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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  • 15 Marks

AT – Nov 2016 – L3 – SC – Q6 – Petroleum Profits Tax (PPT)

Explain associated gas and downstream activities and compute petroleum profits tax for Bivenette Petroleum Company Ltd.

a. The administration of the Petroleum Profits Tax Act is under the charge and management of the Federal Inland Revenue Service with respect to Petroleum Profits Tax Act Cap P13 LFN 2004.

You are required to explain:
i. Associated Gas (2 Marks)
ii. Downstream Activities (2 Marks)

b. Bivenette Petroleum Company Limited has been in the oil prospecting business for some years. Extracts from the financial statements for the year ended December 31, 2013, show the following information:

Details Amount (₦’000)
Value of oil exported 1,030,000
Domestic sales 842,000
Chargeable gas sales 603,000
Other income 425,000
Operating costs 1,385,000
Intangible costs 142,800
Royalty on export sales 125,000
Royalty on local sales 96,500
Non-productive rent 102,000
Exploration incentives 313,500
Rental 101,200
Interest paid 98,000
Administrative expenses 265,000

Additional Information:
(i) The Petroleum Profits Tax rate is 85%.
(ii) Interest paid included ₦12,000,000 paid to an affiliated company.
(iii) Capital allowances were agreed at ₦253,750,000.
(iv) Included in the operating cost is ₦302,000,000 paid to a company for information on oil prospect in Adamawa State.
(v) The company is entitled to Investment Allowance of ₦173,000,000.

Required:
Determine the Assessable Profit, Chargeable Profit, Assessable Tax, and Chargeable Tax of the company for the relevant Year of Assessment. (11 Marks)

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  • 15 Marks

AT – Nov 2016 – L3 – SC – Q5 – Tax Incentives and Reliefs

Identify industries qualifying as Pioneer Industries and compute tax liabilities and withholding tax for Ajanaku Nigeria Limited.

a. **One of the incentives available to industries in Nigeria is contained in the Industrial Development (Income Tax Relief) Act 1971, which grants tax holidays to companies in the industries that meet the conditions for being designated “Pioneer Industries.”

Under the Industrial Development (Income Tax Relief) Act 1971, state any FOUR industries that qualify to be regarded as Pioneer Industries.** (4 Marks)

b. Ajanaku Nigeria Limited was incorporated as a pioneer company on March 15, 2011, with a focus on the manufacture of aluminum roofing sheets. It was granted a Pioneer Certificate with Production Day given as July 1, 2011. Extracts of Audited Financial Statements are as shown below:

Period 6 Months to 31/12/11 Year to 31/12/12 Year to 31/12/13 Six Months to 30/6/14
(Loss) / Profit (3,750) (4,800) 2,250 4,500
After Charging: Depreciation 2,800 2,500 1,700 1,000
Withholding Tax on Rent Included 500 250 – –
Donations to:
Epe Traditional Dance Troupe 10 – – –
Nigerian Red Cross – 100 – –
Borno State General Hospital – – 120 –

Additional Information:

  • Ajanaku Nigeria Limited declared gross dividends of ₦600,000 and ₦1,500,000 for 2013 and 2014, respectively.
  • Withholding tax rates on dividends for the relevant years are 10%.
  • Ignore minimum tax provisions.
  • The company’s initial tax relief period was not extended.

Required:
Compute the tax liabilities for the relevant years of assessment relating to Pioneer Status only, and state the amount of Withholding Tax due from the shareholders. (11 Marks)

a. Four Industries Qualifying as Pioneer Industries:

  1. Agricultural production, including food processing and packaging.
  2. Manufacturing, such as aluminum products and roofing sheets.
  3. Mining and processing of minerals, including petroleum refining.
  4. Telecommunication and information technology.

b. Computation of Tax Liabilities and Withholding Tax for Ajanaku Nigeria Limited:

Step 1: Pioneer Period

  • Pioneer period runs from July 1, 2011, to June 30, 2014.

Step 2: Loss/Profit Exemption During Pioneer Period

  • Losses incurred during the pioneer period are disregarded for tax purposes.
  • Profits during the pioneer period are exempt from tax.

