Q.1

The question was framed to test the presentation of cash flow statement under indirect method. The question contained a concise balance sheet and very simple information to derive cash flows for the year. Working of additions and deletion in fixed assets was the only item that could pose some difficulty for Intermediate level students. Most of the students performed well but a large number was found deficient in the following areas:

• They were unable to workout the non-cash items (bad debt provision and amortization).
• Some adjusted the net profit by revaluation loss ignoring the fact that it was accounted for in surplus on revaluation of fixed assets.
• Many candidates omitted to incorporate increase in short term investments, in changes in working capital. Some classified it as an investing activity.
• Many of the students did not know that the exchange of machine as referred to in item (vii) should not have been treated as an ordinary purchase. It is required to disclose such transactions by way of a separate note.

Q.2

The conversion of a partnership into limited liability company is examined frequently. However, only about half of the students performed well whereas the remaining were found deficient. They made the following types of mistakes:

• Bad debt provision and revaluation of existing assets were adjusted through the realization account
• Majority had no idea that shares and debentures issued by the limited company to the partners of dissolving firm is the consideration for the firm and fair value of net assets is the consideration for limited company. Students mixed up the two, showing a confused understanding of the topic.
• A considerable number of candidates did not attempt part (b) which required preparation of statement of shareholding of newly formed limited company. Many of them gave shares in the company to all the partners disregarding the fact that one of the partners was given debentures instead of shares.
• While preparing initial balance sheet of limited company, goodwill was incorrectly calculated because of the failure of students to calculate purchase consideration as already described above.
• Cash deposited by the partners’ friend was not accounted for.

Q.3

It was an easy question. Most students were able to prepare the required balance sheet and profit and loss account from the given information and secured good marks. Some of the common mistakes were as under:

• It was assumed that the equity consisted of share capital only. Revenue reserve was mostly ignored.
• Long term liabilities were not worked out.

Q.4

Questions on lease accounting have been asked quite frequently yet the performance of the students continues to remain poor. They should concentrate on this important topic which has practical application in almost all organizations.

The two concepts focused in the question were (a) accounting for direct cost related to leases and (b) lease transactions carried out by dealer-lessor. A large number of students did not have any idea as to how the question should be handled. Many of those who did seem to have studied the topic could not consider the following:

• where the lessor is not a dealer, all directly attributable costs should be included while calculating net investment in lease.
• where a lessor who is also the dealer offers artificially low rates of interest, the net investment in lease shall be arrived at by applying the prevailing market rate. The price at which sale is to be recorded should be calculated accordingly.
• Many students did not pass accounting entries for recognizing sales and gross profits.

Q.5

The question was mainly based on contingencies and events occurring after balance sheet date. Students seemed to have reasonable knowledge of the subject but were deficient in applying the same, to issues raised in the question. Some common mistakes were as follows;

• A sizable number of candidates were unable to offer any sort of explanation for their suggestions regarding accounting treatments.
• Very few could identify that the situation given was a case of restructuring of the company’s business which requires a provision of directly related costs at the start of restructuring process.
• Many examinees suggested that compensation to employees on their termination and legal advisors fee for additional assignment should be accounted for on their occurrence. They ignored the fact that these expenses fulfilled the criteria of restructuring cost. Hence, they were supposed to be provided at the start of restructuring process.
• Many students suggested the recognition of contingent gains, contrary to the guidelines given in IAS.
• A number of students advised immediate recognition of estimated operational loss which was expected to be incurred by the end of restructuring process.

Q.6

The question focusing on computation of depreciation under different methods and presentation of details of fixed assets in financial statements, proved to be most challenging for the students. Except for aircrafts, depreciation on all other items was of elementary level. Following deficiencies were noted by the examiners:

• Presentation of the required note was not in compliance with the requirements of the Companies Ordinance, 1984.
• In many cases salvage value was not taken into account for computing depreciation.
• Concept of using separate useful life of the components of a single asset, as tested in case of aircrafts was not found clear among the majority of the candidates.
• Most of the candidates had very confused understanding of the principles of capitalization of replaced parts, as tested in case of engineering machineries.
• In computing depreciation on furniture and fixtures, acquisition dates were carelessly taken. As a result, incorrect depreciation was worked out.
• Very few students knew that assets taken on finance lease have to be disclosed separately.