Question Tag: Fair Value

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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.

Question

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)

Answer

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Tags: Charity Reporting, Efficiency Measurement, Fair Value, Historical Cost, Not-for-Profit Reporting
Level: Level 3

Topic: Ethical Issues in Corporate Reporting

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.

Question

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)

Answer

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Tags: Alternate Use, Fair Value, IFRS 13, Principal Market, Risk Discount
Level: Level 3

Topic: Tax Planning and Management
Series: NOV 2016

CR – May 2016 – L3 – Q4c – Share-Based Payments (IFRS 2)

Discuss how the SARs granted by Yerokun Ltd should be accounted for under IFRS 2 and IFRS 13 from the grant date to April 30, 2014.

Question

On May 1, 2011, Yerokun Limited granted 500 share appreciation rights (SARs) to its 300 managers. All of the rights vested on April 30, 2013, but they can be exercised from May 1, 2013, to April 30, 2015. At the grant date, the value of each SAR was ₦10 and it was estimated that 5% of the managers would leave during the vesting period. The fair value of the SARs is as follows:

Date	Fair Value of SAR
April 30, 2012	₦9
April 30, 2013	₦11
April 30, 2014	₦12

All of the managers who were expected to leave employment did not leave the company as expected before April 30, 2013. On April 30, 2015, 60 managers exercised their options when the intrinsic value of the right was ₦10.50 and were paid.

Yerokun Limited is confused as to whether to account for SARs under IFRS 2 Share-Based Payment or IFRS 13 Fair Value Measurement and would like to be advised as to how the SARs should have been accounted for from the grant date to April 30, 2014.

Answer

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Tags: Fair Value, IFRS 13, IFRS 2, SARs, Share Appreciation Rights, Vesting Period
Level: Level 3

Topic: Share-Based Payments (IFRS 2)

CR – May 2017 – L3 – Q6 – Fair Value Measurement (IFRS 13)

Identify the fair value hierarchies under IFRS 13 and distinguish between principal and most advantageous markets.

Question

The International Accounting Standards Board (IASB) aims at enhancing the guidance available for assessing fair value in order to increase consistency and comparability in fair value measurements and related disclosures. To this end, fair value measurements are categorized into a three-level hierarchy, based on the type of inputs to the valuation techniques used in IFRS 13. IFRS uses the terms principal or most advantageous market.

Required:

(i) What are the fair value hierarchies under IFRS 13? (3 Marks)

(ii) Distinguish between the principal and most advantageous market and state how price is determined in the principal market taking into consideration transport and transaction costs. (5 Marks)

Answer

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Tags: Fair Value, Hierarchy, IFRS 13, Market, Price determination
Level: Level 3

Topic: Fair Value Measurement (IFRS 13)

CR – Nov 2016 – L1 – SB – Q4 – Fair Value Measurement (IFRS 13)

Discuss fair value principles, principal market, and valuation adjustments under IFRS 13.

Question

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 formerly operating in Nigeria that had recently relocated its operation 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 (N’000)	Accra (N’000)
Sale Price	260	250
Transaction Cost	(30)	(10)
Transport Cost	(20)	(20)
Net Price	210	220

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 economic empowerment programs. The land is expected to be used for commercial purposes. The fair value of the land if used for commercial purposes is N100 million, which includes tax credits.

Market participants consider alternative use for residential purposes, with an estimated fair value of N148 million, adjusted for:

Legal Costs: N4 million
Viability Analysis Costs: N6 million
Demolition Costs: N2 million
Planning Permission Uncertainty: 20% risk discount.

Required:
Discuss how Megida Plc should compute the fair value of the Abuja land with reference to IFRS 13 principles. (10 Marks)

Answer

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Tags: Fair Value, IFRS 13, Measurement Methods, Non-Financial Assets, Principal Market
Level: Level 3

Topic: Fair Value Measurement (IFRS 13)
Series: NOV 2016

CR – May 2021 – L3 – Q4c – Fair Value Measurement (IFRS 13)

Advise on measuring the fair value of land for residential purposes in financial statements.

Question

Kantala Limited is a company based in Abeokuta, the Ogun State capital. It uses the revaluation model for its non-current assets. Kantala Limited has several plots of farmland which are unproductive.

The company feels that the land would have more value if it were used for residential purposes.

