CMA JANUARY 2023 EXAMINATION

ADVANCED LEVEL - I
Subject: FR342. ADVANCED FINANCIAL REPORTING

Model Solution
Solution of the Question No. 1
(a)
Ethical responsibilities governing the auditor’s professional responsibilities are:
 Independence
 Integrity & Objectivity
 Professional competence & Due care
 Confidentiality
 Technical Standard
Independence
A member in public practice shall be independent in the performance of professional services
as required by standards promulgated by bodies designated by council.
Independence in Facts:
Independence in facts exist when the auditor is actually able to maintain an unbiased
attitude throught out the audit.

Independence in appearance
Independence is the appearance is the result of others’ interpretations of this
independence.
Integrity & objectivity
In the performance of any professional service, a member shall maintain objectivity & integrity,
shall be free of conflicts of interests, & shall not knowingly misrepresent facts or subordinate
his or her judgment to others.
Professional competence & Due care
Undertake only those professional services that the member of the member’s firm can
reasonably expect to be completed with professional competence & exercise due care in the
performance of the professional services.
Due care includes consideration of the completeness of the working papers, the sufficiency of audit
evidence & appropriateness of the audit report.
Confidentiality:
A member in public practice shall not disclose any confidential client information without the
specific consent of the client.
Technical Standard:
A member who performs auditing, review, compilation, management consulting, tax or other
professional services shall comply with standards promulgated by bodies designated by
council.
(b)
External or Statutory Auditors.-
1. The issuer company shall not engage its external or statutory auditors to perform the
following services of the company, namely:-
(i) appraisal or valuation services or fairness opinions;
(ii) financial information systems design and implementation;
(iii) book-keeping or other services related to the accounting records or financial
statements;
(iv) broker-dealer services;
(v) actuarial services;
(vi) internal audit services or special audit services;
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 (vii) any service that the Audit Committee determines;
(viii) audit or certification services on compliance of corporate governance as required
under condition No. 9(1); and
(ix) any other service that creates conflict of interest.
2. No partner or employees of the external audit firms shall possess any share of the company
they audit at least during the tenure of their audit assignment of that company; his or her family
members also shall not hold any shares in the said company:
Provided that spouse, son, daughter, father, mother, brother, sister, son-in-law and
daughter-in-law shall be considered as family members.
3. Representative of external or statutory auditors shall remain present in the Shareholders’
Meeting (Annual General Meeting or Extraordinary General Meeting) to answer the queries of
the shareholders.
(c)
The 'integrated reporting' concept
Integrated reporting (stylised by the IIRC as '<IR>') is seen by the IIRC as the basis for a
fundamental change in the way in which organisations are managed and report to stakeholders. A
stated aim of <IR> is to support integrated thinking and decision-making.
Integrated thinking is described in the <IR> Framework as "the active consideration by an
organization of the relationships between its various operating and functional units and the capitals
that the organization uses or affects".
Objectives and fundamental concepts of integrated reporting
The objectives for integrated reporting include:
 To improve the quality of information available to providers of financial capital to enable a
more efficient and productive allocation of capital
 Provide a more cohesive and efficient approach to corporate reporting that draws on
different reporting strands and communicates the full range of factors that materially affect
the ability of an organisation to create value over time
 Enhance accountability and stewardship for the broad base of capitals (financial,
manufactured, intellectual, human, social and relationship, and natural) and promote
understanding of their interdependencies
 Support integrated thinking, decision-making and actions that focus on the creation of value
over the short, medium and long term.
There are three fundamental concepts underpinning <IR>:
1. Value creation for the organisation and for others. An organisation’s activities, its
interactions and relationships, its outputs and the outcomes for the various capitals it uses
and affects influence its ability to continue to draw on these capitals in a continuous cycle.
2. The capitals. The capitals are the resources and the relationships used and affected by the
organisation, which are identified in the <IR> Framework as financial, manufactured,
intellectual, human, social and relationship, and natural capital. However, these categories
of capital are not required to be adopted in preparing an entity’s integrated report , and an
integrated report may not cover all capitals – the focus is on capitals that are relevant to the
entity
3. The value creation process. At the core of the value creation process is an entity’s
business model, which draws on various capitals and inputs, and by using the entity’s
business activities, creates outputs (products, services, by-products, waste) and outcomes
(internal and external consequences for the capitals).

