Series: NOV 2020

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  • 20 Marks

AT- Nov 2022 – L3 – Q4 – Regulatory Environment for Corporate Reporting

Discuss the significance, guiding actions, inconsistencies, compliance areas, and dispute resolution in transfer pricing under Nigeria’s 2018 regulations.

Transfer pricing has become a topical issue in the world of taxation in recent years. This trend is partly driven by the need to prevent fiscal evasion and avoid economic double taxation. Various governments, both in developed and emerging countries, have continued to issue regulations to guide the operations of transfer pricing systems within their jurisdictions.

In Nigeria, the first step toward establishing a legal framework for regulating transfer pricing took place in August 2012, with the enactment of Income Tax (Transfer Pricing) Regulations Number 1, 2012. Due to shortcomings in the implementation of this regulation, it was revoked, and the Income Tax (Transfer Pricing) Regulations 2018 was subsequently enacted.

One critical principle, enshrined in various transfer pricing regulations, that every taxpayer must comply with when dealing with transactions between related entities is the arm’s length principle. This principle has gained significant attention among academics, regulatory institutions, and professionals, with ongoing debate surrounding its application.

Required:

a. Explain the significance of transfer pricing to both the taxpayers and tax authorities. (2 Marks)

b. In complying with the arm’s length principle, discuss two guiding actions which enterprises and multinationals must follow in their intercompany dealings. (3 Marks)

c. Identify and explain four methods multinational companies might use in financial dealings with associated or subsidiary entities that deviate from the arm’s length principle. (6 Marks)

d. In the administration of the Transfer Pricing Regulations 2018, highlight and discuss three fundamental compliance areas for taxpayers and tax practitioners. (6 Marks)

e. Explain the resolution process for disputes that arise between a taxpayer and tax authorities under the Transfer Pricing Regulations 2018. (3 Marks)

(Total: 20 Marks)

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  • 20 Marks

CR – Nov 2017 – L3 – Q3 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Evaluate Funda Plc's accounting policies for specific transactions, recommending adjustments as per IFRS where appropriate.

Funda Plc. is a listed utility service company in Nigeria providing water, electricity, and cable services. The directors prepared draft financial statements for the year ended June 30, 2017, following IFRS guidelines to support a loan application. Employees, owning 5% of ordinary shares, raised concerns about certain accounting policies applied by Funda Plc.

The draft income statement for the year ended June 30, 2017, is as follows:

N’m
Revenue 410.0
Cost of Sales (275.0)
Gross Profit 135.0
Other Operating Costs (65.0)
Profit Before Taxation 70.0

Employee Representatives’ Queries on Accounting Policies:

  1. Sale of Water Filters
    Funda Plc. sold 30 industrial water filters to a steelmaker, offering a 20% discount and granting the steelmaker a put option to repurchase the filters at 35% of the purchase price after six years, despite the filters’ expected ten-year life. Funda Plc. has recognized the entire revenue upfront.
  2. Connection Fees
    A refundable connection fee is charged for electricity connections, to be returned upon customer disconnection. No minimum notice is required, and costs can be deducted from refunds. The fee was fully recognized in the year as revenue.
  3. Activation Fees
    Non-refundable activation fees for digital cable services were fully recognized in revenue.
  4. Deposits for Domestic Electrical Goods
    Customers place a 25% deposit on orders, with the balance payable on delivery. Deposits are retained if orders are canceled but refunded if Funda Plc. fails to deliver. Revenue includes N10 million from deposits, with 90% of orders fulfilled.

Required:
Prepare a report explaining the suitability of Funda Plc.’s accounting policies for each transaction and recommend the appropriate IFRS treatment where necessary.

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  • 6 Marks

BL – Nov 2020 – L1 – SB – Q1d – Company Law

List powers exercised by the Annual General Meeting (AGM) of a company.

One of the two organs of a company is the general meeting of members.

Required:
State FOUR powers of the Annual General Meeting.

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  • 5 Marks

BL – Nov 2020 – L1 – SB – Q6c – Partnership Law

Assess the legality of different partnership arrangements.