There are several potential purchasers for the land, but planning permission has not yet been granted by the Abeokuta Planning Authority for use of the land for residential purposes.

However, preliminary enquiries with the planning authority seem to indicate that the planning permission may be granted. Additionally, the Ogun State Government has recently indicated that some agricultural land should be used for residential purposes.

Required:

Advise Kantala Limited on how to measure the fair value of the land in its financial statements. (2 Marks)

Answer

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Tags: Agricultural Land, Fair Value, IFRS 13, Revaluation Model
Level: Level 3

Topic: Fair Value Measurement (IFRS 13)

CR – May 2021 – L3 – Q4 – Fair Value Measurement (IFRS 13)

Evaluate fair value relevance versus historical cost and explain valuation techniques under IFRS 13.

Question

a. Fair value is a market-based measurement, not an entity-specific measurement. It focuses on assets and liabilities and on the exit (selling) price. It also takes into account market conditions at the measurement date. In other words, fair value measurement looks at the amount for which the holders of an asset could sell it and the amount which the holder of a liability would have to pay to transfer it.

Required:

i. Discuss the view that fair value is a more relevant measure to use in corporate reporting than historical cost. (4 Marks)

ii. Discuss the valuation techniques in fair value measurement in accordance with IFRS 13. (4 Marks)

Answer

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Tags: Fair Value, Historical Cost, IFRS 13, Valuation Techniques
Level: Level 3

Topic: Fair Value Measurement (IFRS 13)

CR – Nov 2016 – L3 – Q4c – Fair Value Measurement (IFRS 13)

Discuss IFRS 13’s principles in computing fair value for land with alternative uses in Abuja.

Question

Megida Plc, a public limited liability company, has acquired hectares of land in Abuja designated for economic empowerment programs, intended for commercial use. The fair value of the land for commercial purposes is estimated at N100 million. Utilizing the land for commercial purposes would contribute to reducing unemployment and attract an annual tax credit, which is based on the lower of 15% of the fair market value or N10,000,000, at a 20% tax rate.

Megida Plc has also considered an alternative use of the land for residential purposes, a choice market participants may support. The fair value of the land for residential purposes is estimated to be N148 million, excluding certain associated costs such as:

Legal costs: N4,000,000
Project viability analysis: N6,000,000
Demolition of commercial structures: N2,000,000

Due to uncertainty in obtaining residential use permission from the Abuja Municipal Authority, market participants would discount the fair value by 20%.

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)

Answer

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Tags: Fair Value, Highest and Best Use, IFRS 13, Market Participants, Risk Adjustment
Level: Level 3

Topic: Fair Value Measurement (IFRS 13)

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.

Question

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)

Answer

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Tags: Asset Valuation, Fair Value, IFRS 13, Most Advantageous Market, Principal Market
Level: Level 3

Topic: Fair Value Measurement (IFRS 13)

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

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

Question

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)

Answer

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Tags: Asset Valuation, Fair Value, IFRS 13, Liability Valuation
Level: Level 3

Topic: Fair Value Measurement (IFRS 13)

FR – Mar 2023 – L2 – Q5d – Business combinations and consolidation

Explains fair value in IFRS 13 and its application to assets and liabilities in business combinations.

Question

d) IFRS 3: Business Combinations defines fair value consistently with IFRS 13: Fair Value Measurement. IFRS 3 requires the acquiree’s assets and liabilities to be incorporated into the consolidated financial statements at their fair values rather than at their carrying amounts.

Required:
i) Explain the meaning of fair value in accordance with IFRS 13. (2 marks)
ii) Explain the reasons why the acquiree’s assets and liabilities are measured and recognised at their fair value within the consolidated financial statements. (3 marks)

Answer

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Tags: Assets and liabilities, Business Combinations, Consolidation, Fair Value, Goodwill, IFRS 13, IFRS 3
Level: Level 2

Topic: Business combinations and consolidation
Series: MAR 2023

FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis

Assessment of impairment loss for a cash-generating unit including intangible assets and goodwill.

