Series: MAY 2021

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  • 20 Marks

CSME – May 2021 – L2 – Q6 – Ethics in Business

Analysis of Mr. John’s actions regarding insider trading based on various ethical perspectives.

Mr John, a professional accountant, is the Chief Executive Officer of a company quoted on the Nigerian Stock Exchange. He also owns about 20% of the company’s shares worth hundreds of millions of Naira. Due to several factors, the company began performing poorly, leading to an unpublished financial report indicating a huge loss. In anticipation of a slide in the company’s share price, Mr. John instructed his stockbroker to sell half of his shares for potential repurchase once the price drops after the financial statements are released. He profited substantially from this transaction.

Required:

a. Analyse the action of Mr. John using:
i. The Model Code (3 Marks)
ii. Critical Theory (3 Marks)
iii. Moral Development of Accountants (4 Marks)

b. Advise Mr. John on the fundamental ethical principles which professional accountants are expected to comply with. (10 Marks)

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  • 5 Marks

CSME – May 2021 – L2 – Q5c – Risk Management and Corporate Strategy

Relating 'Impact and Likelihood' to 'Objective and Subjective' risk perception using a table.

Risk Assessment is a very important activity in an organisation. With the use of a table, relate ‘Impact and Likelihood’ to ‘Objective and Subjective’ risk perception.

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  • 5 Marks

CSME – May 2021 – L2 – Q5b – Risk Management and Corporate Strategy

Explanation of the ALARP principle with the aid of a diagram.

With the aid of a diagram, explain the concept of “As Low as Reasonably Practicable” (ALARP) principle. (5 Marks)

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  • 5 Marks

CSME – May 2021 – L2 – Q5a – Corporate Governance

Discussing four different ways in which agency conflict can arise between stakeholders.

Discuss FOUR of the different ways in which agency conflict can arise. (5 Marks)

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  • 20 Marks

CSME – May 2021 – L2 – Q4 – Corporate Social Responsibility (CSR)

Explanation of social responsibility levels by Gray, Owen, and Adams, and ethical stances by Johnson and Scholes.

Gray, Owen, and Adams (1996) provided a framework for classifying different groups of people and their views of the relationship between business organizations and society.

Required:

a. State and explain SEVEN levels or positions on social responsibility by Gray, Owen, and Adams (1996). (15 Marks)
b. State Johnson and Scholes FOUR possible ethical stances for a business entity. (5 Marks)

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  • 10 Marks

CSME – May 2021 – L2 – Q3b – Corporate Governance

Explanation of board responsibilities per ICSA guidelines that cannot be delegated.

Using the Institute of Chartered Secretaries and Administrators (ICSA) guidance note, explain responsibilities of board of directors that should not be delegated.

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  • 10 Marks

CSME – May 2021 – L2 – Q3a – Corporate Governance

Advising on voting rights to protect a shareholder's investment in a struggling company.

A friend of yours, who invested heavily in the ordinary shares of a company that has been struggling in recent years, came to you for advice. He is confused as to what he can do to protect his investment.

Advise him on:
i. How he can use his voting rights as a shareholder to secure his investment. (6 Marks)
ii. Limitations to the use of his voting rights. (4 Marks)

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  • 20 Marks

CSME – May 2021 – L2 – Q2 – Risk Management and Corporate Strategy

Examination of a risk manager’s role, specific risks managed, and purposes of risk monitoring.

“A risk manager is not a line manager and is not directly responsible for risk management but might help with the management of specific risks.”

Required:

a.
i. Review the statement above within the context of the role of a risk manager. (7 Marks)
ii. Evaluate THREE specific risks that can be managed. (3 Marks)

b. Discuss the purposes of risk monitoring. (10 Marks)

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  • 10 Marks

CSME – May 2021 – L2 – Q1 – Strategic Implementation

Assessing Davidson Ltd's key resources, strategic choices, and restructuring to address international opportunities.

