Q.

1
Ans:
A) Show all the journal entries relating to the financial assets (ignore
tax);

BABAR LIMITED

JOURNAL ENTRIES

FOR THE YEAR ENDED 31-DEC-2011

DATE PARTICULARS REF DEBIT CREDIT

1-JUNE-2011 Financial Asset 100,000

Cash/Bank 100,000

31-DEC-2011 Financial Asset 20,000

Fair Value 20,000

31-dec-2011 Bank 130,000

Gain on Disposal 10,000

Financial Asset 120,000

TOTAL 250,000 250,000

BABAR LIMITED

INCOME STAEMENT

FOR YEAR ENDING 31 DEC 2011

Revenue ----------------------------------------------------------------------------- 1,000,000
Cost of good sold
Cost of sales------------------------------------------------------------------------- (450,000)
----------------
Gross Profit---------------------------- 550,000
OTHER COMPREHENSIVE INCOME
Fair Value gain---------------------------------------------------------------------- 20,000
4
Gain on disposal--------------------------------------------------------------------10,000
--------------
580,000
OPERATING EXPENSIVE
Distribution expense------------------------------------- 120,000
Administration expense -------------------------------- 80,000
Interest expense-------------------------------------------100,000
Tax expense-------------------------------------------------70,000 (370,000)
Profit / (Loss) 40,000

Q. 2 (a)
ANS:
Awais Limited consider the following point while complying with IAS 1
IAS 1 requires disclosure of the assumptions concerning the future, and other major sources of
estimation uncertainty at the end of the reporting period, that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the next financial year. For
those assets and liabilities, the proposed disclosures include details of:

(a) their nature; and

(b) their carrying amount as at the end of the reporting period.

Determining the carrying amounts of some assets and liabilities requires estimation of the effects of
uncertain future events on those assets and liabilities at the end of the reporting period. For example, in
the absence of recently observed market prices used to measure the following assets and liabilities,
future oriented estimates are necessary to measure the recoverable amount of classes of property,
plant and equipment, the effect of technological obsolescence of inventories, provisions subject to the
future outcome of litigation in progress, and long-term employee benefit liabilities such as pension
obligations. These estimates involve assumptions about items such as the risk adjustment to cash flows
or discount rates used, future changes in salaries and future changes in prices affecting other costs. No
matter how diligently an entity estimates the carrying amounts of assets and liabilities subject to
significant estimation uncertainty at the end of the reporting period, the reporting of point estimates in
the statement of financial position cannot provide information about the estimation uncertainties
involved in measuring those assets and liabilities and the implications of those uncertainties for the
period’s profit or loss.

The Framework states that ‘The economic decisions that are made by users of financial statements
require an evaluation of the ability of an entity to generate cash and cash equivalents and of the timing
and certainty of their generation.’ The Board decided that disclosure of information about assumptions
and other major sources of estimation uncertainty at the end of the reporting period enhances the
relevance, reliability and understandability of the information reported in financial statements. These
assumptions and other sources of estimation uncertainty relate to estimates that require management’s
most difficult, subjective or complex judgements.

The exposure draft of 2002 proposed the disclosure of some ‘sources of measurement uncertainty’. In
the light of comments received that the purpose of this disclosure was unclear, the Board decided:

(a) to amend the subject of that disclosure to ‘sources of estimation uncertainty at the end of the
reporting period’; and

(b) to clarify in the revised Standard that the disclosure does not apply to assets and liabilities
measured at fair value based on recently observed market prices.

IAS 1 does not prescribe the particular form or detail of the disclosures. Circumstances differ from entity
to entity, and the nature of estimation uncertainty at the end of the reporting period has many facets.
IAS 1 limits the scope of the disclosures to items that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next financial year. The longer the
future period to which the disclosures relate, the greater the range of items that would qualify for
disclosure, and the less specific are the disclosures that could be made about particular assets or
liabilities. A period longer than the next financial year might obscure the most relevant information with
other disclosures.

(b)
ANS:
Employee monthly salary = 50,000 x 12 = 600,000 Tax on salary per annum =1,000

Mr.X

Journal Entries

For the year ended xx-xx-xxx

DATE PARTICULARS REF DEBIT CREDIT

XX-XX-XX Salary expense 599,000
Income Tax 1,000
Bank 600,000

Mr.X

Ledger

For the year ended xx-xx-xxx

s/ Particular D C Balance
no s R R
Opening balance ---------
Salary expense 599,000 600,000 600,000
Income tax 1,000
Q.3 (a)
ANS: A statement of cash flows provides information about where a business obtained its cash
during the financial period, and how it made use of its cash. A statement of cash flows groups inflows
and outflows of cash fewer than three broad headings:

Cash generated from or (used in) operating activities

Operating activities are the normal trading activities of the entity. Cash flows from operating activities
are the cash inflows or cash outflows arising in normal trading activities. Operating activities normally
provide an operating profit before tax. However, profit is not the same as cash flow, and the cash flows
from operating activities are different from profit. A statement of cash flows
normally makes a distinction between: Cash generated from operations, which is the cash from
sales less the cash payments for operating costs, and

Net cash from operating activities, which is the cash generated from operations, less interest payments
and tax paid on profits. Cash flows from operating activities are primarily derived from the principal
revenue-producing activities of the entity. Therefore, they generally result from the transactions and
other events that enter into the determination of profit or loss.