Step 3: Dividend Withholding Tax (WHT):

Year Gross Dividend (₦’000) Withholding Tax Rate (%) WHT Amount (₦’000)
2013 600 10 60
2014 1,500 10 150

Total Withholding Tax Due = ₦60,000 + ₦150,000 = ₦210,000.

Final Tax Liabilities:

  • Since Ajanaku Nigeria Limited’s profits during the pioneer period are exempt from tax, Tax Liability = ₦0.

Withholding Tax Due from Shareholders:

  • Total Withholding Tax on dividends for 2013 and 2014 is ₦210,000.

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  • 20 Marks

AT – Nov 2016 – L3 – SB – Q4 – Tax Planning and Management

Define fair value, determine fair value for a product in principal or non-principal markets, and compute fair value of land under IFRS 13.

a. Prior to the advent of IFRS 13, many standards such as IAS 16, IAS 38, IAS 40, and IAS 39, among others, required the use of fair value. These various requirements have been harmonized with the introduction of IFRS 13 Fair Value Measurement.

Required:
Define fair value in accordance with IFRS 13. (2 Marks)

b. One of the companies formally operating in Nigeria that had recently relocated its operations to Ghana as a result of the challenging business environment in Nigeria has access to both Lagos and Accra markets for its product. The product sells at slightly different prices (in naira) in the two active markets. An entity enters into transactions in both markets and can access the price in those markets for the product at the measurement date as follows:

Market Lagos Market (₦’000) Accra Market (₦’000)
Sale Price 260 250
Transaction Cost (30) (10)
Transport Cost (20) (20)
Net Price Received 210 220

Required:
i. Briefly explain the principal market of an asset in accordance with IFRS 13 and determine what fair value would be used to measure the sale of the above product if the Lagos market were the principal market.

(4 Marks)

ii. How is fair value determined in the absence of a principal market and what fair value would be used to measure the sale of the above product if no principal market could be identified? (4 Marks)

c. Megida Plc, a public limited liability company, has just acquired some hectares of land in Abuja earmarked by the government for an economic empowerment program of citizens given the harsh economic environment in Nigeria and so is only meant for commercial purposes. The fair value of the land if used for commercial purposes is ₦100 million. If the land is used for commercial purposes, it is expected that it will result in reducing unemployment. This will attract a tax credit annually, which is based upon the lower of 15% of the fair market value of the land or ₦10,000,000 at the current tax rate. The current tax rate as fixed by the government is 20%.

Megida Plc has determined that, given the nature of Abuja’s land, market participants would consider that it could have an alternative use for residential purposes. The fair value of the land Megida Plc has just acquired for residential purposes before associated costs is estimated to be ₦148 million. In order to transform the land from its commercial purposes to residential use, there are estimated legal costs of ₦4,000,000, a project viability analysis cost of ₦6,000,000, and costs of demolition of the commercial buildings of ₦2,000,000.

In addition, permission for residential use has not been formally given by Abuja Municipal Authority. This has created uncertainty in the minds of market participants. Consequently, the market participants have indicated that the fair value of the land, after the above costs, would be discounted by 20% because of the risk of not obtaining the planning permission from Abuja Municipal Authority.

Required:
Discuss the way in which Megida Plc should compute the fair value of the Abuja land with reference to the principles of IFRS 13 Fair Value Measurement.

(10 Marks)

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  • 20 Marks

AT – Nov 2016 – L3 – SB – Q3 – Capital Gains Tax

Compute chargeable gains, capital gains tax, and new cost of remaining plant and machinery after a sale.

since 2015. It has been a leading name in the production of a popular brand of household vegetable oil known as “Abop,” which is in high demand.

Given the fact that the company is doing very well, it secured funds from its bankers and bought additional Plant and Machinery in excess of its immediate needs on June 1, 2013, for ₦24,600,000.

The Finance Director convinced the Board to dispose of part of the plant and machinery to boost the company’s working capital. Consequently, on December 31, 2015, the company sold part of the Plant and Machinery for ₦37,925,000 and spent ₦5,125,000 as expenses incidental to the sale. The market value of the remaining Plant and Machinery was ₦15,375,000 as of December 31, 2015.

