Series: MAR 2023

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Has Case Study
  • 8 Marks

SCS – March 2023 – L3 – Q8 – International financial management

Discusses governance structure in terms of the separation of roles between the chairman and the CEO in line with the UK and Ghana Codes of Best Practices.

Dr. Kingsley Tettey is the Chairman of the 4-member board of directors, and Dr. Joy Tettey is the Medical Director. Clearly, the Chairman is not the Chief Executive Officer (CEO) or Medical Director of LCH.

Required:
Discuss what the Ghana Code of Best Practices and the UK Corporate Governance Code state about this governance structure.
(8 marks)

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  • 12 Marks

SCS – March 2023 – L3 – Q7 – Professional practice and codes of ethics

Analyzes LCH board composition using governance codes and discusses OECD principles of disclosure and board responsibilities.

a) LCH’s Board of Directors is composed of four experienced professionals.

Required:
In reference to codes of corporate governance and the composition of LCH’s Board, analyze the view that the board has a suitable balance.
(5 marks)

b) The OECD Principles (2015) provide guidance through recommendations and annotations across six chapters. Principle 5 and 6 deal with disclosure and transparency and the responsibilities of the board respectively.

Required:
Provide the guidance and recommendations given on these principles and how relevant it is to LCH.
(7 marks)

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Has Case Study
  • 20 Marks

SCS – March 2023 – L3 – Q6 – International financial management

Explains the financial reporting implications of debt exchange and compares investing in bonds versus shares

LCH has invested GH¢1,000,000 in a 5-year Government of Ghana Bond with a coupon rate of 20%. As a result of the Government of Ghana DDE programme, LCH has no option but to exchange the old bond with the new bond.

Required:
a) Explain FIVE (5) financial reporting implications of the debt exchange on the financial statements of LCH as at 31 December 2022.
(10 marks)

b) Discuss FOUR (4) advantages and TWO (2) main disadvantages of investing in bonds rather than shares.
(10 marks)

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Has Case Study
  • 10 Marks

SCS – March 2023 – L3 – Q5 – Strategy implementation

Uses Fitzgerald and Moon’s performance measurement dimensions to link LCH’s performance assessment to corporate strategy.

Fitzgerald and Moon (1996) provided a framework for analysing performance management systems in service industries like a hospital. They suggested that a performance management system in a service organisation can be analysed as a combination of three building blocks, namely:
i) Dimensions
ii) Standards
iii) Rewards.

Required:
Using Dimensions as a tool for performance measurement, discuss how LCH could link performance assessment to corporate strategy.
(10 marks)

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  • 10 Marks

SCS – March 2023 – L3 – Q4 – Strategy, stakeholders, and mission

Compares mechanistic and organic structures and recommends which is more suitable for LCH.

An appropriate organizational structure should reflect the size and complexity of an entity.

Required:
Using the management study of Burns and Stalker that identified two categories of organization structure—a mechanistic structure and an organic structure—explain the differences between the two types of structures and determine which of the two is suitable for LCH.
(10 marks)

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  • 20 Marks

SCS – March 2023 – L3 – Q3 – Competitive advantage

Discusses the pros and cons of mergers and acquisitions and uses SWOT analysis to evaluate the business strategy

LCH is facing very stiff competition from both public and private health facilities. You have suggested that LCH consider either acquisition or mergers or both as a strategic move to survive in the industry.

a) Discuss FIVE (5) advantages and FIVE (5) disadvantages of a decision to consider acquisition and merger as a survival strategy.
(10 marks)

b) Using SWOT analysis, identify and discuss key factors that might affect LCH’s business strategy.
(10 marks)

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Has Case Study
  • 10 Marks

SCS – March 2023 – L3 – Q2 – Strategy, stakeholders, and mission

Uses the 4Ps of marketing mix and competitive environment to evaluate the feasibility of adopting telemedicine.

