO would decide whether its membership fees are contributions or fees for services
and account for them accordingly on a consistent basis. Some membership fees have
characteristics of both fees for services and contributions. Such fees would be divided into
the portion that relates to fees for services and the portion that is in substance a
contribution.

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 Government funding provided to an NPO is considered to be a contribution. Certain types of

government funding are calculated and paid as if they were fees for services. However, because the
services being funded are provided to the NPO's community of service, and not directly to the
government funder, government funding is considered to be a contribution.
 In case the NPO is required to provide goods and services directly to the government, the related
government funding shall be treated as fee for services.

 Net investment income may be subject to externally imposed restrictions. In order to ensure the
appropriate reporting of restricted and unrestricted resources, an organization would account for
net investment income in the manner appropriate to the nature of any external restrictions
imposed.
 Net investment income (including revenue, gains or losses on investments) is recognised in the
same way contributions are recognised:
a) Externally restricted investment income that must be added to principal resources held for
endowment are recognised as direct increase or decrease in net assets.
b) Other externally restricted investment income is recognised according to the type of restrictions
(same criteria as for contributions discussed above).
c) In case there is no external restriction, recognise in the statement of income and expenditure.

 If a club has a coffee bar, canteen or shop the “profit” from these is generally calculated
separately (in an account known as a trading account) and presented as a line in the statement
of income and expenditure.
 Any expenses directly related to the operation of a coffee bar or shop would be deducted
from the gross profit of the operation and the net profit would be presented on a separate line
in the statement of income and expenditure.

Sales XXXX
Less. Cost of Sales
Opening Inventory XXXX
Purchases XXXX
Closing Inventory (XXX) (XXX)

Other Related Expense (e.g. Salary) (XXX)

 taken to I/E as a single line item

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 CAF 1 FAR 2026 EDITION

 Many special events, such as dinners, galas, auctions, and walk-a-thons, are organized to raise
contributions to support the NPO’s activities. The participants of these events are offered
something of value (a meal, entertainment, interaction with a celebrity) for a sum.
 The determination of whether to report the revenues and expenses on a gross or net basis
depends on the relative facts and circumstances and requires significant judgment.

 When an NPO recognizes contributions of materials and goods, the cost of inventories shall
reflect the fair value at the date of contribution.

 An NPO shall measure inventories at the lower of cost and current replacement cost when
they are held for:
 distribution at no charge or for a nominal charge; or
 consumption in the production process of goods to be distributed at no charge or for a
nominal charge.

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 CAF 1 FAR 2026 EDITION

 Collections are works of art, historical treasures or similar assets that are:
 held for public exhibition, education or research;
 protected, cared for and preserved; and
 subject to an organizational policy that requires any proceeds from their sale to be used
to acquire other items to be added to the collection or for the direct care of the existing
collection.
 Although items meeting the definition of a collection exhibit the characteristics of ‘assets’ they
are excluded from the definition of property, plant & equipment, and intangible assets.
Collections are made up of items that are often rare and unique. They have cultural and
historical significance.
 Although collections are usually held by museums or galleries, other NPOs may also have
items that meet the definition of a collection. For example, an NPO's library may include rare
books which might be considered to be a collection. The regular library materials, however,
would not usually meet the definition of a collection.
 Certain works of art and historical treasures may have lives that are so long as to be virtually
unlimited. Works of art and historical treasures in this category are those that have cultural,
aesthetic, or historical value that is worth preserving perpetually. In addition, the NPO must
have the technological and financial ability to continue to protect and preserve them. Works
of art and historical treasures of this type would not be depreciated.

Tangible capital assets are identifiable tangible assets that meet all of the following criteria:
 are held for use in the provision of services, for administrative purposes, for production of goods or for the
maintenance, repair, development or construction of other tangible capital assets;
 have been acquired, constructed or developed with the intention of being used on a continuing basis;
 are not intended for sale in the ordinary course of operations; and
 are not held as part of a collection.

 A contributed asset would be recognised at its fair value at the date of contribution. When an estimate of fair
value cannot reasonably be made, both the asset and the related contribution would be recognised at
nominal value to ensure monitoring and accountability.
 A tangible capital asset purchased by an NPO at a value substantially below fair value would also be
recognised at its fair value with the difference between the consideration paid for the tangible capital asset
and fair value reported as a contribution.
 A tangible moveable capital asset procured from a grant may be recognised at carrying amount deducting the
grant. The grant is recognised in profit or loss over the life of the depreciable asset as a reduced depreciation
expense.

 Land normally has an unlimited life and would not be depreciated.

 When a fund accounting basis of reporting is used, the choice of the fund or funds to which depreciation
expense would be charged would be based on providing the most meaningful presentation.

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 CAF 1 FAR 2026 EDITION

 The accounting and approach for preparation of financial statements of an NPO is similar to general-purpose
financial statements of other entities except for the issues specifically addressed in ASNPO.
 Financial statements of NPO shall normally include:
 statement of financial position (or balance sheet)
 statement of income and expenditure
 statement of changes in net assets
 statement of cash flows.
 Notes to financial statements and supporting schedules to which the financial statements are cross-referenced
are an integral part of such statements; the same does not apply to information set out in other material
attached to or submitted with financial statements.

 Information about the NPO's liquidity is presented by classifying current assets separately from non-current
assets and current liabilities separately from non-current liabilities. Cash and other assets subject to external
restrictions limiting their use to beyond one year from the date of the statement of financial position would
be classified as non-current assets.
 Under the deferral method of accounting for contributions:
 endowment contributions are accumulated in the net assets balance; and
 internally restricted balances are reflected as appropriations of unrestricted net assets; and
 externally restricted contributions are accumulated in the statement of financial position as deferred
contributions.

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 CAF 1 FAR 2026 EDITION

 Revenues and expenses should be recognised and presented at their gross amounts and this
information may be presented in the notes to the financial statements. NPO may classify
expenses in the statement of income and expenditure:
 by object (for example, salaries, rent, utilities);
 by function (for example, administrative, research, ancillary operations); or
 by program.
 An NPO would classify its expenses in the manner that results in the most meaningful
presentation in the circumstances. Whether the NPO prepares its budgets by function or object
would be a factor to consider in deciding which method of expense classification would be
most appropriate for the NPO's financial statements.
 The statement of income and expenditure should present:
 for each financial statement item, a total that includes all funds reported; and
 total excess or deficiency of revenues and gains over expenses and losses for the period.

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 CAF 1 FAR 2026 EDITION

 The statement of changes in net assets is presented in the similar way a statement of changes in
equity is prepared i.e. showing the movements in net assets during the year.
 The statement of changes in net assets may be referred to as ‘the statement of changes in fund
balances’ when the NPO uses fund accounting in its financial statements.
 Inter-fund transfers should be presented in the statement of changes in net assets. Allocations of
revenues and expenses between funds that are made when the NPO first recognises the
revenue or expense are not considered to be transfers.
 A format of statement of changes in net assets for an NPO is given below:

 Some small NPOs may not have enough resources to maintain proper double entry accounting
records and, therefore, record cash receipts and payments only in addition to some records of
bills, accruals and prepayments, etc.
 When accounts are prepared on cash or disbursement basis rather than accrual basis of
accounting, a receipt and payment account is prepared and presented. This is simply a
summary of cash receipts and payments during the accounting period. It includes capital items,
as well as revenue items.
 A receipt and payment account gives far less information than a set of financial statements
based on the accruals concept. Therefore, some donors / government might require an NPO
to present financial statements on accrual basis, that are prepared using records available
relating to receipts, payments and other balances.

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Accounting for
NPOs
[Practice Questions]
CAF 1: FINANCIAL ACCOUNTING & REPORTING
COMPILED BY: MURTAZA QUAID, ACA

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Accounting for NPOs Compiled by: Murtaza Quaid

Accounting for NPOs [Practice Questions]

Question No. 1 [Membership Fee / Subscription]
At 31 March 2016 a cricket club had membership subscriptions in arrears amounting to Rs. 48,000 and
had received Rs. 12,000 subscriptions in advance.
During the year to 31 March 2017 the club received Rs. 624,000 including 26 memberships for the year to
31 March 2018 at Rs. 1,200 per annum.
At 31 March 2017 16 members owed subscriptions of Rs. 1,200 each.
Required: How the above transactions would be recorded in the subscription’s ledger account for the year
to 31 March 2017?

Question No. 2 [Membership Fee / Subscription]

At 31 March 2016 a cricket club had membership subscriptions in arrears amounting to Rs. 48,000 and
had received Rs. 12,000 subscriptions in advance.
During the year to 31 March 2017 the club received Rs. 624,000 including 26 memberships for the year to
31 March 2018 at Rs. 1,200 per annum.
At 31 March 2017 16 members owed subscriptions of Rs. 1,200 each.
Half of the members who were in arrears at the end of the previous period still had not paid by 31 March
2017. It was decided to write these amounts off.
Required: How the above transactions would be recorded in the subscription’s ledger account for the year
to 31 March 2017?

Question No. 3 [Joining Fee / Life Membership Fee]

Multan Book Reading Club (MBRC) is a newly established NPO. The members of MBRC can pay for
membership privileges by either paying Rs. 10,000 per annum or paying lump sum amount of Rs. 80,000
for life-time membership.
During the first month of operations, 20 members have opted for life-time membership.
The management of MBRC has estimated that on average a member will be using MBRC services for 10
years.
Required: Advise how MBRC should recognise the above life-membership fee in its financial statements
prepared at the end of Year 1.

Question No. 4 [Subscription Account]

❑ Subscription Receivable – Opening Rs. 37,500
❑ Subscription Receivable – Closing Rs. 67,800
❑ Subscription Received – Cash Rs. 1,931,250
Required: Subscription Account?

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Question No. 5 [Subscription Account]

❑ Subscription in Advance - Opening Rs. 117,000
❑ Subscription in Advance - Closing Rs. 189,000
❑ Subscription Received - Cash Rs. 2,160,000
Required: Subscription Account?

Question No. 6 [Subscription Account]

❑ Subscription in Advance - Opening Rs. 400,000
❑ Subscription in Advance - Closing Rs. 224,000
❑ Subscription Receivable - Opening Rs. 816,000
❑ Subscription Receivable - Closing Rs. 1,184,000
❑ No of member through out the year 350
❑ Annual Subscription (per member) Rs. 20,000
Required: Subscription Account?

Question No. 7 [Subscription Account]

31 Dec 2021 31 Dec 2020
❑ Subscription in Advance Rs. 360,000 Rs. 285,000
❑ Subscription Receivable Rs. 112,500 Rs. 87,500
❑ Subscription received during the year 2021 = Rs. 3,675,000
❑ Subscription receivable as at 31 Dec 2020 to be written off in year 2021 = Rs. 45,000
Required: Subscription Account for the year 2021?

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Question No. 8 [Subscription Account]

❑ Club incorporated on 1 Jan 2019
❑ Annual subscription (per member) = Rs. 8,000
❑ Members pay annual subscription in advance
❑ Members' registration is effective from the month of joining the club
❑ During the year, following member joined the club:

No of Members Joining Month

100 Jan 2019
50 Jul 2019
150 Apr 2020
40 Jul 2020
60 Nov 2020

Required: Subscription Account for the year 2019 and 2020?