Cash obtained from or (used in) investing activities

The second section of a statement of cash flows shows cash flows from investing activities. Investing
activities are defined by IAS 7 as ‘the acquisition and disposal of long-term assets and other investments
not included in cash equivalents’. It generally refers to money made or spent on long-term assets the
company has purchased or sold. Investing transactions generate cash outflows, such as capital
expenditures for plant, property and equipment, business acquisitions and the purchase of investment
securities. Inflows come from the sale of assets, businesses and investment securities. For investors, the
most important item in this category is capital expenditures, made to ensure the proper maintenance
of, and additions to, a company's physical assets to support its efficient operation and competitiveness.

Cash flows from investing activities might also include cash received from investments, such as interest
or dividends received.
The separate disclosure of cash flows arising from investing activities is important because the cash
flows represent the extent to which expenditures have been made for resources intended to generate
future income and cash flows.

Cash received from or paid in financing activities.

The third section of the statement of cash flows shows the cash flows from financing activities. These
activities are defined by IAS 7 as ‘activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity.’ It measures the flow of cash between a firm and its
owners and creditors. Companies often borrow money to fund their operations, acquire another
company or make other major purchases. Here again for investors, the most important item is cash
dividends paid

A statement of cash flows reports the change in the amount of cash and cash equivalents held by the
entity during the financial period.

DIRECT METHOD EXAMPLE

INDIRECT METHOD EXAMPLE
(b)
ANS: I)
According to IAS -18 Akbar Corporation received three installment out of 5 installment in a year 30 -
June- 2018. So revenue arising from the sale of goods is recognized because of fulfilling following criteria
of IAS-18

Revenue arising from the sale of goods should be recognized when all of the following criteria have been
satisfied: [IAS 18]

• the seller has transferred to the buyer the significant risks and rewards of ownership

• the seller retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold

• the amount of revenue can be measured reliably

• it is probable that the economic benefits associated with the transaction will flow to the seller,
and

• the costs incurred or to be incurred in respect of the transaction can be measured reliably

ii. A service contract for maintenance of a machine for a period of one year was signed and Akbar
Corporation received a non-refundable annual fee amounting to Rs. 65,750 as advance on 15 April 2019.

AKBAR COOPERATION HAVE TWO OPTION

Option-1: As we know the amount of annual maintenance is non-refundable

.Akbar Cooperation can show as unearned revenue in the balance sheet and recognized revenue it on
the monthly basis as monthly maintenance provided to the regular customer.

DATE PARTICULARS REF DEBIT CREDIT

15-Apr-19 Cash A/C 65,750
Unearned Revenue 65,750

30-June-19 Unearned Revenue 13,698

To Revenue 65,750x75/360 13,698
 We assume days in a year is
360
days

Option-2: Another option is very simple because Akbar

Cooperation received a non-refundable amount against annual
maintenance So it can be recognized full revenue in year which it is
received Rs. 65,750/-
DATE PARTICULARS R DEBIT CREDI
EF T
15-Apr-19 Advance Payment 65,75
0
Revenue 65,750

Q. 4 (a)
ANS.
PARTICULAR 201 201
S 8 9
Profit before tax 100,000 100,000
Rent Received 10,000 ----
TOTAL 110,000 100,000
DATE PARTCULARS DEBIT CREDIT
2018 Cash 10,000
Unearned Rent 10,000
2019 Unearned Rent 10,000
Rent Revenue 10,000

B)

 Taxable profit of 2018 is 110,000 because the rent is charge on

receipt basis.
 In 2019 only 100,000 is taxable income

According to 2018-19 income tax oridance 2001 , no tax is applicable

on the profit Ibrahim Ltd annual profits .

(b)
a. Show journal entries of Abdul Nafay Ltd in 2017 and 2018
relevant to the income and receipt above.

Calculate the current normal tax expense of Abdul Nafay Ltd in

each year and briefly explain your answer.

Ans:

PARTICULARS 2017 2018

Credit sales 100,000 -------
Payment received ------- 100,000
DATE PARTICULARS DEBIT CREDIT
2017 A/C received 100,000
Sales 100,00
 2018 Bank/Cash 100,000
A/c Received 100,000
B) There is no income tax on the amount of 100,000 on
receipt or earned basis which is happen first.

Q. 5
ANS.
Difference between GAAP and IFRS
There are different types of accounting standards that are followed around the globe. The most
commonly used accounting standards are International Financial Reporting Standards or IFRS and
Generally Accepted Accounting Principles or GAAP.

IFRS refers to the international financial reporting standards that are followed globally and includes
instructions on how certain transactions should be reported in financial statements. IFRS is issued by the
International Accounting Standards Board (IASB).

