Question Tag: Financial Reporting

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SCS – Mar 2025 – L3 – Q5 – Environmental Disclosures

Explain importance of environmental disclosures for AML and key EPA disclosure requirements in sustainability reports.

Question

a) On September 21, 2024, a local advocacy group, Democracy Hub, launched a three-day protest dubbed “Stop Galamsey Now” to demand stronger government action against illegal mining. The protest drew national attention to the severe pollution of water bodies and the degradation of forest reserves caused by illegal mining operations. Activists called on regulatory bodies, including the Environmental Protection Agency (EPA), to strictly enforce environmental laws and ensure greater corporate accountability in the mining sector.

Akosa Minerals Limited (AML), a key player in the mining industry, operates in regions affected by illegal mining activities. As part of its corporate governance and sustainability strategy, AML must ensure compliance with environmental regulations and provide transparent environmental disclosures in its corporate reports. Regulatory bodies such as the EPA require mining firms to disclose the impact of their operations on local ecosystems and outline measures taken to mitigate environmental damage.

Required:

i) Explain the importance of environmental disclosures in corporate governance, particularly for mining companies like AML.

ii) Discuss THREE key environmental disclosure requirements that the Environmental Protection Agency (EPA) would expect AML to include in its sustainability reports. Provide examples based on AML’s operations.

b) The Government of Ghana holds a stake in Akosa Minerals Limited (AML), making it a partially state-owned entity. As a result, AML is subject to oversight and governance requirements under Ghanaian law, including compliance with the State Interests and Governance Authority (SIGA) Act, 2019 (Act 990). This law establishes governance frameworks for state-owned enterprises (SOEs) and entities in which the government has an interest, ensuring transparency, accountability, and efficiency in their operations.

Given the increasing public scrutiny of state-owned entities, AML’s Board of Directors must ensure compliance with Act 990 while balancing the government’s interests with those of private investors and other stakeholders.

Required:

i) Explain the purpose of the State Interests and Governance Authority (SIGA) Act, 2019 (Act 990) and its relevance to state-owned enterprises in Ghana.

(4 marks)

ii) Discuss THREE key governance requirements under the SIGA Act that apply to AML as a partially state-owned entity. Provide examples of how these requirements influence AML’s corporate governance structure.

Answer

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Topic: Social and environmental issues in ethics and business
Series: MAR 2025

FR – Mar 2025 – L2 – Q5 – Conceptual Framework

Explain the elements of financial statements and their recognition criteria per the IASB Conceptual Framework.

Question

a) Explain the elements of financial statements and indicate how an item can be recognised as an element.

b) The principle of recording the substance of transactions rather than their legal form lies at the heart of the IASB’s Conceptual Framework for Financial Reporting as well as numerous International Financial Reporting Standards.

Required:

i) Explain why it is important to record the substance rather than the legal form of transaction. (2 marks) ii) Describe TWO features that may indicate that the substance of a transaction is different from its legal form.

c) Sustainable development as defined by the UN World Commission on Environment and Development, is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Required:

i) Explain the term sustainability in a business setting. (2 marks) ii) Explain the THREE core areas of sustainability.

d) Ahiati LTD (Ahiati) is one of the leading manufacturers of pharmaceuticals in West Africa. Ahiati has a customer in Mexico called Taco. Ahiati made a credit sale to Taco on 1 October 2024 for Mex $100,000. Ahiati received part payment on 30 November 2024 of Mex $60,000. The following exchange rates applied during the financial year:

Required:

i) Prepare journal entries to show how the above transactions should be recorded in the books of Ahiati for the year ended 31 December 2024. (4 marks) ii) Show the financial reporting treatment of the foreign exchange gain or loss at the 31 December 2024 for Ahiati.

Answer

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Tags: Financial Reporting, Foreign Exchange, IAS 21, Journal Entries, Trade receivables
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAR 2025

CR – Mar 2025 – L3 – Q4 – Business Valuation

Calculate share value for Gogomi LTD using net assets, price-earnings, and dividend yield methods.

