Financial Reporting And Professional Issues-part 2

Financial Reporting and Professional Issues Time allowed–3 hours Maximum marks–100 [N.B. – The figures in the margin indicate full marks. Questions must be answered in English .Examiner will take account of the quality of language and of the way in which the answers are presented. Separate answer books should be used for each section. Different parts, if any, of the same question must be answered in one place in order of sequence.] Section I Marks–50 Marks 1. (a) In order to be reliable, an entity’s financial statements should represent faithfully the transactions and events that it has undertaken. Required: Explain what is meant by faithful representation and how it enhances reliability.

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(b) On 1 April 2007, Atia Ltd. increased the operating capacity of its plant. Due to a lack of liquid funds it was unable to buy the required plant which had a cost of Tk.35,000,000. On the recommendation of the finance director, Aita entered into an agreement to lease the plant from the manufacturer. The lease required four annual payments in advance of Tk.10,000,000 each commencing on 1 April 2007. The plant would have a useful life of four years and would be scrapped at the end of this period. The finance director, believing the lease to be an operating lease, commented that the agreement would improve the company’s return on capital employed (compared to outright purchase of the plant). Required: (i) Discuss the validity of the finance director’s comment and describe how BAS 17 Leases ensures that leases such as above are faithfully represented in an entity’s financial statements. (ii) Prepare extracts of Atia’s income statement and balance sheet for the year ended 30 September 2007 in respect of the rental agreement assuming: (1) (2)

It is an operating lease It is a finance lease (use an implicit interest rate of 10% per annum).

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2. (a) According to BAS 16, what are the measurement principles of Property, Plant and Equipment? How they should be presented and disclosed in the balance sheet according to this standard?

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(b) On January 2008, Bunty Ltd. acquired production equipment in the amount of Tk.250,000. The following further costs were incurred: Delivery: Installation; General administrative cost

Tk. 18,000 Tk. 24,500 Tk. 3,000

The installation and setting up period took 3 months, and a further amount of Tk.21,000 was spent on costs directly related to bringing the asset to its working condition. The equipment was ready for use on 1 April 2008. Monthly managerial reports indicated that for the first 5 months, the production quantities from this equipment resulted in an initial operating loss of Tk.15,000 because of small quantities produced. The months thereafter show much more positive results. The equipment has an estimated useful life of 14 years and a residual value of Tk.8,000. Estimated dismantling cost amounts to Tk.12,500. [Please turn over]

2 What is the cost of the assets and what are the annual charges in the income statement related to the consumption of the economic benefits embodied in the assets?

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(c) A multinational with strong presence in consumer goods market in Bangladesh wants to value its brand for incorporation in its financial statements. Prepare a memorandum for discussion in its forthcoming board meeting indicating pros and cons of the issue.

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3. (a) Discuss the key concepts in measuring inventories, and presentation and disclosure of inventories according to BAS 2.

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(b) Padma Ltd. purchased inventory in January 2006, for Tk.600,000. On December 31, the inventory had an NRV of Tk.550,000. During 2007 Padma sold the inventory for Tk.620,000. Based on the above, which of the following statements is true? Give your answer with explanation for each statement.

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(i) (ii)

On December 31 2006, the Balance Sheet reported the inventory at Tk.600,000; On December 31 2006, the Balance Sheet reported the inventory at Tk.620,000. Padma reported a Tk.20,000 gain on its income statement; (iii) For the year ended December 2006, Padma recognized a Tk.50,000 loss on its income statement.

(c) In the valuation of inventories, sometimes NRV can be followed. Explain When and Why?

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4. (a) Explain the post balance sheet events as defined in IAS 10. How post balance sheet events are reported in the Balance Sheet?

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(b) X company with a balance sheet date of 31 December has a foreign long-term liability that is not covered by a foreign currency contract. The foreign currency amount was converted at the closing rate on December 31, 2007, and is shown in the accounting records at Tk.2 million. The local currency dropped significantly against US Dollar on 1 February, 2008. On this date, management decided to hedge further exposure by taking out a foreign currency forward exchange contract, which limited the eventual liability to Tk.4 million. If this situation were to apply at the balance sheet date, it would result in the company’s liabilities exceeding the fair value of the assets. Do you think that it is a post balance sheet event? If yes, why? How you would report it in the 2007 Balance Sheet?

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Section II Marks–50 1. (a) “Many writers and journalists have pointed to the crisis facing contemporary auditing – one that many may argue is critical to its long-term survival as a professional activity. Three key interrelated issues are at the heart of this crisis: the quality of reported financial information, the role of the auditor in respect to that quality, and the litigious risks and economic costs associated with such a role. In particular, the crisis is strongly connected to the phenomenon of the expectation gap – the dichotomy between what appears to be promised by the auditor and what is actually delivered.” Required: Discuss the above observations in the context of future role of auditor. (b) Distinguished between (i) (ii)

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Management Audit and Performance Audit Special Audit and Environment Audit

[Please turn over]

3 2. Hussain & Co. and Menon & Co. have been appointed joint auditors of South West Bank Ltd. for the year ending 31 December, 2007. Before commencement of the audit, the audit firms mutually divided their audit works as follows: Assets and Expenditure Liabilities and Income

Hussain & Co. Menon & Co.

Upon completion of the audit each noted some material audit qualification points which, however, were strongly opposed by the other joint auditor. (a) How, in the above situation, the auditors should frame their audit report? (b) In a joint audit can a dissenting joint auditor prefer to issue separate audit report? (c) How joint auditors can face a professional negligence suit?

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3. (a) IFAC issued guidelines identifying circumstances when auditors’ independence may be threatened against which it has also provided some suggestions as safeguards to practicing accountants. Do you think that those safeguards are practicable in Bangladesh? Explain.

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(b) In the light of IFAC Code of Ethics for Professional Accountants in Business, you are required to: (i) Name the broad categories of safeguards that may eliminate or reduce to an acceptable level the threats faced by professional accountants in business. (ii) State at least four such safeguards from each of the above categories. 4. (a) Is harmonization of accounting profession globally possible or desirable when different countries are at different economic stages?

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(b) It is often alleged by informed quarters that Bangladesh scores highly on the adoption of international accounting and auditing standards but the situation on the application of those standards, if not deplorable, is full of question marks. How do you explain the phenomenon and what can be done for proper application of accounting and auditing standards in Bangladesh? 5

The End