Question Tag: Asset Valuation

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  • 20 Marks

FM – Nov 2014 – L3 – SB – Q2 – Corporate Restructuring

Analyze divestment strategies for Chelsy Plc’s divisions, compute finance needs, and assess buyout and sale implications.

Chelsy Plc has two manufacturing divisions, Bolts and Nuts. The Bolts division is profitable whereas the Nuts division is not. The company’s share price has consequently declined to 50 kobo per share from a price of N2.83 per share three years ago.

The board of directors is considering two proposals:
i. To cease trading and close down the company.
ii. To close the Nuts division and continue the Bolts division through a leveraged management buyout. The new company will continue to manufacture bolts only but will require an additional investment of N275 million to grow the Bolts division’s after-tax cash flows by 3.5 percent in perpetuity. The proceeds from the sale of the Nuts division will be applied to pay the division’s outstanding liabilities. The finance raised from the management buyout will be applied in paying any remaining liabilities, fund additional investment, and purchase the current equity shares at a premium of 20 percent.

The Nuts division is twice the size of the Bolts division in terms of the assets attributable to it.

Extracts from the most recent financial statements of Chelsy Plc are as follows:

Statement of Financial Position as at 31 December 2013

N’000
Non-current assets 605,000
Current assets 1,210,000
Share capital (40 kobo per share) 220,000
Reserves 55,000
Liabilities (non-current and current) 1,540,000

Comprehensive Income Statement for the year ended 31 December 2013

Division Revenue Costs (prior to depreciation, interest, and tax)
Bolts division 935,000 (660,000)
Nuts division 1,870,000 (2,035,000)
Depreciation, interest, and tax (combined): (187,000)
Loss: (77,000)

If the company’s assets are sold, the estimated realizable values are as follows:

N’000
Non-current assets 550,000
Current assets 605,000

Additional Information:

  1. Redundancy and other costs will be approximately N297 million if the whole company is closed and pro rata for individual divisions that are closed. These costs have priority for payment before any other liabilities in case of closure. The taxation effects relating to this may be ignored.
  2. Company income tax on profits is 30%, and it can be assumed that tax is payable in the year it is liable.
  3. Annual depreciation on non-current assets is 10%, and this is the amount of investment needed to maintain the current level of activity.
  4. The new company’s cost of capital is expected to be 11%.

Required:

(a) Discuss, briefly, the possible benefits of divesting Bolts division through a management buyout. (4 Marks)
(b) Estimate the return the creditors and the shareholders will receive in the event that Chelsy Plc is closed and all its assets sold. (3 Marks)
(c) Estimate the additional amount of finance needed and the value of the new company if only the assets of Nuts division are sold and the Bolts division is divested through a management buyout. (8 Marks)
(d) Discuss the issues that should be taken into consideration in relation to:
i. Seeking potential buyers and negotiating the price
ii. Due diligence
(Assume that the Nuts division is to be sold as a going concern). (5 Marks)

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  • 10 Marks

CR – May 2021 – L3 – Q4b – Fair Value Measurement (IFRS 13)

Explain fair value hierarchy under IFRS 13 and compute valuation for Bakatari Plc’s assets.

Bakatari Plc is a public limited company that is reviewing the fair valuation of its assets in line with the provisions of IFRS on fair value measurement.

The company has assets that are traded in different markets and is uncertain as to which valuation to use. The assets have to be valued at fair value under International Financial Reporting Standards. Bakatari Plc., currently only buys and sells the assets in market ‘C’.

The data relating to the assets are set out below:

Market Market A Market B Market C
Volume of market (units) 12 million 6 million 3 million
Price per unit N19 N16 N22
Cost of entering the market per unit N2 N2 N3
Transaction cost per unit N1 N2 N2

Required:

i. Explain the three-level hierarchy for fair value measurement used in IFRS 13. (6 Marks)

ii. Discuss with relevant computations how Bakatari Plc should value the above assets under IFRS 13. (4 Marks)

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  • 8 Marks

CR – Nov 2016 – L3 – Q4b -Fair Value Measurement (IFRS 13)

Determine the principal market and fair value measurement for product sales in the Lagos and Accra markets.

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 the 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:

Lagos Market (N’000) Accra Market (N’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)

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  • 2 Marks

CR – Nov 2016 – L3 – Q4a – Fair Value Measurement (IFRS 13)

Define fair value as per IFRS 13, addressing the standardized approach to valuation.

Prior to the advent of IFRS 13, many standards such as IAS 16, IAS 38, IAS 40, and IAS 39 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)

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  • 15 Marks

CR – Nov 2018 – L3 – SC – Q5 – Impairment of Assets (IAS 36)

Evaluate if a manufacturing machine is impaired due to market changes and calculate the impairment charge.