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Solution of the Question No. 3
(a)
(i)
Cost of goods sold = $760,000.
Cost of goods sold
Inventory turnover = 4 =
 $200,000  $180,000 
 
 2 
4 X $190,000 = Cost of goods sold
Cost of goods sold = $760,000.
(ii)
Net sales = $903,000
Net sales(credit)
Accounts receivable turnover = 8.6 =
 $85,000  $125,000 
 
 2 
8.6 X $105,000 = Net sales = $903,000
(iii)
Net income = $103,100
Return on common stockholders' equity = 20% =
Net income
 $400,000  $130,000  $400,000  $101,000 
 
 2 
.20 X $515,500 = Net income = $103,100
(iv)
Total assets (Dec. 31, 2021) = $603,750

$103,100[see(c)above]
Return on assets = 16% =
Averageassets
$103,100
Average assets = = $644,375
.16
Total assets(Dec.31,2013)  $685,000
= $644,375
2
Total assets (Dec. 31, 2021) = ($644,375 X 2) – $685,000 = $603,750
(b)
PV of defined FV of plan
benefit obligation assets

£ £
B/f at start of year (advised by actuary) (450,000) 300,000
Retirement benefits paid out 120,000 (120,000)
Contributions paid into plan 175,000
Expected return on plan assets (£300,000 x 27,000
9%)
Unwinding of interest (£450,000 x 7%) (31,500)
Current service cost (110,000)
(471,500) 382,000
Actuarial gains / (losses) (Balancing figure) 29,500 (4,000)
C/f at end of year (advised by actuary) (442,000) 378,000

 There is an actuarial gain of £29,500 in respect of the obligation, as the actuarial valuation
is less than the calculated obligation.
 There is an actuarial loss of £4,000 in respect of the plan assets as the actuarial valuation is
less than the calculated value of the assets.
 Overall the net actuarial gain is therefore £25,500.

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(c)
TK
1. No. of shares(15,000,000 / 10) 15,00,000
Basic EPS(25,00,000/15,00,000) 1.67
2. 15% Loan
Additional earnings(20,00,000x0.15x0.65) 195,000
Additional shares(20,00,000x1/20) 1,00,000
Incremental EPS(195,000/1,00,000) 1.95
3. 12% Loan
Additional earnings (30,00,000x0.12x0.65) 2,34,000
Additional shares (30,00,000x1/15) 2,00,000
Incremental EPS(2,34,000/2,00,000) 1.17
4. 12% Loan is dilutive
5. Diluted EPS = (25,00,000+2,34,000/15,00,000+2,00,000) 1.61
Note: 12% loan is dilutive. Only this loan will be considered in the computation
of dilutive EPS.

Solution of the Question No. 4

(a)
Cost of investment in Eve Ltd 55,000
Share of post acquisition change in net assets (30%  (310,000 - 170,000))
42,000
97,000
As the excess of fair value over carrying amount at the date the investment was made was
subsequently reflected in Eve Ltd's books, no fair value adjustment needs to be made at 31
December 20X4.
(b)
(i) Forward exchange contract
20 June 2022 receipt
€632,200 / (€ 1.445 - € 0.0081) = £ 439,975

Money market hedge

20 June 20X7 receipt
€632,000 / 1+ (5.2% / 4) = € 623,889 borrowed

€ 623,889 / 1.445 = £ 431,757 received now

Note: £ 431,757 (1+(4.8%/4))

= £ 436,938 in 6 months 22nd/23rd September net payment
Netting off
Payment due = (€1,347,500)
Receipt due = €560,000
Net payment due = (€787,500)
€787,500 / (1.412 - € 0.0143)
€787,500 / €1.3977
= £ 563,425

Money market hedge

22nd/23rd September net payment
€787,500 / (1 + (3.9%/2)
= €787,500/ 1.0195
= €772,437
€772,437 / 1.412
= £ 547,052 paid now

Note: £ 547,052 (1+(6.1%/2))

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= £ 563,737 in 6 months

For the June receipt Atti Ltd. would be better off with a forward exchange contract, as it would
receive more Taka than with a money market hedge.