Question No. 9 [Subscription Account]

❑ Annual subscription (per member) = Rs. 8,000
❑ Total registered member as at 31 Dec 2018 = 350
❑ As at 31 Dec 2017, 60 members had not paid their subscription for 2017 and 15 members had paid
their subscription for 2018.
❑ As at 31 Dec 2018, 70 members had not paid their subscription for 2018. Out of these 80 member, 15
members had not even paid their subscription for 2017.
❑ There were no advance payment of subscription as at 31 Dec 2018.
Required: Subscription Account?

Question No. 10 [Subscription Account]

31 Dec 2021 31 Dec 2020
❑ Subscription in Advance Rs. 247,500 Rs. 375,000
❑ Subscription Receivable Rs. 618,000 Rs. 534,000
❑ Members who paid subscription during the year 2021 = 402
❑ Average subscription paid per person = Rs. 18,750
❑ 3 members who have not paid their dues for the last two years are written off.
❑ Average annual outstanding balance due from each was Rs. 12,850.
Required: Subscription Account?

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Question No. 11 [Subscription Account]

❑ Annual subscription per member payable in advance = Rs. 15,000.
❑ During the first year ended 30 Jun 2021, following member joined the club:

No of Members Joining Month

35 1 Aug 2020
50 1 Nov 2020
35 1 Mar 2021
18 1 Jun 2021

Required: Subscription Account for the year ended 30 June 2021?

❑ Following new members joined the club during the year ended 30 Jun 2022:

No of Members Joining Month

25 1 Jan 2022
35 1 May 2022

Required: Subscription Account for the year ended 30 June 2022?

Question No. 12 [Fee for Service and/or Contributions]

ABC Golf Club is members only club providing its members with sports facilities in the grounds owned and
maintained by it against annual subscription fee.
At 30 June 20X2, the club had membership subscriptions in arrears amounting to Rs. 48,000,000 and had
received Rs. 12,000,000 in advance.
During the year to 30 June 20X3, the club received Rs. 650,000,000 from its members. This amount
includes:
▪ Rs. 26,000,000 received as donation from members (no conditions attached).
▪ Rs. 31,200,000 received for membership fee for the year to 30 June 20X4.
At 30 June 20X3, members owed Rs. 19,200,000 of subscriptions.
Half of the members who were in arrears at the end of the previous period still had not paid by 30 June
20X3. It was decided to write these amounts off.
Required: How the revenue from above should be reported in financial statements of ABC Golf Club for
the year ended on 30 June 20X3?

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Question No. 13 [Government Funding]

Mujahid Healthcare (MH) is a registered NPO. It has received government funding of Rs. 20 million for
which it has to provide vaccine (dosage and administration) for a viral disease to general public (8,000
dosages x Rs. 2,500 each) without taking any fee from them.
Required: Discuss the accounting treatment of above from perspective of MH.
Answer: The amount of Rs. 20 million is being calculated on dosage basis (i.e. 8,000 dosages x Rs. 2,500)
which might indicate that Rs. 20 million should be recognised as fee-for-services in statement of income
and expenditure.
However, since the service is not being provided to government but rather to MH’s community of service
(i.e. general public to whom they provide healthcare services), the government funding of Rs. 20 million
shall be considered as contribution.
Further, since the purpose of government funding is specified, it shall be considered as restricted
contribution.
The determination of whether to report the revenues and expenses on a gross or net basis depends on
the relative facts and circumstances and requires significant judgment.

Question No. 14 [Government Funding]

An NPO receives funding to undertake a specific research project. The NPO contracts at its own discretion
with a scientist to perform the research. The NPO would not have undertaken the research project had
the funds not been made available.
Required: Whether the funding revenue and cost of scientist’s services be presented on gross basis or net
basis?
Answer: Although the NPO would not have undertaken the research project without the availability of
the funding, the NPO acts as the principal in contracting with the scientist. It specifies the details of the
research to be carried out by the scientist and has discretion in selecting the scientist and in establishing
the price to be paid. Thus, the expenses incurred are obligations of the NPO. The funding revenue and
cost of scientist services should be presented on gross basis in statement of income and expenditure.

Question No. 15 [Government Funding]

An NPO receives funding (reimbursement) to undertake a specific research project from a textile
company. The NPO allocates an employee to textile company for the conduct of research. The NPO would
be reimbursed for all the costs related to that employee.
Required: Whether the reimbursement and employee-related costs be presented on gross basis or net
basis?
Answer: The NPO has an employee who is seconded to a textile company to work under their direction
and the NPO is reimbursed for all of the costs related to that employee. As the NPO is the employer, they
would report their employee-related costs as expenses and would report the reimbursement of their costs
as revenues on gross basis in statement of income and expenditure.

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Question No. 16 [Fundraising Events]

An NPO engages in a number of fundraising activities, including a fundraising telethon, a telephone
campaign, a direct mail campaign, special events and a lottery. The NPO uses an outside fundraising
consultant to conduct the telethon and uses the NPO's own staff and volunteers in the telethon and the
other activities. Funds solicited in each of the activities are raised in the name of the NPO.
Required: Whether the fundraised and related costs be presented on gross basis or net basis?
Answer: Even though the NPO uses an outside fundraising consultant to conduct the telethon, the NPO is
the principal in the relationship with the donors as the funds are raised in its name. The NPO has discretion
in selecting the outside fundraiser, in establishing the fees to be paid and in determining the specifications
of the telethon. The NPO also has the credit risk if donors to the telethon do not pay according to their
pledge. Thus, the NPO should recognize the gross amounts fundraised in each of the activities as revenue
of the NPO, and the total expenses of each activity, including the fees charged by any outside party, as
expenses of the NPO, separately

Question No. 17 [Fundraising Events]

An NPO is actively engaged in helping communities in flood affected area. A group of students organised
a music concert, announcing that the net proceeds of the event shall be given to the NPO.
Required: Whether to report the revenue and costs of the event on gross basis or net basis?
Answer: The NPO is not the principal in the fundraising event as it was not involved in organizing the event
and did not bear any risks in connection with it. The amount received by the NPO is a donation from the
organizers of the event. Neither the gross revenues nor the gross expenses of the event are recognized in
the NPO's financial statements. The net proceeds received are recognized as a contribution. Disclosure of
gross revenues and expenses is not required.

Question No. 18 [Type of Funds]

a) A professional body of accountants (the NPO) sets-up a fund for financial support of deserving
students. For this purpose, Rs. 100 million have been allocated that will be invested and 80% of the
investment income shall be used for student support and 20% of investment income shall be added
to fund investments. The fund investments shall not be available for use by the NPO for its operations
and the NPO shall preserve the principal amount of fund.
b) A healthcare NPO has raised money through special marketing drive in which overseas contributors
deposited $100 each in its ‘Save a life fund’ account. The contributions shall be used for the NPO’s
routine operations which focuses on providing life-saving drugs to patients who cannot afford the
cost.
c) An educational NPO has set-up a fund for development of new school in nearby rural area. The fund-
raising drive has been successful as many people have contributed for the cause. The fund-raising
clearly stated that the funds so raised shall only be used for construction and operations of school at
that specific location.
Required: Identify the type of above funds.

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Question No. 19 [Types of Contribution]

Consider the following independent circumstances:
a) A healthcare NPO received Rs. 10 million from wealthy individuals subject to the condition that this
amount shall only be used for acquisition of land for construction of a hospital in a specific village.
b) A healthcare NPO received Rs. 25 million contribution from a wealthy individual in the year 20X2. The
sole purpose of the amount is to support the NPO’s general operations in the year 20X4 and 20X5.
c) An educational NPO received a plot of land from Mr. Salman subject to the condition that this land
shall only be used for construction of a primary education school to be run by that NPO. The fair value
of this plot of land is Rs. 12 million.
d) An educational NPO received a plot of land from Mr. Jamal subject to the condition that this land or
sale proceeds from its disposal shall only be used to achieve general objectives of that NPO. The fair
value of this plot of land is Rs. 15 million.
e) An educational NPO received Rs. 50 million from alumni donors subject to the condition that the
principal balance shall be invested as per specified investment policy and NPO cannot use the principal
balance to fund operations. However, the NPO can utilise the investment earnings to pay for things
such as academic programs or building new school facilities.
Required: Identify the type of contributions in above circumstances.

Question No. 20 [Restricted Contribution]

Ali has been very successful in business. When he was a young man, he very much enjoyed playing cricket
and has very fond memories of his days at the village cricket club.
He has donated Rs. 1,000,000 to the club to fund the building of a new club house which is under
construction and expected to be completed by the end of next year.
Required: How the above amount of Rs. 1 million should be recognised in the books of village cricket club?
Answer: This is restricted contribution for construction of a capital asset.
Initially, this amount shall be recognised as deferred contribution and presented as liability.
Subsequently, this shall be recognised as revenue on the same basis depreciation expense is charged on
the building of new club house.

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Question No. 21 [Internal Restricted Fund]

A social club in a small town has managed to accumulate a significant balance on its accumulated fund
over the years.
Its board of trustees have decided that the club should establish a fund to contribute to the school fees
of children of high promise from the town. Parents of such children would apply to the club for a grant of
Rs. 50,000. A total Rs. 1,500,000 is to be set aside for this purpose.
Required: How to account for the above when the amount is set-aside and subsequently when the
amount is actually paid?
Answer: This is not restricted contribution because there is no externally imposed stipulation rather an
internal restriction has been imposed by the NPO itself.
The transfer of Rs. 1,500,000 shall be presented in statement of changes in net assets (and not in the
statement of income and expenditure).
General fund 1,500,000
Special education fund 1,500,000
Subsequently, the amount paid will be recognised as reduction from the special fund.
Special education fund 1,500,000
Cash 1,500,000

Question No. 22 [Restricted Contribution for Repayment of Debt]

A member of cricket club donated Rs. 2 million for repayment of loan obtained by the club in order to
finance its general operations.
Required: How the above donation shall be recognised?
Answer: This is restricted contribution for repayment of debt. However, since the loan relates neither to
expenses of future periods nor to capital assets, the contribution shall be recognised as revenue in the
current period.

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Question No. 23 [Contribution of Inventory]

Medicine-for-All is an NPO which provides medicine to communities living in underdeveloped areas at
nominal charge. It has following inventories:

Replacement Fair
Cost NRV*
Item Type cost value

Rupees

Panadol Received in kind Nill 6,000 26,000 28,000

Neubrol 24,000 4,000 24,500 25,000

Imodium Purchased for 12,000 3,000 12,000 12,500

Motilium cash 15,000 2,500 14,700 15,200

Rijix 18,000 3,500 18,300 17,900

*provided at nominal charge
Required: Calculate the amount of inventory that should be presented in the statement of financial
position of Medicine-for-All from above data.

