Series: MAY 2017

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CSME – May 2017 – L2 – SC – Q7 – Corporate Governance

Explain the Nolan principles guiding public life and discuss standards for ethical conduct in the public sector.

Nolan Committee on standards in public life was set up to report on standards of behaviour amongst politicians, civil servants and public bodies. Provide an analysis of Nolan‟s‟ SEVEN Principles of Public Life. (15 Marks)

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CSME – May 2017 – L2 – SC – Q6 – Ethics in Business

Explain agency problems and Tucker's model to guide ethical decisions for accountants.

a. Agency problems and conflicts are common in all organisations.
Required:
Explain the concept of agency problems and discuss FIVE types of agency conflicts that might exist in an organisation. (8 Marks)

b. Tucker‟s Five Question Model can be employed in training new professional accountants in ethics.
Required:
Explain the issues covered by the Tucker‟s Five Question Model. (7 Marks)

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CSME – May 2017 – L2 – SC – Q5 – Risk Management and Corporate Strategy

Show how organizations can address risk management challenges using ISO 31000.

a. Using the ISO 31000 framework, show what an organization might do to address risk management challenges. (9 Marks)

b. Explain THREE main elements of risk management contained in the ISO 31000 framework. (6 Marks)

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CSME – May 2017 – L2 – SB – Q4 – Strategic Management in the Public Sector

Explain organizational growth through Greiner's model and discuss board diversity benefits and limitations.

a. With the aid of an appropriate diagram, explain how organisations and management structures might change as a business grows using Greiner’s growth model. (10 Marks)

b. Explain briefly the concept of board diversity giving THREE examples of categories of diversity. (5 Marks)

c. Explain THREE benefits of the diversity of the board of a large company. (3 Marks)

d. Discuss TWO limitations of board diversity. (2 Marks)

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CSME – May 2017 – L2 – SB – Q3 – Risk Management and Corporate Strategy

Explain business risk to a conservative investor and discuss strategies for risk control and monitoring.

Mallam Danladi is a civil servant who has won a sum of one hundred million Naira in a lottery. Being a very conservative person who is averse to risks, Mallam Danladi is contemplating putting the money in a fixed deposit account at an interest rate of 14% per annum or into treasury bills at an interest rate of 18.5% per annum. These two options are considered to be virtually risk-free. Mr. Madoff, a risk consultant, advised him to invest in the production of shea butter, coconut oil, and black soap, with a promise of 52% profit per annum. In an attempt to convince Mallam Danladi to invest in the production of these items, Mr. Madoff tried to educate him on the nature of risks and how to effectively monitor and control them in ways that will ensure that business remains highly profitable.

Required:

a. Explain briefly the nature of risk in business to Mallam Danladi. (2½ Marks)

b. Discuss FOUR distinct means of controlling business risk. (10 Marks)

c. Explain briefly the purpose of monitoring risks in business. (3 Marks)

d. Discuss THREE ways of monitoring risks in business. (4½ Marks)

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CSME – May 2017 – L2 – SB – Q2 – Corporate Culture and Strategy

Discuss the cultural web and the ethical principles for maintaining client confidentiality.

Johnson and Scholes suggested that there is a cultural web within an organization.

Required:

a. Discuss the idea of the cultural web and its interrelated elements in a way that would assist a new employee to understand this concept in a business organization. (15 Marks)

b. As a professional accountant, explain any TWO ethical principles or requirements you would consider in deciding whether or not to keep a promise to maintain confidentiality with regards to information acquired from a client in the ordinary course of business. (5 Marks)

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CSME – May 2017 – L2 – SA – Q1 – Strategic Planning Process

Develop a business plan for a fast-food franchise and explain the product life cycle with stakeholder analysis.

Gbenga Alimi wants to establish a fast food restaurant in Koko, a state in Naijaland. A well-known global fast-food outfit in Naijaland has agreed to give him a franchise to operate the business in the state. However, the franchisor has requested Gbenga to present a viable business plan for assessment.