GAAP refers to a common set of accounting standards and procedures that a company must follow at
the time of preparation of financial statements.

Let us look at some of the differences between IFRS and GAAP

IFRS GAAP
Stands for
International Financial Reporting Standard Generally Accepted Accounting Principles
Developed by
International Accounting Standard Board Financial Accounting Standard Board (FASB)
(IASB)
Adopted by
Globally adopted in around 144 countries Only adopted in the US
Based on
Principles Rules
Inventory Methods allowed
IFRS allows only FIFO (First In First Out) GAAP uses both FIFO (First In First Out) and
inventory method for valuation of inventories LIFO (Last In First Out) method of inventory
valuation
Inventory Reversal
IFRS allows inventory write down reversal GAAP does not allow inventory write down
reversal
Income Statements
In IFRS, extraordinary items are not In GAAP, the extraordinary items are segregated
segregated and are included in the income and are shown below net income in the income
statement statement
Valuation of Fixed Assets
IFRS uses a revaluation model for valuation GAAP uses a cost model for fixed asset valuation
of fixed assets
Cost of Development
Development costs under IFRS can be Development costs cannot be capitalised in
capitalised, provided certain conditions are GAAP, it is always treated as an expense
met

Compliance with IFRS.

Two SAP parallel accounting approaches

The first approach to solving this problem using SAP ERP products is simply to create additional general
ledger accounts that only appear on one version of the financials. A company running U.S. GAAP as its
primary standard might create two additional accounts to handle IFRS adjustments for the revaluation
of assets. If an asset has appreciated in value, a debit to an IFRS-specific asset account and a credit to a
corresponding IFRS-specific income account would occur. The company can produce reports that
conform to both standards by designing two different versions of the financial statements, with one
including the IFRS accounts and another excluding them.

Another SAP option is a multi-ledger approach. In this case, a company runs two or more parallel
versions of its general ledger, and users can designate each transaction as belonging to a particular
ledger. If neither ledger is designated, transactions are recorded in both places. Recording transactions
in both places will be correct most of the time, but when differences between GAAP and IFRS crop up, a
transaction might only post to one ledger or appear differently across the two sets of accounts.

For the asset revaluation example, the GAAP ledger would not require any entry, as GAAP does not
recognize increases in the market value of fixed assets. However, the IFRS ledger would include a debit
to the asset account and a credit to income.

A company using the multi-ledger approach may choose to use the same financial statement format for
GAAP and IFRS statements and would merely need to designate which ledger to use for the report.

About the IASC Board

The standard-setting board of the IASC was known as the IASC Board. The IASC Board had 13 country
members and up to 3 additional organisational members who operated on a part-time, volunteer basis.
Each member was generally represented by two "representatives" and one "technical advisor". The
individuals came from a wide range of backgrounds – accounting practice, business (particularly
multinational businesses), financial analysis, accounting education, and national accounting standard-
setting. The Board also had a number of observer members (including representatives of IOSCO, FASB,
and the European Commission) who participated in the debate but did not vote.

The IASC Board promulgated a substantial body of Standards, Interpretations, a Conceptual Framework,
and other guidance that was adopted directly by many companies and that was looked to by many
national accounting standard-setters in developing national accounting standards.

Moving to the new structure

After nearly 25 years of achievement, IASC concluded in 1997 that to continue to perform its role
effectively, it must find a way to bring about convergence between national accounting standards and
practices and high-quality global accounting standards. To do that, IASC saw a need to change its
structure. In late 1997 IASC formed a Strategy Working Party to re-examine its structure and strategy.
(Jacques Manardo, Deloitte Touche Tohmatsu Global Managing Partner-Strategic Clients, was a member
of that group.)

The Strategy Working Party published its Report, in the form of a Discussion Paper, in December 1998.
After soliciting comments, the Working Party published its Final Recommendations in November 1999.

The IASC Board approved the proposals unanimously in December 1999, and the IASC member bodies
did the same in May 2000. A new IASB Constitution took effect from 1 July 2000. The standards-setting
body was renamed the International Accounting Standards Board (IASB). It would operate under a new
International Accounting Standards Committee Foundation (IASCF, now the IFRS Foundation).

About the International Accounting Standards Board (IASB)

The IASB is an independent group of experts with an appropriate mix of recent practical experience in
setting accounting standards, in preparing, auditing, or using financial reports, and in accounting
education. Broad geographical diversity is also required. The IFRS Foundation Constitution outlines the
full criteria for the composition of the IASB, and the geographical allocation can be seen on the
individual profiles.

IASB members are responsible for the development and publication of IFRS Accounting Standards,
including the IFRS for SMEs Accounting Standard. The IASB is also responsible for approving
Interpretations of IFRS Accounting Standards as developed by the IFRS Interpretations Committee
(formerly IFRIC).
Members are appointed by the Trustees of the IFRS Foundation through an open and rigorous process
that includes advertising vacancies and consulting relevant organizations.