Question No. 24 [Impairment and Unamortised Deferred Contribution]

Jameel Mahtab Dispensary, an NPO, had capital asset of furniture at carrying value of Rs. 600,000 and
related unamortised deferred contribution balance of Rs. 400,000 in statement of financial position. At
that date, the furniture was destroyed by fire completely and is now worth nothing.
Required: Prepare accounting entries for the above issue.
Answer: The capital asset has been fully impaired and needs to be written off completely.
Impairment loss (I&E) Rs. 600,000
PPE (furniture) Rs. 600,000
In order to ensure application of matching concept, the unamortised deferred contribution shall be
recognised as revenue.
Deferred contribution Rs. 600,000
Contribution revenue (I&E) Rs. 600,000

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Question No. 25 [Comprehensive Example]

The following information relates to Professional Sports Club (PSC), a Not-for-Profit Organisation.
Trial balance as at 30 June 20X4

Rs. in Million
Debit Credit
General fund (1 July 20X3) 1,147
Fund for Supporting the Young-Talent (1 July 20X3) 50
Fund for gymnasium and training centre (1 July 20X3) 115
Fund for franchise (1 July 20X3) 3
Long term assets (net) 428
Investments 1,204
Short term bank loan 17
Prepaid and accrued expenses 8 11
Cash at bank 43
Fee-for-services 340
Fundraising in various tournaments (net proceeds) 15
Contributions 494
Government funding 150
Investment income 144
Salaries 403
Rent and utilities 354
Other expenses 46
2,486 2,486

Additional information:
1. Fund for Supporting the Young-Talent (SYT) has stipulations imposed that require resources
contributed to be maintained permanently. The above contribution received include Rs. 15 million
contribution related to SYT to be maintained permanently. The investment income of Rs. 144 million
includes Rs. 6 million that is externally restricted to be added to principal amount of resources for SYT
to be maintained permanently. There is no other restrictions on investment income. As part of
agreement with contributors of SYT, PSC is required to allocate Rs. 5 million from general fund to the
SYT fund, annually.
2. Fund for gymnasium and training centre has stipulation imposed externally that it shall be used
exclusively for building a gymnasium and training centre in Nawabpur Town. The contribution
received include contributions of Rs. 14 million to acquire freehold land for the centre, however, no
land has been acquired yet.
3. Last year, the trustees of PSC imposed stipulations to create a fund for acquiring a franchise in a
popular league and approved Rs. 3 million to be transferred this year as well.

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4. The contribution received also include Rs. 8 million to repay the loan that was obtained to pay
expenses incurred during the year.
5. The government funding was received to support PSC general operations for five years starting from
1st January 20X4.
6. Long term assets in the trial balance include freehold land of Rs. 20 million and collections of Rs. 8
million. These collections represent items of such historic value that is worth preserving perpetually
and PSC is committed to protect and preserve them as part of its organisation policy
7. Long term assets are depreciated at 20% reducing balance method. All the amortisation is allocated
to general operations.
Required: Prepare the following (under deferral method) for PSC:
▪ Statement of income and expenditure for the year ended 30 June 20X4.
▪ Statement of changes in net assets for the year ended 30 June 20X4.
▪ Statement of financial position as at 30 June 20X4.

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Question No. 26 [Comprehensive Example]

The statement of financial position of Peshawar Business Club as at 31 December 2017 is shown as follows:

Accumulated Carrying
Cost
depreciation amount

Non-current assets: Rs. 000 Rs. 000 Rs. 000

Furniture and fittings 40,000 10,000 30,000

Games equipment 20,000 7,200 12,800

Motor van 30,000 10,000 20,000

90,000 27,200 62,800

Current assets: Cash and bank balances 9,200

72,000

Financed by: Accumulated funds 72,000

The following transactions took place during the year 1 January 2018 to 31 December 2018:

Receipts Rs. 000

Subscriptions (10,000 members @ Rs. 1,600 each) 16,000
Donations 1,600
Sale of tickets for annual dinner 10,800
28,400
Payments
Electricity 4,000
Expenses for annual dinner 6,200
New games equipment 3,200
Cleaners’ wages 2,080
Repairs and renewals 1,660
Motor van repairs 2,520
19,660

Further information:
▪ An electricity bill of Rs. 900,000 was owed at 31 December 2018.
▪ Depreciation should be calculated at 10% of cost of the assets.
Required: Prepare the statement of income and expenditure of Peshawar Business Club for the year
ended 31 December 2018 and statement of financial position as at that date.

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Question No. 27 [Comprehensive Example]

The following were the assets and liabilities of the Nawabshar Youth Movement at 30 April 2017.

Rs. 000

Fixtures and fittings (net) 16,340

Inventory of refreshment (coffee bar) 4,460

Land 51,600

Subscription received in advance 4,900

Payables for drinks supplied (coffee bar) 6,780

Cash at bank 7,466

The accountant’s receipts and payments account for the year to 30 April 2018 shows the following:

Receipts Rs. 000 Payments Rs. 000

Contributions received 500 Repairs and maintenance 3,218

Rent of hall 5,600 Salaries and wages 6,309

Members’ subscription 24,000 Gifts and charity 600

Sale of brochure 1,740 Dance event expenses 950

Sale of dance tickets 3,400 Refreshment supplies (coffee bar) 19,415

Sale of refreshments (coffee bar) 10,200 Sundry expenses 10,000

45,440 40,492

Further information:
1. Wages of Rs. 556,000 were due but unpaid at the year-end.
2. Inventories of drinks at 30 April 2018 were Rs. 14,210,000
3. Provide for depreciation on fixtures and fittings at Rs. 1,900,000
4. Subscription due but not paid by members at 30 April 2018 was Rs. 1,900,000
Required: Prepare the club’s statement of income and expenditure for the year ended 30 April 2018 and
the statement of financial position as at that date.

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Accounting for NPOs - ICAP Past Papers

Question No. 3 of Spring 2022, 10 marks
Following is the trial balance of Mahtab Welfare Hospital (MWH) as on 31 December 2021:

Additional information:
(i) The break-up of restricted fund balance is as follows:

(ii) Contributions received include Rs. 55 million received for construction of hospital.
(iii) During the year, MWH also received construction materials having fair value of Rs. 65 million for
the hospital building which has not been recorded in books.
(iv) MWH has completed the construction of hospital building on 1 April 2021.
(v) Depreciation is to be charged as follows:

Required: Prepare the following using deferral method:

(a) Statement of income and expenditure for the year ended 31 December 2021 (04)
(b) Statement of financial position as at 31 December 2021 (06)

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Question No. 3 of Autumn 2022, 10 marks

Oracle Family Club (OFC) was formed in January 2021. The following information is available in respect of
the first year of operations:
Receipt and payment account for the year ended 31 December 2021

Income and expenditure account for the year ended 31 December 2021

Additional information:
(i) OFC also operates a canteen. All sales and purchases of canteen are made for cash.
(ii) Salary of canteen’s salesman amounted to Rs. 90,000 is included in payments.
Required: Prepare OFC’s statement of financial position as on 31 December 2021.

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Question No. 8 of Spring 2023, 18 marks

Aztec Sports Club (ASC) was formed on 1 January 2021 when a founding member sold a piece of land to
ASC having fair value of Rs. 4,000,000 for the purpose of establishing a sports club, for Rs. 1,000,000 only.
The following information is available for the preparation of financial statements of ASC for the year ended
31 December 2022:
(i) Balances of some assets and liabilities as on 1 January 2022:

(ii) Payments made during the year:

(iii) Annual membership fee for the years 2021, 2022 and 2023 was Rs. 8,000, Rs. 10,000 and Rs. 12,000
respectively. However, members joining in second half of year are charged only half fee for that
year. Each member is required to pay the membership fee for the current year and the next year at
the time of admission. The numbers of members admitted during the years 2021 and 2022 are as
follows:

(iv) Contributions received during the year:

▪ A member contributed Rs. 1,400,000 for the purchase of a tractor for ground’s maintenance.
The tractor will be purchased in the year 2023.
▪ Another member contributed Rs. 1,100,000 without specifying any restriction.
(v) On 1 April 2021, an area was given on rent for operating a canteen in the club at an annual rent of
Rs. 840,000. However, to facilitate the tenant for setting up the canteen, it was agreed that the rent
for 2 years will be paid in 2023.
(vi) On 1 September 2022, some fixed assets having book value of Rs. 3,000,000 on 1 January 2022 were
disposed of for Rs. 3,300,000.
(vii) Depreciation is charged on all fixed assets (other than land) using reducing balance method at a
rate of 20% per annum.
Required: Prepare the following using the deferral method:
(a) Statement of income and expenditure for the year ended 31 December 2022 (09)
(b) Statement of financial position as at 31 December 2022 (09)

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Question No. 1 of Spring 2024, 9 marks

Gemini Club (GC) prepared its complete financial statements for 2023; however, the excel sheet
containing statement of income and expenditure was inadvertently deleted. The following comparative
balance sheet, along with the receipts and payments account, is available:

Balance sheet as on 31 December 2023

Receipts and payments account for the year ended 31 December 2023

Required: Prepare GC’s statement of income and expenditure for the year ended 31 December 2023.
(Comparative figures are not required)

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Question No. 1 of Autumn 2024, 10 marks

Following is the trial balance of Sagala Sports Club (SSC) as at 30 June 2024:

Additional information:
(i) A contribution of Rs. 20 million for the pavilion was received last year. The pavilion was completed
this year at a cost of Rs. 30 million and has been depreciated by Rs. 3 million.
(ii) Players’ subscription of Rs. 16 million were outstanding as at 30 June 2024. Of this amount, Rs. 3
million should be written off as it was also outstanding on 1 July 2023.
(iii) During the year, some players started paying subscriptions in advance for the whole year, receiving
a 20% discount. 40% of these subscriptions should be considered as advances as at 30 June 2024.
(iv) Due to a significant balance in the general fund, SSC’s board of trustees has decided to establish a
fund with Rs. 24 million to contribute to the school fees of promising children from the town.
Parents can apply for a grant up to Rs. 50,000.
Required: Prepare the following using deferral method:
a) Statement of income and expenditure for the year ended 30 June 2024 (05)
b) Statement of financial position as at 30 June 2024 (05)

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Question No. 8 of Spring 2025, 18 marks

Following is the trial balance of Gucci Welfare Hospital (GWH) as on 31 December 2024.

Additional information:
(i) GWH also operates a pharmacy (providing free medicines) and a canteen (selling refreshments).
The closing inventory values for the pharmacy and canteen, based on different measurement
principles, are as follows:

(ii) In 2024, the GWH’s board of trustees passed a resolution requiring 30% of each year’s surplus to
be allocated to a designated special fund called the ‘Health Care Fund.’
(iii) The investment income includes Rs. 2 million, which is externally restricted and designated to be
added to the endowment fund for cancer patients.
(iv) No adjusting entries have been made for accrued administrative expenses of Rs. 2.5 million and
prepaid marketing expenses of Rs. 4.2 million.