Required:

a. Outline the contents of a business plan addressing the proposed franchise’s viability. (20 Marks)

b. Use a graphical representation to educate Gbenga on the four stages of the classical product life cycle. (6 Marks)

c. Within an organizational context, distinguish between:

i. Narrow and wide stakeholders
ii. Active and passive stakeholders

(4 Marks)

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PSAF – May 2017 – L2 – SC – Q7 – Government Expenditure

Identify and explain factors contributing to the rapid growth in Nigeria's government spending.

A number of factors have been identified as inevitably leading to rapid growth in government spending in many countries over time.

Required:

Identify and explain FIVE of these factors as they apply to Nigeria.

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PSAF – May 2017 – L2 – SC – Q6 – Fiscal Policy and Public Finance

Outline and explain the macroeconomic objectives of Nigeria’s federal government.

State and explain FIVE macroeconomic objectives of the Federal Government of Nigeria.

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PSAF – May 2017 – L2 – SC – Q5 – Fiscal Policy and Public Finance

Define external debt and discuss causes and adverse consequences of Nigeria's rising debt levels.

The accumulation of external debt is a common phenomenon in developing countries at the stage of development where external resources are needed to bridge budgetary gap.

Required:

a. Explain what is meant by External Debt. (3 Marks)

b. Discuss the causes and likely adverse consequences of the rising level of Nigeria’s total external debt stock. (12 Marks)

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TAX – May 2017 – L2 – SB – Q4 – Tax Dispute Resolution

Explanation of options available to the Revenue Authority and the taxpayer in tax disputes, including jurisdiction of appeals and court conditions.

Jandon is a Nigerian who lived abroad for many years and recently returned to establish a business in Nigeria. He appointed your firm to audit his financial statements. Jandon prepared his own tax computations for the year ended December 31, 2014, and submitted the returns to the Revenue Authority. However, the tax returns have been disputed by the Revenue Authority.

Required:

a. Explain the options open to the Revenue Authority on receipt of a Letter of Objection. (2 Marks)

b. Outline the content of a Notice of Objection. (3 Marks)

c. Describe the jurisdiction of the Tax Appeal Tribunal. (6 Marks)

d. List the conditions to be fulfilled for an appeal to the Federal High Court to be valid. (4 Marks)

e. Identify the options available to an aggrieved taxpayer dissatisfied with the Federal High Court’s decision. (5 Marks)

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TAX – May 2017 – L2 – SB – Q3 – Taxation of Partnerships and Sole Proprietorships

Computation of adjusted income and chargeable income for partners in a firm with adjustments for disallowable expenses.

Muyiwa, Seyi, and Akpan are partners in an accounting firm in Lagos, Museak & Co (Chartered Accountants). The Statement of Profit or Loss for the year ended December 31, 2015, is shown below:

Additional Information:

  1. Donation was for laying the foundation of a new church.
  2. Repairs for Muyiwa’s wife’s vehicle, costing ₦550,000, were included under repairs and maintenance.
  3. Medical expenses of ₦500,000 were incurred for flying a partner’s father-in-law abroad.
  4. Akpan contributed ₦500,000 under the Pension Reforms Act 2004 (as amended).
  5. Capital allowances agreed with the tax authority were ₦4,000,000.
  6. Partners’ profit-sharing ratio: Muyiwa 6; Seyi 4; Akpan 2.

Required:

  1. Compute the adjusted income of Museak & Co for tax purposes. (6 Marks)
  2. Compute the chargeable income of each partner. (6 Marks)
  3. Compute the tax payable by each partner. (8 Marks)

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TAX – May 2017 – L2 – SB – Q2 – Tax Administration and Enforcement

Explanation of transactions requiring a Tax Clearance Certificate and the procedures for hearing an appeal before the Tax Appeal Tribunal.

a. Mr. Bull Dozer has just submitted his application for an export license to the Nigerian Export Promotion Council. The Council demanded a Tax Clearance Certificate before granting him the export license.

Mr. Bull Dozer was concerned and approached you to explain whether the presentation of this document is required for all government transactions in Nigeria.

