Question Tag: IFRS 9

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  • 20 Marks

CIBG – FRPA 2022 – L3 – Q4 – OJB Ltd Transactions Treatment Report

Present a report on the treatment of specified transactions in OJB Ltd's financial statements per appropriate accounting standards.

At the last Annual General Meeting of OJB Ltd. the shareholders were unhappy about the delay in submitting the audited accounts to them for study before the meeting. Management of OJB Ltd attributed the delay in finalizing the accounts to the time spent by the External Auditors in auditing the accounts. It has been discovered that the delay in presenting the accounts for audit is because the Accounts Officer was not sure of the treatment of the following transactions in the financial statements of OJB Ltd. for the year ended 31st December 2016.

  1. Stocks of raw materials and finished goods in the company’s warehouse have the following details: GH¢000 Stocks of finished goods Direct cost 50,000 Proportion of fixed overhead 10,000 Proportion of selling expenses 5,000 Net Realizable Value 62,000
  2. A customer who owed OJB Ltd. an amount of GH¢25,000,000 lost all his business assets through a fire outbreak. OJB Ltd. had not taken an insurance cover over receivables.
  3. Research and Development expenditure capitalized during the year amounted to GH¢100,000,000. On further examination, it was noted that an amount of GH¢25,000,000 relating to market research was included in the Research and Development cost capitalized.
  4. The company entered into a non-cancellable lease which covered the useful life of the asset. At the inception of the lease, the fair value of the asset was GH¢45,000,000 and was equal to the present value of the minimum lease rentals. The lessee was responsible for both insurance and maintenance of the lease asset. The accounts officer has included only the annual lease rentals of GH¢9,000,000 as a charge in the Statement of Profit and Loss.

You are required to:

Present a report that details out the treatment of the above transactions in accordance with appropriate accounting standards. (20 marks)

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  • 20 Marks

FR – Mar 2025 – L2 – Q2 – Inventories

Identify four situations where net realisable value is likely less than cost per IAS 2.

a) IAS 2: Inventories prescribes the accounting treatment for inventories; it provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. Mrs. Christiana Addo, the Managing Director of Malik LTD has a number of specific queries in relation to inventory and has asked you for professional advice in relation to IAS 2. Malik LTD’s closing inventory at 31 December 2024 is GH₵345,000. This includes GH₵4,600 for items accidentally destroyed on 31 December 2024 after the count was completed. Also included is GH₵2,900 which relates to the cost of inventory damaged in October 2024, which can be reworked at a cost of GH₵600 and which can then be sold for GH₵2,400.

Required:

i) Identify FOUR situations in which net realisable value is likely to be less than cost.

ii) Calculate the closing value of inventory at 31 December 2024 and show how it should be accounted for in the statement of financial position and the statement of profit or loss.

b) IAS 23: Borrowing Costs sets out the conditions under which borrowing costs should be capitalised or expensed. On 1 August 2023, Fausty PLC commenced construction of a factory building for its own use. On the same date it issued a 5% loan notes for GH₵40 million. The entire proceeds of the loan notes were used immediately to pay for the land and to purchase building materials for the project. Construction work commenced on 1 October 2023 and continued throughout the year, except for a half-month break in December 2023 and a further half-month break in July 2024.

Required:

i) State the conditions under which borrowing costs can be capitalised.

ii) Calculate the amounts that should be capitalised as borrowing costs for the financial year end July 2024. (3 marks)

c) IAS 12: Income Taxes prescribes the accounting treatment of income taxes, including how to account for the current and future tax consequences of assets, liabilities and transactions recognised in the financial statements. IAS 12 requires entities reporting under IFRS to disclose certain items.

