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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  • 30 Marks

FR – May 2015 – L2 – SA – Q1 – Consolidated Financial Statements

Prepare consolidated financial statements for Unitarisation Plc and compute Gain on Bargain Purchase.

Unitarisation Plc is a successful Nigerian Company that recently amended its objects clause to promote national unity and encourage anti-terrorism compliance. The company acquired 60% of the equity share capital of Famous Plc to further this mission. Summarised draft financial statements of the two companies are as follows:

Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 October 2014

Unitarisation Plc (N’m) Famous Plc (N’m)
Revenue 51,000 25,200
Cost of Sales (37,800) (19,200)
Gross Profit 13,200 6,000
Distribution Costs (1,200) (1,200)
Administrative Expenses (3,600) (1,920)
Finance Costs (180) (240)
Profit before Tax 8,220 2,640
Income Tax Expense (2,820) (840)
Profit for the Year 5,400 1,800

Statement of Financial Position as at 31 October 2014

Unitarisation Plc (N’m) Famous Plc (N’m)
Non-current assets:
Property, Plant & Equipment 24,360 7,560
Current Assets 9,600 3,960
Total Assets 33,960 11,520
Equity & Liabilities:
Equity Shares of N1 each 6,000 2,400
Retained Earnings 21,240 3,900
Total Equity 27,240 6,300
Non-current Liabilities:
12% Loan Notes 1,800 2,400
Current Liabilities 4,920 2,820
Total Equity & Liabilities 33,960 11,520

Additional Information:

  1. Shares of Famous Plc were acquired on 1 May 2014, and the issue of shares was not recorded by Unitarisation Plc.
  2. There is cash in transit of N120,000,000 due from Unitarisation Plc to Famous Plc.
  3. Non-controlling interests are valued at full fair value; at acquisition, the fair value of non-controlling interests in Famous Plc was N3,540,000,000.
  4. Famous Plc’s assets’ fair value equaled carrying amounts at acquisition except for one equipment valued N1,200,000,000 above its carrying amount with a 5-year remaining life, using straight-line depreciation.
  5. The acquisition of 60% of Famous Plc’s shares was settled via a share exchange of two shares in Unitarisation Plc for three shares in Famous Plc, valued at N6 per share.
  6. Post-acquisition, Unitarisation Plc bought goods from Famous Plc for N4,800,000,000 with a 40% markup; N3,120,000,000 of these goods were unsold by year-end.
  7. Famous Plc’s trade receivables included N360,000,000 from Unitarisation Plc, with a discrepancy in Unitarisation’s payable ledger.
  8. Profits or losses are assumed to accrue evenly.

Required:

  1. Prepare Unitarisation Plc Consolidated Profit or Loss and Other Comprehensive Income for the year ended 31 October 2014. (10 Marks)
  2. Prepare Unitarisation Plc Consolidated Statement of Financial Position as at 31 October 2014. (10 Marks)
  3. Prepare the Consolidated Statement of Changes in Equity for the year ended 31 October 2014. (6 Marks)
  4. Explain “Gain on Bargain Purchase” according to IFRS 3 on Business Combinations. (4 Marks)

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  • 8 Marks

FR – Nov 2022 – L2 – Q4d – Amortisation Schedule for Bond

Prepare amortisation schedule for Lagos State Government Bond and record journal entries on maturity date.

On January 1, 2020, an entity bought Lagos State Government Bond in the capital market for N575,000,000. The principal amount of the bond is
N500,000,000 and it is redeemable at par on December 31, 2025. The bond has a stated interest rate of 15% payable annually and an effective interest rate of 12%. Draft an amortisation schedule to indicate the amortised cost at the end of each year and the journal entries at the end of December 31, 2025

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  • 4 Marks

FR – Nov 2022 – L2 – Q4c – IFRS 9 Financial Instrument Classes

Describe two classifications of financial instruments under IFRS 9, including criteria for measurement.

Explain TWO classes of financial instruments in accordance with IFRS 9. (4 Marks)

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  • 7 Marks

FR – Nov 2022 – L2 – Q4a – IFRS Issuance Process

Summary: Describe six steps in the issuance process of International Financial Reporting Standards (IFRS).

Describe SIX steps involved in the process of issuing International Financial Reporting Standards (IFRS). (6 Marks)

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  • 5 Marks

FR – Nov 2022 – L2 – Q3b – Bargain Purchase and IFRS 3 Review Requirements

Explanation of a bargain purchase and IFRS 3 items requiring review when gain from bargain purchase arises.

b. A gain from a bargain purchase may arise in the course of a business combination and when this happens, the acquirer must review or reassessthe procedure used to measure certain items at the acquisition date.
Required:
Explain the term “Gain from a bargain purchase” and identify the three
items stipulated in IFRS 3 that must be reviewed.

