Question Tag: IFRS 9

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  • 20 Marks

CR – May 2019 – L3 – Q3 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Discuss the classification of financial assets under IFRS 9 and evaluate the appropriate accounting treatment of a loan granted to a special purpose entity.

Ariba Bank Plc. (the Bank) is a Tier 1 Bank in Nigeria with branch network across all the six geo-political zones of the country. Its credit portfolio is spread among many industries with a special focus on the oil and gas industry and real estate.

One of its major customers with a very good credit standing is Dunga Property Development Company (DPDC).

The management of DPDC recently approved a plan to build four shopping malls in major cities across the country. A special purpose entity was registered as a limited liability company, Dunga Malls Limited (DML), dedicated to the development and management of the malls. The project will be solely financed by a loan to be obtained from Ariba Bank. There will be no equity contribution from DPDC other than the minimum required by law to establish a company.

Ariba Bank has approved a loan of N80 billion at a fixed interest rate of 15% per annum payable annually in arrears. The loan has a maturity of 10 years with a moratorium of 3 years. There was no transaction cost and therefore the contractual rate is the same as the effective rate. The loan was granted directly to DML on 1 January, 2018.

The Financial Controller of Ariba Bank Plc. is concerned about the accounting treatment of the loan as IFRS 9 Financial Instrument was adopted by the bank during the year. He noted that the majority of the bank loans are classified at amortized cost in the statement of financial position, but the loans must pass certain tests before such classification.

The Chief Risk Officer noted in his memo that the arrangement is substantially the same as the other borrowing arrangements of the bank except that a borrowing entity would normally have equity or other assets that could be called upon by the bank in a case of default other than the asset being financed.

Required:
a. Discuss how financial assets are classified in accordance with the requirements of IFRS 9. (8 Marks)
b. Advise the Bank on how the loan granted to DML should be classified in the statement of financial position. (6 Marks)
c. Discuss, with supporting calculations, how the loan will be accounted for in the financial statement of the bank for the year ended 31 December, 2018. (6 Marks)

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  • 20 Marks

CR – Nov 2020 – L3 – Q5 – Leases (IFRS 16)

Discuss lease classification, loan liability derecognition under IFRS 9, and tax offsetting rules under IAS 12.

Muzana Limited owns tractors used for farming purposes and sometimes enters into lease arrangements with other agricultural companies. A particular tractor when leased out by Muzana is for 8 years. The useful economic life of each tractor is estimated at 10 years while the fair value of each tractor is estimated at N26 million. The present value of minimum lease payments in the lease arrangement is N28 million. Lease payments are made to Muzana by the lessee on a monthly basis and has a purchase option at the end of the lease term to acquire the machine for N2.2 million. A similar fairly used machine in the market will cost the buyer N2.5 million. Following the transition to IFRS 16, the management of Muzana have classified this lease as an operating lease in its year-end financial statements.

In order to expand its operations, Muzana accessed the Agricultural Loan Credit Programme set up by the government of Nigeria. In the year 2016, Muzana was granted a 5-year interest free loan of N100 million. At year end September 30, 2019, Muzana had been able to set aside N100 million in a special trust to be used for no other purpose than to pay off the loan in full on its due date in 2020. The management of Muzana are currently preparing their year-end 2019 financial statements and have derecognised the loan liability due to the fact that funds have been set aside in full to satisfy the loan payment in 2020.

Muzana Limited have just concluded a meeting with its tax consultant. The amounts due to the state tax authorities in the current year is N2.3 million. Muzana also has a tax credit of N1.8 million due from the Federal government in the current year. The tax consultant has advised Muzana that these amounts can be offset in their year-end financial statements to show only a tax liability of N500,000.

Required: a. Explain how the lease arrangement should be classified in Muzana‘s 2018 year-end financial statements? (7 Marks) b. Advise the management of Muzana, based on IFRS 9 derecognition rules, if the loan liability can be recognised in their year-end September 30, 2019 financial statements. (7 Marks) c. Explain if the advise provided by the tax consultant is consistent with the offsetting rules under IAS 12 Income Taxes? (6 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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  • 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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  • 15 Marks

FR – May 2024 – L2 – SA – Q5 – Financial Instruments

Explains financial assets and liabilities, and categorizes financial assets under IFRS 9.

a. IFRS 9 – Financial Instruments defines a financial instrument as a contract that gives rise to both a financial asset in one entity and a financial liability or equity instrument in another entity.