Question

a) Gogomi LTD, a privately owned joint venture, produces a range of equipment for the oil and gas industry in Ghana. One of the venturers, Oman Pension Funds (OPF), who holds one-third of Gogomi LTD’s ordinary shares, has decided to sell all of its holdings. This plan forms part of measures OPF is using to redirect focus of its investment strategy by replacing its equity assets with fixed-income holdings. OPF would therefore like to know the current value of its shareholdings to guide it during any negotiation with a potential buyer.
The following draft financial statements (together with the additional information) should be used to estimate the share value:

Draft statement of profit or loss of Gogomi LTD for the year ended 31 August 2024

	GH¢000
Revenue	115,500
Cost of sales	(80,300)
Gross profit	35,200
Selling and distribution	(12,300)
Administrative expenses	(8,550)
Profit before tax	14,350
Tax	(2,030)
Profit after tax	12,320

Draft statement of financial position of Gogomi LTD as at 31 August 2024

	GH¢000
Assets
Non-current assets:
Properties	52,400
Plant and equipment	53,300
Current assets	35,300
Total assets	141,000
Equity and liabilities
Capital and reserves
Ordinary shares @ GH¢2 each	24,000
10% Irredeemable preference shares @ GH¢1.50 each	6,000
Retained earnings	57,500
Non-current liabilities	38,080
Current liabilities	15,420
Total equity and liabilities	141,000

Additional information:

Included in properties is an office building whose fair value has been measured by a valuation specialist at GH¢25 million. This value compares to a book value of GH¢19.5 million. Plant is not yet adjusted for a required reversal of GH¢2 million impairment charge previously written off to profit or loss account against an item of plant. On 28 August 2024, Gogomi LTD bought an item of equipment and paid GH¢15.2 million, net of 5% withholding tax, to the equipment dealer. Management have expensed the associated withholding tax (already paid to the local tax office) within the income statement.
Included in receivables is an amount of GH¢4.4 million owed by a customer who has fallen into an unexpected, serious financial difficulty. As a consequence, expert assessment indicates that Gogomi LTD will have to wait until 31 August 2025 to receive the full amount in a single payment.
Gogomi LTD’s current ordinary dividend cover computed, based on the above draft accounts, is 4. Preference dividends have been fully paid.
A comparable quoted firm’s price-earnings ratio and dividend yield are 7.2 and 4.52% respectively. No adjustment should be made to these ratios, if they are used in any computations.
Applicable cost of capital is 10%.

Required:
Determine a range of values to be placed on each ordinary share of Gogomi LTD using:
i) Net assets basis
ii) Price-earnings basis
iii) Dividend yield basis

b) For the purpose of consolidation, a parent must consolidate all controlled entities. However, there is an exemption that applies to investment entities.

Answer

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Tags: Consolidation, Financial Reporting, IFRS 10, Investment Entities
Level: Level 3

Topic: Consolidated Financial Statements (IFRS 10)
Series: MAR 2025

CR – Mar 2025 – L3 – Q2 – Income Taxes

Calculate and present the financial accounting treatment for Amugi's tax items per IAS 12, including revaluation and tax losses.

Question

a) Amugi, a public listed company, is a producer of soft drinks. Recently, Amugi has been experiencing financial difficulties attributed to a recession. Extract of Statement of Financial Position and Statement of Profit or Loss for the year ended 30 June 2024 are as shown below:

Statement of Financial Position as at 30 June 2024 (Extract)

	GHC’000
Property, Plant and Equipment	214,080
Non-current liabilities
Deferred tax liability	13,080
Current liabilities
Current tax payable	–

Statement of Profit or Loss account for the year ended 30 June 2024 (Extract)

	GHC’000
Gross Profit	189,000
Distribution costs	(200,520)
Loss before tax	(11,520)
Income tax expense	–
Loss for the year	(11,520)

The carrying amount of land and buildings included in ‘Property, plant and equipment’ in the draft financial statements above was GH¢144 million. Depreciation for the period of GH¢14.4 million on property, plant and equipment has already been accounted for. The market value of the land and buildings as assessed by professionally qualified valuers was GH¢151.2 million as at 30 June 2024. Gains and losses on property are taxable or tax deductible on sale.