Davidson Ltd is an automobile company based in Aba, Nigeria. It has been in
existence for nearly eighty years. The company originally began by supplying
components for small vehicles and was producing equipment during the Second
World War. However, in the nineties, it underwent rapid transformation under
the founder‟s son, Tony. Tony has diversified the company into supplying tricycle
components and spare parts to the Nigerian market. The company now employs
some 500 staff around the country and is well known for the quality of its
workmanship. The company operates under three divisions. One division is
concerned with the manufacture of tricycle components, a second division with
spare parts and the third division undertakes specific one–off work in automobile
and automobile design. The tricycle component division is by far the biggest and
accounts for seventy per cent of the total turnover. The smaller specialist
automobile design division is by far the most profitable in terms of return on
capital employed and it relies a great deal on a senior engineer, Emmanuel, who
has been with the company for more than twenty years.
Recently, the company was invited to send sample components to a Japanese car
manufacturer who is keen to commence operations in Nigeria. These components
are needed within eight months. However, Mr. Tony is concerned that his
company may not be able to meet the strict standard imposed by the Japanese
manufacturer. The deal, if it is sealed, would establish Davidson Ltd as an
important auto component supplier in South East Asia, thus, opening up the
potential for exports. Tony realises that the export potential is great and that any
initiative towards exports would get full backing from the government. While,
this is happening, the spare parts division is also showing signs of growth.
Recent reforms in part of North Africa has made companies in that region to be
very keen to modernise and innovate their old manufacturing processes and
Davidson had received business enquiries from the region.
Tony faces a dilemma. He knows that the opportunities that have presented
themselves would give the company a global presence. At the same time, he
knows that the company is solely under his management as chief executive.
Tony holds eighty percent of the shares. The other two directors hold ten percent
each. Although the other divisions have managing directors, they rely on him for
decision making. The current managing directors are family members. One is a brother in-law and the other a cousin. Their knowledge of the industry and its
workings is generally poor. He made these appointments to please his father so
that he could be left to run the company as he deems fit. Tony knows that to
satisfy the Japanese auto manufacturer, he needs to reorganise the automobile
design division and consider issues of Total Quality Management (TQM). This will
take time and requires that he delegates responsibilities to other divisions.
However, he feels uncomfortable doing this.
The company is at crossroads. The three divisions are doing well, but could do
even better, if their old, bureaucratic and hierarchical systems are reviewed.
Indeed, some of the younger managers and engineers would prefer a more open,
flexible management structure. Some of them have studied both engineering and
management in Holland and the United States, and are keen to see key
innovations in place. While Tony knows that these opportunities highlighted
above should not be missed, he has to ensure that they are handled successfully
so that the future is secured for Davidson Ltd. This requires that he takes some
tough decisions in restructuring the company within a few months.

Required:

Write a report to the Chief Executive of Davidson Ltd addressing the following issues:

a.
i. The key resources and implementation issues facing Davidson Ltd in the scenario above. (15 Marks)
ii. How the key resources will affect strategic choices. (7 Marks)
iii. How implementation issues will affect strategic choices. (8 Marks)

b. How should Tony restructure the company? (10 Marks)

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  • 10 Marks

PSAF – May 2021 – L2 – Q6b – The Budgeting Process in the Public Sector

Explanation of budget uses and steps for National Chart of Accounts application in public budgeting.

The importance of classification code as a system driven for budget cannot
be over emphasised as it forms the basis for budgeting and budgetary
control mechanism. Thus, for a country, state or local government to
achieve a reasonable level of success in accountability, transparency,
performance evaluation and adherence to Appropriation Act, the
application of unified chart of accounts is paramount.

Required:

Discuss FOUR uses of budget and FOUR steps to be followed to ensure completeness of using the National Chart of Accounts for budgeting.

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  • 5 Marks

CR – May 2021 – L3 – Q2a(ii) – Impairment of Overseas Building and Deferred Tax

Recommend the accounting treatment for impairment and deferred tax for an overseas building under IAS 36 and IAS 12.

ii) Recommend the accounting treatment of the above transaction to the directors of Gyamfi for the year ended 31 March 2021, including financial statements extracts in accordance with relevant International Financial Reporting Standards.

