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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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  • 7 Marks

CR – May 2017 – L3 – Q6b – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Distinguish between liability and equity under IAS 32 with examples.

It is important for entities to understand and properly classify their financial instruments. This is because some financial instruments may have features of both debt and equity, which can lead to inconsistency in reporting. To this end, financial reporting standards provide guidance on the difference between financial instruments classified as equity and liabilities.

Required:
With relevant examples, distinguish between liability and equity under IAS 32: Financial Instruments Presentation. (7 Marks)

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  • 20 Marks

AAA – May 2022 – L3 – Q2 – Assurance Engagements

Discuss due diligence processes and provide IFRS 16 guidance on lease recognition, measurement, and disclosure.

Pegrace Nigeria Limited (PNL), your audit client, is a national hotel group with substantial cash resources. Its accounting functions are well managed and the group’s accounting policies are rigorously applied. The company’s financial year-end is December 31.

The company has been seeking to acquire a construction company for some time in order to bring in-house the building and refurbishment of hotels and related leisure facilities, like swimming pools, volleyball courts, and restaurants. The management has recently identified Robin Construction Company Limited (RCCL) as a potential target and has urgently requested that you undertake a limited due diligence review.

Further to the preliminary talks between the management of RCCL and PNL, you were provided with the following brief on Robin Construction Company Limited:

  1. The Chief Executive, Managing Director, and Finance Director are all family members and major shareholders. The company has an established reputation for quality constructions.
  2. Due to a recession in the building business, the company has been operating at its overdraft limit for the last 18 months and has been close to breaching debt obligations on several occasions.
  3. Robin’s accounting policies are generally less prudent than those of Pegrace (assets are depreciated over longer estimated useful lives).
  4. Contract revenue is recognized on the percentage of completion method, measured by reference to costs incurred to date. Provisions are made for loss-making contracts.
  5. The company’s management team includes a qualified and experienced quantity surveyor, whose main responsibilities are:
    • Supervising quarterly physical counts at major construction sites;
    • Comparing costs to date against quarterly rolling budgets; and
    • Determining profits or losses, by contract, at each financial year-end.
  6. Labour force is provided under subcontracts. During construction, the regulatory body visited the site and discovered non-compliance with site health and safety regulations.

In February 2021, Robin received a claim that a site on which it built a housing development in Banana Estate was not properly drained and is now sinking. Residents are demanding rectification and asking for payment or damages. Robin has referred the matter to its legal counsel and denied all liability, as the site preparation was subcontracted to Sahara Services Company Limited. No provisions have been made in respect of the claims, nor has any disclosure been made.

The auditor’s report on Robin’s financial statements for the year ended December 31, 2020, was signed, without modification, in March 2021.

Required:

a. Prepare a document to give the explanatory meaning of the term ‘due diligence’ and subsequently discuss items to investigate in a due diligence exercise. (12 Marks)

b. Advise on how to recognize, measure, present, and disclose leases as required by IFRS 16. (8 Marks)

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  • 30 Marks

AAA – May 2024 – L3 – SA – Q1 – Audit Reporting

Discuss features in audit report proposal for Anything Goes Bank and differentiate audit, assurance, and attestation engagements.

Anything Goes Microfinance Bank Limited was incorporated in 2018 to meet the financial needs of low-level customers. The Management Accounts of 2019 revealed that the bank has a shareholders’ fund of N2.1 billion, total assets of over N5 billion, and customer deposits of N2 billion. It is the largest microfinance bank in Kito. Today, the bank continues to be the core banker for small and medium-scale enterprises and accounts for over 70% of the business turnover in Kito. It is the only indigenous microfinance bank that is fully owned by Kito shareholders. The bank directors are elected by key shareholders and represent all shareholders in both the public and private sectors.

The bank currently has a total employee establishment of over 350. With the liberalization of the economy and globalization of businesses, the bank embraced new challenges by becoming a commercial bank in 2020 and changed its name to Anything Goes Bank Limited. The change of Chief Executive Officer and the management at Anything Goes Bank Limited in early 2020 ushered in a new era where new ideas are adopted and managers reclaimed managerial responsibilities. The main objective was to come up with innovative business strategies that would ensure the bank serves its core customers effectively.