The tax base of all property, plant and equipment at 30 June 2024 was GH¢150.48 million. Losses incurred in the year ended 30 June 2024 that can be recognised for tax purposes (after taking into account disallowable expenses) amounted to GH¢23.04 million. In the industry in which Amugi operates, tax losses can be carried back for three years and then carried forward indefinitely. Amugi made a profit in the previous three years sufficient to absorb the current year tax losses. Amugi pays tax at 25% and the tax losses will be applied at that rate. The rate is not expected to change.

The deferred tax liability in the above extract statement of financial position is the figure at 1 July 2023. There were no temporary differences other than those noted above. Current tax assets and liabilities can be netted in the tax regime.

Required:
Using financial statement extracts, set out the financial accounting treatment of the above items in accordance with IAS 12: Income Taxes.

b) Paakofi is adopting IFRSs for the first time for the year ended 30 September 2024, with one year of comparative information. Information in respect of the years ending 30 September 2023 and 30 September 2022 is as follows:

	30/9/2023 GHC’000	30/9/2022 GHC’000
Property, Plant and Equipment (previous GAAP)
– depreciated cost	77,600	80,400
– fair value	92,000	88,000
Capitalised staff training costs (at carrying amounts under previous GAAP)	3,000	4,000
Borrowing costs incurred for an asset under construction (cumulative) (expensed under previous GAAP) (asset construction began on 1 October 2021)	360	240
Provision for court case – previous GAAP valuation and recognition basis	1,200	480
– IFRS valuation and recognition basis	–	–

Paakofi wishes to use all exemptions available to the company on transition to IFRSs.

Required:
Calculate the total adjustment required to Paakofi’s opening equity at the date of transition to IFRSs (insofar as the information provided permits).

c) The diagram below relates to Mireku LTD.

Diagram Details (summarized):

Ayariga PLC holds significant influence over Mireku LTD.
Ahmed LTD is jointly controlled by Ayariga PLC.
Alex is a key management personnel of Mireku LTD.
Adorko is Alex’s domestic partner.
Twins are children of Alex and Adorko.
Ayine LTD is Mireku LTD’s main customer (55% of revenue).
Dennis, Adorko’s former spouse, pays monthly upkeep allowance to Adorko.
Jinapor LTD is controlled by Dennis.

Additional Information:
iii) Ayine LTD is Mireku LTD’s main customer, representing approximately 55% of Mireku’s revenue stream.
iv) Dennis pays monthly upkeep allowance to Adorko.

Required:
Justify whether each of the parties in the above diagram is or is not considered a related party of Mireku LTD in accordance with IAS 24: Related Party Disclosures.

d) Identify FOUR indicators of a hyperinflationary economy in accordance with IAS 29: Financial Reporting in Hyperinflationary Economies.

Answer

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Tags: Economic Conditions, Financial Reporting, Hyperinflation, IAS 29, Inflation Indicators
Level: Level 3

Topic: Financial Reporting in Hyperinflationary Economies (IAS 29)
Series: MAR 2025

CR – Nov 2024 – L3 – Q2c – Accounting for Defined Benefit Pension Plans

Compute the pension amounts for Oboisah PLC under IAS 19.

Question

Oboisah PLC (Oboisah) operates a defined benefit pension plan for employees who commenced employment with the company prior to 1 April 2021. The pension scheme is non-contributory.

At 31 March 2023, the Group recorded a net defined liability of GH¢157 million. The following information relates to the year ended 31 March 2024:

Description	Amount (GH¢ million)
Employer contributions paid on 31 March 2024	43
Benefits paid	16
Current service cost	42
Curtailment gain	3
Present value of defined benefit obligation at 31 March 2024	498
Value of plan assets at 31 March 2024	315

The average yield on relevant corporate bonds was 20% on 1 April 2023. Entries so far made in respect of the employer contributions have been incorrectly debited to accounts receivable and credited to cash. Benefits paid have been correctly recorded.

