- 20 Marks
Question
a. Explain what is meant by fair presentation of financial statements for public entities. (2 Marks)
b. University of Wazobia is a public funded entity established by an Act of parliament in 2019. In its recent trial balance for the year ended December 31, 2024, two items which are listed below have caught the attention of the new Vice Chancellor.
Item 1: The research and development costs of N61,295,000 included in the trial balance are made up of the following elements:
Project 1: N13,325,000 was spent on applied research. It is hoped that this will ultimately lead to the development of a new vaccine.
Project 2: N21,320,000 was spent on research into how renewable energy can be used to support technology for economic development.
Project 3: N26,650,000 was spent on the development of a new scanner. Subsequently, the University considers this project no longer a priority of national government and by December 31, 2024 no funding had been identified to continue with the project in 2025. However, on February 15, 2025, a loan was obtained from a commercial organisation which means that the project can be completed and the scanner sold commercially.
The costs to complete all three projects have been estimated by the University.
Item 2: The research grant contracts of N67,957,500 included in the trial balance are to fund the three projects referred to in item 1 above. It is the policy of the University to recognise revenue on the basis of percentage completion of the project.
| Project | Revenue included in the Trial Balance N | % complete |
|---|---|---|
| 1 | 15,990,000 | 80% |
| 2 | 22,386,000 | 96% |
| 3 | 29,581,500 | 90% |
| Total | 67,957,500 |
Required:
(i) With reference to relevant IPSAS, explain your treatment of the costs of N26,650,000 which relate to project 3. (10 Marks)
(ii) With reference to the relevant IPSAS explain your treatment of the revenue of N67,957,500 from research grants contracts. (8 Marks)
Answer
a. Fair presentation of financial statements for public entities
Fair presentation means the financial statements faithfully represent the financial position, performance, and cash flows of the entity in accordance with the applicable framework like IPSAS, without bias.
b. (i) Treatment of costs N26,650,000 for project 3
Under IPSAS 31 Intangible Assets, development costs are capitalized if criteria like technical feasibility, intention to complete, future benefits, resources available are met. At year-end, no funding, so uncertainty in benefits; costs expensed. Post-balance sheet loan is non-adjusting event per IPSAS 14; expense in 2024.
b. (ii) Treatment of revenue N67,957,500 from research grants
Under IPSAS 23 Revenue from Non-Exchange Transactions (or IPSAS 9 if exchange), grants recognized when conditions met. For percentage completion, defer if not met. For project 3, funding uncertainty at year-end; recognize revenue only to extent costs recoverable, potentially defer part of N29,581,500.
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