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  • 9 Marks

CR – May 2021 – L3 – Q2b – Disposal Group

Discuss the accounting treatment for Berko Ltd.’s sale of shares in Jamila Ltd in the consolidated financial statements.

Berko Ltd acquired all the equity shares in Jamila Ltd on 1 January 2018 for a consideration of GH¢1,250 million. The carrying amount and fair value of the identifiable net assets at acquisition were GH¢1,230 million. On 31 December 2020, Berko Ltd was in the process of selling its entire shareholding in Jamila Ltd, and so it was decided that Jamila Ltd should be treated as a disposal group held for sale in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations at that date. The carrying amounts of Jamila Ltd’s net assets before classification as held for sale at 31 December 2020 in the individual statement of financial position are as follows:

GH¢’million
Property, plant, and equipment 836
Intangibles (excluding goodwill) 428
Current assets (at recoverable amount) 584
Non-current liabilities (322)
Current liabilities (254)
Total net assets 1,272

The group has a policy of revaluing its property, plant, and equipment in accordance with IAS 16: Property, Plant, and Equipment. There have been no revaluations or any other gains or losses included within Jamila Ltd’s different components of equity since the date of acquisition as the carrying amount was deemed to be a close enough approximation to its fair value. However, on 31 December 2020, property with a carrying amount of GH¢330 million was considered to have a fair value of GH¢340 million. No adjustment has yet been made for this fair value. The total fair value less costs to sell the disposal group at 31 December was estimated to be GH¢1,220 million. There have been no previous impairments to the goodwill of Jamila Ltd.

Required:
Recommend to the directors of Berko Ltd how the above transaction should be accounted for in the consolidated financial statements as at 31 December 2020 including financial statement extracts in accordance with relevant International Financial Reporting Standards.

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  • 5 Marks

CR – May 2021 – L3 – Q3a – Defined Benefit Scheme Accounting

Recommend the correct accounting treatment of defined benefit scheme transactions for Meagya Ltd.

Meagya Ltd is a government business entity in Ghana. Meagya Ltd operates a defined benefit scheme which at 31 December 2019 was in deficit by GH¢120 million. Details for the current year are as follows:

GH¢’million
Current service cost 55
Cash contribution to the scheme 100
Benefits paid in the year 80
Net loss on curtailment 11
Gain on remeasurement of liability at 31 December 2020 9

The rate of interest applicable to corporate bonds was 5% at 31 December 2019. The cash contributions for the scheme have been correctly accounted for in the financial statements for the year ended 31 December 2020. This is the only adjustment that has been made in respect of the scheme.

Required:
Recommend the correct accounting treatment of the above transactions to the directors of Meagya Ltd in the financial statements for the year ended 31 December 2020, including financial statements extracts in accordance with IAS 19: Employee Benefits.

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  • 5 Marks

CR – May 2021 – L3 – Q3b – Related Party Disclosures for Government Entities

Advice on related party disclosure requirements for government-controlled GHBank Ltd.

GHBank Ltd is a government-controlled bank. GHBank Ltd was taken over by the government of Ghana during the recent financial sector clean-up by the Bank of Ghana. GHBank Ltd does not directly trade with other government-controlled banks but has underwritten the development of the nationally owned postal service and the newly created railway ministry. The directors of GHBank Ltd are concerned about the volume and cost of disclosing its related party interests because they extend theoretically to all other government-controlled enterprises and banks. The directors require general advice on the nature and importance of the disclosure of related party relationships and specific advice on the disclosure of the above relationships in the financial statements.

Required:
Advise the directors of the company on how to deal with the above transaction in the financial statements in accordance with IAS 24: Related Party Disclosures. (5 marks)

 

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  • 10 Marks

CR – May 2021 – L3 – Q3c – Ethical Dilemmas and Actions for a Finance Director

Discuss the ethical dilemmas and potential actions a finance director must take to avoid breaching IFAC's Code of Ethics.

You are the Finance Director of a limited liability company. The company started trading with a handful of employees but now has a workforce of 200. You are aware that staff purchases of goods manufactured by the company are authorised by production managers and then processed outside the accounting system. The proceeds from these sales are used to fund the company’s annual Christmas party, organised for Directors of the company.