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(v) Contribution received comprises of the following:

▪ Rs. 5 million was donated for the endowment fund for cancer patients.
▪ Rs. 10 million was donated with the stipulation that it must be used for free distribution of
medicines during the year.
▪ Rs. 13 million was contributed by a corporate donor to pay nurses’ salaries for the year 2025.
▪ Other contributions were received without any specific restrictions.
(vi) On 1 May 2022, GWH acquired a hospital building for Rs. 100 million financed through a bank
loan. The cost of building includes land valued at Rs. 30 million. The loan principal is to be repaid
in five equal annual instalments of Rs. 20 million, along with interest at 12% per annum, on 30
April each year.
(vii) On 1 October 2024, medical equipment with a fair value of Rs. 40 million was received as a
donation. The equipment was put into use immediately but has not yet been recorded in the
books.
(viii) The building is depreciated at 6% per annum using the straight-line method, while other capital
assets are depreciated at 10% per annum using the reducing balance method.
Required: Prepare the following using the deferral method:
(a) Statement of income and expenditure for the year ended 31 December 2024. (11)
(b) Statement of financial position as at 31 December 2024. (07)

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CONCEPTUAL AND REGULATORY

FRAMEWORK FOR FINANCIAL REPORTING

AT A GLANCE
IN THIS CHAPTER: International Accounting Standards Board (IASB) issued the
Conceptual Framework for Financial Reporting in September
AT A GLANCE 2010 and it was subsequently revised in March 2018.
SPOTLIGHT The Conceptual Framework is the theoretical set of concepts
and principles with the main purpose to:
1. Conceptual Framework • assist IASB in the development of future IFRS and the
review of existing standards by setting out the underlying
2. Qualitative characteristics of concepts;
useful financial information
• assist the preparers of financial statements when no IFRS
3. Recognition and derecognition is applicable to particular transaction or when an IFRS
allows choice of accounting policy; and
4. Measurement • assist all stakeholders to understand and interpret.
5. Concept of capital and capital The Conceptual Framework being the single reference
maintenance document helps avoid inconsistencies in accounting
treatments.
6. Regulatory Framework The Conceptual Framework is divided into eight chapters.
7. Comprehensive Examples This Chapter covers key concepts from chapter 2, 5, 6 and 8 of
the Conceptual Framework. The chapter 1 and 4 of Conceptual
8. Objective Based Q&A Framework had been covered in earlier studies.
The regulatory framework in accounting ensures the accuracy,
STICKY NOTES transparency, and comparability of financial reporting, thereby
safeguarding investors and promoting financial stability. The
IFRS Foundation is global regulatory body, which oversees the
IASB and ISSB. The IASB develops IFRS standards for high-
quality global accounting practices, while the ISSB focuses on
sustainability-related disclosures. The IFRS Advisory Council
provides stakeholder feedback, while the IFRS Interpretations
Committee offers timely guidance on emerging accounting
matters. The IASB follows a structured process to develop IFRS
standards, encouraging stakeholder involvement and ensuring
robust consensus.

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1 INTRODUCTION
1.1 Purpose [Conceptual Framework: SP1.1 & SP1.5]
The Conceptual Framework for Financial Reporting (Conceptual Framework) describes the objective of, and the
concepts for, general purpose financial reporting.
The purpose of the Conceptual Framework is to assist:
• the International Accounting Standards Board (IASB) to develop IFRSs that are based on consistent concepts;
• preparers of financial statements to develop consistent accounting policies when no Standard applies to a
particular transaction or other event, or when a Standard allows a choice of accounting policy; and
• all parties to understand and interpret the Standards.
The Conceptual Framework contributes to the stated mission of the IFRS Foundation and IASB i.e. to develop
Standards that bring transparency, accountability and efficiency to financial markets around the world.
The Conceptual Framework provides the foundation for Standards (IASs and IFRSs) that:
• contribute to transparency by enhancing the international comparability and quality of financial
information, enabling investors and other market participants to make informed economic decisions.
• strengthen accountability by reducing the information gap between the providers of capital and
management. IFRSs and Conceptual Framework are also source of information for regulators.
• contribute to economic efficiency i.e. the use of a single, trusted accounting language derived from Standards
based on the Conceptual Framework lowers the cost of capital and reduces international reporting costs.

1.2 Contents of Conceptual Framework

The Conceptual Framework is divided into eight chapters, namely:
Chapter 1 — The Objective of General Purpose Financial Reporting
Chapter 2 — Qualitative Characteristics of Useful Financial Information
Chapter 3 — Financial Statements and The Reporting Entity
Chapter 4 — The Elements of Financial Statements
Chapter 5 — Recognition and Derecognition
Chapter 6 — Measurement
Chapter 7 — Presentation and Disclosure
Chapter 8 — Concepts of Capital and Capital Maintenance

1.3 Status [Conceptual Framework: SP1.2 to SP1.4]

The Conceptual Framework is not a Standard and nothing in the Conceptual Framework overrides any Standard
(IASs or IFRSs) or any requirement in a Standard.
IASB may sometimes specify requirements, in a Standard, that depart from aspects of the Conceptual Framework.
Further, the Conceptual Framework may be revised from time to time and revisions of the Conceptual
Framework will not automatically lead to changes to the Standards.

1.4 Elements of financial statements [Conceptual Framework: 4.1 & 4.2]

The elements of financial statements defined in the conceptual framework are:
• assets, liabilities and equity, which relate to a reporting entity’s financial position; and
• income and expenses, which relate to a reporting entity’s financial performance

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These elements are linked to the economic resources, claims and changes in economic resources and claims
and are explained as under:

Item discussed Elements Definition or description

Economic resource Asset A present economic resource controlled by the entity as a result of
past events.
An economic resource is a right that has the potential to produce
economic benefits.
Claim Liability A present obligation of the entity to transfer an economic resource
as a result of past events.
Equity The residual interest in the assets of the entity after deducting all its
liabilities.
Changes in Income Increases in assets, or decreases in liabilities, that result in increase
economic resources in equity, other than those relating to contributions from holders of
and claims, equity claims.
reflecting financial
Expenses Decreases in assets, or increases in liabilities, that result in decreases
performance
in equity, other than those relating to distributions to holder of
equity claims.
Other changes in - Contributions from holders of equity claims, and distributions to
economic resources them.
and claims
- Exchanges of assets or liabilities that do not result in increases or
decreases in equity.

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2 QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

2.1 Information to be useful for decision making [Conceptual Framework: 2.4]
If financial information is to be useful, it must be relevant and faithfully represent what it purports to represent.
The usefulness of financial information is enhanced if it is comparable, verifiable, timely and understandable.
It means information must have certain characteristics in order for it to be useful for decision making. The IASB
Conceptual Framework describes:
• fundamental qualitative characteristics; and
• enhancing qualitative characteristics

2.2 Fundamental qualitative characteristics [Conceptual Framework: 2.5]

The fundamental qualitative characteristics are:
• relevance; and
• faithful representation

2.2.1 Relevance [Conceptual Framework: 2.6 & 2.11]

Relevant financial information is capable of making a difference in the decisions made by users. Information may
be capable of making a difference in a decision even if some users choose not to take advantage of it or are already
aware of it from other sources.
The relevance of information is affected by its materiality. Information is material if omitting it or misstating it
or obscuring it could influence decisions that users make on the basis of financial information about a specific
reporting entity.

2.2.2 Faithful representation (true and fair view) [Conceptual Framework: 2.12 & 2.13]
Financial reports represent economic phenomena in words and numbers. To be useful, financial information
must not only represent relevant phenomena, but it must also faithfully represent the substance of the
phenomena that it purports to represent. Although, in many circumstances, the substance of an economic
phenomenon and its legal form are the same, an accountant should be careful to identify when this might not be
the case.
To be a perfectly faithful representation, a depiction would have three characteristics. It would be:
• complete (all information necessary for a user to understand the phenomenon being depicted);,
• neutral (without bias in the selection and presentation of financial statements); and
• free from error (does not mean accurate in all respects, a reliable estimate is acceptable).
Of course, perfection is seldom, if ever, achievable. The objective is to maximise those qualities to the extent
possible.

2.3 Enhancing qualitative characteristics [Conceptual Framework: 2.23]

The qualitative characteristics that enhance the usefulness of information that is relevant and a faithful
representation are:
• comparability;
• verifiability;
• timeliness; and
• understandability.

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2.3.1 Comparability [Conceptual Framework: 2.25, 2.26 & 2.29]

Comparability enables users to identify and understand similarities in, and differences among, items.
Information about a reporting entity is more useful if it can be compared with similar information about other
entities and with similar information about the same entity for another period or another date.
Consistency is related to comparability but is not the same. Consistency refers to the use of the same methods
for the same items, either from period to period within a reporting entity or in a single period across entities.
Consistency helps to achieve the goal of comparability.
A single economic phenomenon can be faithfully represented in multiple ways, permitting alternative accounting
methods for the same economic phenomenon diminishes comparability. This is why, Standards allow minimum
possible alternative accounting treatments.

2.3.2 Verifiability [Conceptual Framework: 2.30 & 2.31]

This quality helps to assure users that information faithfully represents the economic phenomena it purports to
represent. Verifiability means that different knowledgeable and independent observers could reach consensus
that a particular depiction is a faithful representation. Quantified information need not be a single point estimate
to be verifiable. A range of possible amounts and the related probabilities can also be verified.
Verification can be direct or indirect.
• Direct verification means verification through direct observation, e.g. by counting cash or inventory.
• Indirect verification means checking the inputs to a model, formula or other technique and recalculating the
outputs using the same methodology. For example, the carrying amount of inventory might be verified by
checking the inputs (e.g. costs) and recalculating the closing inventory using the same assumption (e.g. FIFO).

2.3.3 Timeliness [Conceptual Framework: 2.33]

This means having information available to decision-makers in time to be capable of influencing their decisions.
Generally, the older the information is the less useful it is.

2.3.4 Understandability [Conceptual Framework: 2.34 to 2.36]

Information is made understandable by classifying, characterising and presenting it in a clear and concise
manner. Some phenomena are inherently complex and cannot be made easy to understand, however, excluding
the relevant information is not justified in such circumstances.
Financial reports are prepared for users who have a reasonable knowledge of business and economic activities
and who review and analyse the information diligently.

2.4 Cost constraint on useful financial reporting [Conceptual Framework: 2.39 to 2.41]
Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial
information imposes costs, and it is important that those costs are justified by the benefits of reporting that
information.
The benefits obtained from financial information should exceed the cost of obtaining and providing it.
Information should not be provided if the cost is not worth the benefit. However, users ultimately bear cost of
providing information in the form of reduced returns and they will have to incur additional costs to obtain or
estimate the information, if needed information is not provided. Therefore, a preparer of financial statement
must not omit mandatory disclosure of a Standard on the pretext that cost of information may not be justified.

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3 RECOGNITION AND DERECOGNITION

3.1 Recognition criteria [Conceptual Framework: 5.6, 5.7 & 5.11]
Only items that meet the definition of an asset, a liability or equity are recognised in the statement of financial
position. Similarly, only items that meet the definition of income or expenses are recognised in the statement(s)
of financial performance.
However, not all items that meet the definition of one of those elements are recognised. Not recognising an item
that meets the definition of one of the elements makes the statement of financial position and the statement(s)
of financial performance less complete and can exclude useful information from financial statements. On the
other hand, in some circumstances, recognising some items that meet the definition of one of the elements would
not provide useful information.
An asset or liability is recognised only if recognition of that asset or liability and of any resulting income, expenses
or changes in equity provides users of financial statements with information that is useful, i.e. with:
• relevant information about the asset or liability and about any resulting income, expenses or changes in
equity; and
• a faithful representation of the asset or liability and of any resulting income, expenses or changes in equity.
Items that fail to meet the criteria for recognition should not be included in the financial statements.
However, some of these items may have to be disclosed as additional details in a note to the financial
statements.

3.2 How recognition links elements of financial statements [Conceptual Framework: 5.3]

 Example 01:
i. A manufacturing unit valuing Rs. 5 million, owned and controlled by the Company
ii. A fleet of trucks valuing Rs 100 million, controlled by another company
iii. A highly skilled workforce, getting an annual compensation of Rs. 12.5 million
Required:
Which of the above assets will be recognised in the financial statements of a company in accordance with the
recognition criteria?