Required:
State TEN transactions in respect of which a Tax Clearance Certificate may be demanded by a government agency. (10 Marks)

b. The Tax Appeal Tribunal has the authority to adjudicate on tax disputes and controversies when the appellant does not discontinue the appeal.

Required:
List TEN procedures for hearing the appeal before the Tax Appeal Tribunal. (10 Marks)

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TAX – May 2017 – L2 – SA – Q1 – Personal Income Tax

Calculation of income tax payable with additional information and brief explanations on tax-related terms.

Damilola Adewunmi is the Human Resources Manager of Mighty Steel Nigeria Limited. He is married and blessed with three children.

  1. The following details relate to Damilola Adewunmi for the year ended December 31, 2015:
Item Amount (N)
Salary 3,144,000
Commission 525,000
Rent received 1,350,000
Gain from sale of shares 300,000
Pension received from employment 450,000
Benefits-in-kind (all assessable) 225,000
Interest on Fixed Deposit (gross) 180,000
  1. Damilola contributes N22,500 monthly towards the upkeep of his aged mother. His elder brother, Adekunle, also contributes N37,500 monthly.
  2. Damilola took an insurance policy on his life and pays a premium of N15,000 monthly.
  3. The children are University undergraduates and enjoy a scholarship for only tuition from his State Government.
  4. Damilola took a loan to build an owner-occupied house on which he pays N90,000 annual interest.
  5. For an outstanding performance, he was given an end-of-year bonus in the sum of N90,000.
  6. Withholding Tax of N18,000 was deducted in respect of interest on Fixed Deposit.

Required:

a. Calculate the income tax payable for the relevant year of assessment.
b. Calculate the income tax payable for the relevant year of assessment, assuming 2015 is the year of assessment with the following additional information:

  • Contribution to National Housing Fund: N78,600
  • Contribution to National Health Insurance Scheme: N210,000
  • Contribution to Pension Scheme: N235,800

c. Explain briefly the following:

  • Itinerant worker
  • Non-resident individual
  • Earned income
  • Resident individual
  • Unearned income

d. List FIVE dividends exempted from tax.

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FR – May 2017 – L2 – SB – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Explain criteria for recognizing provisions, differentiate between provisions and contingent liabilities, and apply IAS 37 to specific company scenarios.

a. IAS – 37 applies to all provisions and contingencies apart from those covered by the specific requirement of other standards.

Therefore, provisions differ from other liabilities because there is uncertainty about timing or amount of the future cashflow required to settle the liability.

Required:

  1. Explain the criteria for recognition of provisions in the financial statements and distinguish between provisions and contingent liabilities.
    (6 Marks)

b. The following activities took place in THREE different companies:

  1. Otapiapia Plc: A Rat Trap Company based in Nigeria has just secured exportation of rat killers to South Africa. The advertising slogan of the rat killers is “KILL the BLACKS.” A South African anti-racist movement with a representative in Nigeria is claiming N15,000,000 from the company as damages because the advertising slogan allegedly compromises the dignity of black people. The company’s legal representative believes that the success of the claim will depend on the judge who presides over the case. They estimate, however, that there is a 70 percent probability that the claim will be thrown out and a 30 percent probability that it will succeed.
  2. Ire-Akari Motors Plc: A Nigerian company that specialises in the manufacture of “made-in-Nigeria cars.” During the current financial year, 100 cars have been completed and sold. During testing, a defect was found in their steering mechanism. All 100 customers that bought the cars were duly informed of the defect and were told to bring their cars back to have the defects repaired at no cost. All the customers have indicated that this is the only remedy they require. The estimated cost of the recall is N10.5m. The manufacturer of the steering mechanism, a quoted company with sufficient funds, has accepted responsibility for the defect and has undertaken to reimburse Ire-Akari Motors Plc for all costs that it might incur.
  3. Abeokuta Electricity Company Plc: This company sold a number of electricity transformers with a warranty in the year ended December 31, 2015. At the beginning of the year, the provisions for warranty stood at N5,625,000. A number of claims have been settled during the period for N3,000,000. At the year-end, there were unsettled claims for 300 customers. Experience is that 40% of the claims submitted do not fulfil warranty conditions and can be defended at no cost. The average cost of settling other claims will be N52,500 each.