Required:

In line with IAS 19: Employee Benefits, determine how much pension amounts should be included in the financial statements of Oboisah PLC for the year ended 31 March 2024. Show the appropriate extracts for the above and any correction entries, if necessary.

Answer

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Tags: Defined Benefit Plan, Employee Benefits, Financial Reporting, IAS 19, Pension Obligation
Level: Level 3

Topic: IAS 19: Employee Benefits
Series: Nov 2024

CR – Nov 2024 – L3 – Q2b – Accounting for Legal Claims

Assess and account for a legal claim against Agropah PLC under IAS 37.

Question

ropah PLC (Agropah) prepares its financial statements to 30 June and usually authorizes them for issue on 25 August.

On 15 July 2024, Agropah received notice of a legal claim made by Odametey, a customer, for loss of profits allegedly due to the supply of faulty goods by Agropah on 30 April 2024. The amount claimed was GH¢5 million.

The directors of Agropah have estimated the following possible outcomes in respect of this legal claim:

28% chance that the claim will not succeed.
45% chance that the claim will succeed, and Odametey will be awarded GH¢3.2 million.
27% chance that the claim will succeed, and Odametey will be awarded GH¢5 million.

Required:

In line with IAS 37: Provisions, Contingent Liabilities & Contingent Assets, explain how this legal claim should be accounted for and reported in the financial statements of Agropah for the year ended 30 June 2024.

Answer

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Tags: Contingent Liability, Financial Reporting, IAS 10, IAS 37, Legal Claim, Provision
Level: Level 3

AAA – Nov 2024 – L3 – Q5a – Roles of an Audit Committee in Corporate Governance

Explain four roles of an audit committee in compliance with good corporate governance practices.

Question

An Audit Committee is a sub-group of a company’s Board of Directors responsible for the oversight of the financial reporting and disclosure process. The duties and responsibilities of the Audit Committee greatly contribute to good corporate governance practices of a company.

Required:
Explain FOUR roles of an Audit Committee in compliance with good corporate governance practices.

Answer

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Tags: Audit Committee, Compliance, Corporate Governance, Financial Reporting, Internal Audit, Oversight, Regulatory Framework, Risk Management
Level: Level 3

Topic: Institutional Regulation and Standard-Setting
Series: Nov 2024

AAA – Nov 2024 – L3 – Q2a – Audit Risks and Responses for Ecowud Co. LTD

Identifying audit risks in Ecowud Co. LTD and how auditors should respond.

Question

Ecowud Co. LTD (Ecowud) is a sustainable goal-oriented company that develops, manufactures, and sells plywood made from rice husk and plastic waste. The company has a wide customer base, including construction companies and furniture manufacturers across Ghana and West Africa.

You are the Audit Manager of Adomako & Associates and are planning the audit of Ecowud for the year ended 31 December 2023. You and the Audit Engagement Partner attended a planning meeting with Ecowud’s Finance Manager.

You are reviewing the initial meeting notes to develop the audit strategy and plan. The following key matters were captured:

Development Expenditure: Revenue for the year was forecast at GH¢32 million. During the year, Ecowud spent GH¢3.5 million on developing new types of plywood. Some of these are in the early stages of development, while others are nearing completion. The Finance Manager intends to capitalize the entire GH¢3.5 million spent on development since all projects are likely to succeed.
Inventory Valuation: Ecowud uses a standard costing method to value inventory. However, the company has never updated its standard costs since adopting this policy. The company operates multiple warehouses in Ghana and across West Africa, most of which are third-party rented premises.
Accounting Software: A new accounting software was developed internally and implemented in August. The old and new software did not run parallel, as management deemed it burdensome. Two months after implementation, the IT Manager resigned, and a new IT Manager will take over in January 2024.
Long-term Loan and Share Capital: Ecowud restructured its finances, raising GH¢2 million through share issuance and GH¢3.5 million through a long-term loan. The loan has bank-imposed financial conditions, including a minimum total asset level. If breached, the loan becomes immediately repayable.
Revaluation of Land & Buildings: Ecowud follows a revaluation model for land and buildings. The Finance Manager has announced that all land and buildings will be revalued at the year-end.

