- 30 Marks
Question
(a) Breakthrough Plc is in the process of releasing its financial statements through one of the daily newspapers on or before May 31, 2024. The following drafts were prepared by the Company‟s Chief Accountant.
Draft consolidated statement of financial position as at December 31,
| 2023 N’000 | 2022 N’000 | |
|---|---|---|
| Assets: | ||
| Non-current assets: | ||
| Property, plant and equipment | 2,630,000 | 2,010,000 |
| Goodwill | 60,000 | 50,000 |
| Investment in an associate | 540,000 | 580,000 |
| Total non-current assets | 3,230,000 | 2,640,000 |
| Current assets: | ||
| Inventories | 1,300,000 | 1,160,000 |
| Trade receivables | 1,220,000 | 1,060,000 |
| Cash and cash equivalents | 100,000 | 280,000 |
| Total current assets | 2,620,000 | 2,500,000 |
| Total assets | 5,850,000 | 5,140,000 |
| Equity and liabilities: | ||
| Equity | ||
| Share capital | 200,000 | 170,000 |
| Share premium account | 60,000 | 30,000 |
| Revaluation reserves | 100,000 | 290,000 |
| Retained earnings | 508,000 | 500,000 |
| 868,000 | 990,000 | |
| Non-controlling interests | 120,000 | 90,000 |
| Total equity | 988,000 | 1,080,000 |
| Non-current liabilities | 1,700,000 | 1,200,000 |
| Current liabilities | 3,162,000 | 2,860,000 |
| Total liabilities | 4,862,000 | 4,060,000 |
| Total equity and liabilities | 5,850,000 | 5,140,000 |
Draft consolidated statement of profit or loss and other comprehensive income for the year ended December 31, 2023
| N’000 | |
|---|---|
| Revenue | 9,400,000 |
| Cost of sales | (6,800,000) |
| Gross profit | 2,600,000 |
| Distribution and administrative expenses | (1,200,000) |
| Interest expense | (80,000) |
| Share of profit in associate | 60,000 |
| Profit before tax | 1,380,000 |
| Income tax expense (including tax on income from associate N20 million) | (420,000) |
| Profit for the period | 960,000 |
| Attributable to: | |
| Equity holders of the parent | 910,000 |
| Non-controlling interests | 50,000 |
| 960,000 |
Draft group statement of recognised income and expense for the year ended December 31, 2023
| N’000 | |
|---|---|
| Foreign exchange difference of associate | (10,000) |
| Impairment losses on property, plant and equipment offset against revaluation surplus | (190,000) |
| Net expense recognised in equity | (200,000) |
| Profit for the period | 910,000 |
| 710,000 |
Draft group statement of changes in equity for the year ended December 31, 2023
| N’000 | |
|---|---|
| Recognised income and expense for the period | 710,000 |
| Dividends paid | (892,000) |
| New shares issued | 60,000 |
| Total movement during the year | (122,000) |
| Equity at the beginning of the year | 990,000 |
| Equity at the end of the year | 868,000 |
Additional information:
(i) Any impairment on goodwill has been included in the draft financial statements for the year ended December 31, 2023.
(ii) There was no disposal of property, plant and equipment during the year. Depreciation charged for the period was N120 million.
(iii) It was established that there was no actuarial gain or loss in the year.
(iv) Included in dividends paid during the year was N800 million paid to Waterside Plc, a subsidiary company through which Breakthrough Plc conducts its investment activities. The transfer was made on January 1, 2023 for specified portfolio of investments but no transfer of profit or loss occurred. Ninety-five percent of the profits and one hundred per cent of the losses in the specified portfolio of investments are to be transferred to Breakthrough Plc at the end of the year annually and the capital is expected to be returned in four years‟ time.
The statement of financial position extract of Waterside Plc as at December 31, 2023 is as follows:
| N’000 | |
|---|---|
| Investment at fair value through profit or loss | 780,000 |
| Share capital | 800,000 |
| Retained earnings | (20,000) |
| 780,000 |
(v) Breakthrough Plc is yet to make provision for its seventy per cent acquisition and holding in Dandy Plc on January 1, 2022. However, the company wants to set up a provision for reconstruction costs of N20 million retrospectively on the acquisition. The fair values of the net assets acquired were as follows:
| N’000 | |
|---|---|
| Property, plant and equipment | 140,000 |
| Inventories and work in progress | 180,000 |
| 320,000 |
The purchase consideration was N200 million in cash and N50 million (discounted value) deferred consideration payable on January 1, 2023. The difference between the discounted value of the deferred consideration (N50 million) and the amount payable (N58million) is included in interest expense.