However, the issue of the tax implications of these transactions is worrisome to the Managing Director, who is visibly disturbed that the Federal Inland Revenue Service (FIRS) might come after the company.

You are required to:
a. State any FOUR Chargeable Assets. (2 Marks)
b. State any FOUR conditions for granting Roll-Over Relief. (8 Marks)
c. Compute the Chargeable Gains on the asset sold. (4 Marks)
d. Compute the Capital Gains Tax. (2 Marks)
e. Compute the new cost of the remaining asset. (4 Marks)

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  • 20 Marks

AT – Nov 2016 – L3 – SB – Q2 – Taxation of Companies

Identify NPDC activities, explain the importance of leases in petroleum operations, and compute adjusted profit, chargeable profit, and chargeable tax.

Nigerian National Petroleum Corporation (NNPC) is one of the regulatory agencies in the Oil and Gas sector of the Nigerian economy. NNPC, through its subsidiaries, carries out various regulatory functions.

a. State any FIVE activities of the Nigerian Petroleum Development Company (NPDC), a subsidiary of NNPC. (5 Marks)

b. State the importance of an Oil Mining Lease and an Oil Prospecting Lease. (2 Marks)

c. **Mr. Gillani Azurhi intimated you about his desire to invest in any company engaged in petroleum operations. One of his friends advised him against the petroleum sector in view of the current low price of crude oil in the international market and the high cost of domestic operations. He declined the advice, arguing that the price will not remain at its current low level as Nigeria will not be in recession forever.

On his own, he carried out some research using the internet. He presented you with the following financial extracts of Joji Petroleum Company Limited, which he obtained from the internet:**

Details Amount (₦’000)
Current year capital allowances 6,080
Previous years’ capital allowances (b/f) 8,901
Custom duty 125
Royalties not included in the accounts 1,638
Loss brought forward 6,250
Petroleum Profits Tax payable 1,336

Assume a tax rate of 85%. You are required to:
i. Compute and explain the significance of Adjusted Profit. (9 Marks)
ii. Compute and explain the significance of Chargeable Profit. (2 Marks)
iii. Compute and explain the significance of Chargeable Tax. (2 Marks)

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  • 30 Marks

AT – Nov 2016 – L3 – SA – Q1 – Tax Administration and Dispute Resolution

Compute adjusted profit, assessable profit, capital allowances, and tax liabilities with election advisory for Zezee Nigeria Ltd.

Zezee Nigeria Limited was incorporated on September 7, 2012, but it did not commence business until July 1, 2013. Based on the Memorandum and Articles of Association, the company was incorporated to carry on the business of distributorship and general contracting.

Extracts of the Company’s Statements of Profit or Loss and Other Comprehensive Income are as given below:

Period 6 Months Ended Dec 31, 2013 Year Ended Dec 31, 2014 Year Ended Dec 31, 2015
Revenue 5,430,000 12,600,000 18,400,000
Direct Cost (890,000) (1,345,000) (1,910,000)
Gross Profit 4,540,000 11,255,000 16,490,000
Other Income 45,000 458,150 201,000
Distribution Cost (386,000) (820,000) (1,060,500)
Administrative Expenses (4,810,550) (6,510,440) (8,240,600)
Other Expenses (41,000) (113,240) (145,100)
Net (Loss)/Profit (652,550) 4,269,470 7,244,800

Additional Information:

  1. Other Income Comprises:
Details 6 Months Ended Dec 31, 2013 Year Ended Dec 31, 2014 Year Ended Dec 31, 2015
Sale of Scraps – 57,000 –
Interest Received on Treasury Bills – 325,000 120,000
Interest on Domiciliary Account 45,000 76,150 81,000
Total Other Income 45,000 458,150 201,000
  1. Administrative Expenses Include:
Details 6 Months Ended Dec 31, 2013 Year Ended Dec 31, 2014 Year Ended Dec 31, 2015
Depreciation 160,000 320,000 440,000
Preliminary and Formation Expenses 216,000 – –
Penalties and Fines – – 65,000
General Provision for Bad Debts 110,000 180,000 240,000
Staff Salaries 2,060,000 4,230,000 4,230,000
Office Rent 600,000 1,200,000 1,800,000
  1. Details of Property, Plant, and Equipment are as follows:
Asset Date of Purchase Cost (N)
Furniture and Fittings June 7, 2013 980,000
Motor Vehicles June 30, 2013 2,400,000
Office Equipment July 1, 2013 1,200,000
  1. On January 2, 2015, the company bought another motor vehicle for N1,800,000.
  2. Extracts of the Statements of Financial Position:
Period 6 Months Ended Dec 31, 2013 Year Ended Dec 31, 2014 Year Ended Dec 31, 2015
Net Assets 1,360,000 2,870,500 3,260,700
Paid-up Share Capital 5,000,000 5,000,000 5,000,000

Required:

For all the relevant years of assessment, you are required to:

a. Compute the Adjusted Profit/Loss. (9 Marks)
b. Determine the Assessable Profit/Loss and advise the Company on whether or not to exercise its right of election. (6 Marks)
c. Compute the capital allowances. (4½ Marks)
d. Compute the tax liabilities. (10½ Marks)

(Total 30 Marks)

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  • 15 Marks

CR – Nov 2016 – L3 – SC – Q7 – Regulatory Environment for Corporate Reporting

Discuss the merits and challenges of adopting IFRS in Nigeria and identify local standards still applicable post-IFRS adoption.

a. ABC Plc, in accordance with the regulations of the Nigerian Stock Exchange on transition to IFRS, prepared its first IFRS Financial Statement in 2012. The Financial Statement was contained in a voluminous document of 155 pages. Some of the stakeholders found it difficult to understand the essence of the voluminous document.

You are required to prepare a brief report, highlighting the essence and merits of the adoption of IFRS by Nigerian Companies and state some of the challenges that could be encountered. (10 Marks)

b. Statements of Accounting Standards (SAS) in Nigeria have been replaced by International Financial Reporting Standards (IFRS); however, some of these local standards relating to industry-specific rules which are not found in IFRS are expected to be applied by companies in the industries as far as they do not conflict with IFRS.

You are required to examine the above statement and identify those statements of Accounting Standards that are still applicable after the adoption of IFRS. (5 Marks)

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  • 15 Marks

CR – Nov 2016 – L3 – SC – Q6 – Events After the Reporting Period (IAS 10)

Assess the treatment of transactions involving a property sale in accordance with IFRS 5 and evaluate the impact of events on reported gains under IAS 10.

straight-line basis at the rate of 7.5%. An impairment loss of N350,000 was recognized at the end of May 31, 2013, financial year when accumulated depreciation was N1 million. Consequently, the property was valued at its estimated value in use. The company planned to move to new premises before the property was classified as held for sale on October 1, 2013. By this time, the fair value less costs to sell was N2.4 million.

Maranathan Plc published interim financial statements on December 1, 2013, by which time the property market had improved, and the fair value less costs to sell was reassessed at N2.52 million. At the year-end, on May 31, 2014, it had improved further, so that the fair value less costs to sell was N2.95 million. The property was disposed of eventually on June 5, 2014, for N3 million.

Required:
a. Assess the above transactions based on the requirements of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. (5 Marks)
b. Evaluate the impact of the events occurring on the property over time and on the reported gain in accordance with IAS 10, Events After the Reporting Period. (10 Marks)

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  • 15 Marks

CR – Nov 2016 – L3 – SC – Q5 – Ethical Issues in Corporate Reporting

Explain the concepts of creative accounting and window dressing, provide examples, reasons, and suggest preventive measures.

Manipulation of reporting entities book’s and records have been termed in many quarters as “Creative Accounting” and “Window Dressing”. The Management of Wastage Plc requires clarification of these two concepts.

Write a report to the management of Wastage Plc that includes:
a. Definitions of Creative Accounting and Window Dressing. (2 Marks)
b. Five examples of each concept. (5 Marks)
c. Three possible reasons for Creative Accounting and Window Dressing. (3 Marks)
d. Advice to management on five possible preventive measures of Creative Accounting. (5 Marks)

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