Required:
Identify FIVE audit risks in relation to Ecowud Co. LTD and for each risk, explain how the auditor should respond.

Answer

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Tags: Audit Risk, Development Expenditure, Financial Reporting, IFRS Compliance, Internal Controls, Inventory Valuation
Level: Level 3

Topic: Audit Approach
Series: Nov 2024

PSAF – Nov 2024 – L2 – Q4b – Public Expenditure and Financial Accountability

Explanation of the Public Expenditure and Financial Accountability framework and its application.

Question

Based on your results in (a), write a report to the newly appointed board analyzing and indicating whether their performance is better in comparison with the old board.

Answer

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Tags: Accountability, Budgeting, Compliance, Financial Reporting, Public Expenditure
Level: Level 2

Topic: Financial Statements Discussion and Analysis
Series: Nov 2024

PSAF – Nov 2024 – L2 – Q3b – Public Expenditure and Financial Accountability (PEFA) Assessment

Evaluate the financial performance of a local government based on PEFA assessment results and recommend strategies for improvement.

Question

Accounting and reporting constitute a key pillar of an organised and transparent public financial management system in the public sector. The effectiveness of accounting and reporting reflects the integrity of financial data, the accuracy of in-year budget reports, and the quality of annual financial statements. In a recent Public Expenditure and Financial Accountability (PEFA) assessment, a local government had the following results:

Annual financial reporting: D
In-year budget report: D+
Financial data integrity: C

Required:
i) Explain the assessment performance to the Municipal Chief Executive of the local government.
ii) Recommend two strategies for improving the performance of the local government in each of the assessed areas.

Answer

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Tags: Budget Reporting, Data Integrity, EFA, financial assessment, Financial Reporting, Local Government
Level: Level 2

Topic: Public expenditure and financial accountability framework
Series: Nov 2024

AAA – Nov 2011 – L3 – SA – Q11 – Assurance Engagements

Identifies an item that may be excluded from an accountant’s report in a prospectus.

Question

The accountants’ report in a prospectus may not contain ONE of the following items:

A. Summarised balance sheet of the company for the last five years
B. Evaluation of quoted and unquoted investments
C. Principal accounting policies
D. Movement in share premium account
E. Particulars of preliminary expenses

Answer

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Tags: Accountants' Report, Disclosure Requirements, Financial Reporting, Prospectus
Level: Level 3

Topic: Assurance Engagements
Series: NOV 2011

AAA – Nov 2011 – L3 – SA – Q8 – Audit of Accounting Estimates and Fair Value Measurements (IAS 36, IFRS 13)

Identifies the appropriate stock valuation method as per SAS 4 standards.

Question

In accordance with SAS 4, which ONE of the following methods is appropriate in valuation of stock?

A. Latest in, first out
B. Base stock
C. Specific identification
D. Latest purchase price
E. Weighted average

Answer

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Tags: Financial Reporting, Inventory Methods, SAS 4, Stock valuation
Level: Level 3

Topic: Audit of Accounting Estimates and Fair Value Measurements (IAS 36, IFRS 13)
Series: NOV 2011

AAA – May 2024 – L3 – SB – Q2 – Overview of Advanced Audit and Assurance

Discuss audit review types, include necessary IAS 16 and IAS 36 information in the audit checklist, and advise on misclassified asset treatment.