Comment on the legality of the following relationships operating as partnerships:

i. A partnership of 16 persons established for charitable purposes
ii. Adex cooperative society consisting of 500 members
iii. Black and Blue law firm consisting of 31 lawyers
iv. Stone Partnership firm comprising Segun aged 28, Tunde aged 17
v. A partnership of volunteers for the purpose of helping persons displaced by flood.

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  • 5 Marks

BL – Nov 2020 – L1 – SB – Q6b – Law of Contract

Define express terms, implied terms, conditions, and warranties in a contract.

Contractual agreements usually contain terms that are different in nature and importance.

Required:
Define the following terms:
i. Express terms
ii. Implied terms
iii. Conditions
iv. Warranties

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  • 5 Marks

BL – Nov 2020 – L1 – SB – Q6a – The Nigerian Legal System

List tests to determine intent to steal during taking or conversion.

Taking or conversion with intent to defraud is an element of stealing.

Required:
State FIVE tests of determining whether or not an accused has an intention to steal at the time of taking or converting a thing.

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  • 5 Marks

BL – Nov 2020 – L1 – SB – Q5d – Negotiable Instruments

Explain different cheque crossing types and define negotiable instruments.

Crossing of cheques has legal implications in banking transactions, and a cheque is a type of negotiable instrument.

Required:
i. A cheque instruction to “pay Ronke the sum of N50,000.00” without crossing the face of the cheque with two parallel lines.
ii. “Pay Andrew N100,000” with two parallel lines traversing the face of the cheque.
iii. “Pay Mary N150,000” with two parallel lines with Congo Bank written in between the two parallel lines on the face of the cheque.
iv. “Pay Ngozi N200,000” and by cheque with two parallel lines and the words “account payee only” written in between the two parallel lines.
v. Define negotiable instruments.

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  • 5 Marks

BL – Nov 2020 – L1 – SB – Q5c – Agency Law

List the duties of an agent in an agency contract.

Parties under a contract of agency have certain rights and duties.

Required:
State FIVE duties of an agent under a contract of agency.

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  • 5 Marks

BL – Nov 2020 – L1 – SB – Q5b – Employment Law

Define an employment contract and list grounds for dismissal by an employer.

Contracts of employment may be created and brought to an end in different ways.

Required:
i. Explain contract of employment.
ii. State THREE reasons for which an employer could dismiss an employee.

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  • 5 Marks

BL – Nov 2020 – L1 – SB – Q5a – Alternative Dispute Resolution

Define arbitration and describe an arbitral award.

Arbitration is a type of alternative dispute resolution mechanism.

Required:
Explain arbitration and arbitral award.

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  • 6 Marks

AA – Nov 2020 – L2 – Q1d – Audit Evidence

List and explain audit procedures appropriate for auditing gross premium income in an insurance company.

List and explain the type of audit procedures that might be appropriate in the audit of gross premium income.

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  • 4 Marks

AA – Nov 2020 – L2 – Q1c – Internal Control Systems

Discuss the limitations of internal controls and how they affect an organization’s ability to prevent errors and fraud.

Explain the limitations of internal controls.

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  • 10 Marks

AA – Nov 2020 – L2 – Q1b – Internal Control Systems

Identify weaknesses in an insurance process and list controls to address them.

Identify the weaknesses in the process and a control that might address each weakness.

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  • 20 Marks

AA – Nov 2020 – L2 – Q1a – Auditing in a Computerized Environment

List five general IT control areas and provide examples of controls within each area.

Aladdin Insurance Nigeria Limited is a private company that provides life and non-life insurance services. The company has annual gross premium of N15 billion.
Ordinarily, the underwriting process is manual and is initiated when a customer
walks into a branch and fills a proposal form requesting for an insurance policy (or
an agent fills in the form at the request of the customer). The proposal form
requires information relating to the subject matter of the insurance policy/cover
required by the customer as this will aid the company in assessing the risks
attached and will also help the underwriter to quote a reasonable premium
amount. The prospective insured must disclose all material and relevant
information. The policy proposal form requires important information, such as:

• The name and address of the customer;
• Occupation of the customer;
• Details of the property being proposed for insurance. This could be vehicle
details (for motor insurance) property (for burglary or fire) or other details
relating to life insurance, etc;
• Value of the property being proposed for insurance; and
• Previous insurance history of the client.