However, to reposition, the bank embarked on reviewing its corporate strategic plan, building on existing strengths, specifically addressing growth and development, information technology and business management, enhanced service delivery, profitability, and capital growth. The strategic plan for the bank has been drawn up with the theme “Managing for Value.” The strategies are based on four perspectives: people, customers, financial performance, and risk and control. The goal of the plan is to ensure that the bank meets shareholders’ expectations, provides a common language, ensures satisfaction for chosen customer segments, and fosters motivated and prepared staff. A focus on these four perspectives would result in customer satisfaction, efficient processes, and enhanced employee motivation.

To remain relevant and meet customers’ needs, the bank believes it must revisit its operating structure and expand its business. The bank aims to become a globally recognized commercial bank in Africa. Management believes a dynamic and flexible approach to strategic change and performance is essential, particularly when facing turbulence in its operating environment. A review of operations shows an increasingly complex environment with an accelerating rate of change, putting performance pressure from the government, public, and other stakeholders.

The bank is interested in early reporting but lacks the software capacity to handle current transaction volumes. Many staff members are not proficient in International Financial Reporting Standards, especially concerning complex financial instruments. A recent tax audit resulted in back duty assessment and other unresolved queries. Additionally, the bank faces issues with inefficient service delivery, public distrust in the banking sector, weak corporate governance, and rising bad loans.

The bank’s management has prepared a master plan with grand strategies, such as product development, market expansion, turnaround, and joint venture strategies. To achieve these grand strategies, functional strategies, including marketing, operations, organizational management, and financial strategies, are detailed in the master plan. However, implementation faces obstacles, including government policies, poor leadership, limited IT capacity, lack of funds, staff capability, and an inadequate corporate culture.

The bank has an audit committee, but it has not been performing optimally due to a lack of structured operations. It is also behind on some reporting requirements and has been fined by regulatory authorities. Although the bank views itself as small, it still requires an auditor to examine its accounts and express an opinion. Management is considering changing its auditors due to the transition to a commercial bank and has decided to request proposals for a new auditor appointment. Delays in attestation and assurance reporting to regulators have led to fines.

A friend of yours, whose father is a management staff member of the company and a student of accountancy, has informed you of these developments and asked for explanations to enlighten management before they send out a proposal for audit services.

Required:

a. Discuss the key features needed in an audit report which should be included in the proposal for audit services of Anything Goes Bank Limited. (10 Marks)

b. Explain the type of assurance service that the auditor of the bank should provide. (6 Marks)

c. List the duties the audit committee of the bank ought to be performing. (8 Marks)

d. Distinguish amongst audit, assurance, and attestation engagements. (6 Marks)

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  • 15 Marks

CR – Nov 2018 – L3 – SC – Q6 – Financial Instruments (IAS 32)

Classify cryptocurrency holdings in financial statements, addressing IAS 32, IAS 38, and IAS 2.

You have been asked to make a presentation to your team on cryptocurrencies. A snapshot of your draft presentation includes the following:

“Cryptocurrency is a new phenomenon in the financial market. A cryptocurrency is a digital or virtual currency designed to serve as a medium of exchange. Cryptocurrencies are created through cryptography, often with a maximum possible number of ‘coins’ that can exist through solutions to a complex algorithm with their value supported only by the laws of supply and demand. Cryptocurrencies are currently not regulated by government or other similar entity.

The following are some of the types of cryptocurrency in the market:

  • Bitcoin: The first-ever cryptocurrency that started the market awareness and “boom.”
  • Ethereum: A programmable currency that lets developers build different distributed apps and technologies that wouldn’t work with Bitcoin.
  • Ripple: Unlike most cryptocurrencies, it doesn’t use a blockchain to reach a network-wide consensus for transactions. An iterative consensus process is implemented, which makes it faster than Bitcoin but also makes it vulnerable to hacker attacks.