Question

Hukpor Ltd (Hukpor) manufactures a variety of consumer products. The company’s founders have managed the company for thirty years and are now interested in selling the company and retiring. Seekers Ltd is looking into the acquisition of Hukpor and has requested the company’s latest financial statements and selected financial ratios in order to evaluate Hukpor’s financial stability and operating efficiency. The summary of information provided by Hukpor is presented below:

Statements of Financial Position as at 31 December

Selected Financial Ratios of Hukpor Ltd for 2017
Current ratio 1.61:1
Acid-test ratio 0.64:1
Inventory turnover 3.17 times
Times interest earned 8.55 times
Debt-to-equity ratio 86%
Required:
a) Calculate ratios for the years 2018 for Hukpor in comparison with ratios for 2017. (5 marks)
b) For each of the ratios computed for 2018, analyse Hukpor’s performance for 2018 based
on the results of the ratio computed, in comparison with the results for 2017. (10 marks) c) Explain FIVE (5) limitations of accounting ratios. (5 marks)
(Total: 20 marks)

Answer

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Tags: Cash-Generating Unit, Fair Value, IAS 36, Impairment, Value in Use
Level: Level 2

FR – May 2017 – L2 – Q2d – Financial Reporting Standards and Their Applications

Recommend accounting treatments for equity shares and bonds in accordance with IFRS 9.

Question

Bawaleshie Ltd controls the following financial assets at its reporting date of 31 January 2017:

i) An investment in the equity shares of Obojo Ltd was purchased during April 2016 for GH¢2.6 million. The fair value of this investment at 31 January 2017 was GH¢2.8 million. Bawaleshie Ltd decided at the date of purchase to recognize any fair value gains and losses through other comprehensive income.
(2 marks)

ii) An investment in a bond issued by Shiashie Ltd on 1 February 2016. This bond cost GH¢10 million (equal to its par value) and entitles Bawaleshie Ltd to 8% interest per annum on the anniversary of the bond’s issue. The principal is to be returned on 31 January 2021. It is the intention of Bawaleshie Ltd to retain the bond in order to collect the contracted cash flows on the due dates.
(3 marks)

Required:
Recommend how the above financial assets should be accounted for at 31 January 2017 in accordance with the requirements of IFRS 9 Financial Instruments.

Answer

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Tags: Bonds, Equity Investment, Fair Value, Financial instruments, IFRS 9
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2017

FR – Nov 2021 – L2 – Q2c – Financial Reporting Standards and Their Applications

This question addresses how to account for the impairment of a cash-generating unit under IAS 36, including the allocation of impairment to assets.

Question

Kwik Ltd (Kwik) runs a unit in Ablekuma Metropolis that has suffered a massive drop in income due to failure in its technology on 1 January 2018. As a result, the following carrying amounts were recorded in the books immediately before the impairment test.

Asset	Carrying Amount (GH¢million)
Goodwill	20
Technology	5
Equipment	10
Land	50
Buildings	30
Other net assets	40
Total	155

The value in use of the unit is estimated at GH¢85 million, and Kwik has received an offer of GH¢75 million for the unit. The technology is worthless following its complete failure. Other net assets include inventory, receivables, and payables. It is considered that the carrying amount of other net assets is a reasonable representation of its net realisable value.

Required:
In accordance with IAS 36: Impairment of Assets, show the accounting treatment for the above transactions.

Answer

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Tags: Allocation of Impairment, Cash-Generating Unit, Fair Value, Goodwill, Impairment, Value in Use
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2021

FR – May 2016 – L2 – Q2 – Group Financial Statements and Consolidation

Prepare a consolidated statement of financial position and calculate the non-controlling interest for H Plc, and explain the need to consolidate fair values.

Question

On 1st April 2014, H Plc. acquired four million of the ordinary shares of S Ltd, paying GH¢4.50 each. At the same time, H Plc also purchased GH¢500,000 of S Ltd 10% redeemable preference shares. At the acquisition date, the retained earnings of S Ltd were GH¢8,400,000.