For the September net payment, a forward exchange contract produces a lower net payment in
Taka.

£
In summary June receipt (forward exchange contract) 439,835
September net payment (forward exchange contract) (563,425)
Net payment (123,590)

Were Atti Ltd. to ignore hedging then the situation, using the spot rates, would be:
June receipt (€632,000/1.445) 437,370
September net payment (€787,500/1.412) (557,720)
Net payment (120,350)

Based on these figures, the hedging would cost the company £ 3,240 (£ 120,350 - £ 123,590).

ii) A futures contract is similar to a forward exchange contract (FEC) as the company would be in
a no win/no loss position. However, the future is for a standardized amount, unlike an FEC, which
can be for any amount. Also the company would not be able to buy a future at the bank (as it
could with an FEC), as futures are traded on currency exchanges.
Currency options are similar to FECs, but they would give Attire Ltd. the right to buy/sell currency in
the future, whereas FECs are a contractual obligation.
There are two types of option: Call option to buy currency or Put option – to sell currency.
Because the holder of the option has the right to buy/sell, the option is more flexible. As a result of
this options are more expensive and transaction charges are high.

Solution to Question No 5

Working 1: Group Structure

Zaym limited has investment in Eshana Ltd. with 15% sharesnow they have acquired additional
55% shares in Eshana making the total share at 70%.70% ownership implies control achieved. So
Eshana has become subsidiary of the group

Working 2: Fair Value of Net Assets of Subsidiary

On reporting On acquisition Post-
date date acquisition
01-Jul-16
Share capital 3,125 3,125 0
Retained earnings 8,125 6,562.5 1,562.5
Fair value adjustment 950 1,000 -50
Provision for Unrealized Profit for
sales -156.25 0 -156.25
Fair Value of Net Assets 12,043.75 10,687.5 1,356.25
Post-Acquisition Profit (70%) 949.375

Note 1: Calculation of Provision for unrealized profit (PURP)

Goods sold 1,250
Unsold goods 625
Unrealized profit 156.25
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Working 3: Calculation of Goodwill

Cash consideration 6,470

Fairvalue of previously held investment 1,250
Total cost of investment 7,720
Non-controlling interest 3,375
11,095
Less: Fair value of net assets of subsidiary 10,687.5
Goodwill 407.5
Working 4: Non-controlling Interest

Fair value of NCI as on 01 July 2022 3,375

Plus: share of post-acquisition profit 407
3,782

Working 5: Calculation of profit and loss on available for sale investment

Cost 1,000
Fair value of investment 1,250
Gain on disposal of investment 250
Working 6: Parent's Retained Earnings

As per separate Financial statement 23,718

Add: Gain on disposal 250
Add: Post acquisition profit 949
24,917

Revaluation reserve 1,282

Less: Gain recognized in separate financial
statement -1,280
Cost of investment 1,000
New Investment 6,470
Total cost of investment 7,470
Shown as investment 8,750
1,280
Remaining balance of reserve 2

Assets Zaym Ltd Eshana Ltd Consolidated

£ £
Non-current assets
Property, plant and equipment 72,500 10,625 84075
Intangibles: Goodwill 407.5
Investments available for sale 8,750 0 0
81,250 10,625 84,482.5
Current assets
Inventories 19,375 2,500 21,718.75
Trade and other receivables 20,625 5,937 26,562
Cash and cash equivalents 3,750 938 4,688
Advance and prepayments 5,500 1,500 7,000
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 Total current assets 49,250 10,875 59,968.75
Total assets 130,500 21,500 144,451
Equity and liabilities
Equity
Ordinary share capital (£1 shares) 62,500 3,125 62,500
Revaluation surplus 1,282 0 2
Retained earnings 23,718 8,125 24,917
Non-controlling interest - - 3,782
Total Equity 87,500 11,250 91,201
Non-current liabilities 12,188 2,500 14,688
Current liabilities
Trade and other payables 25,500 7,500 33,000
Short term borrowings 5,312 250 5,562
30,812 7,750 38,562
Total Liabilities 43,000 10,250 53,250
Total equity and liabilities 130,500 21,500 144,451

= THE END =

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