Required:

Identify THREE disclosure requirements of IAS 12. (3 marks)

d) Akweley LTD issued GH₵20 million of GH₵100 9% bonds at par on 1 January 2023. The maturity date of the bonds is 31 December 2026. At that date the bonds are redeemable at par or convertible to ordinary shares on the basis of 14 ordinary shares for each GH₵100 bond. The market interest rate for identical bonds with no conversion rights would have been 5.5% every six months. Coupon interest is paid in two instalments of 4.5% in arrears on 30 June and 31 December. The following are cumulative discount factors (which you should use where appropriate):

| | 4.5% | 5.5% | 9% | 11% | | 3 periods | 2.7490 | 2.6979 | 2.5313 | 2.4437 | | 4 periods | 3.5875 | 3.5052 | 3.2397 | 3.1024 | | 7 periods | 5.8927 | 5.6830 | 5.0330 | 4.7122 | | 8 periods | 6.5959 | 6.3346 | 5.5348 | 5.1461 |

Required: i) Determine the value of the liability component and the equity component of the bonds at 1 January 2023 (to the nearest GH₵1). ii) Determine the value of the liability component of the bonds at 31 December 2024 (to the nearest GH₵1).

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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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  • 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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  • 4 Marks

CR – Nov 2019 – L3 – Q3b – Financial instruments: Presentation and disclosure 511

Advise on the financial reporting issues arising from the impact of credit risk on debt instruments.

b) Duakwanta is a listed company which manufactures personal computers (PCs). It is preparing its financial statements for the year ended 31 May 2019 and would like to seek advice on the following accounting issue:

During the year, Duakwanta issued a debt finance to the financial markets to fund its expansion plans. This was a very significant debt issue for Duakwanta. After the issue, the market price of each block of debt on the market fell by approximately 10%. The financial press has stated that the reason for the fall is due to an increase in the company’s credit risk, as the market players are worried by the size of the interest payments on Duakwanta’s operating cash flows.

Required:
Advise the directors as to the financial reporting issues arising from the above scenario and explain the appropriate treatment in Duakwanta’s financial statements. (4 marks)

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  • 5 Marks

CR – Nov 2019 – L3 – Q2c – Financial instruments: Presentation and disclosure 511

Explain the accounting treatment for bonds issued by Kaduna Ltd using the amortised cost method.

c) On 1 January 2018, Kaduna Ltd issued 10,000 bond instruments with a face value of GH¢100 at a market price of GH¢95. Bond brokers charged fees totalling GH¢18,000 in relation to the bond issue. The bonds carry a coupon rate of 5% and are redeemable in 3 years at face value.

Kaduna Ltd wishes to account for the bonds using IFRS 9: Financial Instruments amortised cost method. However, there was some confusion about how the bonds should be accounted for. Currently, the cash received from the bond issue of GH¢950,000 has been recognised as a non-current liability. The broker fees of GH¢18,000 were deducted from the non-current liability carrying amount, the coupon payment of GH¢50,000 has been expensed in arriving at profit before tax, and the effective rate of interest is 7.62%.

Required:
Justify the necessary accounting treatment of the above transaction relating to Kaduna Ltd for the year ended 31 December 2018. (5 marks)

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  • 10 Marks

CR – Mar 2023 – L3 – Q2a – Financial instruments: Recognition and measurement Corporate reporting

Discuss financial reporting treatment of Hamza Ltd bonds as at 31 December 2022 and 2023.

On 31 December 2022, Hamza Ltd purchased GH¢10 million 5% bonds in Jins Ltd at par value. The bonds are repayable on 31 December 2025, and the effective interest rate is 8%. Hamza Ltd’s business model is to collect contractual cash flows over the life of the asset. At 31 December 2022, the bonds were considered low risk, and the 12-month expected credit losses were estimated at GH¢10,000. On 31 December 2023, Jins Ltd paid the coupon interest, but the risks associated with the bonds increased significantly.

The present value of the cash shortfall for the year ended 31 December 2024 was estimated at GH¢462,963, with a 3% probability of default. At the end of 2023, it was anticipated that no further coupon payments would be received during the year ended 31 December 2025, and only a portion of the nominal value of the bonds would be repaid. The present value of the bonds was assessed to be GH¢6,858,710 with a 5% likelihood of default in the year ended 31 December 2025.

Required:
With reference to IFRSs, calculate and discuss the financial reporting treatment of the bonds in the financial statements of Hamza Ltd as of 31 December 2022 and for the year ended 31 December 2023, including any impairment losses.

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