Subject: CORPORATE REPORTING

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  • 14 Marks

CR – Nov 2024 – L3 – Q5b – Financial Performance & Digital Technology Integration

Evaluating the financial performance of Nsawkaw PLC and addressing challenges of digital technology integration in accounting.

(a) Compute the following ratios for the years ended 2024 & 2023:
i) Operating profit margin
ii) Return on parent’s equity
iii) Earnings per share
iv) Current ratio
v) Trade receivables days
vi) Total liabilities to total assets %

(b) Write a report to the directors of DPEF evaluating the inter-period financial performance and position of NK using the above six (6) ratios. The report should draw attention to how the non-financial metrics combine with the financial counterparts to showcase the prospects and viability of NK.                                                                      c) The concept of double materiality is relevant to sustainability impacts and dependencies. It
incorporates financial materiality and impact materiality. 

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  • 6 Marks

CR – Nov 2024 – L3 – Q5a – Financial Analysis and Investment Evaluation

Compute financial ratios for Nsawkaw PLC to evaluate its financial performance for investment recommendation.

Nsawkaw PLC (NK), a gold processing and trading company, has been identified by Djaraye Private Equity Fund (DPEF) as a target for long-term equity investment. As a financial consultant of DPEF, you have been tasked to evaluate the integrated financial condition of NK and make an investment recommendation.

Below are the summarised versions of NK’s Consolidated Financial Statements for the year ended June 30, 2024 (together with its comparative period):

Summarised Consolidated Statement of Profit or Loss for the year ended 30 June 2024

2024 (GH¢000) 2023 (GH¢000)
Revenue 2,538,000 2,125,000
Operational expenses (1,909,100) (1,592,900)
Interest costs (186,700) (157,250)
Taxation (234,000) (198,500)
Profit after tax 208,200 176,350
Other comprehensive income 17,900 10,550
Total comprehensive income 226,100 186,900

Summarised Consolidated Statement of Changes in Equity for the year ended 30 June 2024

Equity Holders of the Parent (GH¢000) Non-controlling Interests’ Equity (GH¢000) Total Equity (GH¢000)
2024
Balances b/d 457,200 65,600 522,800
Total comprehensive income 190,800 35,300 226,100
Dividends (110,000) (8,700) (118,700)
Balances c/d 538,000 92,200 630,200
2023
Balances b/d 355,000 46,650 401,650
Total comprehensive income 160,500 26,400 186,900
Dividends (58,300) (7,450) (65,750)
Balances c/d 457,200 65,600 522,800

Summarised Statement of Financial Position as at 30 June 2024

2024 (GH¢000) 2023 (GH¢000)
Non-current assets
Property, plant, and equipment 718,000 657,000
Others 156,000 99,000
Total Non-current assets 874,000 756,000
Current assets
Trade receivables 140,000 121,000
Others 236,500 123,050
Total Current assets 376,500 244,050
Total Assets 1,250,500 1,000,050
Total Equity and Liability 1,250,500 1,000,050

Additional information:

  1. The total number of equity shares outstanding was 1.2 million and 1.4 million at 30 June 2023 and 30 June 2024 respectively.
  2. Other comprehensive income attributable to non-controlling interests for the years ended 30 June 2023 and 2024 amounted to GH¢8.05 million and GH¢9.6 million respectively.
  3. Non-current liabilities at 30 June 2023 and 30 June 2024 amounted to GH¢250,800 and GH¢308,510 respectively.
  4. The following metrics have been gleaned from NK’s published sustainability reports across the two years:
Metric 2024 2023
Scope 1 & 2 carbon emissions (tonnes of CO2) 650 780
Scope 3 carbon emissions (tonnes of CO2) 2,400 2,380
Women in senior management (%) 21 16
Total recordable injury frequency rate (TRIFR) per 100 full-time workers 3.3 4.1

The scope and definitions of the above sustainability measures have remained materially unchanged across the two years.

