Professional Body: ICA (Nigeria)

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  • 6 Marks

CR – Nov 2024 – L3 – Q5a – Financial Analysis and Investment Evaluation

Compute financial ratios for Nsawkaw PLC to evaluate its financial performance for investment recommendation.

Nsawkaw PLC (NK), a gold processing and trading company, has been identified by Djaraye Private Equity Fund (DPEF) as a target for long-term equity investment. As a financial consultant of DPEF, you have been tasked to evaluate the integrated financial condition of NK and make an investment recommendation.

Below are the summarised versions of NK’s Consolidated Financial Statements for the year ended June 30, 2024 (together with its comparative period):

Summarised Consolidated Statement of Profit or Loss for the year ended 30 June 2024

2024 (GH¢000) 2023 (GH¢000)
Revenue 2,538,000 2,125,000
Operational expenses (1,909,100) (1,592,900)
Interest costs (186,700) (157,250)
Taxation (234,000) (198,500)
Profit after tax 208,200 176,350
Other comprehensive income 17,900 10,550
Total comprehensive income 226,100 186,900

Summarised Consolidated Statement of Changes in Equity for the year ended 30 June 2024

Equity Holders of the Parent (GH¢000) Non-controlling Interests’ Equity (GH¢000) Total Equity (GH¢000)
2024
Balances b/d 457,200 65,600 522,800
Total comprehensive income 190,800 35,300 226,100
Dividends (110,000) (8,700) (118,700)
Balances c/d 538,000 92,200 630,200
2023
Balances b/d 355,000 46,650 401,650
Total comprehensive income 160,500 26,400 186,900
Dividends (58,300) (7,450) (65,750)
Balances c/d 457,200 65,600 522,800

Summarised Statement of Financial Position as at 30 June 2024

2024 (GH¢000) 2023 (GH¢000)
Non-current assets
Property, plant, and equipment 718,000 657,000
Others 156,000 99,000
Total Non-current assets 874,000 756,000
Current assets
Trade receivables 140,000 121,000
Others 236,500 123,050
Total Current assets 376,500 244,050
Total Assets 1,250,500 1,000,050
Total Equity and Liability 1,250,500 1,000,050

Additional information:

  1. The total number of equity shares outstanding was 1.2 million and 1.4 million at 30 June 2023 and 30 June 2024 respectively.
  2. Other comprehensive income attributable to non-controlling interests for the years ended 30 June 2023 and 2024 amounted to GH¢8.05 million and GH¢9.6 million respectively.
  3. Non-current liabilities at 30 June 2023 and 30 June 2024 amounted to GH¢250,800 and GH¢308,510 respectively.
  4. The following metrics have been gleaned from NK’s published sustainability reports across the two years:
Metric 2024 2023
Scope 1 & 2 carbon emissions (tonnes of CO2) 650 780
Scope 3 carbon emissions (tonnes of CO2) 2,400 2,380
Women in senior management (%) 21 16
Total recordable injury frequency rate (TRIFR) per 100 full-time workers 3.3 4.1

The scope and definitions of the above sustainability measures have remained materially unchanged across the two years.

Required:

Compute the following ratios for the years ended 2024 & 2023:

  1. Operating profit margin
  2. Return on parent’s equity
  3. Earnings per share
  4. Current ratio
  5. Trade receivables days
  6. Total liabilities to total assets %

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  • 15 Marks

CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

ONDO TELECOMS LIMITED

Ondo Telecoms Limited is one of the biggest telecoms companies in Abuja. One month after the year-end, the Chief Finance Officer (CFO), while reviewing the company’s activities came up with the following issues for the year ended 30 September, 2014:

(a) The Board of Directors is not impressed with the performance of the Home Broadband operating segment which posted a loss of N1.7 billion in 2014 financial year following another loss of N0.8 billion in the 2013 financial year.

(b) The carrying amount of the assets in the segment is N4.3 billion as at 30 September, 2014 and N4.5 billion as at 30 September, 2013. Professional valuers were engaged and they came up with a fair value of N4.2 billion as at 30 September, 2013.