Question

The statement below is an extract of property, plant and equipment from the “notes to the financial statements” of ABC Plc:

	Land and buildings	Plant, equipment, fixtures and fittings, and motor vehicles	Total
Costs (₦)
At January 1, 2020	75,230,481	120,454,850	195,685,331
Additions	12,540,000	16,000,500	28,540,500
Acquisitions through business combinations	24,400,000	35,750,430	60,150,430
Classified as held for sale	(10,200,450)	(15,450,600)	(25,651,050)
Disposals	(5,000,465)	(10,700,250)	(15,700,715)
At December 31, 2020	96,969,566	146,054,930	243,024,496
Accumulated depreciation and impairment losses
At January 1, 2020	46,660,254	66,675,860	113,336,114
Depreciation charge for the year	5,594,523	17,220,518	22,815,041
Classified as held for sale	(7,650,338)	(9,270,000)	(16,920,338)
Disposals	(3,762,523)	(9,034,069)	(12,796,592)
Impairment losses	5,267,533	6,022,713	11,290,246
Reversal of Impairment losses	(4,515,028)	(4,818,170)	(9,333,198)
At December 31, 2020	41,594,421	66,796,852	108,391,273

Net carrying amount
At December 31, 2020: ₦55,375,145 (Land and buildings), ₦79,258,078 (Plant, equipment, fixtures, and fittings, and motor vehicles), Total: ₦134,633,223
At December 31, 2019: ₦28,590,212 (Land and buildings), ₦53,778,390 (Plant, equipment, fixtures, and fittings, and motor vehicles), Total: ₦82,368,602

The above was the situation of the statement of financial position of the company when it was signed at the board of directors meeting. During further review to sign off the audit file, it was discovered that the classification of some of the assets as impaired was due to wrong classification and the value had actually increased due to a new road network in the location. This affected the impairment losses for the year. The new value of the buildings affected and shown in the note above as available from market survey had actually grown to ₦8.5 million within the period under review.

Required:

Evaluate the different types of audit review, the purposes, and the scope of the reviews. (10 Marks)
Discuss the necessary information to be included in the audit checklist based on the information above in relation to IAS 16 – Property, Plant, and Equipment and IAS 36 – Impairment of Assets. (7 Marks)
Advise on the treatment of the issue raised with regard to the wrongly classified assets. (3 Marks)

Answer

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Tags: and Equipment, Asset Classification, Audit Review, Financial Reporting, IAS 16, IAS 36, Impairment Reversal, Plant, Property
Level: Level 3

Topic: Overview of Advanced Audit and Assurance
Series: MAY 2024

AAA – Nov 2020 – L3 – Q3 – Audit of Specialized Industries

Audit planning, risk assessment, internal control, audit evidence, and reporting in a not-for-profit organization.

Question

Question:
You are the Audit Manager at HWO, an audit firm. HWO has secured the audit of SIGMA For Africa, a not-for-profit organization. You have been assigned the audit of SIGMA For Africa. An extract of the unaudited financial statements is as follows:

SIGMA For Africa Statement of Financial Position
As at 31 December

Furthermore, you were assigned an audit senior. Based on preliminary discussions with your audit senior, you noted that the senior had no prior experience with audits of not-for-profit entities.

Required:
To help your audit senior understand how to audit a not-for-profit organization, prepare a presentation note summarizing the key considerations in the audit for the following areas:

a. Planning (4 Marks)
b. Risk analysis (4 Marks)
c. Internal control (4 Marks)
d. Audit evidence (4 Marks)
e. Reporting (4 Marks)

Answer

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Tags: Audit evidence, Financial Reporting, Internal Controls, Not-for-Profit Audit, Risk analysis
Level: Level 3

Topic: Audit of Specialized Industries

CR – May 2024 – L3 – SC – Q7 – Presentation of Financial Statements (IAS 1)

Discuss allocation impacts of purchase price for land and warehouse on earnings and identify ethical issues in CFO’s approach.

Question

Signal PLC purchased land and warehouse for N90,000,000. The warehouse is expected to last for 20 years and to have a salvage value equal to 10% of its cost. The Chief Finance Officer (CFO) and the Chief Accountant (CA) discussed the allocation of the purchase price between the land and the warehouse. The CFO believes that the largest amount possible should be assigned to the land because that will improve reported net income in the future. Depreciation expense will be lower because land is not depreciated. He suggested allocation of one third of the cost to the land. The CA argues that the smallest amount possible, about one-fifth of the purchase price, should be allocated to the land, thereby saving income taxes, since the depreciation will be greater if lesser amount is allocated to land.