According to the Technical Advisor of the Board of Directors, Telemedicine, the remote diagnosis and treatment of patients by means of telecommunications technology is the way to go. This proposal has been subjected to a basic marketing feasibility analysis.

Required:
Using 4Ps of the marketing mix and the competitive environment that LCH operates, explain the factors to be taken into consideration when deciding on whether to adopt the proposal to move into Telemedicine.
(10 marks)

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Has Case Study
  • 10 Marks

SCS – March 2023 – L3 – Q1 – Ethics and social responsibility

Explains the importance of good ethical behavior for accountants and reasons for the public’s high expectations from the accountancy profession.

a) At LCH, the Financial Accountant and the Internal Auditor have been designated as Ethics Focal Persons (EFP) to raise awareness of good ethical behavior among the staff.
As a student of ethics, explain FIVE (5) reasons why good ethical behavior (study and application of ethics) is important to today’s Accountant.
(5 marks)

b) The general public has high expectations of the accountancy profession and the idea of an ethical profession should be reinforced in their minds.
State THREE (3) reasons why the general public has high expectations of the accountancy profession to ensure good corporate governance practices.
(5 marks)

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  • 5 Marks

FR – Mar 2023 – L2 – Q5d – Business combinations and consolidation

Explains fair value in IFRS 13 and its application to assets and liabilities in business combinations.

d) IFRS 3: Business Combinations defines fair value consistently with IFRS 13: Fair Value Measurement. IFRS 3 requires the acquiree’s assets and liabilities to be incorporated into the consolidated financial statements at their fair values rather than at their carrying amounts.

Required:
i) Explain the meaning of fair value in accordance with IFRS 13. (2 marks)
ii) Explain the reasons why the acquiree’s assets and liabilities are measured and recognised at their fair value within the consolidated financial statements. (3 marks)

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  • 5 Marks

FR – March 2023 – L2 – Q5c – Preparation of Financial Statements

Determining the initial cost, depreciation charge, and carrying amount of the head office construction under IFRSs.

Lana Ltd is a public listed company in Ghana, located in the Northern Region. The company operates in the manufacturing sector and prepares its accounts to 31 December each year. During the year ended 31 December 2021, Lana Ltd built a head office. The costs associated with the construction of the head office are as follows:

GH¢ million
Fees for environmental certifications and building permits 0.5
Leasehold Land acquisition 10.0
Architect and engineer fees 1.0
Construction material and labor costs (including unused materials) 6.5

At 31 October 2021, when the head office extension became available for use, the cost of unused materials on site amounted to GH¢0.5 million. The total borrowing costs incurred on a loan specifically used to finance the head office extension amounted to GH¢0.8 million. The estimated useful life of the building was 40 years.

Required:
With reference to IFRSs, determine:
i) The initial cost to be capitalized.
ii) The depreciation charge for the year ended 31 December 2021.
iii) The carrying amount as of 31 December 2021.

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  • 5 Marks

PT – March 2023 – L2 – Q1b – Overview of the Ghanaian Tax System and Fiscal Policy

Differentiate between the features of direct and indirect taxes.

Distinguish between the features of direct taxes and indirect taxes.

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  • 5 Marks

PT – March 2023 – L2 – Q1a – Overview of the Ghanaian Tax System and Fiscal Policy

Differentiate between progressive and regressive tax systems with examples.

When introducing new taxes in a developing economy like Ghana, the contribution of the new tax system to the tax buoyancy of the country is important. However, this will depend on whether the new tax instrument will be a progressive tax or a regressive tax.

Required:

Explain the difference between progressive tax system and regressive tax system and state ONE (1) example of each tax instrument.

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  • 20 Marks

CR – Mar 2023 – L3 – Q5 – Analysis and interpretation of financial statements Series

Compute financial ratios including operating profit margin, ROCE, inventory turnover, current ratio, capital gearing, and dividend yield for Atiku Ltd and Obi Ltd.

