Subject: FINANCIAL REPORTING

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  • 5 Marks

FR – Nov 2024 – L2 – Q5d – Revenue Recognition under IFRS 15

Analyzing distinct performance obligations in a software contract under IFRS 15.

Togbah LTD (Togbah), a software developer, enters into a contract with a customer to transfer the following:

  • Software licence
  • Installation service (includes changing the web screen for each user)
  • Software updates
  • Technical support for two years

Togbah sells the above separately. The installation service is routinely performed by other entities and does not significantly modify the software. The software remains functional without the updates and the technical support.

Required:
Explain whether the goods or services promised to the customer are distinct in terms of IFRS 15: Revenue from Contracts with Customers

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  • 5 Marks

FR – Nov 2024 – L2 – Q5c – Revenue Recognition under IFRS 15

Assessing whether goods and services in a contract are distinct under IFRS 15.

Togbah LTD (Togbah), a software developer, enters into a contract with a customer to transfer the following:

  • Software licence,
  • Installation service (includes changing the web screen for each user),
  • Software updates, and
  • Technical support for two years.

Togbah sells the above separately. The installation service is routinely performed by other entities and does not significantly modify the software. The software remains functional without the updates and the technical support.

Required:
Explain whether the goods or services promised to the customer are distinct in terms of IFRS 15: Revenue from Contracts with Customers.

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  • 5 Marks

FR – Nov 2024 – L2 – Q5b – Ethical Issues in Government Grants

Identification of ethical issues in recording a government grant and recommended corrective actions.

Dahn is a Chartered Accountant who works for a large Pharmaceutical Company, Nimely Company Ltd (Nimely), as an Assistant Financial Controller. The Financial Controller of Nimely is also a Chartered Accountant with more than ten years of experience.

During the year, Nimely received a vehicle worth GH¢800,000 from the government to support its operations. According to the Government Official who presented the vehicle to the management of Nimely, the company has been compliant in filing and paying its taxes.

At the year-end, the Financial Controller passed the following entry in the Tally Software of Nimely Company Ltd:

Dr Vehicle GH¢800,000
Cr Income GH¢800,000

Dahn explained to the Financial Controller that the grant should be treated in line with the provisions of IAS 20: Accounting for Government Grants and Disclosure of Government Assistance. It is the company’s policy that such grants should be treated as deferred income.

The Financial Controller agreed that the treatment should have been in line with IAS 20, but mentioned that the entries should not be changed since the current treatment may help them meet their profit targets.

It is Nimely’s policy to depreciate its vehicles at a rate of 25% per annum on a straight-line basis.

Required:

i) Identify the ethical issues involved.
ii) Recommend the appropriate actions to be taken by Dahn.

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  • 5 Marks

FR – Nov 2024 – L2 – Q5a – Barriers to Harmonisation of Accounting Standards

Identifying five barriers to the harmonisation of accounting standards across different countries.

Harmonisation of accounting standards is a topical issue and is needed due to the increasing globalisation and competitiveness of governments and services. Harmonisation ensures reliable and high-quality financial reporting. However, not all countries have been able to harmonise their accounting standards in line with the International Financial Reporting Standards.

Required:
State FIVE barriers to the harmonisation of accounting standards faced by these countries.

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  • 10 Marks

FR – Nov 2024 – L2 – Q4b – Financial Performance Assessment of Acquisition Targets

Assessment of financial performance and position of Suah LTD and Nagbe LTD to assist Dukuly LTD in an acquisition decision.

Dukuly LTD, a public entity, has been expanding through acquisitions. It is assessing two potential acquisition targets, Suah LTD and Nagbe LTD, both operating in the same industry.

The financial statements of Suah LTD and Nagbe LTD for the year ended 30 September 2024 have been provided, along with a set of financial ratios calculated for Suah LTD.

Required:
Using the calculated ratios for Nagbe LTD from Question 4a, assess the relative financial performance and financial position of Suah LTD and Nagbe LTD, to assist the directors of Dukuly LTD in making an acquisition decision.