Required:

Compute the following ratios for the years ended 2024 & 2023:

  1. Operating profit margin
  2. Return on parent’s equity
  3. Earnings per share
  4. Current ratio
  5. Trade receivables days
  6. Total liabilities to total assets %

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  • 5 Marks

CR – Nov 2024 – L3 – Q4b – Consolidation and Financial Reporting

Discuss the appropriate reporting figures a parent company should include in its consolidated financial statements when its subsidiaries have different reporting dates.

A parent company has a year-end of 31 December 2023. One of its subsidiaries has a year-end of 30 June 2023, and another has a year-end of 30 September 2023.

Required:
What figures should the parent include in its consolidated financial statements in respect of these subsidiaries?

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  • 15 Marks

CR – Nov 2024 – L3 – Q4a – Corporate Reconstruction

Prepare the capital reduction account and the statement of financial position for Mensimah Ltd after reconstruction.

Mensimah LTD (Mensimah) has been experiencing poor trading conditions over the last three years. As a result, it has been difficult to generate revenues and profits in the current year leading to very high inventory levels. Also, Mensimah has defaulted in paying interest due to the loan note holders for two years. Even though the debentures are secured against the land & buildings, the loan note holders have demanded either a scheme of reconstruction or the liquidation of Mensimah.

As the above trading difficulties have significantly threatened the going concern status of Mensimah, the directors as well as representatives of the shareholders and loan holders in a meeting decided to design the following scheme of reconstruction:

  1. The assets were independently valued and should now be recognised at the following amounts:

    Asset Category Amount (GH¢)
    Land 64,000
    Building 64,000
    Plant & Equipment 24,000
    Inventory 40,000

    The value of Mensimah’s investment in Adams LTD has increased to GH¢48,000 and was to be sold as part of the reconstruction scheme. As for the trade receivables, it was determined that 10% of the stated value is non-recoverable and therefore would be written off.

  2. Each GH¢1 equity share is to be redesignated as an equity share of GH¢0.25. After this, the equity shareholders would be persuaded to accept a reduction in the nominal value of their shares from GH¢1 to GH¢0.25 per share and subscribe for a new issue based on one-for-one at a price of GH¢0.30 per share.

  3. The existing 5% loan notes are to be exchanged for a new issue of GH¢28,000 9.5% loan notes, repayable in 2028, plus 112,000 equity shares of GH¢0.25 each. In addition, they will subscribe for GH¢7,200 loan notes, repayable in 2028, at par value at the rate of 9.5%.

    The 8% loan notes holders who have not received any interest for the past two years, are to receive 16,000 equity shares of GH¢0.25 each in lieu of the interest payable. It is agreed that the value of the interest liability is equivalent to the fair value of the shares to be issued. Moreover, the 8% loan notes holders have agreed to defer repayment of their loan until 2028, on condition that they are paid a higher interest rate of 9.5%.

  4. The deficit on retained earnings is to be written off and the bank overdraft is to be repaid immediately.

Mensimah’s statement of financial position as at 31 December 2023 is as follows:

Assets GH¢’000
Non-current assets
Land & buildings 154,597
Plant & equipment 48,603
Investment in Adams LTD 21,600
Total Non-Current Assets 224,800
Current assets
Inventory 96,198
Receivables 56,554
Total Current Assets 152,752
Total Assets 377,552
Equity & Liabilities GH¢’000
Equity
Equity shares (GH¢1) 160,000
Retained earnings (31,857)
Total Equity 128,143
Non-current liabilities
8% loan notes 64,000
5% loan notes 56,000
Total Non-Current Liabilities 120,000
Current liabilities
Trade payables 89,798
Interest payable 10,240
Overdraft 29,371
Total Current Liabilities 129,409
Total Equity & Liabilities 377,552

Required:

i) Prepare the capital reduction account for Mensimah LTD. 
ii) Prepare the statement of Financial Position of Mensimah LTD immediately after the reconstruction.
iii) Determine the position of each stakeholder group if the reconstruction scheme is not implemented.