(vi) The composition of current liabilities, non-current liabilities and retirement benefit liability are as presented below:
| Current liabilities: | 2023 N’000 | 2022 N’000 |
|---|---|---|
| Trade payables | 2,682,000 | 2,400,000 |
| Interest payable | 100,000 | 90,000 |
| Taxation | 380,000 | 370,000 |
| 3,162,000 | 2,860,000 |
| Non-current liabilities: | 2023 N’000 | 2022 N’000 |
|---|---|---|
| Deferred consideration – purchase of Dandy Plc | 58,000 | – |
| Liability for the purchase of property, plant and equipment | 288,000 | – |
| Loans repayable | 1,242,000 | 1,110,000 |
| Provisions for deferred tax | 60,000 | 50,000 |
| Retirement benefit liability | 52,000 | 40,000 |
| 1,700,000 | 1,200,000 |
| Movements in retirement benefit: | 2023 N’000 |
|---|---|
| Liability as at January 1, 2023 | 40,000 |
| Current and past service costs charged to income statement | 26,000 |
| Contributions paid to retirement benefit scheme | (14,000) |
| Liability as at December 31, 2023 | 52,000 |
Required: (a) Prepare Breakthrough Group consolidated statement of cashflows for
the year ended December 31, 2023 using the indirect method.
(20 Marks)
(b) The Chief Accountant understands the guidelines for the preparation of financial statements – one of which is provisions or contingencies. In the course of the preparation of the financial statements, a sum of N200 million was captured under this heading. On further investigation, it was discovered that the N200 million was made up of the following: N20 million for court case involving a supplier, N70 million paid for advertisement rights, N50 million provision for future losses in business operations and N60 million for judgement debt on appeal.
Required: i. Advise on the appropriateness of the amount of N200 million captured in the financial statements.
(2 Marks) ii. Compute the correct amount of provisions or contingencies, if the N200 million recognised in the financial statements is wrong. (3 Marks) iii. Discuss the treatment of the previous entries made in the books to the extent to which the financial statements is wrong.
(5 Marks)
Answer
Breakthrough Plc. Consolidated Statement of Cash Flows for the Year Ended Dec 31, 2023 (₦ ‘000)
| Section | Amount (₦ ‘000) | Details |
|---|---|---|
| Operating Activities | ||
| Profit before tax | 1,380,000 | Starting point |
| Add: Non-cash/non-operating | 182,000 | Includes depreciation (120,000), current/past service cost (26,000), goodwill impairment (16,000), interest expense (80,000), less associate profit share (-60,000) |
| Cash flows before working capital changes | 1,562,000 | |
| Working capital changes: | Decrease in inventories (40,000), increase in trade receivables (-160,000), increase in trade payables (282,000) = Net 162,000 | |
| Cash flows after working capital | 1,724,000 | |
| Less: Tax paid | (380,000) | |
| Less: Retirement-benefit contributions | (14,000) | |
| Net cash from operating activities | 1,330,000 | |
| Investing Activities | ||
| Net cash invested in Dandy Plc acquisition | (200,000) | |
| Investment in financial assets | (800,000) | |
| Dividend received from associate | 70,000 | |
| Cash purchase of PPE | (502,000) | |
| Net cash used in investing activities | (1,432,000) | |
| Financing Activities | ||
| Proceeds from share issue | 60,000 | (30m + 30m) |
| Acquisition of additional loans | 132,000 | |
| Interest paid | (62,000) | |
| Dividend paid to parent’s shareholders | (92,000) | (892m – 800m) |
| Dividend paid to NCI | (116,000) | Calculated from NCI workings (see below) |
| Net cash from financing activities | (78,000) | |
| Cash and Cash Equivalents | ||
| 2023 | 100,000 | |
| 2022 | 280,000 |
Working Notes for Question 1 (Incomplete – Valuation Section Partially Provided):
| Item | Details (₦ ‘000) | Explanation |
|---|---|---|
| Goodwill at Dandy Acquisition | Purchase consideration (200m + 50m) = 250,000; NCI (30% of 320m) = 96,000; Total cost 346,000; Fair value of net assets 320,000; Goodwill = 26,000 | Affects NCI and dividends; 96m variance noted but not fully explained in text. |
| NCI Calculation | Balance b/f 90,000; Added on acquisition 96,000; Share of profit 50,000; Expected c/f 236,000; Actual c/f 120,000; Dividend paid to NCI 116,000 | Reconciliation shows dividend paid to NCI. |
| Goodwill Impairment | Existing goodwill b/f 50,000; New goodwill 26,000; Expected 76,000; Actual 60,000; Impairment loss 16,000 | Included in cash flow adjustments. |
| PPE Movement | B/f 2,010,000; Add Dandy fair value 140,000; Depreciation (120,000); Impairment (190,000); Expected c/f | |
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