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 Answer:
i. It will be recognised as an asset. It meets the definition of an asset being present economic resource
controlled by the entity.
ii. The fleet of truck will not be recognised because it is not controlled by the entity.
iii. Workforce will not be recognised by the entity because there is no control on as workers can quit the entity
at any time. However, in case advance salaries have been paid, the entity has present right to future services
from the workforce.
 Example 02:
ABC Associates received Rs. 160,000 in cash on 20 December 2004 from RM Enterprises in return for having
provided financial advice during the 2004 financial year.
Required:
a) Explain, with reference to the relevant definitions, which elements should possibly be recognised in the 2004
financial year.
b) Briefly identify whether and/ or how your answer would change if the cash received had been received for
financial advice to be provided in the 2005 financial year.
 Answer:

Part (a)
The cash received meets the definition of an asset i.e. present resource now controlled by the entity and entity
may spend it as it may wish. Services have already been provided, therefore, there is no obligation (no change in
liability). Increase in equity shall be recognised as an income.
An asset and an income shall be recognised in year 2004.

Part (b)
The cash received meets the definition of an asset i.e. present resource now controlled by the entity and entity
may spend it as it may wish. Services have not been provided and there is present obligation to provide services,
resulting in increase in liability. No income can be recognised as there is no equity increase.
An asset and a liability shall be recognised in year 2004.
 Example 03:
Read the following scenarios:
i. An amount paid to landlord totalling Rs.120,000 on 1st January 2012 against the rent for the year ended 31st
December 2012. Year end of the entity is 30 June 2012.
ii. An expenditure incurred on repairs and maintenance of plant amounting Rs.300,000.
iii. There has been legal dispute between the entity and its customer and company expects the outflow of Rs.
200,000 in order to settle the dispute.
iv. Entity purchased goods costing Rs. 20,000 for trading purposes and the same was sold for Rs. 25,000.
Required:
Which of the above, would be recognised as expense &/or asset in the financial statements of a company in
accordance with the criteria given in conceptual framework.

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 Answer:
i. Increase in asset (advance rent: Future benefits) Rs. 60,000 and decrease in asset (Cash) Rs. 120,000
resulting in net decrease in equity is Rent expense (Rs. 60,000).
ii. Decrease in asset (Cash) Rs. 300,000 and no increase in other assets (unless increase in present resources)
resulting in net decrease in equity is Repair expense (Rs. 300,000).
iii. Increase in liability (obligation to settle) Rs. 200,000 and no increase in any assets resulting in net decrease
in equity is Expense (Rs. 200,000).
iv. When purchased inventory, it was a present economic resource and recognised as an asset. When sold, it
becomes expense (cost of sales) due to decrease in assets resulting in decrease in equity.
 Example 04:
Read the following scenarios
i. Advance received from customer amounting Rs. 50,000 against the goods to be delivered after 6 months
ii. Services provided to ABC and Co. on credit amounting Rs.30,000.
iii. Account Receivables already written off in previous years amounting Rs. 30,000 were received during the
year.
Required:
Which of the above, would be recognised as income &/or liability in the financial statements of a company in
accordance with the criteria given in conceptual framework.
 Answer:
i. Increase in asset (Cash) Rs. 50,000 and also an increase in liability (obligation to deliver) Rs. 50,000 and
there is no income as no increase in equity.
ii. Increase in asset (right to receive) Rs. 30,000 and no increase in liability (services already provided) and
resulting net increase in equity Rs. 30,000 recognised as income.
iii. Increase in asset (cash) Rs. 30,000 but no decrease in asset (receivable was already written off) resulting in
net increase in equity is Income.

3.3 Derecognition [Conceptual Framework: 5.26]

Derecognition is the removal of all or part of a recognised asset or liability from an entity’s statement of financial
position. Derecognition normally occurs when that item no longer meets the definition of an asset or of a liability:
a) for an asset, derecognition normally occurs when the entity loses control of all or part of the recognised
asset; and
b) for a liability, derecognition normally occurs when the entity no longer has a present obligation for all or
part of the recognised liability.
For example, when an item of property, plant and equipment is sold or destroyed, it will be derecognised.
Similarly, a liability will be derecognised when it is paid or settled otherwise.

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4 MEASUREMENT
4.1 Measurement bases [Conceptual Framework: 6.1 & 6.2]
Elements recognised in financial statements are quantified in monetary terms. This requires the selection of a
measurement basis. A measurement basis is an identified feature, for example, historical cost, fair value or
fulfilment value, of an item being measured.
Applying a measurement basis to an asset or liability creates a measure for that asset or liability and for related
income and expenses. Consideration of the qualitative characteristics of useful financial information and of the
cost constraint is likely to result in the selection of different measurement bases for different assets, liabilities,
income and expenses.

4.2 Historical cost [Conceptual Framework: 6.4 to 6.8]

Historical cost measures provide monetary information about assets, liabilities and related income and expenses,
using information derived, at least in part, from the price of the transaction or other event that gave rise to them.
The historical cost of an asset when it is acquired or created is the value of the costs incurred in acquiring or
creating the asset, comprising the consideration paid to acquire or create the asset plus transaction costs. The
historical cost of a liability when it is incurred or taken on is the value of the consideration received to incur or
take on the liability minus transaction costs.
In some cases, a current value of the asset or liability is used as a deemed cost on initial recognition and that
deemed cost is then used as a starting point for subsequent measurement at historical cost. Unlike current value,
historical cost does not reflect changes in values, except to the extent that those changes relate to impairment of
an asset or a liability becoming onerous.
The historical cost of an asset is updated over time to depict, if applicable:
• the consumption of asset (depreciation or amortisation);
• payments received that extinguish part or all of the asset;
• the effect of events that cause asset to be no longer recoverable (impairment); and
• accrual of interest to reflect any financing component of the asset.
The historical cost of a liability is updated over time to depict, if applicable:
• fulfilment of part or all of the liability (payment);
• the effect of events that increase the value of the obligation (estimate change); and
• accrual of interest to reflect any financing component of the liability.

4.3 Current value [Conceptual Framework: 6.10 & 6.11]

Current value measures provide monetary information about assets, liabilities and related income and expenses,
using information updated to reflect conditions at the measurement date. Because of the updating, current values
of assets and liabilities reflect changes, since the previous measurement date, in estimates of cash flows and other
factors reflected in those current values. Unlike historical cost, the current value of an asset or liability is not
derived, even in part, from the price of the transaction or other event that gave rise to the asset or liability.
Current value measurement bases include:
• fair value
• value in use for assets and fulfilment value for liabilities
• current cost

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4.3.1 Fair value [Conceptual Framework: 6.12 to 6.14 & 6.16]

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date.
Fair value reflects the perspective of market participants i.e. participants in a market to which the entity has
access. The asset or liability is measured using the same assumptions they would use when pricing the asset or
liability while acting in their economic best interest.
In some cases, fair value can be determined directly by observing prices in an active market. In other cases, it is
determined indirectly using measurement techniques, for example, cash-flow-based measurement techniques,
reflecting all the following factors:
• estimates of future cash flows.
• possible variations caused by the uncertainty inherent in the cash flows.
• the time value of money.
• the price for bearing the uncertainty inherent in the cash flows (a risk premium or risk discount).
• other factors, for example, liquidity, if market participants would take those factors into account in the
circumstances.
The fair value is not increased or decreased by the transaction costs incurred when acquiring the asset and when
the liability is incurred or taken on. In addition, fair value does not reflect the transaction costs that would be
incurred on the ultimate disposal of the asset or on transferring or settling the liability.

4.3.2 Value in use and fulfilment value [Conceptual Framework: 6.17 to 6.20]
Value in use is the present value of the cash flows, or other economic benefits, that an entity expects to derive
from the use of an asset and from its ultimate disposal. Fulfilment value is the present value of the cash, or other
economic resources, that an entity expects to be obliged to transfer as it fulfils a liability.
Those amounts of cash or other economic resources include not only the amounts to be transferred to the liability
counterparty, but also the amounts that the entity expects to be obliged to transfer to other parties to enable it
to fulfil the liability.
Value in use and fulfilment value do not include transaction costs incurred on acquiring an asset or taking on a
liability. However, value in use and fulfilment value include the present value of any transaction costs an entity
expects to incur on the ultimate disposal /fulfilment.
Value in use and fulfilment value reflect entity-specific assumptions rather than assumptions by market
participants. In practice, there may sometimes be little differences. Value in use and fulfilment value cannot be
observed directly and are determined using cash-flow-based measurement techniques. Value in use and
fulfilment value reflect the same factors described for fair value, but from an entity-specific perspective rather
than from a market-participant perspective.

4.3.3 Current cost [Conceptual Framework: 6.21 & 6.22]

The current cost of an asset is the cost of an equivalent asset at the measurement date, comprising the
consideration that would be paid at the measurement date plus the transaction costs that would be incurred at
that date. The current cost of a liability is the consideration that would be received for an equivalent liability at
the measurement date minus the transaction costs that would be incurred at that date.
Current cost, like historical cost, is an entry value: it reflects prices in the market in which the entity would
acquire the asset or would incur the liability. Hence, it is different from fair value, value in use and fulfilment
value, which are exit values. However, unlike historical cost, current cost reflects conditions at the measurement
date.
In some cases, current cost cannot be determined directly by observing prices in an active market and must be
determined indirectly by other means. For example, if prices are available only for new assets, the current cost
of a used asset might need to be estimated by adjusting the current price of a new asset to reflect the current age
and condition of the asset held by the entity.

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Measurement bases for assets and liabilities – summary

Measurement bases Definitions Characteristics

Historical cost Asset: The consideration paid to Derived from past transaction /event.
acquire or create the asset plus Reflects conditions existing at the time of
transaction costs. acquisition.
Liability: The consideration received Entry value.
to incur or taken the liability minus
Transaction costs at time of disposal are
transaction costs.
not relevant.
Fair value Asset: The price that would be Derived using information updated to
received to sell an asset in an orderly reflect conditions at the measurement
transaction between market date.
participants at the measurement date. Reflects market-participant assumptions.
Liability: The price that would be paid Exit value.
to transfer a liability in an orderly
Transaction costs are not relevant on
transaction between market
acquisition as well as on disposal.
participants at the measurement date.
Value in use or Asset: The present value of the cash Derived using information updated to
Fulfilment value flows, or other economic benefits, that reflect conditions at the measurement
an entity expects to derive from the date.
use of an asset and from its ultimate Reflects entity specific assumptions.
disposal.
Exit value.
Liability: The present value of the
Transaction costs on acquisition are not
cash, or other economic resources,
relevant, however, present value of
that an entity expects to be obliged to
transaction costs on ultimate
transfer as it fulfils a liability.
disposal/transfer are included in
calculation.
Current cost Asset: The cost of an equivalent asset Derived using information updated to
that would be paid at the reflect conditions at the measurement
measurement date plus the date.
transaction costs. Reflects prices in market in which entity
Liability: The consideration that would acquire the asset or incur a
would be received for an equivalent liability.
liability at the measurement date Entry value.
minus the transaction costs.
Transaction costs at time of disposal are
not relevant.

 Example 05:
Adeel Limited (AL) owns a machine which it purchased two years ago for Rs. 200,000. The accumulated
depreciation on the machine to date is Rs. 80,000 based on 5 years life using straight line method.
The machine could be sold in the market for Rs. 100,000 but there would be dismantling costs of Rs. 10,000.
The cash flows from the existing machine are estimated to be Rs. 50,000 for the next two years followed by Rs.
40,000 in the last year. Relevant discount rate is 10%.
To replace the machine with a new version would cost Rs. 220,000.
Required:
Measure the machine using different measurement bases for AL using the above information.