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  • 10 Marks

CR – Nov 2024 – L3 – Q3b – Digital Transformation & Cybersecurity Risks

Address concerns regarding digital transformation, cybersecurity risks, regulatory compliance, and ethical dilemmas in accounting.

b) In the contemporary business landscape, the integration of digital technologies presents multifaceted challenges for accounting professionals, particularly in the areas of digital transformation, cybersecurity, regulatory compliance, and ethical decision-making.

You are the newly appointed Chief Finance Officer (CFO) of Fanofom Ghana Ltd (FGL), a prominent Ghanaian company that produces and exports shea butter for the cosmetics industry to several companies globally. As FGL largely deals with international customers, it is undergoing a digital transformation to enable it to operate 24/7, and thus meet the needs of its clients given the time differences around the world.

As a result, the company has recently migrated its accounting systems to a cloud-based accounting platform and implemented automation tools to streamline financial processes. However, one of the old and senior directors who described himself as a BBC, a street jargon meaning “born before computer,” has expressed serious concerns about the digital transition and associated problems such as cybersecurity risks, regulatory compliance, and ethical issues that would arise due to the ongoing digital transformation.

Required:
i) Identify and explain the challenges associated with the integration of digital technologies in accounting systems with respect to:

  • Digital transition,
  • Cybersecurity risks,
  • Regulatory compliance,
  • Ethical dilemmas. (8 marks)

ii)Recommend two remedies to address the identified challenges.

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  • 10 Marks

CR – Nov 2024 – L3 – Q3a – Share-Based Payment and Contingent Liabilities

Accounting for share-based payments and contingent liabilities in financial statements.

(i) Share-Based Payment

Pee Manka PLC (PM), a hyper-growing firm in Ghana, prepares its financial statements on 31 December.

The following information is relevant:

  • The financial statements are authorised for issue on 31 March. On 31 December 2021, PM issued share options to seven (7) of its senior executives, giving each executive the option to purchase 2 million shares at GH¢6.50 per share. The fair value of each option at that date was GH¢4.00. The exercise of the share options was conditional on the completion of two-years’ service from 31 December 2021.

The company’s share price on subsequent dates was as follows:

Date Share Price (GH¢)
31 December 2022 13.50
31 December 2023 17.50
  • On 31 March 2023, after the 2022 financial statements were authorised for issue, PM’s Chief Finance Officer, one of the seven executives, unexpectedly resigned from her position in the company.
  • On 30 April 2023 another executive, Mrs. Torsah, was dismissed.
  • The five remaining executives exercised their options on 31 December 2023.

Required:

In line with IFRS 2: Share-Based Payment, recommend how the above scenario would have been dealt with in the financial statements of PM for the year ended 31 December 2023. (6 marks)

(ii) Contingent Liabilities and Share-Based Payment

  • Mrs. Torsah, who was dismissed, immediately instigated legal proceedings against PM, and it was probable, on the 28 February 2024, that she would be deemed to have completed the two-year qualifying period of her share option agreement.
  • Legal advice at that time was that she was also likely to be awarded GH¢3.5 million in compensation, and that it was possible that this could rise to GH¢5.8 million.

Required:

In line with IFRS 2: Share-Based Payment and IAS 37: Provisions, Contingent Liabilities and Contingent Assets, explain how the above scenario would impact your results in (i) above.

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  • 5 Marks

CR – Nov 2024 – L3 – Q2c – Accounting for Defined Benefit Pension Plans

Compute the pension amounts for Oboisah PLC under IAS 19.

Oboisah PLC (Oboisah) operates a defined benefit pension plan for employees who commenced employment with the company prior to 1 April 2021. The pension scheme is non-contributory.