Atiku Ltd operates in the same business sector as Obi Ltd. The directors of Atiku Ltd would like to understand the firm’s strengths and weaknesses relative to Obi Ltd from the latest financial statements of the two entities as set out below:

Summarised Statements of Profit or Loss for the year ended 30 June 2022:

 

Net profit figures were arrived at after considering the following items:

  • Depreciation and amortisation: Atiku Ltd (GH¢3,110), Obi Ltd (GH¢2,850)
  • Employee benefits: Atiku Ltd (GH¢7,200), Obi Ltd (GH¢6,050)
  • Finance cost: Atiku Ltd (GH¢1,050), Obi Ltd (GH¢880)
  • Provision for current tax: Atiku Ltd (GH¢1,004), Obi Ltd (GH¢925)
  • Deferred tax decrease in provision: Atiku Ltd (GH¢116), Obi Ltd (GH¢55)
  • Current tax under-provision (2021): Atiku Ltd (nil), Obi Ltd (GH¢32)

Additional information: The following ratios have been extracted from the Directors’ Report accompanying the financial statements:

  • Gross profit margin: Atiku Ltd (22%), Obi Ltd (25%)
  • Dividend coverage: Atiku Ltd (4), Obi Ltd (5)
  • Current share price: Atiku Ltd (GH¢2.10), Obi Ltd (GH¢1.55)

Required:
a) Compute the following ratios for both entities for the year ended 30 June 2022: i) Operating profit margin (1.5 marks)
ii) Return on capital employed (capital employed defined as all interest-bearing liabilities and equity) (1.5 marks)
iii) Inventory turnover period (1.5 marks)
iv) Current ratio (1.5 marks)
v) Capital (long-term) gearing (1.5 marks)
vi) Dividend yield (2.5 marks)

b) Write a report to the Chief Executive Officer analyzing Atiku Ltd’s financial performance and position relative to Obi Ltd, for the year ended 30 June 2022. For the report writing, use only the following ratios: operating profit margin, return on capital employed, capital gearing and dividend yield. (10 marks)

 

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  • 5 Marks

CR – Mar 2023 – L3 – Q4b – Business combinations and consolidation Series

Explanation of protective rights under IFRS 10 and examples of situations where voting or contractual rights may be considered protective.

Whether an investor’s rights in an entity are voting or contractual under IFRS 10: Consolidated Financial Statements, these rights should be carefully evaluated to find out whether they are mere protective or actually confer power over the investee.

Required:
Explain protective rights, providing FOUR (4) instances where voting or contractual rights could be regarded as protective. (5 marks)

 

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  • 15 Marks

CR – Mar 2023 – L3 – Q4a – Corporate reconstruction and reorganisation

Propose a scheme of capital reorganisation for Adonten, including a revised statement of financial position.

For some years now, Adonten has been reporting operating losses, principally due to competition from better models. Adonten is now considering reorganising its operations and financial structure to allow it to obtain new funding required to develop and launch its new product. This product is tipped by technical experts to fare strongly on the market once launched.

The Statement of Financial Position as at 31 December 2021 is available:

Additional information:

  1. Preference dividends have been in arrears for three years.
  2. Retained earnings balance is to be eliminated.
  3. The following details relate to the assets:
    • Tangible assets: 15% of the book value is to be transferred to the bondholders for an agreed value of GH¢720 million as full settlement of the debt, and the remaining book value of these assets marked up to 110%;
    • Inventories include obsolete items worth GH¢540 million below their book value of GH¢680 million;
    • A bond investment (having 10 months to maturity date) is to be revised to GH¢280 million from its carrying value of GH¢370 million;
    • Receivables with carrying amount of GH¢1,200 million are to be factored out for 70% advance under terms that will allow for refund of any difference between actual collections and the upfront payment from the factor;
    • One customer who owes GH¢828 million is in serious financial difficulty. Only 50% is expected to be received from this customer in one year’s time.
  4. The bank has demanded repayment of the bank overdraft, while the Venture Capital Fund (VCF) has accepted to receive 92% of their existing loan in new ordinary shares as full settlement. Upon successful completion of the reorganisation process, however, VCF is ready to immediately buy 15% GH¢900 million debentures in the reconstructed entity’s debts provided the directors will attach the right to convert the debt into shares at maturity. VCF will also require a 10% discount on the convertible debt at issue and a repayment period of three years. The effective rate of interest on this convertible debt, if the discount is granted, is estimated to be 18.7%, and the effective rate of interest on an equivalent non-convertible instrument will be 22.5%.
  5. Existing ordinary shareholders are prepared to inject GH¢4,200 million for 840 million new ordinary shares, while preference shareholders have pledged to finance a new production equipment whose estimated fair value is GH¢1,350 million in exchange for 250 million ordinary shares. Each of these shares currently has a value of GH¢5.
  6. Half of the trade payables (suppliers) are satisfied to receive ordinary shares in the reconstructed firm.
  7. The directors are projecting an annual profit before interest and tax in the reconstructed entity to be GH¢650 million.
  8. A firm order has been received from Amanten, a competitor, to buy all the business assets for GH¢7,200 million. 60% of these proceeds relate to properties. Closure costs are estimated at GH¢50 million.

Required: Suggest a scheme of capital reorganisation that would be acceptable to all stakeholders, including a revised statement of financial position.

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  • 10 Marks

CR – Mar 2023 – L3 – Q3c – Regulatory framework and ethics

Analyze ethical principles breached in payroll and recommend actions for addressing ethical dilemmas.

BYF Health Facility offers varied medical services; it is known for its high-quality laboratory services. In 2021, the company added to its laboratory services, testing for Covid-19 following the increased demand by airlines that travelers must have negative Covid-19 status either through PCR or Antigen tests. Consequently, the company recruited additional workers in the year to work in the new Covid-19 Lab on a part-time basis. All part-time employees (Locum staff) are paid based on hours worked, either on an 8-hour or 12-hour cycle.

As a precondition, part-time workers are to log in and also log out on every working day, for hours worked to be computed by the log-in device.

Bismark Appau (Bismark), a brother of the Director of Health Services of BYF Health Facility, is one of the employees who was employed on a part-time basis at the Covid-19 Lab on an 8-hour cycle. Bismark has permanent employment with KBT hospital and hardly gets time to work at the Covid-19 Lab of BYF Health Facility. However, in preparing payroll of Locum staff, the Director of Health Services continuously insists that in the case of Bismark, the full hours for the total working days in the month on the 8-hour cycle should be used, regardless of the hours he worked. Colleague workers are aware of this special treatment to Bismark, and are unhappy about this preferential treatment.

Required: i) Based on the scenario above, justify the possible ethical principles that might have been breached and its effect on productivity. (6 marks)

ii) Recommend the possible actions to be taken in dealing with this ethical dilemma. (4 marks)

 

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  • 5 Marks

CR – Mar 2023 – L3 – Q3b – IAS 12

Recommend the correct financial reporting treatment for foreign-currency denominated inventory and related deferred tax.

Sadio Plc imports wheat from Ukraine for wholesale distribution. On 31 October 2022, Sadio purchased goods for €7.2 million cash at an exchange rate of GH¢1 = €0.12. At 31 October 2022, the net realisable value (NRV) of the inventory was estimated at €7.0 million, and the exchange rate at this date was GH¢1 = €0.14. Sadio’s directors recorded the inventory at its purchase cost in the financial statements for the year ended 31 October 2022.

Sadio only receives tax relief for any inventory loss when the related item is sold. The company’s tax rate at 31 October 2022 was 20%, but a revised rate of 25% was introduced on 18 November 2022. Assume that Sadio has sufficient taxable future profit.

Required:
Recommend the correct financial reporting treatment of the above in Sadio’s financial statements for the year ended 31 October 2022.