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  • 10 Marks

FR – Nov 2024 – L2 – Q4a – Financial Ratios and Performance Evaluation

Calculation of key financial ratios for Nagbe LTD to compare with Suah LTD and evaluate financial performance.

Dukuly LTD, a public entity, has been expanding through acquisitions. It is assessing two potential acquisition targets, Suah LTD and Nagbe LTD, which operate in the same industry. The indicative price for acquiring either entity is GH¢12 million.

The financial statements for Suah LTD and Nagbe LTD are provided as follows:

Statement of Profit or Loss for the year ended 30 September 2024

Item Suah LTD (GH¢’000) Nagbe LTD (GH¢’000)
Revenue 25,000 40,000
Cost of Sales (19,000) (32,800)
Gross Profit 6,000 7,200
Distribution & Admin Expenses (1,250) (2,300)
Finance Costs (250) (900)
Profit Before Tax 4,500 4,000
Income Tax Expense (900) (1,000)
Profit for the Year 3,600 3,000

Statement of Financial Position as at 30 September 2024

Item Suah LTD (GH¢’000) Nagbe LTD (GH¢’000)
Non-Current Assets 4,800 10,300
Current Assets 4,800 8,700
Total Assets 9,600 19,000
Equity 2,600 5,600
Non-Current Liabilities 5,000 9,200
Current Liabilities 2,000 4,200
Total Equity & Liabilities 9,600 19,000

Additional Information:

  1. Carrying Amount of Plant Assets:

    • Suah LTD: GH¢4,800,000
    • Nagbe LTD: GH¢2,000,000

  2. The following ratios for Suah LTD are provided:

    Ratio Suah LTD
    Return on Capital Employed (ROCE) 62.5%
    Net Asset Turnover 3.3 times
    Gross Profit Margin 24.0%
    Profit Margin (Before Interest & Tax) 19.0%
    Current Ratio 2.4:1
    Inventory Holding Period 31 days
    Trade Receivables Collection Period 31 days
    Trade Payables Payment Period 24 days
    Gearing Ratio 65.80%
    Acid Test Ratio 1.6:1

Required:
Using the financial statements provided, calculate the corresponding ratios for Nagbe LTD to compare with Suah LTD.

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  • 20 Marks

FR – Nov 2024 – L2 – Q3 – Financial Statements Preparation

Preparation of Fahnbulleh LTD’s Statement of Comprehensive Income and Statement of Financial Position using IFRS.

Fahnbulleh LTD (Fahnbulleh) is a well-known company manufacturing thrill rides. During the current economic climate, Fahnbulleh has experienced some difficulties and has had to close down its Merry Go Round division.

The company’s trial balance as at 31 October 2023 is as follows:

Account Description Dr (GH¢’000) Cr (GH¢’000)
Revenue 1,296,000
Cost of Sales 546,480
Distribution Costs 127,080
Administrative Expenses 142,560
Investment Income 28,080
Investment Property 270,000
Interest Paid 17,280
Income Tax 10,800
Property, Plant & Equipment (PPE) – Carrying Value at 1 Nov 2022 1,620,000
Inventories (31 October 2023) 108,000
Trade Receivables 135,000
Bank 64,800
Payables 43,200
Deferred Tax (1 Nov 2022) 75,600
8% Loan Note 432,000
Ordinary Share Capital (GH¢1 per share) 540,000
Retained Earnings (1 Nov 2022) 605,520
Totals 3,031,200 3,031,200

Additional Information:

  1. Revenue Adjustments:

    • Revenue includes VAT of GH¢72 million.

  2. Property, Plant & Equipment (PPE):

    • A building with a carrying value of GH¢54 million was revalued on 1 November 2022 to GH¢72 million.
    • The building had an estimated useful life of 25 years when purchased, and this has not changed after the revaluation.
    • All other PPE should be depreciated at 20% per annum (reducing balance method).
    • All depreciation should be charged to cost of sales.