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 Answer:

Historical cost Rs.

Cost 200,000
Less: Accumulated depreciation (80,000)
120,000

Fair value
The fair value is market value (exit price) of Rs. 100,000 without deducting cost to sell of Rs. 10,000.

Value in use Rs.

Year 1 Rs. 50,000 x 1.1-1 45,455
Year 2 Rs. 50,000 x 1.1-2 41,322
Year 3 Rs. 40,000 x 1.1-3 30,053
116,830

Current cost Rs.

Cost of new asset 220,000
Less: Accumulated depreciation* Rs. 220,000 / 5 x 2 years (88,000)
132,000

*The replacement cost is of new machine and needs to be adjusted for two years usage.
 Example 06: [Question No. 3 of Spring 2020, 6 marks]
Briefly describe the measurement bases that may be used to measure the value of assets in the financial
statements.
 Answer:

Historical cost
The historical cost of an asset, when it is acquired or created is the value of the cost incurred in acquiring or
creating the asset, comprising the consideration paid to acquire or create the asset plus transaction cost.

Current value
Current value measures provide monetary information about assets using information updated to reflect
conditions at the measurement date.
Current value measurement bases include:
• Fair value
• Value in use for assets
• Current cost
Fair value: Fair value is the price that would be received to sell an asset in an orderly transaction between
market participants at the measurement date. Fair value reflects the perspective of market participants.
Value in use: Value in use is the present value of the cash flows or other economic benefit that an entity expects
to derive from the use of an asset and from its ultimate disposal. Value in use reflect entity specific assumptions
rather than assumptions by market participants.

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Current cost: The current cost of an asset is the cost of an equivalent asset at the measurement date comprising
the consideration that would be paid at the measurement date plus the transaction cost that would be incurred
at that date.
Current cost, like historical cost is an entry value; while fair value is an exit value. However, unlike historical cost,
current cost reflects conditions at the measurement date.

4.4 Measurement of equity [Conceptual Framework: 6.87 & 6.88]

The total carrying amount of equity (total equity) is not measured directly. It equals the total of the carrying
amounts of all recognised assets less the total of the carrying amounts of all recognised liabilities (i.e. equity =
total assets – total liabilities).
Because the general purpose financial statements are not designed to show an entity’s value, the total carrying
amount of equity will not generally equal:
• the aggregate market value of equity claims on the entity;
• the amount that could be raised by selling the entity as a whole on a going concern basis; or
• the amount that could be raised by selling all of the entity’s assets and settling all of its liabilities.

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5 CONCEPT OF CAPITAL AND CAPITAL MAINTENANCE

5.1 Concept of capital [Conceptual Framework: 8.1]

5.1.1 Financial concept of capital

Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous
with the net assets or equity of the entity.

5.1.2 Physical concept of capital

Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of
the entity based on, for example, units of output per day.
Consider the basic accounting equation:
Assets = Liabilities + Equity
Or
Assets – Liabilities = Equity (net assets)
Like any other equation, changes on one side of the accounting equation are matched by changes in the other
side. Therefore, profit or loss for a period can be calculated from the difference between the opening and closing
net assets after adjusting for any distributions during the period.
Change in equity = Closing equity – Opening equity
Increase in equity = Profit + capital introduced – distributions
Profit = Increase in equity – capital introduced + distributions
This shows that the value ascribed to opening equity is crucial in the measurement of profit.

5.2 Capital maintenance concepts and determination of profit [Conceptual Framework: 8.3]
Only inflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore
as a return on capital. Hence, profit is the residual amount that remains after expenses (including capital
maintenance adjustments, where appropriate) have been deducted from income.

5.2.1 Financial capital maintenance

Under this concept a profit is earned only if the financial (money) amount of the net assets at the end of the period
exceeds the net assets at the beginning of the period excluding any distributions to, and contributions from,
owners during the period.
Financial capital maintenance can be measured in either:
• nominal monetary units (also called Historical Cost Accounting); or
• units of constant purchasing power (also called Constant Purchasing Power Accounting).

5.2.2 Physical capital maintenance

Under this concept a profit is earned only if the physical productive capacity (or operating capability of the entity
or the resources or funds needed to achieve that capacity) at the end of the period exceeds the net assets at the
beginning of the period excluding any distributions to, and contributions from, owners during the period.
This is also called Current Cost Accounting as the physical capital maintenance concept requires the adoption of
the current cost basis of measurement.

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5.3 Capital maintenance adjustments [Conceptual Framework: 8.7 & 8.8]

5.3.1 Financial capital maintenance (money terms)
Profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets
held over the period, i.e. holding gains, are, conceptually, profits. They may not be recognised as such until
disposal.
As mostly historical costs is used, no adjustments to profit is required.
5.3.2 Financial capital maintenance (real terms)
Profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase
in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the
increase is treated as a capital maintenance adjustment and, hence, as part of equity.
The journal entry for capital maintenance adjustment is:
Debit Statement of profit or loss
Credit Inflation reserve
5.3.3 Physical capital maintenance
Profit represents the increase in physical capital over the period. All (specific) price changes affecting the assets
and liabilities of the entity are viewed as changes in the measurement of the physical productive capacity of the
entity; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit.
The journal entry for capital maintenance adjustment is:
Debit Statement of profit or loss
Credit Current cost reserve
 Example 07:
X Limited commenced business on 1 January Year 1 with a single item of inventory which costs Rs. 10,000.
During the year it sold the item for Rs. 14,000 (cash).
During the year general inflation was 5% but the inflation specific to the item was 10%.
Required:
Calculate profit and prepare summary statement of financial position as of 31 December Year 1 under the
following capital maintenance concepts:
a) Financial capital maintenance (money terms)
b) Financial capital maintenance (real terms)
c) Physical capital maintenance
 Answer:
Capital maintenance concept
Financial Financial Physical
(money terms) (real terms)
Profit calculation Rs. Rs. Rs.
Revenue 14,000 14,000 14,000
Cost of sale (10,000) (10,000) (10,000)
Inflation adjustment:
5% x Rs.10,000 (500)
10% x Rs.10,000 (1,000)
4,000 3,500 3,000
*inflation rate applied to opening equity

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Capital maintenance concept

Financial Financial Physical
(money terms) (real terms)
Statement of financial position Rs. Rs. Rs.
Cash 14,000 14,000 14,000
Total assets 14,000 14,000 14,000

Equity:
Before adjustment 10,000 10,000 10,000
Inflation or current cost reserve 500 1,000
10,000 10,500 11,000
Retained profit (profit for the year) 4,000 3,500 3,000
14,000 14,000 14,000
Commentary on the above example
Under historical cost accounting, the profit is Rs. 4,000. If the business paid this out as a dividend it would have
Rs. 10,000 left.
Rs. 10,000 is the opening equity expressed as a number of units of currency. This means that the company would
have maintained its equity expressed as a number of units of currency. However, inflation in the period has
caused the purchasing power of the currency to decline. This means that Rs. 10,000 no longer has the same
purchasing power that it had a year ago. The company has not maintained its capital in real terms.
To maintain its opening equity in real terms the company would have to ensure that it had the same purchasing
power at the year-end as it had at the start. Inflation was 5% so the company would need Rs. 10,500 at the year-
end in order to have the same purchasing power as it had at the start of the year. The company can achieve this
by transferring Rs.500 from profit and loss into an inflation reserve. Profit would then be reported as Rs. 3,500.
If the business paid out Rs. 3,500 as a dividend it would have Rs. 10,500 left. This is not enough to buy the same
asset that it had at the start of the year. The asset has been subject to specific inflation of 10% therefore the
company would need Rs. 11,000 at the year-end in order to buy the same asset.
This means that the company would not have the same capacity to operate as it had a year ago.
To maintain its opening equity in physical terms the company would have to ensure that it had the same ability
to operate at the year-end as it had at the start. In other words, it would need to have Rs. 11,000. The company
can achieve this by transferring Rs. 1,000 from profit and loss into an inflation reserve. Profit would then be
reported as Rs. 3,000.
5.4 Comparing the two concepts [Conceptual Framework: 8.2]
Neither the Conceptual Framework nor accounting standards require the use of a specific capital maintenance
concept. In practice, almost all entities use money financial capital maintenance, but both concepts can provide
useful information.
Thus, a financial concept of capital should be adopted if the users of financial statements are primarily concerned
with the maintenance of nominal invested capital or the purchasing power of invested capital. If, however, the
main concern of users is with the operating capability of the entity, a physical concept of capital should be used.
Financial capital maintenance is likely to be the most relevant to investors as they are interested in maximizing
the return on their investment and therefore its purchasing power.
Physical capital maintenance is likely to be most relevant to management and employees as they are interested
in assessing an entity’s ability to maintain its operating capacity. This is particularly true for manufacturing
businesses, where management may need information about the ability of the business to continue to produce
the same or a greater volume of goods.

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6 REGULATORY FRAMEWORK
6.1 Purpose of regulatory framework in accounting
The regulatory system in accounting aims to ensure accuracy, transparency, and comparability of financial
reporting, protecting investors and maintaining financial stability by establishing rules and standards that
govern financial reporting practices. Therefore, it is important to understand the role of standard-setting bodies,
their due process and coordination among them.

6.2 Role of IFRS Foundation

IFRS Foundation is supervisory body, responsible for governance issues and ensuring proper funding, for
International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB).
The IFRS Foundation aims to develop globally accepted standards for financial reporting and sustainability
disclosures through the IASB and ISSB. These standards ensure high-quality, transparent, and comparable
information for decision-making in capital markets. Additionally, the foundation promotes the rigorous
application of IFRS Standards, considers diverse economic contexts, and facilitates their adoption by aligning
them with national and regional standards.

6.3 Role of International Accounting Standards Board (IASB)

IASB is responsible for developing IFRS and IFRS for SMEs and for promoting their use and application. Its
objective is to establish a single set of high-quality, clear, and enforceable global accounting standards. However,
since IASB lacks the authority to enforce IFRS compliance, it relies on the collaboration of national standard
setters.

6.4 Role of International Sustainability Standards Board (ISSB)

In 2021, the IFRS Foundation established the ISSB with the aim of creating a globally consistent framework for
sustainability-related disclosure standards to address the investors need for corporate reporting on climate, as
well as other environmental, social, and governance (ESG) issues, that is transparent, reliable, comparable, and
of high quality. So far, ISSB has issued sustainability standards IFRS S1 and IFRS S2 in 2023.

6.5 IFRS Advisory Council (IFRS AC)

IFRS AC serves as a platform for IASB and ISSB to engage with a diverse group of stakeholders impacted by its
activities. Its key objectives include:
• Offering guidance to IASB and ISSB on agenda-setting decisions and prioritization of its work:
• Communicating to IASB and ISSB the perspectives of organizations and individuals on significant standard-
setting initiatives; and
• Providing additional advice to IASB, ISSB or the Trustees as needed.