At 31 March 2023, the Group recorded a net defined liability of GH¢157 million. The following information relates to the year ended 31 March 2024:

Description Amount (GH¢ million)
Employer contributions paid on 31 March 2024 43
Benefits paid 16
Current service cost 42
Curtailment gain 3
Present value of defined benefit obligation at 31 March 2024 498
Value of plan assets at 31 March 2024 315

The average yield on relevant corporate bonds was 20% on 1 April 2023. Entries so far made in respect of the employer contributions have been incorrectly debited to accounts receivable and credited to cash. Benefits paid have been correctly recorded.

Required:

In line with IAS 19: Employee Benefits, determine how much pension amounts should be included in the financial statements of Oboisah PLC for the year ended 31 March 2024. Show the appropriate extracts for the above and any correction entries, if necessary.

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  • 5 Marks

CR – Nov 2024 – L3 – Q2b – Accounting for Legal Claims

Assess and account for a legal claim against Agropah PLC under IAS 37.

ropah PLC (Agropah) prepares its financial statements to 30 June and usually authorizes them for issue on 25 August.

On 15 July 2024, Agropah received notice of a legal claim made by Odametey, a customer, for loss of profits allegedly due to the supply of faulty goods by Agropah on 30 April 2024. The amount claimed was GH¢5 million.

The directors of Agropah have estimated the following possible outcomes in respect of this legal claim:

  • 28% chance that the claim will not succeed.
  • 45% chance that the claim will succeed, and Odametey will be awarded GH¢3.2 million.
  • 27% chance that the claim will succeed, and Odametey will be awarded GH¢5 million.

Required:

In line with IAS 37: Provisions, Contingent Liabilities & Contingent Assets, explain how this legal claim should be accounted for and reported in the financial statements of Agropah for the year ended 30 June 2024.

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  • 10 Marks

CR – Nov 2024 – L3 – Q2a – Lease Accounting and Foreign Exchange

Discuss lease accounting treatment and foreign exchange effects on lease payments.

On 1 January 2023, Fabin Ghana Airlines PLC (FGA) leased a new fuel-efficient aircraft from German Jets Builders PLC (GJB) for ten (10) years, with an option to extend the lease period for five (5) additional years. However, at lease inception, FGA determined that the renewal option was not economically beneficial and would not be exercised.

The lease formed part of FGA’s sustainability strategy to green its air operations. Lease payments were structured as follows:

  • Fixed annual lease payments of €6 million, payable at each year-end starting 31 December 2023.
  • An additional 5% annual payment, conditional on FGA’s aircraft noise footprints and nitrogen oxide emissions declining by at least 15% and 10%, respectively.
  • At 31 December 2023, the Sustainability Committee determined that these environmental targets were met.

Additional lease details:

  • Estimated residual value of €15 million at 31 December 2032 and €10 million at 31 December 2037.
  • Residual Value Guarantee: FGA guaranteed that the relevant residual value will not drop below 30%.
  • Initial Direct Costs: GH¢500,000 was incurred in setting up the lease.
  • Discount Rate: 12%
  • Exchange Rates:
    • 1 January 2023: €1 = GH¢10
    • 31 December 2023: €1 = GH¢12
    • Average rate: €1 = GH¢11

Discount Factors at 12%:

Year Single-Period Factor Annuity Factor
10 0.32 5.65
14 0.20 6.63
15 0.18 6.81

Required:

In line with IFRS 16: Leases and IAS 21: Effects of Changes in Foreign Exchange Rates, discuss how this lease should be accounted for in the financial statements of FGA for the year ended 31 December 2023.

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  • 20 Marks

CR – Nov 2024 – L3 – Q1 – Consolidated Financial Statements

Prepare the consolidated statement of financial position for Okaekwei PLC, considering acquisitions and fair value adjustments.

The following financial statements relate to Okaekwei PLC (Okaekwei), Ablekuma PLC (Ablekuma), and Katamanso PLC (Katamanso), three companies operating in the manufacturing industry.

