- 20 Marks
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
(a). PPE Revaluation
| GHC’000 | |
|---|---|
| Market (fair) value | 151,200 |
| Carrying amount | (144,000) |
| Revaluation gain | 7,200 |
Dr Property, plant and equipment (151,200 – 144,000) 7,200
Cr Other comprehensive income 7,200
Deferred tax on revaluation (7,200 × 25%) 1,800
Dr Other comprehensive income 1,800
Cr Deferred Tax 1,800
Current tax
Current tax credit:
DR Current tax asset (23,040 × 25%) 5,760
CR Income tax (P/L) 5,760
Deferred tax
Deferred tax liability:
| Accounting Carrying Amount GHC’000 | Tax base GHC’000 | Temporary difference GHC’000 | |
|---|---|---|---|
| Property, Plant and Equipment (214,080 + 7,200) | 221,280 | 150,480 | 70,800 |
Deferred tax liability @ 25% × 70,800 = 17,700
Calculation of deferred tax in profit or loss:
| GHC’000 | |
|---|---|
| Net deferred tax liability b/d | 13,080 |
| Charge to other comprehensive income ((Revaluation) 7,200 @ 25%) | 1,800 |
| Charge to profit or loss (balancing figure) | 2,820 |
| Net deferred tax liability c/d (from above) | 17,700 |
Statement of financial position as at 30 June 2024 (Extract)
| GHC’000 | |
|---|---|
| Property, Plant and Equipment | 221,280 |
| Current asset | |
| Current tax asset | 5,760 |
| Non-current liabilities | |
| Deferred tax liability | 17,700 |
| 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 (5,760 – 2,820) | 2,940 |
| Loss for the year | (8,580) |
(6 marks)
(b). The date of transition is 1 October 2022 (30 September 2022 closing figures).
Total adjustment to opening equity at that date is:
| GHC’000 | |
|---|---|
| Property, plant and equipment (fair value as deemed cost) (88,000 – 80,400) | 7,600 |
| Capitalised staff development costs | (4,000) |
| Borrowing costs incurred for asset under construction (exemption available) | 0 |
| Provision for court case – reverse liability | 480 |
| 4,080 |
(c).
- Ayariga PLC is a related party of Mireku LTD as it has significant influence over Mireku LTD.
- Ahmed PLC is a related party of Mireku LTD as it is jointly controlled by Ayariga PLC that has significant influence over Mireku LTD.
- Alex is key management personnel of Mireku LTD and therefore a related party.
- Adorko is a close family member of Alex (whether married or not) who is key management personnel of Mireku LTD and is therefore also a related party.
- The twins are also related parties of Mireku LTD as they are also close family of key management personnel, even though they are minors.
- Ayine LTD is NOT a related party of Mireku LTD as Mireku does not have any influence over it, despite the fact that it is also a key customer.
- Dennis is also a related party of Mireku LTD as a patron/sponsor of close family of key management personnel of Mireku.
- Jinapor LTD is NOT a related party of Mireku LTD. If Dennis had significant influence over it, it would be considered a related party.
(d). Hyperinflation occurs when the general price level of goods and services in an economy increases rapidly, often causing the local currency to lose value. The International Accounting Standard (IAS) 29, “Financial Reporting in Hyperinflationary Economies,” provides guidance on how entities should account for transactions and prepare financial statements in such economies.
Indications of a Hyperinflationary Economy
The following are indications that an economy is hyperinflationary:
- High inflation rates: The cumulative inflation rate over three years approaches or exceeds 100%.
- Rapid increase in prices: Prices of goods and services increase rapidly, often causing the local currency to lose value.
- Decrease in purchasing power: The purchasing power of the local currency decreases significantly over time.
- Widespread rejection of local currency: The local currency is no longer widely accepted as a medium of exchange.
- Tags: Economic Conditions, Financial Reporting, Hyperinflation, IAS 29, Inflation Indicators
- Level: Level 3
- Uploader: Samuel Duah