(c) The Board of Directors made the final decision in June 2014 to sell off the assets in this segment and concentrate on other business lines. Since the beginning of September, four serious bidders have been negotiating with Ondo. The board anticipates the sale to be concluded by the end of May 2015 with the transaction cost of N0.3 million.

(d) On 1 November 2013, Ondo Telecoms Limited acquired a block of flats with an estimated useful life of 50 years at a total cost of N225 million. The blocks of flats are to be rented out to its employees and engineers at market prices. The decision to acquire the block of flats was made by the board due to the need to have the engineers close to the head office to attend to technical issues immediately they arise.

(e) Professional valuers were engaged to value the flats as at 30 September, 2014 and a fair value of N232 million was determined.

(f) International Telecom Limited, which acquired Edo Communications Limited during the year, has just published its results. Edo Communications Limited was a direct competitor to Ondo Telecoms Limited and does similar business. The CFO noted that International Telecom Ltd. shows an asset of N110 million arising from Edo Communication Limited customer lists’. This made the CFO realize how valuable the customer details are and has engaged a professional valuer who valued them at N98 million.

(g) Over the years, Ondo Telecoms Limited’s main business has been the provision of mobile and fixed landlines services as well as broadband services. In July 2013, Ondo Telecoms Limited bid for the award of a subscription television license from the government.

(h) Ondo Telecoms Limited won the bid and paid N560 million for a five-year license beginning 1 October 2013. The license is transferred and at the time of winning the bid, the fair value of the license was estimated at N580 million. Due to the slow uptake of the television business, the license was revalued at N420 million as at 30 September, 2014 by a professional valuer.

Required:
Advise, with suitable computations, how the above transactions should be accounted for in the financial statements of Ondo Telecoms Limited under IFRS for the year ended 30 September, 2014.

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  • 15 Marks

CR – May 2015 – L3 – Q6 – Ethical Issues in Corporate Reporting

Analyze the financial reporting needs and efficiency challenges of not-for-profit organizations, including asset valuation at cost vs. fair value.

NICE & DICE

NICE & DICE is a large charity located in Abuja and set up to provide support and assistance to disadvantaged people in major cities. Most of the charity’s income comes from members of the public through direct cash collections and regular monthly payments from donors. The other source of funding comes from government bodies who give grants to support specific projects that are recognized as being beneficial to the public good.

The charity publishes a detailed annual report. Performance is described largely in terms of an analysis of income received and the manner in which it has been spent. The trustees are concerned that this type of analysis does not really reflect the performance of the charity. They would like to report performance in terms of the work done rather than in terms of cash inflows and outflows. They want donors to appreciate how efficient the charity is.

The statement of financial position of the charity is a typical one for a large organization. NICE & DICE owns numerous properties in Abuja, some of which have been owned for many years. These are shown at historical cost less depreciation. The trustees do not wish to revalue the properties because this will create the impression that the charity is wealthy and that it does not require further financial support.

Required:
(a) Prepare a report to the trustees of Nice & Dice advising them on the reasons why specialized entities are required to publish detailed information about their activities. (5 Marks)
(b) Analyze the problems of quantifying and reporting the efficiency of not-for-profit organizations such as Nice & Dice. (5 Marks)
(c) Discuss the decision of the trustees to value its properties at cost less depreciation rather than at fair value. (5 Marks)

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  • 15 Marks

CR – May 2015 – L3 – Q5 – Introduction to Corporate Reporting

Discuss the need for IFRS for SMEs and evaluate simplified recognition principles for reducing reporting burdens on Jossy Limited.

International Financial Reporting Standards (IFRS) for Small and Medium-Sized Entities (SMEs)

International Financial Reporting Standards (IFRS) for small and medium size entities (SMEs) was mandatorily adopted in Nigeria as at January 1, 2014. Entities that do not meet the IFRS for SME criteria shall report using Small and Medium Size Entities Guidelines on Accounting (SMEGA).

Jossy Limited has total costs excluding land of two-hundred million naira. Being a family business, the labor force totaled 150 workers with an annual turnover of N18 million. The management of this company sought your advice to have better understanding of some of the recognition and measurement principles of SMEs.