Required:
Discuss the possible actions that you will take in order not to breach the fundamental principles of the IFAC’s Code of Ethics. (10 marks)

 

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  • 15 Marks

CR – May 2021 – L3 – Q4a – Corporate Reconstruction for Kanzo Ltd

Prepare a statement of financial position and related computations after reconstruction or liquidation for Kanzo Ltd.

Kanzo Ltd (Kanzo) is a company located in the Savannah Region. The company was strategically located to produce cashew nuts and to take advantage of available tax incentives. However, the company has incurred trading losses for many years now. The Directors are considering the alternatives of liquidation and capital reduction. The company’s Statement of Financial Position as at 31 December 2020 is as follows:

Non-current assets GH¢’million
Property, plant and equipment 3,250
Patent 350
Total Non-current assets 3,600
Current assets GH¢’million
Inventories 1,000
Accounts receivables 500
Total Current assets 1,500
Total assets GH¢’million
Total Assets 5,100
Equity & Liabilities GH¢’million
Ordinary share capital (@GH¢1) 2,000
Retained earnings (750)
Total Equity 1,250
Non-Current liabilities GH¢’million
20% Preference shares 1,100
25% Debentures (unsecured) 1,000
Total Non-Current liabilities 2,100
Current liabilities GH¢’million
Accounts payables 1,000
Bank overdraft (secured on property, plant & equipment) 750
Total Current liabilities 1,750

| Total Equity & Liabilities | 5,100 |

Additional Information:

  • In the event of a forced sale, the assets would probably raise the following amounts:
Asset GH¢’million
Property, Plant and Equipment 1,500
Inventories 400
Accounts receivable 450
  • The company is developing a new product, expected to generate profit before interest and tax of GH¢500 million per annum in anticipation of an immediate capital injection of GH¢2,000 million.
  • The Ordinary share capital should be written down to 200 million shares of GH¢1.00 each. In addition, they have agreed to provide the immediate capital injection.
  • The 20% preference shares are to be converted into 500 million ordinary shares valued at GH¢1 per share.
  • It is proposed for GH¢650 million of the 25% Debentures to be converted into ordinary shares at GH¢1 per share and the remainder to be converted into GH¢350 million 20% Debentures.
  • Accounts payables to accept immediate payment of 50% and a moratorium of six (6) months in payment of the remaining balance. New supplies would be paid for on delivery.
  • Property, plant and equipment are to be revalued at GH¢2,250 million, inventories at GH¢800 million, and Accounts Receivables at GH¢450 million.
  • The accumulated losses and intangible assets are to be written off.
  • The corporate tax rate is 25%.
  • Liquidation expenses will amount to GH¢10 million.

Required:
i) Prepare a Statement of Financial Position after reconstruction on the assumption that the capital injection took place. (6 marks)
ii) Compute the expected profit after tax and the earnings per share after the reconstruction. (2 marks)
iii) Prepare a statement of distribution if the company were to be liquidated now. (2 marks)
iv) Describe the steps the Directors of Kanzo Ltd should follow to appraise the proposed scheme of reconstruction with an emphasis on the interest of shareholders. (5 marks)

 

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  • 5 Marks

CR – May 2021 – L3 – Q4b – Control Assessment of Tema Ltd

Discuss the control of Accra Ltd over Tema Ltd in accordance with IFRS 10.

Accra Ltd, a government business entity, acquires 40% of the voting rights of Tema Ltd. The remaining investors each hold 5% of the voting rights of Tema Ltd. A shareholder agreement grants Accra Ltd the right to appoint, remove and set the remuneration of management responsible for key business decisions of Tema Ltd. To change this agreement, a two-thirds majority vote of the shareholders is required.

Required:
In accordance with IFRS 10: Consolidated Financial Statements, discuss whether Accra Ltd controls Tema Ltd. (5 marks)

 

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  • 20 Marks

CR – May 2021 – L3 – Q5 – Financial performance of Shop First Ltd

Analyze the financial performance of Shop First Ltd for 2020 and discuss the effects of discontinued operations and contingencies.