Statement of Financial Position as at 31 October 2024

Description Okaekwei (GH¢’000) Ablekuma (GH¢’000) Katamanso (GH¢’000)
Non-current assets:
Property, plant and equipment 88,307 53,657 82,875
Investments 102,500 78,095 –
Total Non-current Assets 190,807 131,752 82,875
Current assets:
Inventory 9,492 4,618 14,642
Trade receivables 4,573 8,101 18,085
Cash and Bank 11,625 4,599 30,056
Total Current Assets 25,690 17,318 62,783
Total Assets 216,497 149,070 145,658
Equity & Liabilities:
Share capital (GH¢1) 106,250 63,750 61,625
Retained earnings 38,607 42,361 27,025
Other component of equity 3,825 3,060 2,678
Total Equity 148,682 109,171 91,328
Liabilities:
Non-current liabilities 40,851 20,327 31,582
Current liabilities 26,964 19,572 22,748
Total Liabilities 67,815 39,899 54,330
Total Equity & Liabilities 216,497 149,070 145,658

Additional Information:

  1. Acquisition of Katamanso:

    • On 1 November 2023, Ablekuma acquired 60% of the ordinary shares of Katamanso at a cost of GH¢55 million.
    • Due diligence costing GH¢0.25 million was undertaken and included in the investment cost.
    • Retained earnings and other components of equity of Katamanso at acquisition were GH¢21.6 million and GH¢1.65 million, respectively.

  2. Fair Value Adjustments:

    • A fair value exercise was conducted, with a building’s fair value exceeding its carrying value by GH¢1.2 million (remaining useful life: 20 years).
    • The financial statements of Katamanso do not yet reflect this adjustment.
    • Non-controlling interest is measured using the proportionate share of identifiable net assets.

  3. Acquisition of Ablekuma by Okaekwei:

    • On 1 November 2022, Okaekwei purchased 80% of the ordinary shares of Ablekuma for GH¢92 million.
    • The investment value reflects the fair value of the subsidiary at 31 October 2024.
    • Retained earnings and other equity components at acquisition: GH¢29.6 million and GH¢2.32 million.

  4. Deferred Tax on Fair Value Adjustments:

    • Deferred tax is to be provided at 25% on temporary differences arising from fair value adjustments.

  5. Intragroup Transactions:

    • On 1 June 2024, Ablekuma sold inventory (cost: GH¢2 million) to Katamanso for GH¢1.8 million.
    • As of 31 October 2024, these goods were still in Katamanso’s inventory, valued at the purchase cost. The fair value of the inventory at year-end was GH¢1.78 million.

  6. Intragroup Transfer of PPE:

    • On 1 August 2024, Okaekwei transferred a production machine to Ablekuma at GH¢2 million (carrying value: GH¢2.4 million).
    • The remaining useful life was five years, but Ablekuma depreciates it over four years.
    • Okaekwei harmonizes accounting policies upon consolidation.

Required:

Prepare the Consolidated Statement of Financial Position of Okaekwei PLC as at 31 October 2024.

(All workings are to be rounded to the nearest thousand).

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  • 6 Marks

CR – May 2017 – L3 – Q7b – Integrated Reporting

Discuss the usefulness of cash flow statements and the potential benefits of integrated reporting.

The directors of Duranga Plc. have learned that corporate reporting could be improved by adopting the International Integrated Reporting Council’s Framework for Integrated Reporting. The directors believe that International Financial Reporting Standards (IFRS), which the company has recently adopted following the decision of the Federal Executive Council, are already extensive and provide stakeholders with a comprehensive understanding of its financial position and performance for the year. They believe that with over 100 countries adopting IFRS, their financial statements speak the international financial reporting language and practice. In particular, statements of cash flows, which the company prepares in accordance with IAS 7, enable stakeholders to assess the liquidity, solvency, and financial adaptability of a business. They are concerned that any additional disclosures could be excessive and obscure the most useful information within a set of financial statements. This is against the backdrop of a recent effort by the IASB on excessive disclosures in financial statements. They are therefore unsure of the rationale for the implementation of a separate or combined integrated report.