There are many merchants – both online and offline – that accept Bitcoin as a form of payment, while Ethereum and Ripple are not yet widely accepted.

Required:

Following your presentation, you are asked how a holding of cryptocurrency should be classified in the financial statements of your clients. (15 Marks)

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  • 30 Marks

AAA – Nov 2023 – L3 – SA – Q1 – Audit of Complex Entities

Prepare the consolidated statement of financial position for Sports PLC Group as of September 30, 2020, with adjustments for subsidiaries, non-controlling interests, goodwill, and investments.

BP Fashion Limited is trading and expanding in the fashion industry. Over the years, the company has been audited by LMP Professional Services. The company is considering going to the stock market to raise funds through an increase in its issued share capital for the purpose of expansion into new markets.

The summarised two-year financial statements and the nine (9) months accounts of the company are given below:

BP Fashion Limited

Summarised Income Statement For the Years Ended December 31,

2019 2020 2021 (9 months)
Revenue ₦2,952m ₦3,510m ₦4,139m
Cost of sales (₦1,402m) (₦1,671m) (₦1,987m)
Gross profit ₦1,550m ₦1,839m ₦2,152m
Other income ₦15m ₦21m ₦25m
Operating costs:
– Employee costs (₦390m) (₦460m) (₦538m)
– Occupancy costs (₦262m) (₦312m) (₦373m)
– Other operating costs (₦278m) (₦326m) (₦389m)
Earnings before interests, taxes, depreciation and amortisation (EBITDA) ₦635m ₦762m ₦877m

 

Summarised Statement of Financial Position

2019 2020 2021 (9 months)
Non-current assets
Property, plant and equipment ₦375m ₦470m ₦470m
Deferred tax ₦30m ₦35m ₦40m
Total non-current assets (A) ₦405m ₦505m ₦510m
Current assets
Inventories ₦425m ₦525m ₦655m
Trade and other receivables ₦125m ₦150m ₦175m
Cash and equivalents ₦425m ₦545m ₦780m
Total current assets (B) ₦975m ₦1,220m ₦1,610m
Total assets (A + B) ₦1,380m ₦1,725m ₦2,120m

Equity and Liabilities

2019 2020 2021 (9 months)
Share capital and reserves ₦885m ₦1,135m ₦1,430m
Long-term loans ₦125m ₦125m ₦125m
Employees’ benefits ₦20m ₦35m ₦50m
Deferred tax ₦55m ₦65m ₦70m
Non-current liabilities ₦200m ₦225m ₦245m
Trade and other payables ₦270m ₦335m ₦410m
Tax payable ₦25m ₦30m ₦35m
Current liabilities ₦295m ₦365m ₦445m
Total equity and liabilities ₦1,380m ₦1,725m ₦2,120m

It has become necessary, and as part of the NGX Exchange Limited‟s requirements,
to appoint another firm of accountants to review the financial statements for some
specified periods. Your firm Stratcom Partners has been approached to carry out the
necessary review.

Required:

a. Highlight the features of professional engagements as contained in ISRE 2410:
International Standard on Review Engagement and ISRS 4410 (revised):
International standard on Related Services. (8 Marks)
b. Detail out the procedures to be carried out in the review of interim financial
information. (6 Marks)

c. In view of the changes in inventories in the financial statements given above,
between the last two periods, provide the substantive procedures that would
be carried out to establish a reliable evidence of the change. (6 Marks)

d. Prepare the outline of the reporting requirements of a compilation engagement.
(10 Marks)

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  • 20 Marks

CR – Nov 2023 – L3 – SB – Q4 – Financial Instruments (IFRS 9)

Discuss IFRS 9 derecognition rules, trade receivables factoring, and FVTOCI investment strategy for Pelumi Limited.

a. Derecognition of financial instruments is the removal of a previously recognised financial asset or liability from an entity’s statement of financial position.