Required: Explain how the matters in (b)(i) to (b)(iii) above should be accounted for in the financial statements of the three companies using figures to illustrate your points where appropriate.
(9 Marks)

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FR – May 2017 – L2 – SB – Q6 – Non-Current Assets Held for Sale

Explain conditions for assets held for sale, identify impairment, and allocate impairment loss for a disposal group.

a. IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations set out requirements that specify the accounting treatment for assets held for sale and the presentation and disclosure of discontinued operations.

Required:

  1. Explain the conditions that must apply at the reporting date for an asset (or disposal group) to be classified as held for sale and how the assets can be measured.
    (5 Marks)

b.

  1. Explain how impairment of asset should be identified and accounted for at the end of a reporting period.
    (4 Marks)
  2. A company has decided to dispose of a group of its assets. The carrying amounts of the assets immediately before the classification as held for sale were as follows:
    Asset Amount (₦)
    Goodwill 800,000
    Property, plant and equipment (revalued amounts) 3,050,000
    Property, plant and equipment (at cost) 3,200,000
    Inventory 840,000
    Other current assets 700,000
    Total 8,590,000

    The company estimates that the “fair value less cost to sell” of the disposal group is ₦6,400,000.

    Required:
    Calculate the impairment loss and its allocation to the non-current assets in the disposal group.
    (6 Marks)

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FR – May 2017 – L2 – SB – Q5 – Preparation of Financial Statements

Discuss distinguishing features of debt and equity presentation under IFRS and explain the impact of classification on financial statements.

The difference between debt and equity in an entity’s statement of financial position is not easily distinguishable for preparers of financial statements. Debts and equity financial instruments may have similar characteristics, which may lead to inconsistency of reporting.

Required:

  1. Discuss the main distinguishing features in the presentation of debt and equity under International Financial Reporting Standards (IFRS) with clear examples.
    (10 Marks)
  2. Explain why it is important for entities to understand the impact of the classification of a financial instrument as debt or equity in the financial statement.
    (5 Marks)

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FR – May 2017 – L2 – SB – Q4 – Earnings Per Share (IAS 33)

Explain EPS and PE ratio, and calculate EPS and DPS for Almond Nigeria Limited, also discussing EPS limitations.

a. Explain the following, stating their importance to investors in evaluating financial performance:
i. Earnings per share (EPS)
ii. Price earnings ratio (PE ratio)
(6 Marks)

b. The issued and fully paid share capital of Almond Nigeria Limited, which has remained unchanged since the date of incorporation until the financial year ended March 31, 2015, includes the following:

  • 2,400,000,000 ordinary shares
  • 600,000,000 6% participating preference shares of N1 each

The company has been operating at a profit for a number of years. As a result of a very conservative dividend policy in previous years, there is a large accumulated profit balance on the statement of financial position.

On July 1, 2015, the directors decided to issue two bonus shares to all ordinary shareholders for every one previously held.

The following is an extract of the group statement of profit or loss and other comprehensive income for the year ended March 31, 2016:

Almond Nigeria Limited
Extract of Group Statement of Profit or Loss and Other Comprehensive Income for the Year Ended March 31, 2016

2016 2015
Profit for the year N740,000 N540,000
Other comprehensive income (20,000)
Total comprehensive income N740,000 N520,000
Total comprehensive income attributable to:
Owners of parent N680,000 N480,000
Non-controlling interest N60,000 N40,000
Total comprehensive income N740,000 N520,000

The following dividends have been paid or declared at the end of the period:

Dividend Type 2016 2015
Ordinary N330,000 N240,000
Preference N69,000 N60,000

Note: The participating preference shareholders are entitled to share profits in the same ratio in which they share dividends after payment of fixed preference dividends. They will also share the same benefit as ordinary shareholders if the company is liquidated.