Required:
Discuss the extent to which statements of cash flow provide stakeholders with useful information about an entity and whether this information would be improved by the entity introducing an Integrated Report. (6 Marks)

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  • 9 Marks

CR – May 2017 – L3 – Q7a – Revenue Recognition (IFRS 15)

Itemize and discuss the five-step model for revenue recognition under IFRS 15.

Megida hopes to obtain contracts from both the private and public sectors following the new government economic initiatives. The company’s revenue had always been accounted for in line with IAS 18, as the company had adopted IFRS. Some directors of Megida understand that with the introduction of IFRS 15: Revenue from Contracts, the way revenue from contracts is recognized may change. In particular, one of them who attended an IFRS training organized by the Institute of Chartered Accountants of Nigeria (ICAN) heard about IFRS 15 and its five-step model for revenue recognition but did not understand.

Required:
Itemize and briefly discuss the FIVE-step model approach to revenue recognition under IFRS 15. (9 Marks)

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  • 7 Marks

CR – May 2017 – L3 – Q6b – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Distinguish between liability and equity under IAS 32 with examples.

It is important for entities to understand and properly classify their financial instruments. This is because some financial instruments may have features of both debt and equity, which can lead to inconsistency in reporting. To this end, financial reporting standards provide guidance on the difference between financial instruments classified as equity and liabilities.

Required:
With relevant examples, distinguish between liability and equity under IAS 32: Financial Instruments Presentation. (7 Marks)

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  • 8 Marks

CR – May 2017 – L3 – Q6 – Fair Value Measurement (IFRS 13)

Identify the fair value hierarchies under IFRS 13 and distinguish between principal and most advantageous markets.

The International Accounting Standards Board (IASB) aims at enhancing the guidance available for assessing fair value in order to increase consistency and comparability in fair value measurements and related disclosures. To this end, fair value measurements are categorized into a three-level hierarchy, based on the type of inputs to the valuation techniques used in IFRS 13. IFRS uses the terms principal or most advantageous market.

Required:

(i) What are the fair value hierarchies under IFRS 13? (3 Marks)

(ii) Distinguish between the principal and most advantageous market and state how price is determined in the principal market taking into consideration transport and transaction costs. (5 Marks)

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  • 5 Marks

CR – May 2017 – L3 – Q5c – Ethical Issues in Corporate Reporting

Identify the contents of a corporate governance report in annual reports of quoted companies.

Institutional investors, if not all investors, need information about corporate governance in order to make rational and reasonable investment decisions. As such, the Securities and Exchange Commission (SEC) of Nigeria requires that the annual reports of all quoted companies should include a corporate governance report.

Required:
Identify the contents of such a corporate governance report. (5 Marks)

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  • 10 Marks

CR – May 2017 – L3 – Q5 – Integrated Reporting

Identify voluntary disclosures in annual reports and discuss reasons for and limitations of such disclosures.

An annual report is a comprehensive report on a company’s activities intended to give information about the company’s activities and financial performance. In addition to the audited financial statements, annual reports contain a great deal of extra information which could be financial and non-financial. The extra information provided may be required by law, hence, it is mandatory. However, many companies provide additional information not required by law, on a voluntary basis.

Required:

(a) Identify THREE of such reports that are voluntarily disclosed in annual reports of Nigerian companies. (3 Marks)

(b) Why would a company disclose information not required by law in its annual report? Propose FOUR reasons for and give any TWO limitations of such disclosures. (7 Marks)

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  • 20 Marks

CR – May 2017 – L3 – Q4 – Revenue Recognition (IFRS 15)

Advise on the correct accounting treatment for transactions involving contracts, licences, and purchase of components.

Dango Plc is a conglomerate company operating in Nigeria with diverse interests across Africa. It prepares its financial statements in accordance with International Financial Reporting Standards with a year-end of September 30. The following transactions relate to Dango Plc.

