Series: JULY 2023

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  • 10 Marks

SCS – July 2023 – L3 – Q6b – Conflicts of Interest and Ethical Conflict Resolution

Explain the ICSA guidance on decisions that the board should reserve for itself and not delegate to individual or executive managers.

The Director of Human Resources and Organisational Development is concerned that her recent presentation about matrix management structure and performance management should be sent to the board for approval. Prof. Ernest Kofi Mensah vehemently disagrees. He referred her to the Institute of Chartered Secretaries and Administrators (ICSA) guidance.

Required:
Identify and explain FOUR (4) of the Institute of Chartered Secretaries and Administrators (ICSA) guidance on decision-making responsibilities that the board should reserve to itself and should not be delegated to individual or executive managers to confirm and comment on the view that the Director of Human Resources and Organisational Development’s matrix structure presented is not one of the issues which require board approval before implementation.

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  • 10 Marks

SCS – July 2023 – L3 – Q6a – Professional Practice and Codes of Ethics

Explain five reasons why the Director of Finance and Operations might project finance over other functions.

Some of the SavvyTech plc management team is concerned that the Director of Finance and Operations is domineering during the acquisition engagement processes at meetings. The Director of Finance and Operations mentioned in anger that ‘arguably, accountancy has an influence on business and government and that is both:
i) continuous and
ii) more extensive than any other profession’.

Required:
As a newly qualified Chartered Accountant responsible for code of ethics in SavvyTech plc, identify and explain FIVE (5) reasons in support of why the Director of Finance and Operations seems to be projecting finance over other functions.

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  • 5 Marks

SCS – July 2023 – L3 – Q5b – Sources of Finance

Explain two benefits of increasing long-term capital using retained profits.

When companies retain profits in the business, the increase in the retained profits adds to equity reserves. This view was suggested by SavvyTech plc management team to the board. The Board is not convinced and seek further explanation.

Required:
Explain TWO (2) benefits to the board of directors on what it means to increase long-term capital using retained profits in SavvyTech plc.

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  • 15 Marks

SCS – July 2023 – L3 – Q5a – International financial management

Calculate the group profits from the sale of HVSC based on the transfer price set at market price and 25% of Utopia's unit cost.

As the Head of Finance of SavvyTech plc, the Director of Finance and Operations has assigned you to use the forecast data (Table 8) and the “additional information” provided to calculate the following to support engagement by the management team with the Board.

Required:
Calculate the group profits to be realised from the sale of HVSC, if the transfer price for the component is set at its market price, which is GH¢26 per unit (total Ghana cost) plus 25% of Utopia’s unit cost.

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  • 10 Marks

SCS – July 2023 – L3 – Q4 – Controlling Risk

Prepare an internal memo on how SavvyTech's board can show commitment to risk management and create a risk-aware culture.

Essential aspects of risk management and control are the culture within the organisation. The culture within the organisation is set by the board of directors and senior management (the tone at the top), but it should be shared by every manager and employee.

Required:
You are the ‘Risk and Assurance Manager’ of SavvyTech plc with the responsibility of creating a culture of risk awareness in the organisation. Prepare an internal memo for the management team to be discussed with the board of directors on what they must do to show their own commitment to risk management in the things that they say and do.

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  • 10 Marks

SCS – July 2023 – L3 – Q3b – Strategy Implementation

Identify and explain four reasons why SavvyTech needs to research, innovate, and develop existing and new products.

Business entities must innovate to survive and grow. The Director of Marketing and Sales, in a meeting, presented a product market annual performance analysis report and highlighted that the sales trend of the ‘Wrist Organiser 3b’, introduced in 2018, reduced by 75% in 2022 and by 50% in 2021.

Required:
As a member of SavvyTech plc management team, identify and explain FOUR (4) reasons why it is necessary to research, innovate and develop existing and new products as an organisation.

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  • 10 Marks

SCS – July 2023 – L3 – Q3a – Strategy Implementation

Identify and explain five internal triggers of change at SavvyTech plc with examples from the case study.

Change happens continually within organisations, and the markets within which SavvyTech plc operate are not an exception. Strategic development inevitably results in some changes, which need careful management. Some of SavvyTech plc’s internal triggers of change are motivated or caused by developments within the organisation.

Required:
Review SavvyTech plc case study, identify, and explain FIVE (5) internal triggers of change with specific examples from the case.

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  • 10 Marks

SCS – July 2023 – L3 – Q2b – Strategy Implementation

Explain three broad corporate parenting styles described by Goold and Campbell that SavvyTech might adopt.