Atigen Manufacturing Limited bought a new machine for its factory in Otta, Ogun State, for N140 million on January 1, 2015. At acquisition, the machine was estimated to have a life span of 7 years with no scrap value. The carrying amount at December 31, 2017, is N80 million.

The machine generates largely independent cash flows and is therefore tested for impairment as a standalone asset. Due to a downturn in the economy and the reduction and cancellation of major customer orders, the directors concluded that the machine might be impaired.

You are provided with the following information:

  • Fair value of the machine: N60 million
  • Selling costs: 5% of the fair value
  • Value-in-use based on discounted future cash flows: N63.5 million

Required:

a. Determine if the machine is impaired based on the above information. (6 Marks)

b. Calculate (if any) the impairment charge that the directors should recognize in profit or loss. (9 Marks)

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  • 40 Marks

PSAF – Nov 2020 – L2 – Q1 – International Public Sector Accounting Standards (IPSAS)

Discuss IPSAS transition exemptions and prepare financial statements for Oranta State Government using IPSAS accrual.

IPSAS 33, gives a transition relief (exemption) of up to three years within which to develop models for transiting to IPSAS accrual. However, the government of Nigeria adopted accrual IPSAS on revenue from exchange transactions effective January 1, 2016.

Oranta State Government mandated the Accountant-General of the State to implement the IPSAS accrual in the preparation of their financial statements with effect from January 2018 which was complied with accordingly.

For the smooth implementation of IPSAS accrual, the State Executive Council approved the following:

(i) Asset valuation committee to be chaired by the Deputy Governor with the Commissioner of Finance, Commissioner of Budget and Planning, Chairman State Internal Revenue Service, Accountant-General of the State, and Head of Service as members while a Director in the Office of the Secretary to the State Government was appointed as the Secretary.
(ii) The Committee was mandated to value all the State assets and liabilities on or before the implementation of IPSAS accrual.
(iii) The Committee was allowed to engage the services of competent valuers for the job.
(iv) The valuation of the assets and liabilities should be on a continuous basis and any value agreed and approved by the State Executive Council should be brought into the books in the year of valuation.
(v) All assets and liabilities incurred after implementation of IPSAS accrual should be recognized in the year they occurred.

The consolidated trial balance for the year ended December 31, 2017, based on IPSAS cash is as follows:

Extracted consolidated cashbook for the year 2018:

The following information is relevant:
(i) The employees‟ salaries and wages bill for the month of December 2018
amounting to N6.5billion was outstanding at the end of the year.
(ii) The following information was extracted from the unit in charge of
accounting for property, plant and equipment (PPE): 100 sets of HP
computers were received from Koko Computers Limited to assist the State
government to eradicate ghost workers from the payroll- the HP series
P1120, 2016 model. Based on this information, a call was made to three of
their computer suppliers to find out the current price of the HP P1120. Two of
the suppliers quoted N450,000 each, while one quoted N500,500 each.
Based on this information, the fair value of the computers, were taken as
N500,000 each.
(iii) The government during the year received an asset valuation report from the
Asset Valuation Committee that was set up to carry out the valuation of the
old assets and liabilities of the State.
(iv) The following values were recommended and approved by the State
Executive Council respectively:

(v) Pension and gratuity of N15 billion was outstanding at the end of the year
(vi) Some of the accounting policies adopted by the government for depreciation
include the following rates;

(vii) During the year, one of the contractors took the State to court for breach of
contract. The case was still in court as at the end of the year and from all
indications, judgment will eventually be in his favour. The legal adviser
estimated the judgment debt to be N50million.
(viii) Value of office consumables based on inventory sheet as at December 31,
2018 was N550million.
(ix) The following expenses were incurred but not settled as at end of the year.

(x) An extract from the foreign loan amortisation schedule indicates that a total
sum of N32billion comprising principal and interest of N2billion was due
and paid during the year. Also domestic loan of N13billion comprising
principal and interest of N1billion was paid during the year. The interest
payable on domestic and external loans at the end of the year amounted to
N3billion and N5 billion respectively.
(xi) The investment of 10% treasury bills for 360 days was due to mature on
January 1, 2018 and reinvested immediately for another term.
(xii) The revolving loan attracts interest of 4% per annum and it is paid along
with the principal.
Required:
a. In line with the provisions of IPSAS 33, explain how the following revenue
from exchange transactions should be recognised:
i. Aid and grants receivable as at December 31, 2015 (2 Marks)

ii. Debt forgiveness approved on or after January 1, 2016 (2 Marks)
iii. Personal income tax on or after January 1, 2016 (2 Marks)
b. Prepare in vertical form:
i. Statement of financial performance for the year December 31, 2018.
(17 Marks)
ii. Statement of financial position for the year December 31, 2018.
(17 Marks)
(Total 40 Marks)

 

 

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  • 1 Marks

FA – May 2012 – L1 – SA – Q29 – Accounting for Property, Plant, and Equipment (IAS 16)

Calculating the cost of a moulding machine to be stated in the financial statement.