(a) In February 2016, Dango Plc won a significant new contract to supply large quantities of rice to the government of Guyama, a small West African country, for the next two years. Under the terms of the arrangement, payment is made in cash on delivery once goods have been cleared by customs. The rice will be delivered in batches four (4) times every year, on April 1, July 1, October 1, and January 1. The batches for April 1, 2016, and July 1, 2016, amounting to N250 million and N380 million respectively, were delivered and paid. Dango incurred significant costs on customs duties for the first batch of delivery. The October 1 batch, valued at N520 million, was shipped prior to the year-end but delivered and paid for on October 1, 2016.

(b) On October 1, 2010, a 12-year licence was awarded to Dango Plc by the Federal Government to be the sole manufacturer of a chemical used in the Nigerian pharmaceutical industry. The licence was recognised on that date at its fair value of N196 million. The award of the licence motivated Dango Plc in 2011 to purchase a division of another Nigerian competitor company making similar products. Goodwill of N240 million was recognised on the purchase of the division. Dango Plc merged the activities of the newly acquired division with its own to create a specialist chemical sub-division, which it now classifies as a separate cash-generating unit. By 2016, the revenue of this cash-generating unit now amounts to 5% of the Group’s revenue.

(c) Dango Plc buys raw materials from overseas suppliers. It has recently taken delivery of 1,000 units of component X, used in the production of chemicals. The quoted price of component X was N1,200 per unit, but Dango Plc has negotiated a trade discount of 5% due to the size of the order. The supplier offers an early settlement discount of 2% for payment within 30 days, and Dango Plc intends to achieve this. Import duties of N60 per unit must be paid before the goods are released through customs. Once the goods are released, Dango Plc must pay a delivery cost of N5,000 to have the components taken to its warehouse.

Required:
Write a report to the directors advising them on the correct accounting treatment of the above transactions in the financial statements for the year ended September 30, 2016, in accordance with the provisions of the relevant standards.

Note: You may consider the relevance of the following standards to the transactions: IAS 20, IAS 2, IAS 38, IFRS 3, and IFRS 15.

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  • 5 Marks

CR – May 2017 – L3 – Q3c – Impairment of Assets (IAS 36)

Allocate an impairment loss across assets in a cash-generating unit based on IAS 36.

A cash-generating unit holds the following assets:

Asset Value (N’Million)
Goodwill 160
Patent 320
Property, Plant and Equipment 480

An annual impairment review is required as the cash-generating unit contains goodwill. The most recent review assesses its recoverable amount to be N720 million. An impairment loss of N240 million has been incurred and has been recognised in profit or loss.

Required:
Show how the value of the assets held by the cash-generating unit will change after the impairment test based on the information provided above.

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  • 8 Marks

CR – May 2017 – L3 – Q3b – Impairment of Assets (IAS 36)

Identify indicators of impairment and discuss how to test for impairment of assets with dependent cash flows.

IAS 36 stipulates how a company should test for impairment of assets. A multinational oil marketing company operating in Nigeria is not sure how to test for impairment of its assets, especially those that do not generate cash flows that are independent of other assets.

Required:

(i) Identify TWO external and TWO internal indicators that an asset of the multinational oil company may have been impaired. (2 Marks)

(ii) Briefly discuss how the multinational oil company should test for impairment of assets that do not generate independent cash flows. (6 Marks)

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  • 7 Marks

CR – May 2017 – L3 – Q3a – Impairment of Assets (IAS 36)

Discuss why FRCN should focus on impairment of non-financial and deferred tax assets during economic recession.

The economic environment in the country has been very harsh, and it is now common knowledge that the economy is in a recession. This downturn impacts the income-generating capacity of companies, particularly in industries experiencing a significant decline in fortunes. Consequently, financial reporting regulators must closely examine evidence of impairment of assets in financial statements submitted by such companies.

Required:
Discuss briefly the reasons why the Financial Reporting Council of Nigeria (FRCN) should focus on the impairment of non-financial assets and deferred tax assets of listed companies in Nigeria during this period of slow economic growth. Also, outline the key areas entities should focus on when accounting for these items.

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