Q.1

This was a fairly straight-forward question on consolidation involving a subsidiary and an associate company. However only 40% could secure pass marks. Common mistakes made were as follows:

(i)

Beta Limited was consolidated although it was only an associated company and not a subsidiary.

(ii)

Investment in Beta Limited was taken as Rs. 11.80 million being 40% of Beta Limited’s capital and unappropriated profits.  It should have been Rs.25.80 million being purchase consideration of Rs.25.00 million (one million shares @ Rs.25 each) and post-acquisition profits of Rs.0.80 million (40% of Rs.2.0 million). Some students treated the difference of Rs. 14.0 million as goodwill.

(iii)

Fair value adjustment and depreciation thereon were not properly made in plant, unappropriated profits and minority interest.

(iv)

Many students read the question in a hurry and treated the profits for year 2004-05 as pre-acquisition profits thus ending up with incorrect figures of  goodwill, accumulated profits and minority interest.

(v)

Items like share capital, share premium, accumulated profits and minority interest were not properly calculated. Many students omitted share premium and 7% loan while preparing the balance sheet.

Q.2

Cash flow statement: This was a scoring question with 81% students securing pass marks. Mistakes noted were as follows:

(i)

Adjustments to profits for the year were wrongly made i.e. items of gains and losses were added instead of being deducted and vice versa.

(ii)

Marks were assigned for proper disclosures which also includes headings like ‘cash flow from operating activities’. Many students ignored them.

(iii)

For a good presentation, it was expected that there would be one line disclosure of figures like depreciation, fixed capital expenditure, proceeds form sale of fixed assets etc. with a parenthetic disclosure of details. Students used separate lines for say depreciation on building, depreciation on equipment etc.

(iv)

IAS 7 requires separate disclosure of non-cash transactions. Very limited number of students mentioned in the notes about the settlement of Rs.12.0 million loan by the issue of ordinary shares. Some students wrongly showed this as a financing activity.

Q.3

This was the worst attempted question and following were the main shortcomings in the answers:

(i)

Students did not know the precise meaning/definition of the terms gross and net investment with the result that they could not answer part (a) properly. Many students did not include unguaranteed residual value in the gross/net investment figure.

(ii)

Many students made calculations as if the annual rentals were payable at the end of each year and thus did not use proper discounting factors. Also many students did not discount the unguaranteed residual value.

(iii)

Very few students could draw up the amortization schedule correctly. It was surprising that most of them took Gross Investment in Lease as the opening balance. It was obvious that they had no idea about various concepts involved in leasing.

(iv)

Very few had any idea as to the items that were required to be disclosed in the extracts of financial statements.

In conclusion, one can say that students had not learnt the disclosure requirements of IAS 17, had not practiced questions related  to leasing and had not studied published accounts of companies dealing in lease business.

Q.4

Generally the students knew the concepts involved however two common mistakes noted were as follows:

(i)

Carrying value of the asset was shown as Rs.16.0 million instead of Rs.18.0 million as salvage value of Rs.2.0 million was not added back. This reflected much carelessness on the part of students.

(ii)

Salvage value was not included in calculating present value.

Q.5

It was again a very poorly attempted question. It was evident that most students had ignored this topic in their studies. About 30% of the students did not attempt this question. Common mistakes were as follows:

(i)

Items were not arranged in proper sequence, even though the trial balance items were given in proper sequence.

(ii)

National Bank of Pakistan and Central Bank of Oman were to be included among treasury banks. Hardly any students classified them as such.

(iii)

Balances with other banks were to be classified as in Pakistan and outside Pakistan. Students simply repeated the appellations given in the trial balance.

(iv)

Investments were to be classified as required under IAS 39. This was not properly done.

Q.6

Appraisal of accounts for loan advance: This question was also poorly answered. Generally the students were able to calculate the ratios correctly but were seriously lacking in making the advice. Proper presentation and communication was clearly missing. The following mistakes were common:

For a short term loan, bank would be interested in liquidity position for which the relevant ratios were current and quick ratios, collection period and inventory turnover ratios. EBIT/interest ratio and debt to asset ratio would have some bearing on the decision of the bank. Other profitability ratios were less significant from bank’s point of view. Student simply repeated all ratios given in the question for industry without this perspective in mind.

Correct amounts were not taken in the calculation of ratios: e.g. current liabilities were included with debentures in debt to asset ratio. For time interest earned, profit before tax was taken instead of profit before interest and tax.

For part (ii), barring 1 or 2 candidates, the exact impact of reducing the sales to inventory and average collection period to industry levels were not calculated (the impact being Rs. 9.0 million) and generalized answers were given. 

The students mostly failed to note that an improvement in sales to inventory ratio will significantly reduce the financing requirement. As a result the bank will feel far more comfortable while granting the loan.

Q.7

Revenue recognition policies of companies: Not well answered with students averaging 5 marks out of 16. The students mostly adopted such language as if they were replying to a question rather than explaining the policy. For example some students wrote “Sales should be recorded when goods have been dispatched” instead of saying that “Sale is recorded on dispatch of goods”. Beside studying the IAS 18 appendix where a number of examples are given, students should also study published accounts of listed companies to familiarize themselves with various accounting policies.