Ishola & Sons Limited purchased a moulding machine for N2,550,000 from Japan, the transport expenses amounted to N250,000, installation cost amounted to N150,000, and the annual maintenance is N170,000. At what cost will the moulding machine be stated in the statement of financial position?

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  • 1 Marks

FA – May 2012 – L1 – SA – Q7 – Accounting for Property, Plant, and Equipment (IAS 16)

Identifying the correct accounting entry for an increase in asset value due to revaluation.

Which accounting entries should be raised to record an increase in the value of assets on revaluation by the partners?

A. Debit revaluation account and credit partners’ capital account
B. Debit partners’ capital account and credit revaluation account
C. Debit revaluation account and credit partners’ current account
D. Debit revaluation account and credit assets account
E. Debit assets account and credit revaluation account.

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  • 1 Marks

FA – May 2012 – L1 – SA – Q5 – Accounting for Property, Plant, and Equipment (IAS 16)

Identifying features of non-current assets under IAS 16.

According to IAS 16 – “Accounting for Property, Plant and Equipment” all of the following are features of non-current assets EXCEPT where they are:

A. Held by an enterprise for use in the production or supply of goods and services
B. Expected to be used on a continuing basis
C. Intended for sale in the ordinary course of business
D. Financed by leasehold rights
E. Held for rental to others, or for administration purpose.

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  • 20 Marks

QTB – Nov 2015 – L1 – SB – Q1 – Mathematics of Business Finance

Calculate depreciation and salvage value of an asset using the reducing balance method.

A company buys an item having a useful life of 10 years for N1,000,000. If the company depreciates the item by the reducing balance method:

a. Determine the depreciation for the first year.
b. Estimate the depreciation for the second and third years.
c. What is the salvage value of the asset?

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  • 1 Marks

FA – May 2014 – L1 – SA – Q17 – Accounting Concepts

This question tests knowledge of terminology used in container accounting for the difference between cost and carrying amount.

In Container accounting, the difference between the cost and carrying amount of a container is known as …………………….

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  • 1 Marks

FA – May 2014 – L1 – SA – Q4 – Accounting Concepts

Defines the depreciable amount of an asset.

What is the cost of an asset or other amount substituted from costs, less its residual value?

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  • 1 Marks

FA – Nov 2013 – L1 – SA – Q36 – Accounting for Property, Plant, and Equipment (IAS 16)

Understanding the term for when the carrying amount of an asset exceeds its recoverable amount under IAS 16.

In accordance with IAS 16 (Property, Plant and Equipment), the amount by which the carrying amount of an asset exceeds its recoverable amount is called ____________.

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  • 1 Marks

FA – Nov 2013 – L1 – SA – Q11 – Partnership Accounts

Reason for revaluing assets when partnership composition changes.

Assets must be revalued where there is a change in the partnership composition because:

A. Inflation affects the values of partnership assets
B. The economic value of the partnership must be enhanced
C. Deflation affects the value of partnership assets
D. It helps to prevent injustice to the concerned partners
E. The law insists that there should be a revaluation

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  • 1 Marks

FA – Nov 2013 – L1 – SA – Q1 – Financial Statements Preparation

Determining the total cost for equipment recognition.

Fred Manufacturing Enterprise purchased equipment for N150,000. The equipment was transported at a cost of N15,000 and installed at a cost of N7,500. The employees were trained in the use of the equipment at a cost of N50,000.

At what cost will the equipment be recognised in the books of account?

A. N150,000
B. N157,500
C. N165,000
D. N172,500
E. N222,500

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  • 7 Marks

FR – May 2018 – L2 – Q7b – Impairment of Assets (IAS 36)

Explain the process of identifying and accounting for impairment of property, plant, and equipment under IAS 36.

As the accounting officer in charge of your company’s property, plant, and equipment (PPE), draft a memo to the chief accountant explaining how impairment of PPE should be identified and accounted for by your company in accordance with IAS 36.

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  • 1 Marks

FA – May 2022 – L1 – SA – Q18 – Depreciation Methods and Accounting for Disposals

Calculate the value of an asset after 3 years using the reducing balance method.

A company bought equipment worth ₦200,000 and the equipment is to be depreciated at 5%, using the reducing balance method. What would be the value of the asset after 3 years?

