a) Elements of financial statements and how they can be recognised.

Asset definition A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Liability definition A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Equity definition The residual interest in the assets of the entity after deducting all its liabilities.

Income definition Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Expense definition Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Recognition of the elements of financial statements Recognition is the process of incorporating in the statement of financial position or statement of profit or loss an item that meets the definition of an element and satisfies the following criteria for recognition:

• It is probable that any future economic benefit associated with the item will flow to or from the entity; and
• The item’s cost or value can be measured with reliability.

Based on these general criteria:

• An asset is recognised in the statement of financial position when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.
• A liability is recognised in the statement of financial position when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably.
• Income is recognised in the statement of profit or loss when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means, in effect, that recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities (for example, the net increase in assets arising on a sale of goods or services or the decrease in liabilities arising from the waiver of a debt payable).
• Expenses are recognised when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets (for example, the accrual of employee entitlements or the depreciation of equipment).

b) i) One of the primary characteristics of financial statements is reliability, i.e. they must faithfully represent the transactions and other events that have occurred. It can be possible for the economic substance of a transaction to be different from its strict legal position or ‘form’. Thus financial statements can only give a faithful representation of a company’s performance if the substance of its transactions is reported.

It is worth stressing that there will be very few transactions where their substance is different from their legal form, but for those where it is, they are usually very important. This is because they are material in terms of size or incidence, or because they may be intended to mislead. (2 marks)

ii) Common features which may indicate that the substance of a transaction (or series of connected transactions) is different from its legal form are:

• Where the ownership of an asset does not rest with the party that is expected to experience the risks and reward relating to it (i.e. equivalent to control of the asset).
• Where a transaction is linked with other transactions. It is necessary to assess the substance of the series of connected transactions as a whole.
• The use of options within contracts. It may be that options are either almost certain to be (or not to be) exercised. In such cases these are not really options at all and should be ignored in determining commercial substance.
• Where assets are sold at values that differ from their fair values (either above or below).

Many complex transactions often contain several of the above features. Determining the true substance of transactions can be a difficult and sometimes subjective procedure. (2 relevant points @ 1.5 marks each = 3 marks)

c) i) In a business setting, “sustainability” means operating a company in a way that minimizes negative environmental and social impacts while ensuring long-term economic viability, essentially balancing the needs of the planet, people, and profit through practices that don’t deplete resources or harm communities for future generations. It involves integrating environmental, social, and economic considerations into everyday business operations and strategies.

In business, sustainability refers to doing business without negatively impacting the environment, community, or society as a whole.

It also refers to a company’s strategy and actions to reduce adverse environmental and social impacts resulting from business operations in a particular market.

An organization’s sustainability practices are typically analyzed against environmental, social and governance (ESG) metrics. (2 marks)

ii) The Core Areas of Sustainability The core areas of sustainability, often referred to as the “three pillars,” are environmental (planet) sustainability, social (people) sustainability, and economic (profit) sustainability; essentially focusing on protecting the planet, ensuring social equity, and maintaining economic viability, all in a balanced way to meet the needs of the present without compromising future generations.

Environmental sustainability (Planet)

• This pillar focuses on minimizing environmental damage by responsible resource management, reducing pollution, conserving biodiversity, and mitigating climate change.

Social sustainability (People)

• This pillar addresses issues like human rights, equitable access to resources, community well-being, quality of life, and fair labor practices.

Economic sustainability (Profit)

• This pillar aims to maintain long-term economic growth by promoting efficient resource use, sustainable business practices, and equitable distribution of wealth. (3 points for 3 marks)

d) The accounting treatment for the transactions for the year-ending 31 December 2024 are as follows:

30.11.2024 Dr. Bank – SOFP GH$50,000 Cr. Trade Receivables – SOFP GH$50,000 Accounting for receipt at foreign exchange rate of GHS1 = Mex $1.20

31.12.2024 Dr. Trade Receivables – SOFP (See Below) Cr. Foreign Exchange Gain – SOPL & OCI 6,363.60 (4 marks)

Calculation of Foreign Exchange Gain at 31.12.2024 Balance per Trade Receivables 30,000 Balance due in Mex $(100,000 – 60,000 = 40,000) @ 31.12.2024 GH¢1 = Mex $1.10 Foreign Exchange Gain 6,363.60 (1 mark)