Required:
Discuss the rules of IFRS 9 – Financial Instruments relating to the derecognition of a financial asset. (10 Marks)

b. Royal Business Limited (RBL) held a portfolio of trade receivables with a carrying amount of N40 million as of May 31, 2022. At that date, the entity entered into a factoring agreement with Hexlinks Bank Limited (HBL), whereby it transfers the receivables in exchange for N36 million in cash. Royal Business Limited has agreed to reimburse the factor (HBL) for any shortfall between the amount collected and N36 million. Once the receivables have been collected, any amount above N36 million, less interest on this amount, will be repaid to Royal Business Limited. Royal Business Limited has derecognised the receivables and charged N4 million as a loss to profit or loss.

Required:
Explain how the rules of derecognition of the financial assets will affect the portfolio of trade receivables in Royal Business Limited’s financial statements. (3 Marks)

c. During the year 2021, Pelumi Limited invested in 800,000 shares in an NGX quoted company. The shares were purchased at N4.54 per share. The broker collected a commission of 1% on the transaction. Pelumi Limited elected to measure their shares at fair value through other comprehensive income (FVTOCI). The quoted share price as of December 31, 2021, was N4.22 to N4.26. Pelumi Limited decided to adopt a ‘sale and buy back’ strategy for the shares to realise a tax loss and therefore sold the shares at the market price on December 31, 2021, and bought the same quantity back the following day. The market price did not change on January 1, 2022. The broker collected a 1% commission on both transactions.

Required:
Explain the IFRS 9 accounting treatment of the above shares in the financial statement of Pelumi Limited for the year ended December 31, 2021.
Note: Show relevant calculations. (7 Marks)

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  • 20 Marks

CR – Nov 2017 – L3 – Q3 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Evaluate Funda Plc's accounting policies for specific transactions, recommending adjustments as per IFRS where appropriate.

Funda Plc. is a listed utility service company in Nigeria providing water, electricity, and cable services. The directors prepared draft financial statements for the year ended June 30, 2017, following IFRS guidelines to support a loan application. Employees, owning 5% of ordinary shares, raised concerns about certain accounting policies applied by Funda Plc.

The draft income statement for the year ended June 30, 2017, is as follows:

N’m
Revenue 410.0
Cost of Sales (275.0)
Gross Profit 135.0
Other Operating Costs (65.0)
Profit Before Taxation 70.0

Employee Representatives’ Queries on Accounting Policies:

  1. Sale of Water Filters
    Funda Plc. sold 30 industrial water filters to a steelmaker, offering a 20% discount and granting the steelmaker a put option to repurchase the filters at 35% of the purchase price after six years, despite the filters’ expected ten-year life. Funda Plc. has recognized the entire revenue upfront.
  2. Connection Fees
    A refundable connection fee is charged for electricity connections, to be returned upon customer disconnection. No minimum notice is required, and costs can be deducted from refunds. The fee was fully recognized in the year as revenue.
  3. Activation Fees
    Non-refundable activation fees for digital cable services were fully recognized in revenue.
  4. Deposits for Domestic Electrical Goods
    Customers place a 25% deposit on orders, with the balance payable on delivery. Deposits are retained if orders are canceled but refunded if Funda Plc. fails to deliver. Revenue includes N10 million from deposits, with 90% of orders fulfilled.

Required:
Prepare a report explaining the suitability of Funda Plc.’s accounting policies for each transaction and recommend the appropriate IFRS treatment where necessary.

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  • 4 Marks

FR – Nov 2022 – L2 – Q4c – IFRS 9 Financial Instrument Classes

Describe two classifications of financial instruments under IFRS 9, including criteria for measurement.

Explain TWO classes of financial instruments in accordance with IFRS 9. (4 Marks)

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  • 6 Marks

FR – Nov 2022 – L2 – Q7b – Business Model Test

Explain the steps in applying the Business Model Test under IFRS 9.

b. Explain the basic steps in the application of the Business Model Test in IFRS 9. (6 Marks)

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  • 1 Marks

BMF – May 2024 – L1 – SA – Q15 – Basics of Business Finance and Financial Markets

Identifying a financial instrument that is not considered short-dated.