Reproduced below are the draft statements of financial positions of the two companies at 31st March 2015:

Extracts from the statement of profit or loss of S Ltd, before intra group
adjustments, for the year to 31st March 2015 are:

The following information is relevant:

Included in the land and buildings of S Ltd is a large area of development land at a cost of GH¢5 million. Its fair value at the date S Ltd was acquired was GH¢7 million, and by 31st March 2015, this had risen to GH¢8.5 million. The group valuation policy for development land is to carry it at fair value and not depreciate it.
At the date of acquisition of S Ltd, its plant and equipment included plant that had a fair value of GH¢4 million in excess of its carrying value. This plant had a remaining life of 5 years. Depreciation is calculated on a straight-line basis.
During the year, S Ltd sold goods to H Plc. for GH¢1.8 million. S Ltd adds a 20% mark-up on cost to all its sales. Goods with a transfer price of GH¢450,000 were included in the inventory of H Plc. at 31st March 2015. The balance on the current accounts between H Plc. and S Ltd was GH¢240,000 on 31st March 2015.
An impairment test carried out at 31st March 2015 showed that consolidated goodwill was impaired by GH¢1,488,000.
S Ltd had paid its preference dividends in full and ordinary dividends of GH¢500,000.

Required:

Prepare the consolidated statement of financial position of H Plc. as at 31st March 2015.
Calculate the non-controlling interest in the adjusted profit of S Ltd for the year to 31st March 2015.
Explain why IFRS 3 Business Combinations requires an acquirer to consolidate the fair values of the assets and liabilities of an acquired subsidiary, at the acquisition date.

Answer

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Tags: consolidated financial statements, Depreciation, Fair Value, Goodwill, Group Structure, Non-Controlling Interest, Post-Acquisition Profit
Level: Level 2

Topic: Group Financial Statements and Consolidation
Series: MAY 2016

FR – March 2024 – L2 – Q2a – Financial Reporting Standards and Their Applications

Evaluate financial reporting treatment of Sikapa and Cocoa bonds in accordance with IFRS 9: Financial Instruments.

Question

Kombra Ltd (Kombra) is a market leader in the printing and publishing industry. To benefit from a potential future decline in interest rates, Kombra invests in bonds and issues callable bonds. It occasionally trades these bonds by immediately flipping them for a profit. Others are held for the long term.

Kombra purchased two bonds on 1 January 2023. Details of the two particular bonds are as follows:

	Sikapa Bond	Cocoa Bond
Nominal value of bond	GH¢47.25 million	GH¢31.5 million
Coupon rate	4%	5%
Purchase price of bond	GH¢40.425 million	GH¢29.4 million
Effective yield to maturity	6.75%	7.8%

The Sikapa bond was bought with the intention of keeping it for a long time and withdrawing the interest and principal as they fall due.

The Cocoa bond was bought at a deep discount, and the aim is to wait until the market value increases, and then sell it at a profit. The Cocoa bond had a fair value of GH¢28.875 million as of December 31, 2023.

In both situations, the coupon, which is due on December 31 each year, has been paid as agreed.

Required:
In the case of each bond above, show the financial reporting treatment required by IFRS 9: Financial Instruments for the year ended 31 December 2023. Show all workings clearly.

Answer

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Tags: Amortised Cost, Bonds, Fair Value, Financial instruments, Financial Reporting, IFRS 9
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAR 2024

FR – Nov 2016 – L2 – Q2e – Preparation of Financial Statements

Discuss how a plant classified as held for sale should be accounted for under IFRS 5.

Question

Sofoline Ltd has a plant which cost GH¢40,000 and was purchased on 1 January 2013 with a useful life of 10 years. The plant was being used as part of its business operating capacity. On 30 June 2015, Sofoline Ltd made a decision to classify the plant as held for sale and an agent was appointed for the sale of the plant, which started being advertised at a selling price of GH¢29,000, which was considered to be its fair value. The selling expenses are estimated to be GH¢1,500. The asset has not yet been sold by the year-end of 31 December 2015, and it has a fair value less cost to sell of GH¢24,000 on this date.

Required:
Discuss how this will be accounted for in the financial statements of Sofoline Ltd for the year ended 31 December 2015 in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Answer

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Tags: Fair Value, Financial Statements, Held for Sale, IFRS 5, Impairment, Non-current Assets
Level: Level 2

Topic: Preparation of Financial Statements
Series: NOV 2016

CR – Nov 2018 – L3 – Q2c – IFRS 13 Fair value measurement

Advise Gonja Ltd on the fair value measurement of its real estate-linked investment portfolio in the financial statements for 31 July 2018.