The underwriter reviews the information in the proposal form and assesses the risks
inherent in the contract with a view to making a recommendation as to whether to
accept or reject the proposal; if the recommendation is to accept, how much
premium should be charged. For external and complex risks, external inspectors are
engaged. After inspection, the report is sent to the underwriter to review and
consider if any risk recommendations should be made to the customer (usually on
how to properly manage risks) or if an amendment to the policy wordings is
required. The proposal form and the recommendation of the underwriter is passed
on to an approving authority based on the approval limits.
On approval of the policy, the policy terms are communicated to the customer for
review and acceptance. On acceptance, the customer signs the proposal form and pays the premium. Payment method includes cash, cheques, bank transfers. The
details of the policy are recorded in the system by the underwriters who also act as
the accountants. Based on NAICOM‟s requirements, premium should be paid before
the insurance cover starts.
However, due to the COVID 19 pandemic, the Federal Government announced a
lock down of Lagos, thereby imposing a restriction on movement of goods and
persons in the state. In response to this, the company bought a new underwriting
system and automated its entire underwriting process.

Required:

a. List FIVE control areas for General Information Technology (IT) Controls and examples of controls that can be found in each area.

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  • 20 Marks

FR – Nov 2020 – L2 – Q6 – Property, Plant, and Equipment (IAS 16)

Discuss depreciation concepts and characteristics under IAS 16 and calculate machine cost, revenue expenditures, and carrying amounts over the years.

Noodles Nigeria Limited (NNL) manufactures various types of noodles in Oluyole for sale across Nigeria. Recently, to sustain the company’s market leadership, NNL bought a brand new machine under the following conditions:

On September 1, 2016, NNL decided to upgrade the machine by adding new major components at a cost of N300,000,000. As a result of the upgrade, the remaining useful life was increased to 8,000,000 units and the residual value was revised to N114,000,000.

Required:
a. Describe what is meant by depreciable amount within the context of IAS 16 on property, plant, and equipment (PPE). (1 Mark)
b. Highlight THREE characteristics of depreciable assets under IAS 16. (3 Marks)
c. Describe the TWO models of accounting for cost of PPE under IAS 16. (3 Marks)
d. Calculate the following:
i. Machine cost. (3 Marks)
ii. Revenue expenditure over the years in the statement of profit or loss. (5 Marks)
iii. Carrying amounts of the machine over the years. (5 Marks)

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  • 10 Marks

FR – Nov 2020 – L2 – Q5c – Impairment of Assets (IAS 36)

Explain disposal group and rules of recognition under IFRS 5, determine impairment loss, and allocate impairment on the assets.

The Board of directors of Adamu Limited has decided to dispose of a group of held-for-sale assets. The extracts of carrying amounts of the assets immediately before classification as held-for-sale were stated as follows:

Assets N’000
Goodwill 80,000
PPE at revalued amounts 208,000
PPE at cost 320,000
Inventory 84,000
Financial asset 68,000

Total: 760,000

The Board estimated that the fair value of the disposal group is N650,000,000 gross, with selling costs amounting to N10,000,000.

Required:
i. Explain what is meant by disposal group and the rules of recognition under IFRS 5 – Non-current assets held for sale and discontinued operations. (2 Marks)

ii. Determine and allocate the impairments on the disposed-off asset under IFRS 5. (4 Marks)

iii. Prepare necessary journal entries to record the transactions. (1 Mark)

iv. Identify THREE applicable criteria under IFRS 5 for classifying an asset or disposal group as held for sale in the financial statements. (3 Marks)

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  • 3 Marks

FR – Nov 2020 – L2 – Q5b – Regulatory Framework for Financial Reporting

Highlight the three basic steps necessary for developing a new accounting standard.

International Financial Reporting Standards (IFRS) may either be premised on principle-based or rule-based concepts.

Required:

Highlight the three basic steps/processes necessary for developing a new accounting standard.

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  • 7 Marks

FR – Nov 2020 – L2 – Q5a – Conceptual Framework for Financial Reporting

Explain the principle-based and rule-based approaches in accounting concepts.

nternational Financial Reporting Standards (IFRS) may either be premised on principle-based or rule-based concepts.