Required:

(a) Evaluate how the different allocations of one-third and one-fifth to land will affect reported earnings and determine how the purchase cost should be allocated. (8 Marks)

(b) Identify and discuss inherent ethical issues in the CFO’s submission in the above scenario. (7 Marks)

Total Marks: 15

Answer

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Tags: Asset Allocation, CFO Decisions, Depreciation, Earnings Impact, Ethical Issues, Financial Reporting, Land Valuation, Tax Savings
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)
Series: MAY 2024

CR – May 2024 – L3 – SC – Q5b – Interim Financial Reporting (IAS 34)

Discuss the role of estimates in interim financial reports and provide examples allowed under IAS 34.

Question

Accounting information must be reliable and free from material error, but some accuracy and reliability may need to be sacrificed for timeliness and cost benefits, especially in interim financial reporting. IAS 34 acknowledges that interim reports require more extensive use of estimates than annual reports to facilitate timely reporting.

Required:

Discuss, giving relevant examples, the financial information that could be included in interim reports where IAS 34 permits the use of estimates. (7 Marks)

Answer

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Tags: : Interim Reporting, Cost Efficiency, Financial Reporting, IAS 34 Compliance, Timeliness vs. Accuracy, Use of Estimates
Level: Level 3

Topic: Interim Financial Reporting (IAS 34)
Series: MAY 2024

CR – May 2018 – L3 – SB – Q4b – Presentation of Financial Statements (IAS 1)

Discuss accounting issues and treatments for factoring and sale-leaseback transactions, applying the substance over form principle.

Question

Waasimi entered into the following transactions during the year ended March 31, 2018:

In March 2018, Waasimi factored some of its trade receivables to Asejere, a finance house. Based on selected account balances, Asejere paid Waasimi 80% of its book value. The agreement was that Asejere would administer the collection of the receivables and remit a residual amount to Waasimi depending upon how quickly individual customers paid. Any balance not collected by Asejere after six months will be refunded to Asejere by Waasimi.

On April 1, 2017, Waasimi’s freehold building had a carrying amount of N15 million and an estimated remaining useful life of 20 years. On this date, Waasimi sold the building to Gbajumose for a price of N24 million and entered into an agreement with Gbajumose to lease back the building for an annual rental of N2.6 million for a period of five years.

The auditors of Waasimi have commented that in their opinion the building had a market value of N20 million at the date of its sale and to rent an equivalent building under similar terms to the agreement between Waasimi and Gbajumose would cost N1,600,000 per annum. Assume finance cost of 10% per annum.

Required:

i. Briefly explain the major accounting issues involved in the above transactions using the principles of substance over form. (5 Marks)

ii. State the appropriate accounting treatments of the various elements identified. (6 Marks)

iii. State the classes of charges to be incurred and their appropriate accounting treatments. (3 Marks)

Answer

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Tags: Accounting Treatment, Factoring, Financial Reporting, Non-current Liabilities, Off-Balance Sheet Financing, Operating Lease, Sale-Leaseback, Substance Over Form
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)
Series: MAY 2018

CR – May 2018 – L3 – SB – Q4a – Presentation of Financial Statements (IAS 1)

Explain how off-statement financing can mislead financial statement users, with examples for three user groups.

Question

a. Recording the substance of transactions, rather than their legal form, is an important principle in financial reporting. The use of off-statement of financial position financing arrangement enables companies to obtain financing without showing debts in their books.

Required:

Describe how the use of off-statement of financial position financing can mislead users of financial statements, making specific reference to THREE user groups and giving examples where recording the legal form of transactions may mislead them. (6 Marks)

Answer

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Tags: Financial Misrepresentation, Financial Reporting, Gearing, Liquidity, Off-Balance Sheet Financing, Profitability, Substance Over Form, User Groups
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)
Series: MAY 2018

AAA – Nov 2023 – L3 – SC – Q5 – Audit of IT Systems and Data Analytics

Discusses COBIT's purposes, components, and its application in business processes for IT governance and audit functions.

