Report to Management of OJB Ltd

Subject: Recommended Accounting Treatment for Uncertain Transactions in 2016 Financial Statements

Dear Management,

Following the AGM concerns on audit delays, I have reviewed the four transactions causing uncertainty for the Accounts Officer. As a senior banking expert with experience at Ecobank Ghana, I emphasize compliance with IFRS/IAS as adopted in Ghana, aligning with BoG’s regulatory framework for accurate reporting to prevent misstatements that could affect credit ratings or investor confidence, as seen in the 2017-2019 bank collapses. Below is the detailed treatment per relevant standards.

1. Inventory Valuation (Finished Goods) – IAS 2 Inventories:
   • Cost of inventories should include direct costs (50,000), fixed production overheads allocated on normal capacity (10,000), but exclude selling expenses (5,000), as they are not costs to bring inventory to present location/condition.
   • Thus, cost = 50,000 + 10,000 = 60,000 (exclude 5,000 selling).
   • Valued at lower of cost (60,000) and NRV (62,000), so 60,000.
   • Treatment: Recognize at 60,000 in SOFP; expense the 5,000 selling in P&L. In practice, for Ghanaian manufacturers, this ensures conservative valuation, aiding BoG liquidity assessments.
2. Bad Debt on Receivable – IFRS 9 Financial Instruments:
   • The customer’s loss of assets via fire, with no insurance, indicates the debt (25,000,000) is irrecoverable, as there are no assets for recovery.
   • Under IFRS 9, impair the receivable fully if expected credit loss (ECL) is 100%, based on objective evidence (fire outbreak).
   • Treatment: Write off 25,000,000 as bad debt expense in P&L, reduce trade receivables in SOFP. No provision if direct write-off; disclose in notes. This aligns with BoG’s credit risk directives, preventing overstated assets in borrower statements.
3. Research and Development Expenditure – IAS 38 Intangible Assets:
   • R&D costs: Research phase (including market research) must be expensed; development phase can be capitalized if criteria met (technical feasibility, etc.).
   • Market research (25,000,000) is research, so expense immediately; remaining 75,000,000 assumable as development if criteria satisfied.
   • Treatment: Reverse capitalization of 25,000,000, expense in P&L; keep 75,000,000 capitalized as intangible asset, amortize over useful life. Disclose policy. In Ghana, this prevents overcapitalization, as BoG scrutinizes intangibles in capital adequacy calculations post-recapitalization guidelines.
4. Lease Accounting – IFRS 16 Leases:
   • The lease is finance lease (non-cancellable, covers useful life, PV min payments = fair value 45,000,000, lessee bears insurance/maintenance).
   • Recognize right-of-use asset and lease liability at 45,000,000 at inception.
   • Depreciate asset over useful life; interest on liability in P&L; payments reduce liability.
   • The officer’s treatment (only rental 9,000,000 expensed) is incorrect (operating lease treatment).
   • Treatment: Recognize asset 45,000,000 (depreciate, say straight-line); liability 45,000,000 (reduce by principal portion of payments); P&L: depreciation + interest (not full rental). Adjust retrospectively if prior year. This reflects substance over form per FRS 5, crucial for Ghanaian firms to avoid off-balance sheet risks, as per BoG’s outsourcing and risk guidelines.

Recommendations: Implement training on IFRS updates; consult auditors early. This will expedite future audits and ensure BoG compliance.

Regards, [Your Name], Financial Reporting Expert with 20+ years in Ghanaian banking.