SavvyTech plc’s management team is debating the corporate parenting strategy that should be adopted. Corporate parenting refers to the relationship between the Head Office and the strategic business unit staff in Utopia.

Required:
As a lead consultant, explain to SavvyTech plc management team THREE (3) broad parenting styles that might be adopted as described by Goold and Campbell (1991).

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  • 4 Marks

SCS – July 2023 – L3 – Q1b – Controlling Risk

Explain why FCA might be difficult to use for the HVSC discussion at SavvyTech.

After the presentation of the SAM four-step approach to the management team, the Director of Finance and Operations made the following statement: ‘The data required for FCA is usually only available in organisations that are at the forefront in responding to the environmental agenda’ (Bebbington, Gray, Hibbitt, and Kirt, 2001).

Required:
Explain to the management team why it might be difficult to use FCA to support the ongoing discussion about the new product HVSC.

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  • 10 Marks

PSAF – July 2023 – L2 – Q4b – International public sector accounting standards

Discuss the recognition of service concession assets under IPSAS 32 and determine whether a hostel facility qualifies as a service concession asset.

A public university has engaged a private estate developer to construct a hostel for its candidates under a Build-Operate-Transfer arrangement over 25 years. Under the arrangement, the university reserves the right to fully control services the operator offers and any significant residual interest. The hostel can only be used to provide accommodation for candidates of the university. The university prepares its financial statements in compliance with the International Public Sector Accounting Standards (IPSAS). The Director of Finance is uncertain whether the hostel facility is a service concession asset or not.

Required:

i) In reference to the above, explain the term “service concession asset” under IPSAS 32: Service Concession Arrangement: Grantor. (1 mark)

ii) Discuss TWO (2) conditions necessary for the recognition of a service concession asset, and indicate whether the hostel facility qualifies for recognition under IPSAS 32. (6 marks)

iii) Outline THREE (3) disclosures that the grantor should make in the notes to the financial statements in respect of concession assets. (3 marks)

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  • 10 Marks

PSAF – July 2023 – L2 – Q4a – Public procurement

Explain the terms "Unserviceable" and "Surplus" and outline the methods of disposal of public stores and equipment as per the Public Procurement Amendment Act, 2016 (Act 914).

A public sector entity may not dispose of a store item, an equipment, or a plant unless such an item is certified as Obsolete, Unserviceable, or Surplus (Redundant). Disposal of store items can be effected using one of the four methods prescribed by the Public Procurement Amendment Act, 2016 (Act 914).

Required:

i) Explain the terms “Unserviceable” and “Surplus” as contextualized above. (4 marks)

ii) Explain each of the FOUR (4) methods of disposal of public stores and equipment prescribed by the Public Procurement Amendment Act, 2016 (Act 914). (6 marks)

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  • 10 Marks

PSAF – July 2023 – L2 – Q3b – Financial statements discussion and analysis

Compute financial ratios and analyze the financial performance and position of Ghana's Consolidated Fund for 2022 and 2021.

The Financial Statements of the Consolidated Fund of Ghana for the year ended 31 December 2022 and 2021 are presented below:

Consolidated Fund of Ghana – Statement of Financial Performance for the year ended 31 December

Additional Information:

  1. The Statistical and economic data for the two years are as follows:
    • 2022: Population: 30.8 million, Gross Domestic Product (GH¢): 768,000,000,000
    • 2021: Population: 29.5 million, Gross Domestic Product (GH¢): 552,500,000,000
  2. Capital Assets acquired in 2022 and 2021 amounted to GH¢255,200,000,000 and GH¢141,600,000,000 respectively.

Required:

i) Compute the following accounting ratios for the two respective years (2022 and 2021):

  • Debt to Gross Domestic Product
  • Capital Spending as a percentage of Gross Domestic Product
  • Wage Bill as a percentage of Total Tax Revenue
  • Debt per Capita
    (4 marks)

ii) Based on the result in question i) above, write a report discussing and analyzing the Financial Performance and Financial Position of the nation.
(6 marks)

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  • 10 Marks

PSAF – July 2023 – L2 – Q3a – Public expenditure and financial accountability framework

Explain the seven pillars of the Public Expenditure and Financial Accountability (PEFA) framework.

PEFA is a methodology for assessing public financial management performance. It identifies 94 characteristics (dimensions) across 31 key components of Public Financial Management (indicators) in 7 broad areas of activity (pillars).

