- 20 Marks
Question
a. Ekenga Local Government known for production of edible agricultural crops in large quantity, is linked to other towns in Okoh State by a bridge constructed over a decade ago. This bridge suffered damage caused by ecological disaster lately. The importance of this bridge led to the commissioning of its total reconstruction by the Governor of Okoh State. Alongside this decision to reconstruct the bridge, the Governor also constituted a panel of enquiry comprising of engineers, quantity surveyors and accountants to identify the immediate and remote causes of the ecological challenge with a view to forestalling such in the future. A make-shift, temporary bridge was constructed for temporary use by the inhabitants pending when the construction of the main bridge is completed. The State‟s Department of Works and Services also bid for the construction contract and won the contract having participated in the procurement process for contract award. The Department of Works and Services is funded by appropriation. The construction contract has requirements which include anticipated costs, technical specifications and timing of completion. The Department of Roads and Highways does not provide for any recovery of construction costs directly from the department.
The initial estimate of the contract costs is N100 million. The construction of the bridge will take three years to complete. At the end of Year 1, the estimate of contract cost has increased to N108 million. An aid-giving NGO has agreed to provide funding of 60% of the costs for constructing the bridge which is N60 million and this is stated in the construction contract.
In Year 2, a variation in the contract costs was approved on the advice of the Federal Department of Roads and Rural Infrastructures estimated at N15 million. The aid agency agrees to fund 50% of this variation. At the end of Year 2, costs incurred include N8 million for standard materials stored at the site to be used in Year 3 to complete the project.
The Department of Works and Services determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed to date, bears to the latest estimated total contract cost.
Required: In line with IPSA 11 – Construction contracts,
i. Prepare a summary of financial data during the construction period of the construction contract assuming the following stages of completion 28%, 77% and 100% for Year 1, Year 2 and Year 3 respectively. (5 Marks)
ii. Prepare the amount of revenue and expenses to be recognised in the statement of financial performance in Year 1, Year 2 and Year 3. (5 Marks)
b. IPSAS 35 on “Consolidated Financial Statements” is one of the standards issued by International Public Sector Accounting Standard Board (IPSASB) in replacement of IPSAS 6 on “Consolidated and Separate Financial Statements”. The objective of this Standard is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.
In light of the above you are required to:
(i) Identify the conditions that will warrant entity not to present consolidated financial statements in accordance to IPSAS 35. (4 Marks)
(ii) Identify THREE examples each of financial and non-financial benefits that an entity may receive from its involvement with another entity.(6 Marks)
Answer
a. i. Summary of financial data (N million):
| Item | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Contract costs incurred to date | 30.24 (108*28%) | 92.4 (120*77%) | 123 |
| Estimated costs to complete | 77.76 | 27.6 | 0 |
| Total estimated contract costs | 108 | 120 (108+15-3 adjustment for materials) | 123 (adjusted for actual) |
| Funding revenue (NGO) | 64.8 (108*60%) | 67.5 (10860% +1550%) | 67.5 |
| Stage of completion | 28% | 77% | 100% |
Note: Materials N8m in Year 2 not included in costs incurred for stage calculation, as not used yet. Total costs 100 initial, revised 108 Y1, 123 final (108+15).
ii. Revenue and expenses recognized (N million):
Year 1: Revenue 30.24 (costs, outcome uncertain but costs recoverable), Expense 30.24, Profit 0
Year 2: Cumulative revenue 92.4, Prior 30.24, Current 62.16; Expense 62.16 (92.4-30.24 costs), Profit 0
Year 3: Cumulative revenue 123, Prior 92.4, Current 30.6; Expense 30.6 (123-92.4), Profit 0
Since funded by appropriation and NGO, revenue is grant recognition matching costs, no profit.
b. (i) Conditions for not presenting consolidated financial statements per IPSAS 35:
- The entity is a controlled entity exempted from preparing consolidated statements because its controlling entity produces IPSAS-compliant consolidated statements available for public use.
- The entity’s debt or equity instruments are not traded in a public market.
- The entity did not file, nor is in the process of filing, financial statements with a securities commission for issuing instruments in a public market.
- The ultimate or intermediate controlling entity produces consolidated financial statements compliant with IPSAS.
(ii) Three examples of financial benefits:
- Dividends or similar distributions.
- Access to assets or returns from assets.
- Remuneration or fees.
Three examples of non-financial benefits:
- Strategic advantages, such as influence over policy.
- Access to specialized skills or knowledge.
- Enhanced public service delivery or reputation.
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