Required:
(a) Justify the need for IFRS for SMEs financial statements. (6 Marks)
(b) Assess the circumstances of Jossy Limited and advise on the principal recognition and measurement principles that will reduce the company’s reporting burden. (9 Marks)

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  • 20 Marks

CR – May 2015 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Discuss implications of changes in accounting policy for intangible assets and demonstrate retrospective application in financial statements.

LIKELY EFFECT LIMITED

Likely Effect Limited has shown a sincere intention to be IFRS compliant. Among a number of events and transactions, there is the need to change the accounting policies of the company in trying to comply with a few other standards. As the Consultant of the company, your attention was drawn to the fact that prior to 2013, the company had capitalized training costs.

According to IAS 38, training cost is regarded as an internally generated intangible asset and cannot be capitalized. Therefore, there is the need for a change of accounting policy which must be applied retrospectively.

The training costs capitalized in 2012 was N6m while the total for periods before 2012 was N12m.
Training costs incurred in 2013 is N4.5m. Retained earnings were N600m and N649m at the beginning and end of 2012 respectively. The corporate income tax rate is 30% for the relevant periods. Additional information available is given below:

2013 (N’M) 2012 (N’M)
Income tax expense 24 21
Profit after tax 56 49
Share capital 50 50

Required:

(a) Advise the directors on the implication of the change in accounting standard relating to treatment of intangible assets and tax effect on the company. (5 Marks)

(b) Prepare statements of profit or loss and other comprehensive income and changes in equity showing a retrospective application of the change in policy. (7 Marks)

(c) Analyze the effects of the change in accounting policy on periods before 2013. (8 Marks)

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  • 20 Marks

CR – May 2015 – L3 – Q3 – Emerging Trends in Corporate Reporting

Analyze financial statements of two companies and discuss limitations of ratio analysis.

Real Expansion Plc is a large group that seeks to grow by acquisition. The directors have identified two potential entities and obtained copies of their financial statements. The accountant of the company computed key ratios to evaluate the performance of these companies relating to:

  • Profitability and returns;
  • Efficiency in the use of assets;
  • Corporate leverage; and
  • Investor-based decisions.

The computation generated hot arguments among the directors, and they decided to engage a Consultant to provide expert advice on which company to acquire.

Extracts from these financial statements are given below:

Required:

(a) As the Consultant to the company, carry out a financial analysis on the financial statements and advise the company appropriately. (15 Marks)

(b) State the major limitations of ratio analysis for performance evaluation. (5 Marks)

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  • 20 Marks

CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

The following transactions relate to Alilerimba Limited:

  1. Convertible Bonds
    • On July 1, 2011, Alilerimba Limited issued 400,000 convertible bonds with a 3-year tenure and a total fair value of N4 million, which is also the par value.
    • The bonds carried an interest rate of 16% per annum, payable annually in arrears, while similar bonds without the conversion option carried an interest rate of 19% per annum on the same date.
    • The company incurred 10% issue costs. If the investors did not convert to shares, the bonds would have been redeemed at par.
    • At maturity (June 30, 2014), all bonds were converted into 1 million ordinary shares with a nominal value of N4 per share. No conversions were allowed before maturity.
    • The directors are uncertain how to account for the bonds up to the date of conversion. They were informed that the effective interest rate, considering issue costs, was 24%.
  2. Revenue Recognition for Handsets
    • Alilerimba purchases handsets at N120,000 each and sells them to customers at N90,000, provided the customers also purchase prepaid credit cards.
    • Prepaid credit cards are sold for N12,600 each and expire after six months. The average unused credit per card at expiry is N1,800.
    • Selling costs for the handsets are estimated at N600 per unit.
    • Alilerimba also sells handsets to dealers for N50,000 each, invoicing them for this amount. Dealers are allowed to return the handsets until a service contract is signed by a customer. When a service contract is signed, the handset is given to the customer free of charge.
    • Dealers receive a commission of N168,000 per customer connection. Net of the handset cost (N90,000), Alilerimba pays N78,000 to dealers for each customer connection.
    • Handsets cannot be sold separately by dealers, and the service contract has a 12-month duration. Dealers do not sell prepaid phones, and Alilerimba earns monthly revenue from the service contracts.
    • The Chief Operating Officer, a non-accountant, has requested an explanation of the accounting principles and practices to apply for handset purchases and revenue recognition.
  3. Preference Shares
    • Alilerimba Limited issued 8% preference shares with a redemption feature that entitles holders to receive cash.