6.6 IFRS Interpretations Committee (IFRS IC)

IFRS IC provides timely guidance on accounting matters where varying interpretations of IFRS Standards have
emerged. All IFRIC interpretations require approval from the IASB. These interpretations focus on issues of
significant and widespread relevance, rather than those affecting only a small minority of entities. They address:
• newly identified financial reporting challenges that are not explicitly covered within IFRS Standards; and
• issues where conflicting or inadequate interpretations have arisen, or are likely to arise, in the absence of
authoritative guidance, aiming to establish consensus on the appropriate accounting treatment.

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6.7 Procedure for the development of an IFRS Standard

The summarised procedure for the development of an IFRS Standard is as follows:
• IASB identifies a subject and appoints an advisory committee to advise on the issues.
• IASB may issue a discussion paper on IFRS to be issued to encourage comments from stakeholders.
• IASB publishes an exposure draft of IFRS to be issued
• After consideration of comments received on the exposure draft, IASB publishes the final text of the IFRS.
The publication of an IFRS, exposure draft or IFRIC Interpretation requires the votes of at least eight of the fifteen
Board members of IASB.

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7 COMPREHENSIVE EXAMPLES
 Example 08:
Carrie starts in business on 1 January Year 1. Carrie’s sole shareholder contributed capital of Rs. 1,000. Carrie
purchased one item of inventory for Rs. 1,000 and sold that inventory for cash of Rs. 1,400. At the end of Year 1
the replacement cost of the same item of inventory is Rs. 1,100. General inflation during the year was 7%.
Required:
Calculate profit and prepare summary statement of financial position as of 31 December Year 1 under the
following capital maintenance concepts:
a) Physical capital maintenance
b) Financial capital maintenance: Historical cost accounting
c) Financial capital maintenance: Constant purchasing power accounting
 Answer:

Financial Capital Maintenance

Physical Constant
Capital Historical cost purchasing
Maintenance accounting power
accounting
Profit calculation Rs. Rs. Rs.
Sales 1,400 1,400 1,400
Cost of sales (1,000) (1,000) (1,000)
Inflation adjustment
Specific (1,100 – 1,000) (100)
General (1,000 x 7%) (70)
Profit 300 400 330

Statement of financial position

Cash 1,400 1,400 1,400
Total assets 1,400 1,400 1,400

Equity:
Before adjustment 1,000 1,000 1,000
Inflation or current cost reserve 100 - 70
1,100 1,000 1,070
Retained profit (profit for the year) 300 400 330
1,400 1,400 1,400

Tutorial note: Share capital at the year end is restated under the physical capital maintenance concept for an
increase in specific price changes and under Constant Purchasing Power accounting for general price changes.

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 Example 09:
Read the following statements:
i. In case of conflict between requirements of conceptual framework and IFRS, the requirements of conceptual
framework shall prevail.
ii. Conceptual framework is not an International financial reporting standard (IFRS)
iii. HR related cost is recognised as an asset in the financial statements since economic benefit is probable from
human resource
iv. Internally generated goodwill is recognised as asset and measured at fair value in the financial statements
v. When economic benefits arise over several accounting periods, and the association with income can only be
decided in broad terms, expenses should be recognised in profit and loss of each accounting period on the
basis of systematic and rational allocation procedure
vi. When an item of expenditure is not expected to provide any future economic benefit, it is recognised as an
asset in the financial statements
vii. In fair value method, assets are measured at the amount that would be paid to purchase the same or a similar
asset currently.
Required:
Analyse the above statements as true or false along with reasons for the selected answer.
 Answer:
i. False. Nothing in the Conceptual Framework overrides any Standard or any requirement in a Standard.
ii. True. The Conceptual Framework is not a Standard. However, it provides foundation for consistent
development for IFRSs.
iii. False.HR related cost can never be capitalised as it does not meet the definition criteria of asset “controlled
by the entity”
iv. False. Internally generated goodwill is not recognised because its cost or value cannot be measured reliably.
IAS 38 specifically prohibits recognition of internally generated goodwill.
v. True, because of matching principle
vi. False. Instead, an expense shall be recognised in that case.
vii. False. This describes “current cost” which is entry value. “Fair value” is an exit value.
 Example 10: [Question No. 1 of Autumn 2022, 7 marks]
Consider the following statements with reference to ‘Conceptual framework for financial reporting’:
i. Physical capital maintenance measures profit in terms of increase in the productive capacity of an entity.
ii. In times of rising prices, profits will be overstated and assets will be understated when financial statements
are prepared on the basis of historical cost.
iii. Income represents all increases in assets or decreases in liabilities that result in increase in equity.
iv. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete,
relevant and verifiable.
v. In value in use method, assets are measured at the amount that would be paid to purchase the same or a
similar asset currently.
vi. Current cost and fair value are exit values.
vii. Requirements of a standard overrides the requirements of conceptual framework.
viii. Financial capital maintenance is likely to be the most relevant to investors as they are interested in
maximizing the return on their investment and purchasing power.
Required:
Identify whether each of the above statements is TRUE or FALSE. Give reasons for statements identified as FALSE.

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 Answer:
i. True
ii. True
iii. False. Income does not include those increase in equity which are relating to contributions from holders of
equity claims.
iv. False. The three characteristics are complete, neutral and free from error.
v. False. Value in use is the present value of the cash flows, or other economic benefits that an entity expects
to derive from the use of an asset and from its ultimate disposal.
vi. False. Current cost is an entry value while fair value is an exit value.
vii. True
viii. True
 Example 11: [Question No. 5 of Spring 2023, 4 marks]
On 1 March 2022, Inca Empire Limited (IEL) commenced business with a capital of Rs. 60,000 which was used
to purchase two items of inventory. Details of their cost and sales for the year ended 28 February 2023 are as
follows:

Cost Sale
----------- Rupees -----------
Product A 25,000 55,000
Product B 35,000 70,000

Additional information:
ix. General inflation during the year is 8%.
x. Inflation specific to product A during the year is 12%.
xi. Replacement cost of the product B at the end of the year is Rs. 45,000.
Required:
Prepare the statement of profit or loss and the statement of financial position (equity portion only) of IEL
according to the concept of ‘Physical Capital Maintenance’.
 Answer:

Statement of profit or loss Rs. in '000

Sales 55+70 125
Cost of sale 25+35 (60)
Gross profit 65
Inflation adjustment
- Specific (Product A) 25×12% (3)
- Specific (Product B) 45–35 (10)
(13)
Profit for the year 52

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Statement of financial position

Equity: Rs. in '000

Opening equity 60
Inflation reserve 13
Equity after adjustment 73
Profit for the year 52
125

 Example 12: [Question No. 4 of Autumn 2024, 6 marks]

During the review of the statement of financial position of Nerunkot Limited (NL), the junior accountant is
uncertain whether the following items should be reflected in the books to accurately represent the financial
position of NL:
i. An asset for loyal customers, as they are expected to bring future business.
ii. An asset for plant and related liability, since the contract for the purchase has been signed, but the plant
will be delivered next year.
iii. A liability for the full year’s office rent for the next year, as contract has been signed.
Required:
As an accounting manager of NL, discuss whether the above items should be recognised in the statement of
financial position as per the Conceptual Framework for Financial Reporting.
 Answer:

Part (i)
Loyal customers do not meet the recognition criteria for an asset. Although they may generate future economic
benefits, the company does not exert control over them as it would over other assets. Further, the future
economic benefits derived from loyal customers are uncertain and cannot be measured reliably. Therefore, loyal
customers should not be recognised as an asset in the statement of financial position.

Part (ii)
According to the conceptual framework, an asset or liability arises from past events. Since the plant has not yet
been delivered, the recognition criteria are not met. Recognition will occur when the plant is delivered or
payment is made. Consequently, no asset or liability is recorded at this stage. Transactions involving future
obligations or unrealized assets should not be recognised until the relevant criteria are met.

Part (iii)
Future rent payments do not meet the recognition criteria for a liability until the related service (use of office
space) is received. A liability is recognised when there is a present obligation resulting from past events. Hence,
the office rent for the next year should not be recognised as a liability in the statement of financial position.??

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8 OBJECTIVE BASED Q&A

1. Which of the following measurement basis is an ‘entry value’ and ‘reflects the conditions at the measurement
date’?
a) Historical cost
b) Fair value
c) Value in use / fulfilment value
d) Current cost

2. Financial capital maintenance (money terms) is also referred to as:

a) Historical cost accounting
b) Current cost accounting
c) Constant purchasing power accounting
d) Fair value accounting

3. Which of the following concepts measures profit in terms of an increase in the productive capacity of an entity?
a) Physical capital maintenance
b) Historical cost accounting
c) Financial capital maintenance
d) Going concern concept

4. Which of the following statements is true about historical cost accounts in times of rising prices?
a) Profits will be overstated, and assets will be understated
b) Asset values will be overstated
c) Unrecognised gains will be recorded incorrectly
d) Depreciation will be overstated

5. Which of the following measurement basis fulfils following two conditions when measuring an asset or liability:

• Transactions costs at acquisition are ignored in valuation

• Transaction costs at disposal or ultimate disposal are considered in valuation
a) Historical cost
b) Fair value
c) Value in use / fulfilment value
d) Current cost

6. Which of the following is NOT a purpose of the International Accounting Standards Board’s Conceptual
Framework?
a) To assist the Board in the preparation and review of IFRS Standards
b) To assist auditors in forming an opinion on whether financial statements comply with IFRS Standards
c) To assist in determining the treatment of items not covered by an existing IFRS Standards
d) To be authoritative where a specific IFRS Standard conflicts with the Conceptual Framework

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7. Which of the following items should be recognised as an asset in the statement of financial position of an entity?
a) A skilled and efficient workforce which has been very expensive to train. Some of these staff is still employed
by the entity
b) A highly lucrative contract signed during the year which is due to commence shortly after the year-end
c) A government grant relating to the purchase of an item of plant several years ago which has a remaining life
of four years
d) A receivable from a customer, an agency has been hired for collection, however, the reporting entity will bear
the loss in case of default by the customer

8. Which of the following criticisms does NOT apply to historical cost financial statements during a period of rising
prices?
a) They contain mixed values, some items are at current values, some at out-of-date values
b) They are difficult to verify as transactions could have happened many years ago
c) They understate assets and overstate profit
d) They overstate gearing in the statement of financial position

9. Financial capital maintenance (real terms) is also referred to as:

a) Historical cost accounting
b) Current cost accounting
c) Constant purchasing power accounting
d) Fair value accounting

10. Physical capital maintenance is also referred to as:

a) Historical cost accounting
b) Current cost accounting
c) Constant purchasing power accounting
d) Fair value accounting

11. In which of the following, no adjustment for inflation is considered?

a) Financial capital maintenance (money terms)
b) Financial capital maintenance (real terms)
c) Physical capital maintenance
d) Fair value accounting

12. In which of the following, inflation adjustment is made on general rate of inflation?
a) Financial capital maintenance (money terms)
b) Financial capital maintenance (real terms)
c) Physical capital maintenance
d) Fair value accounting

13. In which of the following, inflation adjustment is made on specific rate of inflation?
a) Financial capital maintenance (money terms)
b) Financial capital maintenance (real terms)
c) Physical capital maintenance
d) Fair value accounting

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14. Financial capital maintenance is likely to be most relevant to:

a) Investors
b) Management and employees
c) Neither (a) nor (b)
d) Capital maintenance is always irrelevant to decision making

15. Physical capital maintenance is likely to be most relevant to:

a) Investors
b) Management and employees
c) Neither (a) nor (b)
d) Capital maintenance is always irrelevant to decision making

16. An entity made a profit of Rs. 350,000 for the year 2019 based on historical cost accounting principles. It had
opening capital of Rs. 1,000,000.
Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should be recorded for 2019 under money financial capital maintenance concept?
a) Rs. 450,000
b) Rs. 350,000
c) Rs. 400,000
d) Rs. 300,000

17. An entity made a profit of Rs. 350,000 for the year 2019 based on historical cost accounting principles. It had
opening capital of Rs. 1,000,000.
Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should be recorded for 2019 under real financial capital maintenance concept?
a) Rs. 450,000
b) Rs. 350,000
c) Rs. 400,000
d) Rs. 300,000

18. An entity made a profit of Rs. 350,000 for the year 2019 based on historical cost accounting principles. It had
opening capital of Rs. 1,000,000.
Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should be recorded for 2019 under physical capital maintenance concept?
a) Rs. 100,000
b) Rs. 125,000
c) Rs. 150,000
d) Rs. 175,000

19. An entity acquired an item of plant on 1 October 2012 at a cost of Rs. 500,000. It is being depreciated over five
years, using straight-line depreciation and an estimated residual value of 10% of its historical cost or current
cost as appropriate. As at 30 September 2014, the manufacturer of the plant still makes the same item of plant
and its current price is Rs. 600,000.
What is the correct carrying amount to be shown in the statement of financial position as at 30 September 2014
under historical cost accounting?