Shop First Ltd operates supermarket chains across the sixteen (16) regions of Ghana. The firm has been in commercial operation for more than two decades, growing its operations through an effective supply chain and financial management. However, in the last few years, keen competition and worsening general economic performance have steadied the consistent growths experienced over the years, resulting in the entity disposing off part of its operations. Below are the financial statements of Shop First Ltd:

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  • 5 Marks

FR – May 2021 – L2 – Q1a – Calculation of Goodwill in Consolidation

Calculate goodwill for Abirem at acquisition and at reporting for a group financial statement consolidation.

Tafo Group is a key player in the food processing industry made up only of Tafo Ltd (Tafo) and Abirem Ltd (Abirem). Below are the consolidated statement of comprehensive income of Tafo Group and the separate statements of comprehensive income of Tafo and Bonsu Ltd (Bonsu) for the year ended 31 December 2020.

Statements of Comprehensive Income for the Year Ended 31 December 2020

GH¢ Million Tafo Group Tafo Bonsu
Revenue 116 90 25
Cost of Sales (78) (62) (15)
Gross Profit 38 28 10
Distribution Costs (7) (5) (1.6)
Administrative Expenses (11) (7.5) (3.4)
Finance Costs (8.5) (2) (0.5)
Investment Income 6 5.3 –
Profit Before Tax 17.5 18.8 4.5
Tax (5.6) (4.8) (1.5)
Profit for the Year 11.9 14 3
Other Comprehensive Income
Gain on Revaluation (Net of Tax) 4.5 3.4 –
Total Comprehensive Income 16.4 17.4 3

Additional Information:

  1. Tafo purchased 80% of the 10 million ordinary shares (all issued at GH¢2 each) of Abirem on 1 January 2020 when the balance of Abirem’s reserves was GH¢35 million. Tafo agreed to settle the consideration in two unconditional instalments as follows:
    • Cash payment of GH¢33 million on 1 January 2021.
    • Cash payment of GH¢30.25 million on 1 January 2022.

    The policy of the group is to value any non-controlling interests at fair value. For this purpose, it was agreed to use the share price of Abirem as an approximation of its fair value. Abirem’s market capitalisation figures at 1 January 2020 and 31 December 2020 stood at GH¢70 million and GH¢75 million, respectively. The appropriate discount rate for Tafo is 10%. The required unwound discount has been included in the group’s (but not Tafo’s) finance costs.

  2. On 1 January 2020, a fair value exercise was carried out on Abirem’s net assets. The results showed that the book value of the depreciable plant was higher than its fair value by GH¢4 million. Post-acquisition depreciation adjustment of GH¢0.8 million is required.
  3. Tafo has held a 20% equity interest in Bonsu for several years. On 31 December 2020, an impairment loss of GH¢0.2 million was estimated for the investment in the associate. The group’s policy is to present the share of the associate’s profit before tax and share of the associate’s tax expense separately within the consolidated statement of comprehensive income. The investment income of the group shown above includes the group’s share of associate’s profit before tax (including the effects of the GH¢0.2 million impairment loss).
  4. Sales from Abirem to Tafo occurring evenly throughout the year amounted to GH¢8 million. By 31 December 2020, Tafo had sold all these goods except for items worth GH¢1.8 million. Abirem applies a cost-plus 20% markup on all sales.
  5. At 31 December 2020, it was concluded that 5% of the goodwill in Abirem had been impaired. The impairment has been charged to administrative expenses.
  6. Assume that all the necessary consolidation adjustments are correctly included in the above consolidated statement of comprehensive income.

Required:
a) Calculate the goodwill in Abirem at acquisition and reporting.
(5 marks)

 

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  • 5 Marks

FR – May 2021 – L2 – Q1c – Analysis of Consolidated Profit and Total Comprehensive Income

Provide an analysis of the consolidated profit and total comprehensive income attributable to non-controlling interest and parent equity holders.

Show an analysis of consolidated profit for the period and total comprehensive income attributable to non-controlling interest and parent’s equity holders.
(5 marks)

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