Question

Gonja Ltd is an investment company that holds a portfolio of securities linked to the real-estate market in Ghana. The following information is available at 31 July 2018 regarding this portfolio:

The portfolio cost GH¢13 million 2 years ago.
Real-estate prices in Ghana are generally accepted to have dropped by 20-30% in the past 2 years.
The portfolio of securities held by Gonja is difficult to value, as there is no active market. However, the company has received an offer of GH¢2.6 million for this portfolio from an investor. It has no intention of accepting this offer, although similar companies have accepted offers from this investor due to financial difficulties.
A normal sale in the present climate could be reasonably expected to yield GH¢6 million, based on an analysis of transactions in similar assets.
Gonja’s valuation models suggest that the real estate market in Ghana will recover, and it expects that the portfolio will generate GH¢12 million (at present value) over the next three years.

Required:
In accordance with IFRS 13: Fair Value Measurement, advise Gonja Ltd on the amount it should state its investment portfolio in its financial statements to 31 July 2018, assuming it wishes to use fair value as measured.

Answer

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Tags: Fair Value, IFRS 13, Investment Portfolio, Level 2 Inputs, Level 3 Inputs, Valuation Techniques
Level: Level 3

Topic: IFRS 13 Fair value measurement
Series: NOV 2018

CR – Nov 2018 – L3 – Q2b – Financial instruments: Recognition and measurement Corporate reporting

Recommend the financial reporting treatment for an interest-free government loan received by Bole Bamboi Ltd, including suitable calculations.

Question

On 1 June 2017, Bole Bamboi Ltd (Bole Bamboi) purchased a factory building in a regional development area for GH¢4 million. It used the building to store some relocated equipment, but shortly after the purchase, the roof needed to be replaced. Bole Bamboi has been replacing the roof of the factory building with an environmentally friendly one, including insulation and integrated solar panels. The replacement of the roof will cost GH¢2 million. The cost of the replacement is to be incurred by Bole Bamboi; however, the Ministry of Trade and Industry advanced a 5-year, interest-free loan to Bole Bamboi on 1 July 2017 to finance the GH¢2 million cost. The loan has to be repaid in 5 equal annual instalments of GH¢400,000 beginning on 30 June 2018. An equivalent loan from Bole Bamboi’s bank with the same repayment terms would have been made at a fixed annual interest rate of 5% for the 5 years.

The present value of 5 annual payments of GH¢1 at 5% is GH¢4.32948.

Required:
In accordance with IFRS, recommend, with suitable calculations, the financial reporting treatment of the above items in the financial statements of Bole Bamboi for the year ended 31 December 2017.

Answer

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Tags: Discounting, Fair Value, Financial Reporting, Government Loan, Interest-Free Loan
Level: Level 3

Topic: Financial instruments: Recognition and measurement Corporate reporting
Series: NOV 2018

CR – May 2016 – L3 – Q2b – IAS 36: Impairment of assets

Advise on impairment effects on consolidated financial statements for various scenarios including subsidiaries, plant assets, and R&D projects.

Question

AT Group Ltd is preparing its financial statements to 30th June 2015. The following situations have been identified by an impairment review team;

On 1st July 2014, AT Group Ltd acquired the whole share capital of two subsidiary companies, Accra Ltd and Tema Ltd, in separate acquisitions. Consolidated goodwill was calculated as follows;

Accra Ltd Tema Ltd GH¢’000 GH¢’000 Purchase Consideration 24,000 9,000 Estimated fair value of net assets (16,000) (6,000) Consolidated goodwill 8,000 3,000

i) A review of the fair value of each subsidiary’s net assets was undertaken in June 2015. Unfortunately both companies’ net assets had declined in value. The estimated value of Accra Ltd.’s net assets as at 1st July 2014 was now only GH¢15,000,000. This was due to more detailed information becoming available about the market value of its specialized properties. Tema Ltd.’s net assets were estimated to have a fair value of GH¢1,000,000 less than their carrying value. This fall was due to some physical damage occurring to its plant and machinery. (4 marks)

ii) AT Group Ltd has an item of earth moving plant, which is rented out to companies on short-term contracts. Its carrying value, based on depreciated historical cost is GH¢400,000. The estimated selling price of this asset is only GH¢250,000, with associated selling expenses of GH¢5,000. A recent review of its value in use based on its forecast future cash flows was estimated at GH¢500,000. Since this review was undertaken, there has been a dramatic increase in interest rates that has significantly increased the cost of capital used by AT Group Ltd to discount the future cash flows of the plant. (6 marks)