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  • 15 Marks

FR – Nov 2022 – L2 – Q3a – Consolidated Statement of Financial Position

Preparation of the consolidated statement of financial position for Food Plc and its subsidiary Eba Ltd as of September 30, 2020.

a. Food Plc has a subsidiary, Eba Limited. The statements of financial position of the companies as at September 30, 2020 are presented below:


Additional Information:
(i) Food PLC acquired four hundred and eighty million shares in Eba Limited two years ago when the balances in retained earnings and general
reserves were N60,000,000 and N48,000,000 respectively.
(ii) The fair value of non-controlling interests in Eba limited as at the acquisition date was N158,000,000.
(iii) During the year, goods costing N80,000,000 to Food PLC were transferred to Eba Limited. It is the policy of Food PLC to transfer goods at cost plus 25%. A quarter of these goods have been sold by Eba Limited at year end.
(iv) Part of the bills receivable have been discounted by Food PLC.
(v) The sum of N8,000,000 transferred by Eba Limited to Food PLC as part payment for indebtedness was received after the reporting date.
(vi) An impairment test revealed a loss of N16,000,000 on the goodwill arising on the acquisition of Eba Limited.
(vii) The carrying amount of the net assets of Eba Limited is N20,000,000 more than the fair value at acquisition date. This was due to the loss in value of the company’s machinery occasioned by change in technology. The machinery is depreciated at a flat rate of 15% on cost.
(viii) The nominal value of the ordinary shares of Food PLC are denominated in 50 kobo per share, while those of Eba Limited are 25 kobo each.

Required:
a. Prepare the consolidated statement of financial position of Food group as at September 30, 2020. (15 Marks)

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  • 9 Marks

FR – Nov 2022 – L2 – Q2 – Statement of Cash Flows

Prepare a statement of cash flows using the direct method for Obudu Nigeria Limited based on the given financial statements.

Financial statements and extract from the cashbook of Obudu Nigeria Limited for the year ended December 31, 2020 are summarised below:
Obudu Nigeria Limited Statement of profit or Loss for the year ended December 31, 2020

Obudu Nigeria Limited Statement of financial position as at December 31



Other Information
(i) The 8% loan notes have been partly redeemed. It is expected that the full redemption will be made in five years time.
(ii) A cash payment for insurance of N1million was omitted in the cash book and other records.
(iii) The investments are not easily realisable.
Required:
a. Prepare the statement of cash flows for the year ended December 31, 2020 using the direct method in accordance with IAS 7. (9 Marks)
b. Prepare a statement of reconciliation of the operating profit to cash flow from operations. (5 Marks)
c. Discuss the benefits of statement of cash flows information to users of financial statements.

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  • 30 Marks

FR – Nov 2022 – L2 – Q1 – Financial Performance Ratios

This question asks for the computation of key financial ratios and an analysis of the viability of acquiring controlling interests in two companies.

There has been agitation to stop importation of containers from China, to increase patronage of local industries. The Board of Favour PLC is planning to acquire 75% controlling interests in either Grace Limited or Blessing Limited which produce better and cheaper containers locally. As a trainee working in
Obokun Chartered Accountants, the Managing Partner has requested you to carry out performance score cards of the companies using accounting ratios to assess the viability of the acquisition.

Statement of comprehensive income for the year ended December 31, 2020:



Additional Information:
(i) Inventories as at December 31, 2019 were N60 million, N30 million and N50 Million and the current market prices, 30 kobo, 28 kobo and 10 kobo
for Favour Plc, Grace Limited and Blessing Limited respectively.
(ii) Purchases for cash within 365 days in the year 2020 were 10%, 20% and 40% of cost of sales for Favour Plc, Grace Limited and Blessing Limited
respectively.
Required:
a. Calculate the following ratios for Grace Limited and Blessing Limited.
i. Net profit margin
ii. Quick ratio
iii. Debt equity ratio
iv. Proprietary ratio
v. Earnings yield
vi. Net asset per share

b. Draft a technical report titled “Performance Scorecard‟ of Blessing Limited and Grace Limited and advise Favour Plc in which of the two companies it should acquire 75% controlling interests. (10 Marks)

c. The Chief Financial Officer (CFO) of Favour Plc noted that the records of Blessing Limited and Grace Limited are maintained using block chain technologies.

Required: Discuss the type of records that a company can maintain in blockchain and state TWO benefits of making use of this technology. (10 Marks)

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  • 15 Marks

FR – Nov 2022 – L2 – Q5 – Professional Behaviour and IAS 38 Conditions

Discuss professional behaviour and threats for accountants, and conditions for recognizing development costs.

(a) Explain briefly what is meant by professional behaviour and outline THREE threats that could affect the work of professional accountants. (5 Marks)

(b) IAS 38 prescribes the requirements for reporting intangible assets in the financial statements of an entity.

Required:
i. Explain FIVE conditions under which development costs can be recognised as intangibles in financial statements. (5 Marks)

ii. Highlight FIVE conditions, which should be considered to determine the useful life in the amortisation of intangible assets in the financial statements. (5 Marks)

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  • 3 Marks

FR – Nov 2022 – L2 – Q6a – Potential Ordinary Shares in EPS Calculation

Explain potential ordinary shares with three examples as per IAS 33.

IAS 33 – Earnings Per Share (EPS) requires entities to calculate basic and diluted earnings per share. However, diluted EPS and basic EPS will usually differ when there are potential ordinary shares in existence.
Required:

i. Explain the term “potential ordinary share” and provide THREE examples as stated in IAS 33. (3 Marks)
ii. Describe the procedure for ranking when there are several types of potential ordinary share in issue when calculating diluted EPS.
(3 Marks)

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