Which of the following does NOT represent short-dated financial instruments?
A. Treasury bills
B. Bills of exchange
C. Commercial paper
D. Certificates of deposit
E. Equity finance

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  • 10 Marks

PT – Nov 2023 – L2 – Q4a – Income Tax Liabilities

Explanation of tax treatment of research and development expenses, contributions to worthwhile causes, and financial costs from derivatives.

Your company has recruited five new employees, and the Director of Training has instructed you to explain certain provisions in the Income Tax Act, 2015 (Act 896) to them:

i) Research and development expenditure (3 marks)
ii) Contribution and donations to worthwhile causes (3 marks)
iii) Financial cost from derivatives (4 marks)

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  • 5 Marks

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

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

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.

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  • 7 Marks

FR – Nov 2021 – L2 – Q2a – Financial Reporting Standards and Their Applications

This question deals with the application of IFRS 9 in financial instruments and the recognition of revenue under IFRS 15.

Manu Ltd (Manu) is a private company that prepares financial statements in compliance with International Financial Reporting Standards (IFRSs). Financial statements for the year ended 31 December 2020 are being prepared, and the following transactions occurred.

i) On 1 September 2020, Manu purchased 100,000 ordinary shares on the stock exchange for speculative reasons (making a profit) at a price of GH¢1.20 per share and paid a transaction cost of GH¢1,250. On 31 December 2020, the shares were now trading at GH¢1.32 per share on the stock exchange, and Manu received a dividend of GH¢15,000 on the shares.
(3 marks)

ii) Manu issued GH¢360,000 of redeemable 2% Preference shares at a discount of 14% on 1 January 2020. Issue costs were GH¢5,265. The shares will be redeemed on 31 December 2022 at par. Interest is paid annually in arrears, and the effective interest rate is 8%.
(4 marks)

Required:
In accordance with IFRS 9: Financial Instruments, explain how to account for the above transactions in the statement of profit or loss and statement of financial position for the year ended 31 December 2020.

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  • 5 Marks

FR – May 2016 – L2 – Q3b – Financial Reporting Standards and Their Applications

Show the initial accounting treatment of the bond in accordance with IFRS for Naniama Ltd's convertible bonds.

Naniama Ltd issued 3,000 convertible bonds at par. The bonds are redeemable in 4 years’ time at their par value of GH¢100 per bond. The bonds pay interest annually in arrears at an interest rate (based on nominal value) of 5%. Each bond can be converted at the maturity date into 5 GH¢1.00 shares. The prevailing market interest rate for four-year bonds that have no right of conversion is 8%. The present value at 8% of GH¢1 receivable at the end of:

  • Year 1: 0.926
  • Year 2: 0.857
  • Year 3: 0.794
  • Year 4: 0.735

Required:
Show the initial accounting treatment of the bond in accordance with International Financial Reporting Standards (IFRS).

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  • 9 Marks

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.

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.

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  • 10 Marks

Aug 2022 – L2 – Q2a – Financial Reporting Standards and Their Applications

Discuss the accounting treatment of specific transactions for Hiba Ltd under IFRS for the year ending December 31, 2021.

Hiba Ltd is a Ghanaian company located in the Bono region, and the directors are unsure of the implications of the International Financial Reporting Standards (IFRSs) on the following specific transactions that took place during the accounting period:

i) On 1 January 2021, Hiba sold one of its mining equipment to Wontumi Ltd for GH¢900,000. The carrying amount of the equipment before the transaction was GH¢500,000, with a remaining useful life of 10 years. On the same day, Hiba entered into a contract with Wontumi Ltd to use the equipment for 5 years, with annual payments of GH¢200,000 payable in arrears. The fair value of the equipment was GH¢800,000, and the interest implicit in the lease was 10% per annum. The sale satisfies the performance obligation criteria in IFRS 15.