A. ₦170,000
B. ₦171,475
C. ₦180,505
D. ₦190,000
E. ₦200,000

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  • 1 Marks

FA – May 2022 – L1 – SA – Q11 – Partnership Accounts

Determine the amount to be debited to the office equipment account when a partner contributes equipment.

As part of the initial investment, a partner contributed office equipment that originally cost ₦20,000,000 and on which accumulated depreciation of ₦12,500,000 had been recorded. If the partners agree on a valuation of ₦9,000,000 for the equipment, what amount should be debited to the office equipment account?

A. ₦7,500,000
B. ₦9,000,000
C. ₦9,500,000
D. ₦12,500,000
E. ₦20,000,000

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  • 15 Marks

CR – Nov 2023 – L3 – Q4a – Business Valuation

Determine appropriate valuation methods and price range for Odenkey Plc based on financial statements and additional information provided.

a) The Directors of Odenkey Plc have decided to sell their business and have begun a search for organisations interested in the purchase. As a Consultant, you have been asked to determine the appropriate range of price per share suitable for the company. Relevant information is as follows:

Additional information:

  1. The receivables include GH¢12,000,000 of revenue for credit sales made on a ‘sale or return’ basis. On 31 December 2022, customers who had not paid for the goods, had the right to return GH¢5,000,000 worth of them. Odenkey Plc applied a markup on cost of 25% on all these sales. Based on previous transactions, it is expected that 80% of the goods will be returned.
  2. The property, plant and equipment includes a building that was originally acquired for GH¢20,000,000 five years ago with an initial estimated useful life of 20 years. The property was revalued to GH¢18,000,000 as at 31 December 2022, and the revaluation reserve is yet to be recognised in the financial statement. Due to degradation of the land on which the building stands, the company undertook an impairment review and it was found that, the fair value of the property as at 31 December 2022 is estimated to be GH¢17,000,000. The value in use of the property is calculated as being GH¢16,000,000.
  3. The patent was originally acquired 2 years ago and the rights were set at 50 years from the date the patent was originally purchased. The patent was amortised by Odenkey Plc using straight line method over the remaining copyright period. However, recent legislative changes passed on 1 January 2022 have extended the patent period forever. The Research and Development departments projects net future cashflow of GH¢4,500,000 per year from the patent even though the prices of similar patents on the market are valued at GH¢ 18,500,000.
  4. The company had a retained earnings balance of GH¢5,000,000 as at 31 December 2021. It has always practiced a dividend payout ratio of 35% when it makes profit during the year.
  5. The following information relates to Odenkey Plc and a competitor Odafomtim Ltd: Odenkey Plc Odafomtim Ltd Number of Shares 3,000,000 500,000 5 years’ average sales growth 8% 9% 5 years’ average growth in EBIT 6% 10.5% P/E ratio as at 31 December 2022 – 18.61 Estimated return on equity 9.5% 12%
  6. The company’s cost of capital is 25%.
  7. Odafomtim Ltd is a listed firm and has a sizeable market share.

Required:

i) Use the information provided to suggest FOUR (4) valuations which prospective purchasers might make.

(12 marks)

ii) Comment on the appropriateness of the range of price per share of Odenkey Plc that the Directors can offer.

(3 marks)

 

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  • 6 Marks

CR – Nov 2017 – L3 – Q2a – IAS 20

Explain the financial reporting treatment for a grant awarded for equipment purchase and subsequent repayment under IAS 20.

Dodowa Ltd is a large textile manufacturing company. Wherever possible, it structures its operations to take advantage of any financial assistance available from national and regional authorities.

During the year, a heavy-duty equipment was purchased for Dodowa Ltd’s main manufacturing operation for GH¢12 million on 1 April 2015. The equipment was expected to be used for 10 years, with a zero residual value. Dodowa Ltd pre-applied for a government grant on 1 January 2015, meeting all necessary criteria for awarding the grant. On 1 February 2015, the grant was awarded for 40% of the equipment’s cost and the cash was received on 1 July 2015. Conditions relating to maintaining employment are attached to the grant and if they are not satisfied, then the grant becomes repayable, or partly repayable.

Dodowa Ltd expected to meet these conditions when the grant was applied for. However, due to worsening economic conditions, redundancies for some staff on 31 December 2016 resulted in a repayment of 10% of the original grant becoming due. The repayment was made on 1 February 2017. Dodowa Ltd accounted for the grant as a reduction in the carrying amount of the asset.

Required:
Explain, with suitable calculations, the financial reporting treatment of the above in the financial statements of Dodowa Ltd for the year ended 31 December 2016 in accordance with IAS 20: Accounting for Government Grants and Disclosure of Government Assistance.

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