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a) Rs. 320,000
b) Rs. 420,000
c) Rs. 520,000
d) Rs. 620,000

20. An entity acquired an item of plant on 1 October 2012 at a cost of Rs. 500,000. It is being depreciated over five
years, using straight-line depreciation and an estimated residual value of 10% of its historical cost or current
cost as appropriate. As at 30 September 2014, the manufacturer of the plant still makes the same item of plant
and its current price is Rs. 600,000.
What is the correct carrying amount to be shown in the statement of financial position as at 30 September 2014
under current cost accounting?
a) Rs. 425,000
b) Rs. 295,000
c) Rs. 384,000
d) Rs. 485,000

21. An entity made a profit of Rs. 480,000 for the year 2018 based on historical cost accounting principles. It had
opening capital of Rs. 1,100,000. During 2018, specific price indices increased by 15% while general price indices
increased by 12%. How much profit should be recorded for 2018 under real financial capital maintenance
concept?
a) Rs. 480,000
b) Rs. 315,000
c) Rs. 348,000
d) Rs. 645,000

22. Which of the following statements is correct about financial statements based on historical cost in times of
rising prices?
a) Profits will be overstated and assets will be understated
b) Assets will be overstated
c) Profits as well as assets will be understated
d) Depreciation will be overstated

23. The IASB's Framework identifies qualitative characteristics.

i. Relevance
ii. Comparability
iii. Verifiability
iv. Understandability
v. Faithful representation
Which of the above are not listed as enhancing characteristics?
a) (i), (iv) and (v)
b) (ii), (iii) and (iv)
c) (ii) and (iii)
d) (i) and (v)

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24. The IASB’s Conceptual Framework for Financial Reporting identifies qualitative characteristics of financial
statements.
Which TWO of the following characteristics are NOT fundamental qualitative characteristics according to the
IASB’s The Conceptual Framework for Financial Reporting?
a) Relevance
b) Reliability
c) Faithful representation
d) Comparability

25. Which of the following is NOT a measurement base for assets as referred in the Conceptual Framework?
a) Value in use
b) Fulfilment value
c) Current cost
d) Fair value

26. An entity made a profit of Rs. 550,000 for the year 2020 based on historical cost accounting principles. It had
opening capital of Rs. 1,500,000. During 2020, specific prices indices increased by 15% while general price
indices increased by 10%. How much profit should be recorded for 2020 under physical capital maintenance
concept?
a) Rs. 325,000
b) Rs. 400,000
c) Rs. 467,500
d) Rs. 495,000

27. Which of the following concepts measures profit in terms of an increase in the productive capacity of an entity?
a) Physical capital maintenance
b) Historical cost accounting
c) Financial capital maintenance (money terms)
d) Financial capital maintenance (real terms)

28. Which of the following statements is/are correct?

i. The Conceptual Framework is not an IFRS and nothing in the Conceptual Framework overrides any specific
IFRS.
ii. One of the purpose of Conceptual Framework is to assist IASB to develop IFRSs that are based on consistent
concepts.
a) Only (I) is correct
b) Only (II) is correct
c) Both are correct
d) None is correct

29. Which of the following best describes the role of the IFRS Advisory Council?
a) To prepare interpretations of IFRS Standards
b) To select and appoint members of IASB
c) To promote the use of IFRS Standards globally
d) To offer guidance to IASB on agenda-setting decisions and prioritization of its work

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30. Which of the bodies listed below is responsible for the approval of Draft Interpretations?
a) IFRS Interpretations Committee
b) IFRS Foundation
c) IFRS Advisory Council
d) International Accounting Standards Board

31. Which of the bodies listed below acts as the overall supervisory body?
a) IFRS Interpretations Committee
b) IFRS Foundation
c) IFRS Advisory Council
d) International Accounting Standards Board

32. A multi-national manufacturing company needs to report on sustainability-related metrics, including

environmental and social impacts. The management wants assurance that their reporting aligns with
internationally recognised standards and meets investor expectations for transparency and comparability.
Which body is responsible for setting globally consistent sustainability-related disclosure standards?
a) IFRS Interpretations Committee
b) International Accounting Standards Board (IASB)
c) IFRS Advisory Council
d) International Sustainability Standards Board (ISSB)

33. During a review of financial statements, an entity encounters conflicting interpretations of an IFRS standard,
affecting their reporting accuracy. They seek guidance to address this issue. Which body provides timely
guidance on accounting matters where varying interpretations of IFRS Standards have emerged?
a) IFRS Interpretations Committee
b) International Accounting Standards Board (IASB)
c) IFRS Advisory Council
d) International Sustainability Standards Board (ISSB)

34. Which TWO of the following characteristics are considered fundamental qualitative characteristics according to
the IASB’s conceptual framework for financial reporting?
a) Timeliness
b) Faithful representation
c) Relevance
d) Comparability

35. Which of the following is NOT included in the Conceptual framework for financial reporting?
a) Objective of general purpose financial reporting
b) Structure and content of financial statements
c) Elements of financial statements
d) Qualitative characteristics of useful financial information

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36. Which of the following statements is/are correct?

i. Relevance and faithful representation are the two fundamental qualities that make accounting information
useful for decision making.
ii. Comparability is an enhancing quality that makes accounting information useful for decision-making.
a) Only (I) is correct
b) Only (II) is correct
c) Both are correct
d) None is correct

37. Alpha Enterprises (AE) earned a profit of Rs. 700,000 for the year 2023 based on historical cost accounting
principles. AE had opening capital of Rs. 2 million. During 2023, specific price indices and general price indices
increased by 12% and 21% respectively.
How much profit should be recorded for 2023 under the physical capital maintenance concept?
a) Rs. 280,000
b) Rs. 460,000
c) Rs. 700,000
d) Rs. 940,000

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ANSWERS
01. (d) Historical cost and current cost both are entry values (unlike fair value and value in use),
however, historical costs reflects conditions on acquisition date and current cost reflects
conditions at measurement date.
02. (a) Historical cost accounting
03. (a) Physical capital maintenance looks at profit in terms of the physical productive capacity of
the business, taking into account specific price changes relevant to the entity.
04. (a) In times of rising prices, asset values will be understated, as historical cost will not be a true
representation of the asset values. Additionally, the real purchase cost of replacement items
will not be incorporated, meaning that profits are overstated.
05. (c) Value in use and fulfilment value do not include transaction costs incurred on acquiring an
asset or taking on a liability. However, value in use and fulfilment value include the present
value of any transaction costs an entity expects to incur on the ultimate disposal /fulfilment.
06. (d) Where there is conflict between the conceptual framework and an IFRS Standard, the IFRS
Standard will prevail. An example of this is IAS 20 Government grants, where deferred grant
income is held as a liability, despite not satisfying the definition of a liability.
07. (d) As the receivable is ‘sold’ with recourse it must remain as an asset on the statement of
financial position and is not derecognised.
08. (b) Historical cost is the easiest to verify as the cost can be proved back to the original
transaction. Fair value is often more difficult to verify as it may involve elements of
estimation.
09. (c) Constant purchasing power accounting
10. (b) Current cost accounting
11. (a) Financial capital maintenance (money terms)
12. (b) Financial capital maintenance (real terms)
13. (c) Physical capital maintenance
14. (a) Investors
15. (b) Management and employees
16. (b) Rs. 350,000. Money financial capital maintenance looks at the actual physical cash. No
inflation adjustment is required.
17. (d) Rs. 350,000 – (1,000,000 x 5%) = Rs. 300,000
18. (c) Rs. 350,000 – (1,000,000 x 20%) = Rs. 150,000
19. (a) Historical cost annual depreciation = Rs. 90,000 ((500,000 × 90%)/5 years).
After two years carrying amount would be Rs. 320,000 = (500,000 - (2×90,000)).
20. (c) Current cost annual depreciation = Rs. 108,000 ((600,000 × 90%)/5 years).
After two years carrying amount would be Rs. 384,000 = (600,000 - (2×108,000)).
21. (c) Rs. 348,000
22. (a) Profits will be overstated and assets will be understated.
23. (d) Relevance and faithful representation are fundamental characteristics. Without these
characteristics, information cannot be useful.

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24. (b) & (d) It is important to learn that the two fundamental characteristics are relevance and faithful
representation.
25. (b) Fulfilment value is measurement base for liabilities
26. (a) Rs. 550,000 – (Rs. 1,500,000 x 15%) = Rs. 325,000
27. (a) Physical capital maintenance
28. (c) Both statements are correct.
29. (d) To offer guidance to IASB on agenda-setting decisions and prioritization of its work
30. (d) International Accounting Standards Board
31. (b) IFRS Foundation
32. (d) International Sustainability Standards Board (ISSB)
33. (a) IFRS Interpretations Committee
34. (b) and (c) Faithful representation
Relevance
35. (b) Structure and content of financial statements
36. (c) Both are correct
37. (b) Profit based on HCA Rs. 700,000 – specific inflation adjustment Rs. 2m x 12%
= Rs. 460,000

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STICKY NOTES

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Characteristics of measurement basis

Measurement
Characteristics
bases

• Derived from past transaction /event.

Historical • Reflects conditions existing at the time of acquisition.

cost • Entry value.
• Transaction costs at time of disposal are not relevant.

• Derived using information updated to reflect conditions at the

measurement date.
• Reflects market-participant assumptions.
Fair value
• Exit value.
• Transaction costs are not relevant on acquisition as well as on
disposal.

• Derived using information updated to reflect conditions at the

measurement date.
Value in use
• Reflects entity specific assumptions.
or
• Exit value.
Fulfilment
value • Transaction costs on acquisition are not relevant, however, present
value of transaction costs on ultimate disposal/transfer are included
in calculation.

• Derived using information updated to reflect conditions at the

measurement date.
• Reflects prices in market in which entity would acquire the asset or
Current cost incur a liability.
• Entry value.
• Transaction costs at time of disposal are not relevant.

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Structure of IFRS Foundation

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