Required:
In reference to the statement above, explain the SEVEN (7) pillars of PEFA.

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  • 20 Marks

PSAF – July 2023 – L2 – Q2 – Preparation and presentation of financial statements for covered entities

Prepare the Statement of Financial Performance and Statement of Financial Position for Ayigya Central Hospital for the year ended December 31, 2022, based on the provided trial balance and additional information.

Ayigya Central Hospital is a Public Hospital established in the Ashanti Region, which serves several communities in the Municipalities. Its Trial Balance for the year ended 31 December 2022 is provided below:

Additional information:

  1. Inventory as at 31 December 2022 consists of Drugs and Stationery amounting to GH¢50 million and GH¢20 million respectively.
  2. Four patients who paid GH¢25 million to the Hospital intending to undertake heart surgery are scheduled to have their surgery done in February 2023. This amount is included in Surgical Fees.
  3. The fixed assets in the trial balance were acquired at the beginning of the year. It is the policy of the Hospital to provide for the consumption of fixed assets using the straight-line method:
    • Asset: Laboratory Equipment, Building, Motor Vehicles, Software
    • Useful life: 5 years, 50 years, 10 years, 5 years respectively
  4. Salaries and other emoluments outstanding relating to casual labor during the year amounted to GH¢8 million.
  5. Provision for Bad Debt relates to NHIS Claims Receivables in the Trial balance. The Provision for Bad Debt is 2%.

Required:

a) Prepare a Statement of Financial Performance for Ayigya Central Hospital for the year ended December 31, 2022. (10 marks)

b) Prepare a Statement of Financial Position for Ayigya Central Hospital as at December 31, 2022. (10 marks)

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  • 10 Marks

PSAF – July 2023 – L2 – Q1b – General purpose financial reporting framework

Provide briefing notes on qualitative characteristics, measurement bases, and the statutory role of internal auditors in public sector financial reporting.

You are the Head of Finance of Public Sector Reform Secretariat, Office of the President. You have received the following e-mail from the Chief Executive Officer.

Email:

“Dear Head of Finance,

I have been invited by the Office of Head of Civil Service to attend a seminar on the theme ‘Fundamentals of Public Financial Reporting’. Among the topics listed for discussion are the following:

  1. Qualitative Characteristics of Financial Information.
  2. The Bases of Measurement of Public Sector Assets.
  3. The Statutory Roles of Internal Auditors of Public Sector Entities.

I am aware of your expertise in public financial management and will greatly appreciate it if you could prepare some briefing notes for me to bridge my knowledge gap prior to the conference.”

Required:
As Head of Finance and a recipient of the e-mail, provide your response in a memo to the Chief Executive Officer.

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  • 10 Marks

PSAF – July 2023 – L2 – Q1a – Accounting policies for cash and accrual-based accounting systems

Discuss the conditions for transitioning from cash basis to accrual basis accounting in a public sector entity.

A public sector entity is transitioning from cash basis of accounting to accrual basis of accounting for the 2022 financial year. You are a member of the transitional committee set up to ensure smooth change over.

Required: Discuss FIVE (5) conditions for seamless transition from cash basis of accounting to accrual basis of accounting.

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  • 20 Marks

FM – July 2023 – L2 – Q5 – Hedging with options | Working Capital Management

Calculate the overdraft requirement and net working capital, identify the working capital financing policy, and justify using currency futures over options.

a) The Treasury Department of LCM Ltd is preparing financial plans for the ensuing financial year. Annual credit sales revenue is projected to be GH¢500 million while the cost of sales is expected to be GH¢260 million. Its current assets are composed of inventory and trade receivables, while its current liabilities comprise trade payables and bank overdraft. The following targets have been set:

  • Receivables turnover days: 90 days
  • Payables turnover days: 30 days
  • Operating cycle: 150 days
  • Current ratio: 1.1 times

The company’s long-term capital consists only of owners’ equity. The composition and size of long-term capital are expected to remain the same for the ensuing year. The opportunity cost of equity capital is 20%, and the interest rate on the bank overdraft is 18%.

Required:
i) Compute the amount of bank overdraft the company will need in the ensuing year. (6 marks)
ii) Compute the net working capital of the company for the ensuing financial year. (2 marks)
iii) Compute the cost of financing working capital (in GH¢). (3 marks)
iv) Identify the working capital financing policy LCM Ltd is employing. (4 marks)

b) Risk can be hedged through a variety of derivative instruments such as futures, options, and swaps. Each derivative instrument presents its advantages and disadvantages.