Required:
i. Explain the terms “financial asset” and “financial liability.” (3 Marks)
ii. Describe with examples THREE categories of financial assets in accordance with IFRS 9. (7 Marks)

b. Olisa Nigeria PLC issued a stepped bond on January 1, 2018 with an issue value of N10million. The bond pays a coupon rate of 5% interest for the first two years and 7% interest for the next two years. The interest on the bond is paid annually on the anniversary of the bond issue. The bond has an effective interest rate of 5.94234% and is expected to be redeemed at par after four years.

Required:
Calculate the amortised cost of the bond at the end of each year over its life.
(5 Marks)

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  • 4 Marks

CR – Nov 2020 – L3 – Q3b – Convertible Loan Accounting under IFRS 9

Accounting treatment of investment in a convertible bond under IFRS 9.

During the year ended 31 December 2018 Pakyi Ltd invested in a convertible bond on its issue date. The bond matures four years after the issue date and at that date the bond can be converted into ordinary shares of the investee or repaid at par. The entity’s plan for the bond is to hold it until it matures and collect the cash flows.

Required:

Advise the directors of Pakyi Ltd of the accounting treatment on the above transaction under IFRS 9: Financial Instruments for the year ended 31 December 2018.
(4 marks)

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  • 5 Marks

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

Asamankese Ltd (Asamankese) purchased a 6% GH¢50 million bond on 1 August 2018 at a 10% discount to par value. Expenses of purchase were GH¢500,000. The bond is due for redemption on 31 July 2028 at par. The effective annual interest rate to maturity is 7.3%. Asamankese intends to hold the bond until its maturity date.

Required:
In accordance with IFRS 9: Financial Instruments, how much should be recognized in Asamankese’s financial statements in respect of the above transaction for the year ended 31 July 2019 (to two decimal places)?

 

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  • 5 Marks

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

Asamankese Ltd (Asamankese) purchased a 6% GH¢50 million bond on 1 August 2018 at a 10% discount to par value. Expenses of purchase were GH¢500,000. The bond is due for redemption on 31 July 2028 at par. The effective annual interest rate to maturity is 7.3%. Asamankese intends to hold the bond until its maturity date.

Required:
In accordance with IFRS 9: Financial Instruments, how much should be recognized in Asamankese’s financial statements in respect of the above transaction for the year ended 31 July 2019 (to two decimal places)?

 

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  • 5 Marks

FR – Mar/Jul 2020 – L2 – Q5a – Financial Instruments (IAS 32, IFRS 9)

Explains how IFRS requires gains or losses on re-measurement to be dealt with in the financial statements for financial assets held at fair value under IFRS 9 and property, plant, and equipment under the revaluation model of IAS 16.

a. IFRS requires several methods for recognising gains and losses on re-measurement of various types of assets recognised by different International Accounting Standards.
Required:
Explain how IFRS requires gains or losses on re-measurement to be dealt within the financial statements for each of the following type of assets:
i. Financial assets held at fair value under – IFRS 9. (3 Marks)
ii. Property, plant and equipment held under revaluation model of IAS 16
(2 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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  • 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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  • 4 Marks

FR – May 2019 – L2 – Q2d – Financial Reporting Standards and Their Applications

Treatment of Sukura Ltd’s investment in Awoshi Electronics under IFRS 9.

Sukura Ltd entered into a contractual arrangement on 1 September 2018 with another company, Mammobi Ltd, setting up an unquoted entity, Awoshi Electronics. However, Sukura Ltd only has a 15% shareholding and does not have any influence in the day-to-day financial and operating policies. Sukura Ltd has recorded the investment in Awoshi Electronics at its cost on 1 September 2018, being the carrying amount of the equipment and cash transferred at that date. No subsequent changes were made to the carrying amount.

Required:

Advise the directors on the accounting treatment of the above in Sukura Ltd’s financial statements for the year ended 31 December 2018.

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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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  • 6 Marks

CR – May 2019 – L3 – Q2a – Financial instruments: Recognition and measurement corporate reporting

The question requires the accounting treatment for the issue of a subsidized loan granted by Chereponi Ltd to a charity, applying IFRS 9 Financial Instruments.