  3. Closure of the Merry Go Round Division (Discontinued Operations):

    • Closure Date: 1 October 2023
    • Division’s Results (1 Nov 2022 – 1 Oct 2023):
    Item GH¢’000
    Revenue 58,800
    Cost of Sales 38,700
    Distribution Costs 12,240
    Administrative Expenses 11,880
    • The division’s net assets were sold at a loss of GH¢19.2 million, recorded in cost of sales.

  4. Investment Property Revaluation (IAS 40):

    • Investment property value increased by 5%, which should be incorporated into the financial statements.

  5. Income Tax and Deferred Tax (IAS 12):

    • The estimated income tax provision for the year: GH¢140.4 million.
    • Deferred tax liability should be adjusted for temporary differences (GH¢129.6 million) at a 25% tax rate.

  6. Damaged Inventory (IAS 2):

    • Inventory worth GH¢46 million was damaged.
    • It can be reconditioned at a cost of GH¢12 million and sold for GH¢52 million.
    • Appropriate adjustments should be made.

Required:

Prepare and present the Statement of Comprehensive Income for the year ended 31 October 2023 and the Statement of Financial Position as at 31 October 2023 for Fahnbulleh LTD.

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  • 3 Marks

FR – Dec 2022 – L2 – Q2d – Structured Entities

Justify whether Wesseh LTD qualifies as a structured entity under IFRS 12.

Under IFRS 12: Disclosure of Interests in Other Entities, a structured entity is defined as one designed so that voting or similar rights are not the dominant factor in deciding who controls the entity.

Wesseh LTD is an entity set up by a sponsoring bank to hold specific mortgages, securitised by that bank. The operation of Wesseh LTD is governed by an operating agreement that sets out the managerial structure and rules of operation.

Required:
Justify whether the above would meet the definition of a structured entity.

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  • 7 Marks

FR – Nov 2024 – L2 – Q2c – Intangible Assets and Their Measurement

Determining the correct accounting treatment for various intangible assets in Dolo LTD's financial statements, including licensing, software, and book rights.

Question:

Dolo LTD, a market leader in the pharmaceutical industry, incurred the following expenditures during the financial year ended 31 December 2023:

Expenditure Item Amount (GH¢’000) Additional Information
Licence to operate in the pharmaceutical industry (10-year validity from January 2023) 200 Intangible asset
Costs incurred in setting up a website for a new product 20 The website will be developed in 2024
Purchase of 295 personal computers on 1 July 2023 (three-year useful life) 840 Excludes software costs
Windows operating system (for 295 PCs) 530 Perpetual software license
Microsoft Office software (for 295 PCs) 24 Three-year software license
Induction training for new staff 430 Staff training for new hires
Book rights purchased from another entity a few years ago 90 The rights have an indefinite useful life
Independent valuation of book rights as of 31 Dec 2023 240 Valued by an independent expert

Dolo LTD’s policy is to use the revaluation model for intangible assets where a market valuation is available.

Required:
Determine the carrying amount of intangible assets at 31 December 2023, in accordance with IAS 38 – Intangible Assets and IFRS.

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  • 5 Marks

FR – Nov 2024 – L2 – Q2b – Events After the Reporting Period

Accounting treatment of a court ruling after the reporting period and its impact on Mulba LTD’s financial statements.

As a Trainee Financial Accountant working for Mulba LTD, a technology business, you have been asked by the Financial Controller to provide guidance on how to account for a variety of transactions that took place after the company’s fiscal year ended on December 31, 2023.

Mulba LTD was sued by a customer who was dissatisfied with the quality of a product delivered in June 2023. The court case was heard in late October 2023, but the judgment was delivered on 8 January 2024, ruling in favor of Mulba LTD. The ruling awarded the company legal costs of GH¢20,000 to cover solicitor’s fees.

The legal costs were paid by the customer to Mulba LTD on 12 January 2024.

Mulba LTD was doubtful of winning the case and had previously made a provision in its financial statements for the year ended 31 December 2023 as follows:

Account Debit (GH¢) Credit (GH¢)
Legal Fees – Administrative Expenses 25,000 –
Cost of Sales 35,000 –
Provisions – Current Liabilities – 60,000

Required:
In accordance with IAS 10: Events after the Reporting Period, advise the management of Mulba LTD on the proper accounting treatment of the above issue to ensure that the financial statements are prepared in compliance with IFRS.