Required:
In reference to the above statement, justify why a company would choose a currency futures contract over a currency option contract in hedging currency exposure. (5 marks)

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  • 20 Marks

FM – July 2023 – L2 – Q4 – Discounted cash flow | Introduction to Investment Appraisal

Compute the Net Present Value (NPV) of an investment in the cement industry and advise whether it should be undertaken, and discuss the importance of secondary markets.

a) Ntam Ghana Ltd has identified an opportunity in the Cement Industry in Ghana and decided to set up a plant to produce cement in Ghana under the brand name “Kong” in 50kg per bag. This new product has performed very well in the marketing trials carried out by the Research and Development division of the company.

The following information regarding the investment has been prepared by the Finance Manager:

  • Initial Investment (Plant Cost) = GH¢50 million
  • Working capital (At the beginning) = GH¢5 million
  • Selling price per bag (current price terms) = GH¢50
  • Variable cost per bag (current price terms) = GH¢25
  • Fixed operating cost per year (current year terms) = GH¢5 million
  • Annual Demand (current year terms) = 500,000 bags

The table below represents the forecast increases for the next 5 years:

Year Selling Price Variable Cost Fixed Operating Cost Annual Demand
1 15% 10% 10% 10%
2 18% 15% 15% 14%
3 20% 15% 15% 16%
4 15% 12% 20% 15%
5 17% 13% 18% 14%

The initial investment plant is depreciated at 20% per annum on a straight-line basis with a residual value of GH¢5 million at the end of the period. Prior discussions with Ghana Revenue Authority confirm approval for an allowable capital allowance rate on the above investment at 20% per annum. The company uses 22% as its internal cost of capital, and the Corporate tax rate for the company is 25%.

Required:
Compute the Net Present Value (NPV) and advise whether the investment should be undertaken. (15 marks)

b) Investors in the Financial Markets have the option of trading on the primary market or secondary market or both. As a professional investor in the Financial Markets, you are required to:

i) Distinguish between the Primary market and Secondary market. (2 marks)
ii) State THREE (3) reasons the secondary market is more important to investors. (3 marks)

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  • 20 Marks

FM – July 2023 – L2 – Q3 – Discounted cash flow | Simple interest and compound interest

Compute the maturity value of a loan, determine the size of quarterly sinking fund deposits, and compare annuity due with ordinary annuity.

a) Osiadan Contractors Ltd plans to construct housing units in the Kpone-Katamanso District of Ghana for sale to young professionals. It has obtained a US$4 million loan facility from the International Finance Corporation (IFC). The total principal granted will be released in two equal tranches: the first tranche to be released now and the second tranche at the beginning of the fourth year. Interest will be charged on the loan at 12% per annum with semi-annual compounding. The total principal granted plus the total interest is to be paid at the end of the duration of the loan in six years’ time.

To raise money toward the settlement of the maturity value of the loan, Osiadan Contractors Ltd plans to establish a sinking fund by which it will deposit equal amounts of U.S. dollars at the beginning of every quarter starting from the third year until the end of the loan duration. The dollar deposits will be invested at 8% per annum with quarterly compounding.

Required:
i) Compute the maturity value of the loan at the end of six years. (3 marks)
ii) Compute the size of the quarterly deposits to be invested in the sinking fund to raise the amount needed to settle the maturity value of the loan. (4 marks)
iii) Compare and contrast annuity due and ordinary annuity. (3 marks)

b) Klessy Beverages Inc (Klessy), an American malt drink producer, imports barley from Australia and pays for the import in Australian dollars. It has bought a consignment of barley with an invoice value of AUD2.5 million, and payment is due next month. The exchange rate between the United States dollar (USD) and the Australian dollar (AUD) is currently trading at USD0.7265/AUD. The Managers of Klessy fear that the Australian dollar may strengthen against the US dollar. The Treasury Manager has recommended using currency options to address the potential currency risk.

Below are the CME Group’s quotations for weekly options on the Australian dollar:

Contract Specification Call Put
Contract size AUD100,000 AUD100,000
Premium (US$) 0.0131 0.0031
Strike price (US$) 0.7275 0.7275
Expiration Week 4 Week 4

Required:
i) Justify which option Klessy should buy considering its underlying currency exposure. (3 marks)
ii) Compute the intrinsic value of your selected option and interpret the results. (4 marks)
iii) Distinguish between option premium and option strike (or exercise) price. (3 marks)

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