- 20 Marks
Question
Okushe Ltd is a listed textile manufacturing company that prepared the following draft statement of financial position as at 31 October 2017. On subsequent examination of the books and records, the Finance Director prepared a list of issues that may require amendments to the draft statement presented.
Okushe Ltd Statement of Financial Position as at 31 October 2017
| GH¢000 | |
|---|---|
| Non-current assets | |
| Property, Plant & Equipment | 1,020,000 |
| Intangible assets | 100,000 |
| Equity investments | 360,000 |
| Total non-current assets | 1,480,000 |
| Current assets | |
| Inventory | 65,000 |
| Trade receivables | 130,000 |
| Cash & bank | 30,000 |
| Total current assets | 225,000 |
| Total assets | 1,705,000 |
| Equity | |
| Equity share capital | 580,000 |
| Retained Earnings: | |
| – Balance 1 November 2016 | 375,000 |
| – Profit for year | 95,000 |
| – Dividend declared | (30,000) |
| Total Retained Earnings | 440,000 |
| Other components of equity: | |
| – Balance 1 November 2016 | 128,000 |
| – Other comprehensive income for the year | 35,000 |
| Total other components of equity | 163,000 |
| Total equity | 1,183,000 |
| Non-current liabilities | |
| Finance lease obligations | 175,000 |
| 5% debenture 2021 | 150,000 |
| Total non-current liabilities | 325,000 |
| Current liabilities | |
| Trade payables | 95,000 |
| Finance lease obligations | 35,000 |
| Provision for warranty claim | 12,000 |
| Corporation tax due | 25,000 |
| Final dividend due | 30,000 |
| Total current liabilities | 197,000 |
| Total equity & liabilities | 1,705,000 |
The following notes are relevant:
- Property, Plant and Equipment (PPE):
- The property carried at GH¢130 million was revalued to GH¢110 million on 31 October 2017. This revaluation has not been accounted for. The revaluation reserve (included in other components of equity) had a balance of GH¢12 million due to previous revaluations of this property.
- A sale agreement was entered during October 2017 to sell some plant with a carrying value of GH¢45 million for an agreed price of GH¢39 million. No cash has been received, as a 30-day credit period was agreed with the purchaser. No entry has been made for this transaction.
- Equity Investments:
- The fair value of equity investments as at 31 October 2017 was GH¢380 million, which has not yet been incorporated into the financial statements. Okushe has decided to take all fair value gains and losses on equity investments to “other comprehensive income” as permitted by IFRS 9 – Financial Instruments.
- 5% Debenture:
- The 5% debenture was issued on 1 November 2016 for cash proceeds of GH¢150 million and was correctly recorded. The effective rate of interest to maturity was 6.5%. The only other entry made in respect of the debenture was the payment of GH¢7.5 million interest on 31 October 2017.
- Warranty Provision:
- The company offers a 12-month warranty on all goods sold. A provision is maintained for the expected cost of honoring this warranty, which has not been updated as at 31 October 2017. 40,000 units of its product were sold during the year, all qualifying for warranty. It expects 10% will need minor repairs at an average cost of GH¢500 each, and 3% will need major repairs at a cost of GH¢10,000 each.
Required:
a) Prepare a schedule showing any corrections required to the profit and other comprehensive income for the year. (8 marks)
b) Redraft the Statement of Financial Position at 31 October 2017, considering the above adjustments. (12 marks)
Answer
a) Schedule of Corrections to Profit and OCI for the Year
| Profit for year | GH¢000 | OCI for year | GH¢000 |
|---|---|---|---|
| Figures per draft financial statements | 95,000 | 35,000 | |
| Revaluation of property (W1) | (8,000) | (12,000) | |
| Loss on disposal of plant (W1) | (6,000) | ||
| Gain in fair value of equity investments (W2) | 20,000 | ||
| Additional finance cost (W3) | (2,250) | ||
| Additional warranty provision (W4) | (2,000) | ||
| Adjusted figures | 76,750 | 43,000 |
Workings:
- W1 – Property, Plant & Equipment:
- The property should be revalued downwards by GH¢20 million (GH¢130 million – GH¢110 million). A downward revaluation in an IAS 16 (Property, Plant & Equipment) asset should be charged to the revaluation reserve (and OCI) to the extent that a balance exists in that reserve relating to the same asset. Here, this amount is GH¢12 million. Any further revaluation loss should be charged to profit or loss. The extra GH¢8 million of loss should be so charged.
- The plant sold had a carrying value of GH¢45 million at the date of sale and was sold for an agreed price of GH¢39 million. No cash has yet been received in respect of this sale, as a 30-day credit period was agreed with the purchaser. No entry has been made to record this transaction. Hence, a loss on disposal of GH¢6 million (GH¢39 million – GH¢45 million) will be recorded in profit or loss. GH¢45 million will be derecognized from PPE, and a receivable of GH¢39 million recorded in current assets.
- W2 – Equity Investments:
- Under IFRS 9, equity investments should be classified as “Fair Value” financial instruments and remeasured to fair value at each reporting date. Any resulting gains or losses are taken to profit or loss unless the entity makes an irrevocable election to take them to OCI. The decision has been made by Okushe, hence the gain in value of GH¢20 million (GH¢380 million – GH¢360 million) should be taken to OCI as well as being reflected in the carrying value of the equity investments.
- W3 – Debenture:
- Under IFRS 9, the amortized cost method is appropriate for this liability as there is no evidence to suggest the company is treating the liability as a trading instrument. Hence, the annual finance charge should reflect the effective rate to maturity rather than the coupon rate. The correct finance cost should therefore be GH¢150 million * 6.5% = GH¢9.75 million instead of the recorded GH¢7.5 million. The additional GH¢2.25 million (GH¢9.75 million – GH¢7.5 million) should be charged as a finance cost to profit or loss and accrued as an additional non-current liability.
- W4 – Warranty Provision:
- The current liability for warranty provision needs to be updated at each reporting date to reflect best estimates available at that date. At 31 October 2017, best estimates suggest a provision of GH¢14 million is required, calculated as follows:
- Minor repairs: 40,000 units * 10% = 4,000 units requiring repairs at a cost of GH¢500 each = GH¢2 million.
- Major repairs: 40,000 units * 3% = 1,200 units requiring repairs at a cost of GH¢10,000 each = GH¢12 million.
- Total provision required = GH¢2 million + GH¢12 million = GH¢14 million.
- As the existing provision is recorded at GH¢12 million, an additional charge of GH¢
- The current liability for warranty provision needs to be updated at each reporting date to reflect best estimates available at that date. At 31 October 2017, best estimates suggest a provision of GH¢14 million is required, calculated as follows:
- Topic: Preparation of Financial Statements
- Series: NOV 2017
- Uploader: Uploader1