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  • 5 Marks

CR – Mar 2023 – L3 – Q3a – Non-current assets: sundry standards (IAS 16, IAS 23, IAS 20 and IAS 40) ,IAS 36: Impairment of Assets,

Discuss the impairment of a printing machine owned by Dajanso Plc, including necessary computations.

Dajanso Plc owns a number of printing shops across the country. On 1 January 2021, the carrying amount of Dajanso’s largest printing machine was GH¢65 million. The machine had a remaining useful life of five years and a residual value of GH¢7 million using the cost model. Due to a fall in demand for printed books, management conducted an impairment review of the printing machine on 30 June 2021.

At this date, the estimated selling price was GH¢55 million, including GH¢4 million, which would be received after reconditioning the asset. Agent fees would be 5% of the appropriate fair price. If the machine is kept in use, it is estimated to generate real cash flows of GH¢20 million a year over its remaining life (now estimated to be three years), with a revised residual value of GH¢6 million. The following discount rates are applicable:

Rate Type Pre-tax Nominal Pre-tax Real Post-tax Nominal Post-tax Real
Discount Rate (p.a.) 11.9% 8.3% 10.5% 6.6%

Required:
In line with IAS 16 Property, Plant, and Equipment and IAS 36 Impairment of Assets, recommend how Dajanso would account for the plant in its financial statements for the year ended 31 December 2021. Show appropriate computations where necessary.

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  • 10 Marks

CR – Mar 2023 – L3 – Q2b – IAS 12: Income taxes

Discuss the appropriate accounting treatments for Sanda Ltd’s preference shares and deferred tax asset.

Sanda Ltd, a consumer electronics company in Accra, faced a challenging year due to increased competition and COVID-19. Sanda Ltd has a year-end of 31 December 2021. The unaudited financial statements reported an operating loss, and debt covenant limits were close to being breached. The following occurred during the year:

i. On 1 January 2021, the Finance Director and CEO paid GH¢3 million each for preference shares that provide cumulative dividends of 7% per annum. These preference shares can either be converted into a fixed number of ordinary shares in three years or redeemed at par. The Finance Director suggested classifying the preference shares as equity.

ii. Sanda Ltd included a deferred tax asset in the statement of financial position based on losses incurred in the previous two years. The Finance Director asked the Accountant to include the deferred tax asset in full, expecting a return to profitability once funding issues are resolved.

Required:
With reference to International Financial Reporting Standards (IFRS), discuss the appropriate accounting treatments which Sanda Ltd should adopt for the issues identified in i) and ii) and their impact on gearing as at 31 December 2021.

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  • 10 Marks

CR – Mar 2023 – L3 – Q2a – Financial instruments: Recognition and measurement Corporate reporting

Discuss financial reporting treatment of Hamza Ltd bonds as at 31 December 2022 and 2023.

On 31 December 2022, Hamza Ltd purchased GH¢10 million 5% bonds in Jins Ltd at par value. The bonds are repayable on 31 December 2025, and the effective interest rate is 8%. Hamza Ltd’s business model is to collect contractual cash flows over the life of the asset. At 31 December 2022, the bonds were considered low risk, and the 12-month expected credit losses were estimated at GH¢10,000. On 31 December 2023, Jins Ltd paid the coupon interest, but the risks associated with the bonds increased significantly.

The present value of the cash shortfall for the year ended 31 December 2024 was estimated at GH¢462,963, with a 3% probability of default. At the end of 2023, it was anticipated that no further coupon payments would be received during the year ended 31 December 2025, and only a portion of the nominal value of the bonds would be repaid. The present value of the bonds was assessed to be GH¢6,858,710 with a 5% likelihood of default in the year ended 31 December 2025.

Required:
With reference to IFRSs, calculate and discuss the financial reporting treatment of the bonds in the financial statements of Hamza Ltd as of 31 December 2022 and for the year ended 31 December 2023, including any impairment losses.

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