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  • 20 Marks

FR – Nov 2019 – L2 – Q3 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Family Plc as of September 30, 2019, including the calculation of goodwill, unrealised profit, and non-controlling interests.

Family Plc. is the parent company of Children Limited. The statements of financial position of the two companies as at September 30, 2019, are presented below:

Statement of Financial Position as at September 30, 2019

Assets Family Plc Children Ltd
Office building complex 5,000 1,920
Plant and machinery 7,000 6,000
Investment in Children Ltd shares 6,028 –
Total Non-current Assets 18,028 7,920
Current Assets
Inventory 3,600 1,900
Trade receivables 4,100 1,700
Other receivables 300 20
Tax assets 0 100
Bank balances 1,440 840
Total Current Assets 9,440 4,560
Total Assets 27,468 12,480
Equity and Liabilities Family Plc Children Ltd
Ordinary shares of N1.50 each 21,600 9,600
Retained earnings 1,260 480
Total Equity 22,860 10,080
Current Liabilities
Trade payables 2,000 280
Other payables 928 200
Overdrafts 1,680 1,920
Total Current Liabilities 4,608 2,400
Total Equity and Liabilities 27,468 12,480

Additional Information:

  1. Family Plc acquired 4.8 billion shares in Children Limited a year ago when Children Limited had retained earnings of N144 million, and the fair value of the non-controlling interest was N3.396 billion. Profits were evenly distributed over the years.
  2. During the year ended September 30, 2019, Family Plc sold goods with an invoiced value of N576 million at cost plus 20% to Children Limited. Half of the goods were still in Children Limited’s inventory as at the end of the year.
  3. Children Limited owed Family Plc N72 million for goods purchased during the year.
  4. Included in the other payables is the proposed dividend of 2.5 kobo per share for Children Limited for the year ended September 30, 2019. Both companies agreed that the proposed dividend should be paid by the directors of Children Limited before consolidation.

Required:

Prepare the Consolidated Statement of Financial Position for Family Plc as at September 30, 2019.
(20 Marks)

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  • 15 Marks

FR – Nov 2019 – L2 – Q2b – Accounting for Income Taxes (IAS 12)

Calculate current and deferred tax for Dan Ruwa Nigeria Limited and prepare the statement of profit or loss.

b. Dan Ruwa Nigeria Limited is a company that specializes in the production of bottled and sachet water. The company was incorporated on January 1, 2018.

The summarised financial statements of the company for the year ended December 31, 2018, are as follows:

Extract of Statement of Profit or Loss for the year ended December 31, 2018:

Description N’000
Revenue 270,000
Administrative and other allowable expenses (138,000)
Accounting depreciation (11,000)
Net profit before taxation 121,000

Extract of Statement of Financial Position as at December 31, 2018:

Description N’000
Property, plant & equipment 48,000
Motor vehicle 12,000
Less: Depreciation (11,000)
Carrying amount 49,000
Description N’000
Ordinary share capital 17,000
Retained earnings 12,000
Other liabilities 20,000
Total 49,000

The Federal Inland Revenue Service (FIRS) granted the company a capital allowance on its non-current assets, which amounted to N15,000,000, and the company income tax rate is 30%.

Required:

i. Calculate the current income tax expense and the deferred tax liability balance that should be disclosed in the statement of financial position of the company as at December 31, 2018.
(10 Marks)

ii. Prepare the statement of profit or loss of Dan Ruwa Nigeria Limited showing the tax expense for the year ended December 31, 2018.
(5 Marks)

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  • 5 Marks

FR – Nov 2019 – L2 – Q2a – Accounting for Income Taxes (IAS 12)

Explain the concepts of current tax and deferred tax in accordance with IAS 12.

a. In accordance with IAS 12 on Income Tax, the income tax expense in the statement of profit or loss is composed of two tax components:

i. Current tax
ii. Deferred tax

Required:

Explain these two tax components.
(5 Marks)

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  • 12 Marks

FR – Nov 2019 – L2 – Q1c – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explain the factors required for selecting and applying accounting policies per IAS 8, and identify alternative policies for inventory and depreciation.

c. State the main factors that IAS 8 requires management of a company to consider in selecting and applying accounting policies in the absence of any IFRS and identify the alternative accounting policies on the following items in the financial statements:

i. Inventories
ii. Depreciation

(12 Marks)

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  • 16 Marks

FR – Nov 2019 – L2 – Q1b – Presentation of Financial Statements (IAS 1)

Prepare financial statements for Uchena Nigeria Plc, including profit or loss, changes in equity, and financial position.

The Chief Accountant of Uchena Nigeria plc has just forwarded the trial balance of the company to you for review before the preparation of draft financial statements for the year ended December 31, 2018.

The trial balance is as follows:

Description Debit (N’m) Credit (N’m)
Ordinary share capital 43,200
Revenue 125,280
Staff cost 18,720
Leasehold building 21,600
Patent rights 4,320
Work-in-progress (Jan 1, 2018) 9,000
Accum. Depreciation on building (Jan 1, 2018) 4,320
Inventories of finished goods (Jan 1, 2018) 11,160
Consultancy fee 3,168
Directors’ salaries 25,920
Computer at cost (Hardware) 3,600
Accum. Depreciation on computer (Jan 1, 2018) 1,440
Retained earnings (Jan 1, 2018) 8,712
Dividend paid 9,000
Cash and bank 31,680
Trade receivables 30,240
Trade payables 6,624
Sundry expenses 21,168
Totals 189,576 189,576

Additional information:

  1. On January 1, 2018, buildings were revalued to N25,920 million. This has not been reflected in the accounts.
  2. Computer (hardware) is depreciated over five years. Buildings are now to be depreciated over 30 years.
  3. The patent rights relate to a computer software with a 3-year life span.
  4. An allowance for bad debts of 5% is to be created.
  5. Closing inventories of finished goods are valued at N12,960 million. Work-in-progress has increased to N10,080 million.
  6. There is an estimated liability for current tax of N8,640 million, which has not been recognized.

Required:

  1. Prepare a draft statement of profit or loss (analyzing expenses by nature) for the year ended December 31, 2018. (6 Marks)
  2. Prepare a statement of changes in equity for the year ended December 31, 2018. (4 Marks)
  3. Prepare a statement of financial position as at December 31, 2018. (6 Marks)

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  • 12 Marks

FR – Nov 2019 – L2 – Q1a – Property, Plant, and Equipment (IAS 16)

Explain the classification and measurement differences between investment properties and property, plant, and equipment.

You are the Financial Controller of Uchena Nigeria plc. The company was established about 15 years ago. At the last annual general meeting of the company, a new Managing Director was appointed.

The new Managing Director is a non-finance executive with very little knowledge of accounting. He has requested for the past five years financial statements of the company for review.

He has prepared a list of issues based on his review as follows:

  1. When I look at the statement of financial position of one of the past financial statements, one of the categories of non-current asset is investment properties and another category is property, plant, and equipment, in which all other properties are included. It is certain that the company invested in properties, so why do you have two categories for them in the statement of financial position? How did you decide what goes where?
  2. A note to the financial statements states that investment properties are measured at their fair values and not depreciated. Don’t all non-current assets have to be depreciated over their estimated useful lives?
  3. Another note to the financial statements states that property included in the property, plant, and equipment is measured at cost less accumulated depreciation rather than at fair value. Shouldn’t all properties be measured in financial statements on a consistent basis?
  4. Finally, I can’t see from the financial statements where gains or losses relating to the measurement of investment properties are included; the profit statement includes two main components: profit or loss and other comprehensive income; where would the gains or losses go? Presumably, the treatment of gains or losses is the same for any non-current assets, which one is measured at fair value?

Required:

Provide answers to the issues raised by the Managing Director. You should justify your answers with reference to the relevant IFRS. (12 Marks)

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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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