iii) AT Group Ltd is engaged in a research and development project to produce a new product. In the year to 30th June 2015, the company spent GH¢120,000 on research that concluded that there were sufficient grounds to carry the project on to its development stage and a further GH¢75,000 had been spent on development. At that date management having decided that they were not sufficiently confident in the ultimate profitability of the project wrote off all the expenditure to date to the income statement. In the current year further direct development costs have been incurred of GH¢80,000 and the development work is now complete with only an estimated GH¢10,000 of costs to be incurred in the future. Production is expected to commence within the next few months. Unfortunately the total trading profit from sales of the new product is not expected to be as good as market research data originally forecast and is estimated at only GH¢150,000. As the future benefits are greater than the remaining future costs, the project will be completed, but due to the overall deficit expected, the directors have again decided to write off all the development expenditure. (5 marks)

Required: Advise, with numerical illustrations where possible, how the information in (i) to (iii) above would affect the preparation of AT Group Ltd.’s consolidated financial statements to 30th June 2015.

Answer

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Tags: Carrying Value, Fair Value, Goodwill, Impairment, Research and Development, Value in Use
Level: Level 3

Series: MAY 2016

Question Tag: Fair Value

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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.

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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.

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CR – May 2016 – L3 – Q4c – Share-Based Payments (IFRS 2)

Discuss how the SARs granted by Yerokun Ltd should be accounted for under IFRS 2 and IFRS 13 from the grant date to April 30, 2014.

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CR – May 2017 – L3 – Q6 – Fair Value Measurement (IFRS 13)

Identify the fair value hierarchies under IFRS 13 and distinguish between principal and most advantageous markets.

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CR – Nov 2016 – L1 – SB – Q4 – Fair Value Measurement (IFRS 13)

Discuss fair value principles, principal market, and valuation adjustments under IFRS 13.

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CR – May 2021 – L3 – Q4c – Fair Value Measurement (IFRS 13)

Advise on measuring the fair value of land for residential purposes in financial statements.

Required:

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CR – May 2021 – L3 – Q4 – Fair Value Measurement (IFRS 13)

Evaluate fair value relevance versus historical cost and explain valuation techniques under IFRS 13.

Required:

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CR – Nov 2016 – L3 – Q4c – Fair Value Measurement (IFRS 13)

Discuss IFRS 13’s principles in computing fair value for land with alternative uses in Abuja.

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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.

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

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

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FR – Mar 2023 – L2 – Q5d – Business combinations and consolidation

Explains fair value in IFRS 13 and its application to assets and liabilities in business combinations.

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FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis

Assessment of impairment loss for a cash-generating unit including intangible assets and goodwill.

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FR – May 2017 – L2 – Q2d – Financial Reporting Standards and Their Applications

Recommend accounting treatments for equity shares and bonds in accordance with IFRS 9.

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FR – Nov 2021 – L2 – Q2c – Financial Reporting Standards and Their Applications

This question addresses how to account for the impairment of a cash-generating unit under IAS 36, including the allocation of impairment to assets.

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FR – May 2016 – L2 – Q2 – Group Financial Statements and Consolidation

Prepare a consolidated statement of financial position and calculate the non-controlling interest for H Plc, and explain the need to consolidate fair values.

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FR – March 2024 – L2 – Q2a – Financial Reporting Standards and Their Applications

Evaluate financial reporting treatment of Sikapa and Cocoa bonds in accordance with IFRS 9: Financial Instruments.

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FR – Nov 2016 – L2 – Q2e – Preparation of Financial Statements

Discuss how a plant classified as held for sale should be accounted for under IFRS 5.

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CR – Nov 2018 – L3 – Q2c – IFRS 13 Fair value measurement

Advise Gonja Ltd on the fair value measurement of its real estate-linked investment portfolio in the financial statements for 31 July 2018.

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CR – Nov 2018 – L3 – Q2b – Financial instruments: Recognition and measurement Corporate reporting

Recommend the financial reporting treatment for an interest-free government loan received by Bole Bamboi Ltd, including suitable calculations.

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CR – May 2016 – L3 – Q2b – IAS 36: Impairment of assets

Advise on impairment effects on consolidated financial statements for various scenarios including subsidiaries, plant assets, and R&D projects.

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