- 20 Marks
Question
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).
Answer
a.i) The principal situations in which net realisable value is likely to be less than cost is where there has been;
- An increase in costs or a fall in selling price
- Physical deterioration of inventories
- Obsolescence of products
- A decision as part of a company’s marketing strategy to manufacture and sell products at a loss
- Errors in production or purchasing (4 relevant points for 2 marks)
ii) Working – Closing Inventory
| Total Inventories at Cost per Inventory Count | 345,000 | | Accidentally Destroyed Inventory | (4,600) | | Damaged Inventories – Cost | (2,900) | | NRV – Selling Price less costs to sell (2,400 – 600) | 1,800 | | Inventory Write Down | (1,100) | | Value of Closing Inventories in SOFP (current asset) | 339,300 |
Statement of profit or loss for the year ended 31 December 2024
| Cost of sales: | GH₵ | | Inventories write-off (4,600 + 1,100) | (5,700) |
b. i) Under IAS 23, borrowing costs should be capitalised when three conditions are met:
- Borrowing costs are being incurred;
- Expenditure is being incurred on the qualifying asset; and
- Activities are taking place to construct the asset.
ii) Here, (1) and (2) are taking place all year. Construction activities were not taking place for August and September 2023, and for 1 month during the breaks. Hence there was 9 months activity, and 9/12 of the interest cost should be capitalised. 5% * GH₵40 million * 9/12 = GH₵1.5 million
c) Disclosure requirements of IAS 12
- The major components of tax expense (income) shall be disclosed separately.
- The aggregate current and deferred tax relating to items that are charged or credited directly to equity.
- The amount of income tax relating to each component of other comprehensive income.
- An explanation of the relationship between tax expense (income) and accounting profit in either or both of the following forms: (i) a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are) computed; or (ii) a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed.
- An explanation of changes in the applicable tax rate(s) compared to the previous accounting period;
- The amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognised in the statement of financial position.
- The aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint arrangements, for which deferred tax liabilities have not been recognised. (3 relevant points for 3 marks)
(d) Split of Liability and equity components
| Period | Description | CF(GH₵’000) | Cumulative DF@5.5% | PV (GH₵’000) | | 1 to 8 | Interest | 900 | 6.3346 | 5,701.14 | | 8 | Principal | 20,000 | 0.6516 | 13,032.00 | | FV of Liability component = Sum of PVs | | | | 18,733.14 | | FV of Equity component | | | | 1,266.86 | | Proceeds of issue | | | | 20,000.00 |
Period 8 Discount factor = 6.3346 – 5.6830 = 0.6516 Entries on initial recognition:
| DR | Bank | 20,000.00 | | CR | Financial Liability | 18,733.14 | | CR | Other component of equity | 1,266.86 |
Subsequent measurement of the liability component at y/e
| Year | Period end | Opening bal. | Int.@5.5% | Payments | Closing bal. | | 2023 | 30-Jun | 18,733.14 | 1,030.32 | 900.00 | 18,863.46 | | 2023 | 31-Dec | 18,863.46 | 1,037.49 | 900.00 | 19,000.95 | | 2024 | 30-Jun | 19,000.95 | 1,045.05 | 900.00 | 19,146.00 | | 2024 | 31-Dec | 19,146.00 | 1,053.03 | 900.00 | 19,299.03 |
Akweley LTD Statement of Financial Position as at 31 December 2024 GH₵’000
Equity: Other component of equity 1,266.86
Non-current liability: Financial liability 19,299.04 (6 marks)
- Tags: Convertible Bonds, Equity Component, Financial instruments, IFRS 9, Liability Component
- Level: Level 2
- Topic: Financial Reporting Standards and Their Applications
- Series: MAR 2025
- Uploader: Samuel Duah