ii) On 1 January 2021, Hiba issued 1.5 million shares at GH¢1 each for GH¢1.5 million. Each share is convertible on 31 December 2025 into 2 ordinary shares with a par value of GH¢0.10 each. Interest is payable at 8% per annum. The market interest rate for similar debt without a conversion option was 11%.

iii) On 1 January 2021, Hiba received notice of a lawsuit from an ex-employee claiming unjust dismissal, with an 85% chance of losing the case and being required to pay GH¢1.275 million by 1 January 2022. Based on legal advice, Hiba recorded a provision of GH¢1 million and made no further adjustments. The cost of capital is 9%, and the discount factor at 9% for one year is 0.9174.

Required:
Discuss how the above transactions (i) – (iii) should be treated in Hiba’s financial statements for the year ending 31 December 2021 in accordance with IFRSs. (Show all calculations wherever possible).

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  • 12 Marks

PT – May 2021 – L2 – Q4a – Income Tax Liabilities

Explain the financial costs from derivatives and the tax treatment of such costs.

The following details were taken from the records of KK Company Limited for the 2020 year of assessment.

Item GH¢
Profit before tax 132,000
Total Financial Gain from derivatives 42,000
Total Financial Cost from derivatives 300,000

Required:
i) State what constitutes financial cost from derivatives? (3 marks)
ii) Explain the tax treatment of financial cost from derivatives under a company such as KK Company Limited that is neither a mining nor petroleum company. (2 marks)
iii) Compute and explain the allowable financial cost from derivatives. (3 marks)
iv) Assume all facts are the same except that Financial gain from derivatives is GH¢60,000 and Financial Cost from derivatives is GH¢30,000. Compute and explain the allowable financial cost from derivatives.

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  • 7 Marks

CR – May 2018 – L3 – Q2c – Financial instruments: Recognition and measurement Corporate reporting

Show the accounting treatment for a convertible loan note under IFRS 9 for income statement and financial position.

Alfa Limited issued a GH¢5,000,000 18% convertible loan note at par on 1 July 2015 with interest payable annually in arrears. Three years later, on 30 June 2018, the loan note becomes convertible into equity shares on the basis of GH¢100 of loan note for 50 equity shares, or it may be redeemed at par in cash at the option of the loan note holder. The Financial Accountant of Alfa Limited has observed that the use of a convertible loan note was preferable to a non-convertible loan note as the latter would have required an interest rate of 24% in order to make it attractive to investors.

The present value of GH¢1 receivable at the end of the year, based on discount rates of 18% and 24%, can be taken as:

Year 18% 24%
1 0.847 0.806
2 0.718 0.650
3 0.609 0.524

Required:
Show the accounting treatments for the convertible loan note in Alfa Limited’s:
i) income statement for the years ended 30 June 2016, 2017, and 2018. (3 marks)
ii) statement of financial position as at 30 June 2016, 2017, and 2018. (4 marks)
(Note: Assume that the share option is taken at the end of June 30, 2018.)

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  • 5 Marks

CR – May 2018 – L3 – Q1b – Consolidated Financial Statements

Calculate the consolidated gain or loss on disposal of a 60% equity interest and explain accounting for the remaining investment.

On 30 June 2016, Afoko Ltd acquired a 100% interest in Anyidohu Ltd, a public limited company, for a cash consideration of GH¢195 million. Anyidohu’s identifiable net assets were fair valued at GH¢160 million. On 30 November 2017, Afoko disposed of 60% of the equity of Anyidohu when its identifiable net assets were GH¢180 million. Of the increase in net assets, GH¢15 million had been reported in profit or loss, and GH¢5 million had been reported in other comprehensive income as a gain on an available-for-sale financial asset. The sale proceeds were GH¢115 million, and the remaining equity interest was fair-valued at GH¢65 million. Afoko could still exert significant influence after the disposal of the interest.

Required:
Calculate the consolidated gain or loss arising on the disposal of the equity interest in Anyidohu Ltd and explain how the investment in Anyidohu Ltd is accounted for after the disposal of 60% of equity.

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