Required:

Advise the directors of Alilerimba Limited on:
(a) The accounting treatment for the convertible bonds. (12 Marks)
(b) The accounting principles and practices to apply for the purchase of handsets and recognition of revenue from customers and dealers. (6 Marks)
(c) The provisions of IAS 32 regarding the presentation in financial statements of financial instruments entitling holders to receive cash with a redemption feature. (2 Marks)

(Total: 20 Marks)

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  • 30 Marks

CR – May 2015 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013, considering acquisitions and adjustments.

Barewa Plc has two subsidiary companies and one associate. Since the adoption of International Financial Reporting Standards (IFRS) by companies listed on the Nigeria Stock Exchange, Barewa has been preparing its consolidated financial statements in accordance with the provisions of International Financial Reporting Standards (IFRSs).

The draft Statements of Financial Position of Barewa and its two subsidiaries as at 31 May, 2013 are as follows:

Assets Barewa (N’m) Megida (N’m) Mindara (N’m)
Non-current assets
Plant 2,650 2,300 1,610
Investments – Megida 3,000
Investments – Mindara 1,280
Associate (Calamari) 200
Available for sale 510 60 50
Total Non-current assets 7,640 2,360 1,660
Current assets
Inventory 1,350 550 730
Trade receivables 910 450 320
Cash and cash equivalent 1,020 1,000 80
Total Current assets 3,280 2,000 1,130
Total Assets 10,920 4,360 2,790
Equity and Liabilities
Share capital 5,200 2,200 1,000
Retained earnings 2,400 1,500 800
Other components of equity 120 40 70
Total equity 7,720 3,740 1,870
Non-current liabilities
Long-term loans 1,200 150 50
Deferred tax 250 90 30
Total non-current liabilities 1,450 240 80
Current liabilities
Trade payables 1,150 300 600
Current tax payables 600 80 240
Total current liabilities 1,750 380 840
Total Equity and Liabilities 10,920 4,360 2,790

The following information is relevant to the preparation of the group financial statements:

  • Acquisition of Megida Plc
    • Date of Acquisition: 1 June 2012
    • Barewa acquired 80% of the equity interest in Megida Plc.
    • At the date of acquisition, Megida’s retained earnings were N1.36 billion, and other components of equity amounted to N40 million.
    • There had been no new issuance of share capital by Megida since the acquisition date.
    • The consideration for the acquisition was N3 billion in cash.
    • The fair value of Megida’s identifiable net assets at acquisition was N4 billion, with the excess attributed to an increase in the value of non-depreciable land.
    • An independent valuation determined that the fair value of the non-controlling interest (NCI) in Megida on 1 June 2012 was N860 million.
    • Barewa’s policy is to measure NCI based on their proportionate share in the identifiable net assets of the subsidiary, not at fair value (full goodwill method).
  • Acquisition of Mindara Plc
    • Date of Acquisition: 1 June 2012
    • Barewa acquired 70% of the ordinary shares of Mindara Plc.
    • The consideration for the acquisition included:
      • An upfront payment of N1.28 billion.
      • A contingent consideration requiring Barewa to pay the former shareholders 30% of Mindara’s profits on 31 May 2014 for each of the financial years ending 31 May 2013 and 31 May 2014. This arrangement was valued at N120 million as of 1 June 2012 and remains unchanged. It has not been included in the financial statements.
    • The fair value of the identifiable net assets at acquisition was N1.76 billion. This included retained earnings of N550 million and other components of equity of N70 million.
    • There had been no new issuance of share capital by Mindara since the acquisition date.
    • The excess fair value of the net assets was due to an increase in property, plant, and equipment (PPE), which is depreciated on a straight-line basis over seven years.
    • The fair value of the non-controlling interest (NCI) in Mindara was N530 million on the acquisition date.
  • Investment in Calamari Plc
    • On 1 June 2011, Barewa acquired a 10% interest in Calamari Plc for N80 million. This was classified as an available-for-sale investment.
    • As of 31 May 2012, the value of this investment had increased to N90 million.
    • On 1 June 2012, Barewa acquired an additional 15% interest in Calamari for N110 million, achieving significant influence.
    • Calamari recorded profits after dividends of N60 million and N100 million for the financial years ending 31 May 2012 and 31 May 2013, respectively.
  • Equity Instrument Purchase
    • On 1 June 2012, Barewa purchased an equity instrument valued at 100 million pesos, classified as available-for-sale.
    • Relevant exchange rates:
      • 31 May 2012: N5.1 to 1 peso.
      • 31 May 2013: N5.0 to 1 peso.
    • The fair value of the instrument as of 31 May 2013 was 90 million pesos, reflecting an impairment that Barewa has not recorded.
  • Loan to a Director
    • A loan of N10 million to a director has been included in cash and cash equivalents.
    • The loan is repayable on demand with no specific repayment date.
    • The directors believe that this treatment complies with International Financial Reporting Standards (IFRS), as no IFRS explicitly prohibits showing the loan as cash.
  • Goodwill Impairment
    • There is no impairment of goodwill arising from the acquisitions.