Required:

  1. Calculate the earnings per share (EPS) in accordance with IAS 33 and the dividend per share (DPS) for the years ended March 31, 2015, and 2016. (10 Marks)
  2. Discuss the limitations of earnings per share (EPS) as a measure of a company’s performance. (4 Marks)

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FR – May 2017 – L2 – SB – Q3 – Partnership Account

Advise Bode Limited on accounting treatment for impairment, borrowing costs, and reclassification to investment property in accordance with IAS 36, IAS 23, and IAS 40.

You are a financial reporting consultant. The management of Bode Limited, a well-diversified company with branches in all states of the federation, has some transactions for which it requires advice. Bode Limited has a financial accountant who is not yet a qualified accountant. These transactions are as follows:

  1. Impairment of Assets: Bode Limited recognized a cash-generating unit during the year ended December 31, 2015, comprising:
    • Property, plant, and equipment: N4,050 million
    • Goodwill: N450 million
    • Other assets: N2,700 million
      Total carrying amount: N7,200 million

    The management estimated the recoverable amount of the cash-generating unit at N6,300 million as of December 31, 2015. The financial accountant understands some provisions of IAS 36 on asset impairment but is uncertain about how to allocate impairment across these assets within the unit.

  2. Borrowing Costs: On January 1, 2015, Bode Limited borrowed N300 million to fund the construction of two assets, expected to take a year to complete. The funds were drawn on January 1 and were allocated as follows, with the remaining funds invested temporarily:
    • Asset X: N50 million on January 1, N50 million on July 1
    • Asset Y: N100 million on January 1, N100 million on July 1
      The loan interest rate is 9% per annum, and surplus funds can be invested at a rate of 7% per annum.
  3. Investment Property Reclassification: The company’s head office in Abuja, previously owner-occupied, was vacated and let out on June 30, 2015, due to a cost-saving decision to move operations to a nearby branch office. The property, initially recognized under IAS 16 at a cost of N37.5 million with a 50-year useful life, was revalued to N52.5 million by an independent valuer as of December 31, 2015. Bode Limited’s accounting policy for investment properties is to use the fair value model.

Required:
Write a memo advising Bode Limited on the accounting treatments for each transaction in their financial statements. Provide relevant calculations where necessary.

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FR – May 2017 – L2 – SB – Q2 – Consolidated Financial Statements

Calculate non-controlling interest, goodwill, and consolidated reserves for Abuja Limited’s acquisition of Abaji Limited.

Abuja Limited acquired 80% of Abaji Limited’s ordinary shares on January 1, 2015. The company paid an immediate N5.00 per share and a further payment of N19,440,000 in cash. The company only recorded the cash consideration of N5 per share. The two statements of financial position as of December 31, 2015, are as follows:

Additional Information:

  1. Non-Controlling Interests (NCI): Abuja Limited values NCI using the fair value at the acquisition date, set at N14,940,000. Due to impairment, the NCI value reduced to N14,220,000 by December 31, 2015.
  2. Revaluation: Abaji Limited revalued its land and buildings at the acquisition date, increasing the value by N3,600,000, with an additional increase of N720,000 on December 31, 2015.
  3. Brand Valuation: Abaji Limited’s product line brand was valued at N7,200,000, with a 10-year useful life as of January 1, 2015. This brand is not included in Abaji’s statement of financial position.
  4. Intercompany Loan: Abuja Limited provided a loan of N10,800,000 to Abaji Limited at acquisition. Interest, payable annually, was not recorded by Abuja Limited by the end of the year.
  5. Development Costs: Abaji Limited completed a development project on June 30, 2015, costing N9,000,000, of which N1,800,000 was amortized by year-end. Only N3,240,000 of development costs were capitalized by the acquisition date, but Abuja Limited’s directors deem these costs unrecognized assets under IAS 38.
  6. Inventory Profits: Abaji Limited sold goods to Abuja Limited, with one-third remaining in Abuja’s inventory at December 31, 2015. The sale profit was N1,080,000.

Required:

Provide the figures to be included in the consolidated statement of financial position as of December 31, 2015, for:

  • a. Non-Controlling Interest (7 Marks)
  • b. Goodwill (7 Marks)
  • c. Consolidated Reserves:
    i. Share premium
    ii. Retained earnings
    iii. Revaluation reserve
    (Show workings for all calculations)

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