Question

Hillary Professional Services is a medium-sized firm on a retreat having successfully combined business operations to take advantage of mandatory audit rotation guidelines. At the retreat, it was agreed that a robust software to reduce paperwork was inevitable. All along, one of the combined firms has an Information Technology (IT) Unit which has been strengthened with state-of-the-art equipment.

All auditors are now encouraged to show more interest in information technology, especially in areas relating to data analytics, artificial intelligence, and machine learning. Undoubtedly, understanding the business information system used by management is necessary as they affect risk assessment involved in the financial reporting process. It was also concluded that obtaining an understanding of the field of information technology is a standard audit procedure to be followed; otherwise, it will be difficult to evaluate the adequacy of the expert’s work as recommended by International Standards on Auditing. The purpose of the merger will be defeated if the firm will not be able to win jobs and perform well in a highly competitive market. The after-effect of the COVID-19 pandemic has also revealed that one could work with flexibility anywhere if there is a robust audit software in place.

The IT Audit Partner made a presentation on “COBIT (Control Objectives for Information and Related Technologies) – a globally accepted suite of tools that a client might use in order to ensure IT is working effectively.” He stated that COBIT is all about doing the right things the right way in order to deliver benefits to the client.

You are a staff of Hillary Professional Services. Based on the presentation made on COBIT at the retreat, you have been divided into groups and the groups are to debrief the main group after one hour.

Required:

a. State the purposes of COBIT (Control Objectives for Information and Related Technologies).
(3 Marks)

b. Identify and explain the specific components of COBIT.
(8 Marks)

c. Explain how COBIT will be applied in the business process.
(4 Marks)

Total: 15 Marks

Answer

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Tags: Audit Procedure, Audit Standards, COBIT, Data Analytics, Digital Transformation, Financial Reporting, Information Systems, IT Governance, Machine Learning
Level: Level 3

Topic: Audit of IT Systems and Data Analytics
Series: NOV 2023

CR – Nov 2018 – L3 – SB – Q2 – Share-Based Payments (IFRS 2)

Examination of KutuKutu Plc.'s share-based payment policies and transactions under IFRS 2

Question

(1) KutuKutu Plc. has a policy in place to pay its employees a performance bonus. This bonus is to be paid in cash and is unrelated to the movement in its share price. KutuKutu Plc. has the choice of settling the bonus in cash or in equity shares to the value of the cash bonus. Based on bonuses paid in prior years, KutuKutu Plc. has always settled the bonuses of qualified employees in shares.

(2) KutuKutu Plc. grants one share option to each of its 50 employees on January 1, 2016. The share options will vest at the end of 2 years provided that:

The employees remain in KutuKutu Plc.’s employment at that date; and
The Earnings before Interest, Tax, Depreciation, and Amortisation (EBITDA) of KutuKutu Plc. for the second year achieves a specified target.

At the grant date, each recipient is required to make a non-refundable cash payment of N2,000 to KutuKutu Plc. This payment is based on the estimated fair value (FV) of the share option which reflects the probability that the target EBITDA will be achieved in the second year. FV of each option would be N250 (excluding the effect of the EBITDA condition).

If KutuKutu Plc. does not achieve the target EBITDA or if an employee leaves the employment of KutuKutu Plc., no shares will be issued, and the employee will not be entitled to a repayment. Accordingly, both service and non-market vesting conditions are deemed to be substantive.

Required:

a. Do the transactions entered into in (1) above meet the definition of equity-settled share-based payment transactions within the scope of IFRS 2? (8 Marks)

b. How should the transaction in (2) above be accounted for? (12 Marks)

Answer

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Tags: Cash-Settled Transactions, Employee Benefits, Equity-Settled Transactions, Financial Reporting, IFRS 2, Share-Based Payments
Level: Level 3

Topic: Share-Based Payments (IFRS 2)

Question Tag: Financial Reporting

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