Required

Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013.

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  • 15 Marks

AAA – May 2016 – L3 – Q6 – Audit Reporting

Discuss audit work and written representation letter for legal claims, outstanding balances, and investments.

Bob Removals Limited is a removals company. In the year ended December 31, 2015, the company made a trading profit of N800,000. You are the manager in charge of the audit.
The following issues have arisen:

(i) A customer is suing the company for N1 million for damage caused to antique furniture. The company is defending the claim and believes that the furniture was a reproduction as opposed to antique and therefore worth only N100,000.
(ii) A balance due from Safe Storage in respect of sub-contract work, of N300,000, has been outstanding for over six months. Your firm has been asked by Bob Removals’ accountant not to write to Safe Storage for direct confirmation of this amount as the latter company objects to such letters. You have been assured by the accountant that the relationship between the two companies is good and that the outstanding balance will be paid.
(iii) Bob Removals has recently invested in four new removal vans and is currently carrying out extensive refurbishment of its premises. As a result of this expenditure, the company has reached its overdraft limit of N500,000.

Required:

For each of the above issues:
a. State, with reasons, the audit work that you would expect to find when undertaking your review of the audit working papers for the year ended December 31, 2015.
b. Draft the relevant sections dealing with these issues of the written representation letter you would wish the directors to sign.

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  • 15 Marks

AAA – May 2016 – L3 – Q5 – Ethical Issues in Auditing

Identify and discuss fraud and error in the audit of Badagry Yachting and Marina.

Badagry Yachting and Marina (BYM) have a marina on the West Coast of Nigeria and a large sales operation dealing in yachts and speedboats. You are responsible for the audit of BYM and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company. In particular:

(i) 30% of the yachts on sale by BYM are supplied through one of the major international boating companies with a special finance arrangement deal. However, BYM have also obtained separate finance on these yachts, which are therefore in effect being ‘double financed’.
(ii) Ten yachts shown as assets by BYM cannot be located, with no explanation other than that they have not been sold. These yachts are worth approximately N50 million.
(iii) Long delays have occurred in performing reconciliations, with the last four months of reconciliations still not completed. At the time of the last reconciliation, material differences had been identified upon which no action appears to have been undertaken.
(iv) Sales have been overstated by N100 million in the current financial statements.
The finance director has been off sick with stress for the last five months and therefore has not been available to discuss any of the issues identified.

Required:

a. Explain the difference between fraud and error and how the issues shown here could be categorised as fraud or error. (6 Marks)
b. Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error. (3 Marks)
c. Describe what steps you would take to further investigate and then report on the matters referred to above. (6 Marks)

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  • 20 Marks

FM – May 2016 – L3 – Q3 – Financing Decisions and Capital Markets

Calculation of bond issue price, yield to maturity, and duration, and discussion of conflicts between shareholders and bondholders.