Required:

(a) Explain the principle-based and rule-based concepts.

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  • 20 Marks

FR – Nov 2020 – L2 – Q4 – Presentation of Financial Statements (IAS 1)

Prepare the Statement of Profit or Loss and Other Comprehensive Income for Gbenga Nigeria Plc based on provided trial balance.

Gbenga Nigeria Plc trial balance as at December 31, 2019 is shown below:

Item N’000 N’000
Revenue 2,290,125
Administrative expenses 237,150
Selling and distribution expenses 175,200
Legal and professional expenses 81,150
Allowance for receivables 8,625
Inventories – finished goods – 31/12/18 276,750
Work-in-progress – 31/12/18 49,125
Inventories – raw materials at cost – 31/12/18 162,600
Purchases – raw materials 1,125,900
Carriage inwards – raw materials 15,750
Manufacturing wages 375,000
Manufacturing overheads 187,500
Authorised and issued 900,000 ordinary shares of 50 kobo each fully paid 450,000
150,000 8.4% cumulative preference shares of N1 each fully paid 150,000
Revaluation surplus 65,000
Share premium 150,000
General reserve 85,000
Retained earnings – 31/12/18 425,250
Patents and trademarks 323,250
Motor vehicle at cost 112,500
Freehold property at cost 375,000
Leasehold property at cost 112,500
Plant and equipment at cost 225,000
Furniture and fittings at cost 75,000
Amortisation of leasehold property – 31/12/18 22,500
Accumulated depreciation @ 31/12/2018:
– Plant and equipment 102,750
– Furniture and fittings 23,625
– Motor vehicles 37,500
10% loan notes 150,000
Trade payables 146,250
Trade receivables 266,445
Bank overdraft 76,875
Cash 7,680
4,183,500 4,183,500

Additional information:
(i) A gain of N20,000 made on the revaluation of old freehold property during the year is yet to be accounted for.
(ii) Inventories at December 31, 2019 were:

  • Raw materials: N168,900
  • Finished goods: N413,025
  • Work-in-progress: N56,700

(iii) Legal and professional expenses include solicitor’s fees for purchase of new freehold land during the year of N7,500.
(iv) Provision is to be made for full year’s interest on the loan notes.
(v) The leasehold land and buildings are held on a 50-year lease, with 40 years unexpired life left as at the end of December 31, 2018.
(vi) Depreciation for the year is to be charged as follows:

  • Plant and equipment 8% on cost – charged to production
  • Furniture and fittings 10% on cost – charged to administration
  • Motor vehicles 20% on carrying amount – charged 25% to administration and 75% to selling and distribution.

(vii) Income tax on the profit for the year is estimated at N68,900 and is due for payment on February 28, 2020.

Required:
Prepare the statement of profit or loss and other comprehensive income for the year ended December 31, 2019.

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  • 14 Marks

FR – Nov 2020 – L2 – Q3b – Events After the Reporting Period (IAS 10)

Advise on accounting treatment for events after the reporting date in a company case study.

(b) The following events took place in Chakachaka Company Nig. Limited:

(i) Shortly after the financial year ended on June 30, 2018, but before the financial statements were authorized for issue, Chakachaka Nigeria Limited’s inventory was destroyed by a fire outbreak which resulted in a loss of N200 million.

(ii) The company’s financial year that ended June 30, 2018, shows an amount of N60 million due from one of its debtors, Mr. Onigbese. Chakachaka Nigeria Limited provided for impairment at June 30, 2018, of N15 million against the gross value of N60 million. On July 31, 2018, before the financial statements were authorized for issue, Mr. Onigbese was declared bankrupt and unable to pay the debt.

(iii) Chakachaka Nigeria Limited was sued on June 30, 2018, but the judgment was only handed down on July 21, 2018. The Company was found liable for damages and costs amounting to N31 million. On July 22, 2018, Chakachaka Nigeria Limited filed a claim with its insurers, and on July 29, 2018, it was notified that the insurer would only cover N26 million of the loss.

Required:
Prepare a brief memorandum advising the directors of Chakachaka Nigeria Limited on the accounting treatment and/or disclosure required as a result of the events in (i) to (iii) after the reporting date.

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