Chereponi Ltd (Chereponi) is a listed manufacturing company. Chereponi granted a loan of GH¢25 million to a homeless charity for the building of a community centre. The loan was granted on 1 January 2018 and is repayable on maturity in four years’ time. Interest, which is subsidized, is to be charged one year in arrears at 4%, but Chereponi assesses that a normal rate for such a loan would have been 8%. Chereponi recorded a financial asset at GH¢25 million and reduced this by the interest received each year.

Required:
In accordance with IFRS 9: Financial Instruments, recommend with justification the required accounting treatment for the issue of the loan to the homeless charity in the financial statements of Chereponi for the year ended 31 December 2018. (6 marks)

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  • 10 Marks

CR – April 2022 – L3 – Q3a – Financial instruments: Recognition and measurement

Account for finance lease and financial liability transactions according to relevant IFRS.

a) Zeus Ltd manufactures equipment for lease or sale. The following transactions relate to Zeus Ltd for the year ended 31 December 2020:

i) On 31 December 2020, Zeus Ltd leased out equipment under a 10-year finance lease. The selling price of the leased item was GH¢50 million, and the net present value of the minimum lease payments was GH¢47 million. The carrying value of the leased asset was GH¢40 million, and the present value of the residual value of the product when it reverts to Zeus Ltd at the end of the lease term is GH¢2.8 million. Zeus Ltd has shown sales of GH¢50 million and cost of sales of GH¢40 million in its financial statements.
(5 marks)

ii) On 1 January 2020, Zeus Ltd raised finance by issuing a two-year deeply discounted 2% bond with a nominal value of GH¢20,000 that was issued at a discount of 5% and is redeemable at a premium of GH¢2,150. There were no issue costs. The bond has an effective interest rate of 10%.
(5 marks)

Required:
Recommend to the directors of Zeus Ltd how the above transactions should be accounted for in the financial statements for the year ended 31 December 2020 in accordance with relevant International Financial Reporting Standards.

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  • 4 Marks

CR – Nov 2018 – L3 – Q2e – Financial instruments: Recognition and measurement Corporate reporting

Discuss the accounting treatment of a variable rate loan commitment under IFRS 9 in the financial statements of Garu-Tempane Ltd.

Garu-Tempane Ltd had the following transaction during the year ended 31 December 2018:

The entity entered into a contractual commitment to make a variable rate loan to a customer beginning on 1 January 2019 for a fixed period at 1% less than the rate at which the entity (not the customer) can borrow money.

Required:
Advise the directors of Garu-Tempane Ltd on the accounting treatment of the above transaction under IFRS 9: Financial Instruments for the year ended 31 December 2018.

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  • 5 Marks

CR – Nov 2021 – L3 – Q3b – Financial instruments: Recognition and measurement Corporate reporting

Advise Ajara Ltd on the accounting treatment of receivables factoring arrangements, both with and without recourse, under IFRS 9.

Ajara Ltd has two receivables that it has factored to a factoring agency, the GBB Bank, in return for immediate cash proceeds of less than the face value of the invoices for the year ended 31 December 2020. Both receivables are due from long-standing customers who are expected to pay in full and on time. In addition, Ajara Ltd has agreed to a three-month credit period with both customers.

  • The first receivable is for GH¢400,000, and in return for assigning the receivable, Ajara Ltd has just received from the factor GH¢360,000. Under the terms of the factoring arrangement, this is the only money that Ajara Ltd will receive regardless of when or even if the customer settles the debt; that is, the factoring arrangement is said to be “without recourse.”
  • The second receivable is for GH¢200,000, and in return for assigning the receivable, Ajara Ltd has just received GH¢140,000. Under the terms of this factoring arrangement, if the customer settles the account on time, then a further GH¢10,000 will be paid by the factoring agency, the GBB Bank to Ajara Ltd, but if the customer does not settle the account in accordance with the agreed terms, then the receivable will be reassigned back to Ajara Ltd who will then be obliged to refund to the factor the original GH¢140,000 plus a further GH¢20,000. This factoring arrangement is said to be “with recourse.”

Required:

Advise the directors of Ajara Ltd on the proper accounting treatment of the monies received under the terms of the two factoring arrangements in the financial statements for the year ended 31 December 2020 in accordance with IFRS 9: Financial Instruments.

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