(a)

Skylet Limited is a major player in the aviation industry with a credit rating of AA. The company plans to raise ₦5 billion from the bond market. The features of the bond are:

  • Maturity: 4 years
  • Coupon payment: Annual
  • Coupon rate: 5%
  • Redemption value: Par

The current annual spot yield curve for government bonds is as follows:

Term Spot Rate
One-year 3.3%
Two-year 3.8%
Three-year 4.5%
Four-year 5.3%

The following table of spreads (in basis points) is given for the aviation industry:

Rating 1 Year 2 Year 3 Year 4 Year
AAA 12 23 36 50
AA 27 40 51 60
A 43 55 67 80

You are required to calculate:
i. The issue price of the bond. (6 Marks)
ii. The yield to maturity. (3 Marks)
iii. The duration. (6 Marks)

(b)

Discuss why conflicts of interest might exist between shareholders and bondholders. (5 Marks)

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  • 20 Marks

FM – May 2016 – L3 – Q2 – Financing Decisions and Capital Markets

Analysis of the impact of a rights issue on shareholder wealth, financial ratios, and evaluation of its appropriateness.

BeeJay Plc is a medium-sized manufacturing company which is considering a 1-for-5 rights issue at a 15% discount to the current market price of ₦4.00 per share. Issue costs are expected to be ₦220,000, and these costs will be paid out of the funds raised. It is proposed that the funds raised from the rights issue will be used to redeem some of the existing debentures at par.

(a)

Ignoring issue costs and any use that may be made of the funds raised by the rights issue, calculate:
i. the theoretical ex-rights price per share.
ii. the value of the rights per existing share. (3 Marks)

(b)

Calculate the current earnings per share and the revised earnings per share if the proceeds of the rights issue are used to redeem some of the existing debentures. (4 Marks)

(c)

Evaluate whether the proposal to redeem some of the debentures would increase the wealth of the shareholders of BeeJay Plc. Assume that the price/earnings ratio of BeeJay Plc remains constant. (2 Marks)

(d)

Discuss the reason why a rights issue could be an attractive source of finance for BeeJay Plc. Your discussion should include an evaluation of the effect of the rights issue on the debt/equity ratio and interest cover. (11 Marks)

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  • 30 Marks

FM – May 2016 – L3 – Q1 – Investment Appraisal Techniques

Calculation of Adjusted Present Value (APV) for a proposed project and analysis of its application in investment appraisal.

Katam Pie has adopted a strategy of diversification into many different industries in order to reduce risk for the company’s shareholders. This has resulted in frequent changes in the company’s gearing level and widely fluctuating risks of individual investments. Presently, the company has a target debt-to-asset ratio i.e., D/(E + D) of 25%, an equity beta of 2.25, and a pre-tax cost of debt of 5%.

On January 1, 2016, Katam Plc with a year-end of December 31, is considering the purchase of a new machine costing N750million, which would enable it to diversify into a new line of business. The new business will generate sales of N522.50million in the first year, growing at 4.5% p.a. A constant contribution margin ratio of 40% can be expected throughout the 15-year life of the project. Incremental fixed cash costs will be N84.32million in the first year, growing by 5.4% p.a.

A regional development bank has offered a 10-year loan of 3% interest to finance 40% of the cost of the machine. The balance of 60% will be financed equally by a 10-year commercial loan (with annual interest of 5%) and a fresh round of equity. The issue cost on the commercial loan will be 1%, and the new equity will incur an issue cost of 3%. All issue costs are on the gross amount raised for the respective capital. Issue costs on debt are allowed for tax purposes.

A firm that is already in the business of the new project has a gearing ratio of 20% (debt to asset) and a cost of equity of 18.1%. Its corporate debt is risk-free.

The tax rate is 30% payable in the year the profit is made. Tax depreciation of 20% on cost is available on the new machine. Katam Pie has a weighted average cost of capital of 14% and a cost of equity of 17.5%. The risk-free rate is 4%, and the market risk premium is 7%.

You are required to:

  1. Estimate the Adjusted Present Value (APV) and advise whether the project should be accepted? (21 Marks)
  2. Explain:
    i. The circumstances under which the use of APV is appropriate. (5 Marks)
    ii. The major advantages and limitations of the use of the APV method. (4 Marks)

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  • 8 Marks

ATAX – May 2016 – L3 – Q7b – Taxation of Non-Resident Companies and Individuals

Compute the tax liabilities payable in Nigeria for Apex Communications Limited, a foreign company with income originating, routed, and terminating in Nigeria.

Apex Communications Limited is a British company engaged in the business of transmission of messages by cable or any other form of wireless technology.

Its worldwide operating results for the year ended December 31, 2014, are as follows:

You are provided with the following information:
(i) The British Tax Authority has certified the Adjusted Profit and Depreciation allowance ratios.
(ii) Included in Overhead Expenses are disallowable items totaling ₦12,500,000.
(iii) The Federal Inland Revenue Service is satisfied that tax is computed and assessed in Britain, the home country of the foreign company, on the same basis as Nigeria.

You are required to:
Compute the Tax Liabilities payable by the company in Nigeria for the relevant assessment year. (8 marks)

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  • 7 Marks

ATAX – May 2016 – L3 – Q7a – Tax Planning and Management

List seven essential documents/information required for effective tax planning strategies.

Tax planning involves making conscious efforts to arrange a taxpayer’s affairs in ways that will minimize tax liabilities. It requires detailed knowledge of tax legislation and the application of the same to particular circumstances, identifying and taking advantage of loopholes, if any.

The tax-conscious taxpayer and the expert tax adviser working together can often significantly reduce the tax liability that would have otherwise been payable.

You are required to:
Provide an adequate checklist of any SEVEN documents/information to be considered for effective tax planning strategies. (7 marks)

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  • 15 Marks

AT – May 2016 – L3 – Q6 – Tax Audits and Investigations

Define tax avoidance and evasion, outline the differences, and explain key stages and objectives of a tax audit.

YASSAR LIMITED imports baby wears and has been in business for some years now. The company is doing very well, and the Directors are impressed with the growth. The company’s Managing Director, Chief Agbaegonkiti, is a member of Enugu Sports Club. On January 14, 2015, after the morning aerobics in the club’s gym, a friend of Chief Agbaegonkiti, who is also the Finance Director of a trading outfit, narrated how the company he works for was subjected to a Tax Audit by the Federal Inland Revenue Service (FIRS), which resulted in payment of additional tax liabilities totaling N10.5 million.

The Finance Director attributed their company’s ordeal to the Board’s poor understanding of key tax-related issues. Chief Agbaegonkiti, after listening to his friend, was highly worried about such a fate befalling his company. As a proactive move, he enquired for seasoned tax practitioners, and your firm, Cutting-Edge & Co, Chartered Accountants, was referred to him.

As the Managing Partner, you are to take action and address the following:

REQUIRED:

a. Briefly explain what you understand by the terms Tax Avoidance and Tax Evasion. (2 marks)

b. State FIVE differences between Tax Avoidance and Tax Evasion. (5 marks)

c. Outline the key stages in the Tax Audit process. (3 marks)

d. State SIX objectives of a Tax Audit exercise. (5 marks)

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  • 15 Marks

ATAX – May 2016 – L3 – Q5 – Taxation of Companies

Compute the original and revised tax liabilities of Atlas Nigeria Limited, considering tax official adjustments.

Atlas Nigeria Limited is into the sale of Mobile Phones, and the company’s year-end is December 31 of each year. The company’s Annual Tax Returns for the year ended December 31, 2012, were submitted in January 2014. Tax officials found a number of irregularities during a routine examination of the Tax Returns. They discovered that trade payables included N940,000 representing VAT for the two months to December 31, 2012. All sales attract VAT. There was no Input VAT during 2012. Tax officials were, however, of the opinion that the income of the company accrued uniformly throughout the 12 months of the year.

The accounts showed Adjusted Profits of N44,062,500, and Capital Allowances totaled N33,025,000. The tax liability arrived at was N4,406,250. The tax officials were not satisfied with the explanations received in connection with the Withholding Tax on the Director’s fee of N1,562,500, as well as Consultancy fee of N812,500. They also decided to write back 2/3 of the following expenses:

  • Printing and Stationery N168,750
  • Donations and Subscription N1,320,620
  • Losses claimed, amounting to N128,025 was disallowed. Included in the adjusted profit figure is N6,962,500 for Depreciation.

REQUIRED:

i. Show the computations resulting in the Original Tax Liability of N4,406,250 (5 marks)

ii. Compute a revised Tax liability based on the findings of the Tax Officials (10 marks)

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  • 16 Marks

ATAX – May 2016 – L3 – Q4b – Capital Gains Tax (CGT)

Analyse the transactions and determine the chargeable gains, provide an opinion on the transactions, and explain the role of the Federal Inland Revenue Service in handling bad debt.

Your Tax Manager has just sent a memo in which you were asked to analyse the situation in a client’s file with the sole aim of determining the Chargeable Gains:

Contents of Memo:

  • Dr. Alexander Bold purchased a Duplex in Parkview Estate at a cost of N80 million on January 2009. It was used as a private residence. Another property was purchased in Banana Island in the year 2012, and Dr. Bold transferred the Parkview Estate Property to his wife as a birthday present on August 12, 2013. The market value of the property was N140 million. As a result of incessant flooding in Parkview Estate, the property was finally disposed of for N200 million on January 31, 2014 by the wife.
  • An option on a piece of land in Magodo, Lagos State, was sold by Dr. Bold for a sum of N120 million to Mr. Robert on July 1, 2010. Mr. Robert exercised the right to purchase the land for N150 million in 2013 and sold the property for N400 million in 2014.
  • Mr. Clyde, a friend of Dr. Bold, purchased a piece of property belonging to Bold and Wife Limited in Badagry at a cost of N240 million. The two parties agreed on installment payments starting with an installment of N80 million on July 1, 2010, and the balance of N80 million every 6 months thereafter. The last installment could not be settled on time because of Mr. Clyde’s illness, who managed to pay N20 million on January 1, 2013. The cost of the property to Bold and Wife Limited was N180 million.
Instalment Date Amount Paid (₦)
July 1, 2010 80,000,000
January 1, 2011 80,000,000
July 2, 2011 40,000,000
January 1, 2013 20,000,000

Mr. Clyde eventually died on March 5, 2013, hence the balance of N20 million could not be recovered and this was written off as Bad Debt with the consent of the Federal Inland Revenue Service.

  • Mr. Saxon (S.A.N), a Legal Practitioner from the Chambers of Saxon in Lagos, was involved in a case on behalf of Dr. Bold’s wife. The case lasted for about 4 years and judgment was received in favor of the client. The fees were settled partly by cash and partly with an acre of land belonging to Mrs. Bold at Lekki Phase Two in Lagos. Although the debt was N85 million, the property was valued at N60 million. Mr. Saxon eventually sold the property for N220 million.

Required:

i. Chargeable gains (5 marks)
ii. Opinion on all the above transactions (9 marks)
iii. The role of Federal Inland Revenue Service on the issue of Bad Debt on payment by Mr. Clyde (2 marks)

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  • 4 Marks

ATAX – May 2016 – L3 – Q4a – Capital Gains Tax (CGT)

Define disposal and explain when an acquisition/disposal is considered effective under the Capital Gains Tax Act.

a. With respect to the Capital Gains Tax Act Cap C1 LFN 2004 (As Amended)
i. What is ‘Disposal’? (2 marks)
ii. When can an Acquisition/Disposal be said to be effective? (2 marks)

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  • 20 Marks

ATAX – May 2016 – L3 – Q3 – Petroleum Profits Tax (PPT)

Analyze the taxation effects of incentives on Joint Ventures vs. Sole Risk operations, compute Tax Inversion Penalty, and explain Mineral Rights Acquisition Costs.

Ugheli Limited is operating a Joint Venture with NNPC under the Year 2000 Memorandum of Understanding, while Eket Limited operates under the Sole Risk Operation agreement.

The following information reflects the two companies’ operations for the month of July 2014:

Required:

(a)
i. Using the above information, compare the effects of Incentives on Joint Venture Operation as against the Sole Risk Operation using the two companies’ operations. (7 Marks)

ii. What is the purpose of Tax Inversion Penalty (TIP)? (4 Marks)

iii. Determine the Tax Inversion Penalty and the Revised Government Take from the operations of the two companies. (Tax Inversion Rate is 35%) (3 Marks)

(b) Explain the term “Mineral Rights Acquisition Costs.” (3 Marks)

(c) Explain briefly the differences between Joint Venture and Sole Risk Agreements under the Year 2000 Memorandum of Understanding. (3 Marks)

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