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  • 1 Marks

BMIS – L1 – SA – Q13.3 – Professional ethics in accounting and business

Identifies unethical conduct in presenting misleading financial reports.

The finance director of a large public company, Zenith Corp, presents a financial report to the board of directors, with a view to the company issuing a statement about its financial prospects to the stock market. The director knows that the information in the report is incorrect and materially misleading. The finance director is acting unethically by failing to comply with the principle of:

A   professional competence

B   integrity

C   technical standards

D   professional behaviour

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  • 10 Marks

BCL – L1 – Q111 – Governance and ethical issues relating to business

Explain four key functions of an audit committee in corporate governance.

Explain FOUR (4) functions of an audit committee of the Board.

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  • 25 Marks

FR – L2 – Q98 – Consolidated Financial Statements

Prepare Kari Plc's consolidated statement of financial position as at 31 March 20X4, accounting for subsidiaries and associates.

Kari Plc acquired 90% of Kane Ltd’s GH$1 ordinary shares on 1 April 20X2 paying GH$3.00 per share. The balance on Kane Ltd’s retained earnings at this date was GH$800,000. On 1 October 20X3, Kari Plc acquired 30% of Kora Ltd’s GH$1 ordinary shares for GH$3.50 per share. The statements of financial position of the three companies at 31 March 20X4 are shown below:

Kari Plc Kane Ltd Kora Ltd
GH$000 GH$000 GH$000 GH$000 GH$000 GH$000
Non-current assets
Property, plant and equipment 8,050 3,600 1,650
Investments 4,000 910 nil
12,050 4,510 1,650
Current assets
Inventory 830 340 250
Accounts receivable 520 290 350
Bank 240 nil 100
1,590 630 700
Total assets 13,640 5,140 2,350
Equity and liabilities
Equity:
Ordinary shares of GH$1 each 5,000 1,200 600
Reserves:
Retained earnings b/f 6,000 1,400 900
Profit year to 31 March 20X4 1,400 600 300
7,400 2,000 1,200
12,400 3,200 1,800
Non-current liabilities
10% Loan notes 500 240 nil
Current liabilities
Accounts payable 420 960 350
Taxation 220 250 100
Overdraft nil 490 nil
640 1,700 450
Total equity and liabilities 13,640 5,140 2,350

The following information is relevant:
(i) The fair value of the non-controlling interest in Kane Ltd at the date of acquisition was GH$2.50 per share.
(ii) In January 20X4 Kari Plc sold goods to Kora Ltd for GH$65,000. These were transferred at a mark-up of 30% on cost. Two thirds of these goods were still in the inventory of Kora Ltd at 31 March 20X4.
(iii) To facilitate the consolidation procedures the group insists that all inter-company current account balances are settled prior to the year-end. However a cheque of GH$40,000 from Kane Ltd to Kari Plc was not received until early April 20X4. Inter-company balances are included in accounts receivable and payable as appropriate.
(iv) Kora Ltd is to be treated as an associated company of Kari Plc.
(v) An impairment test at 31 March 20X4 on the consolidated goodwill of Kane Ltd and Kora Ltd concluded that it should be written down by GH$468,000 and GH$12,000 respectively. No other assets were impaired.

Required
(a) Prepare the consolidated statement of financial position of Kari Plc as at 31 March 20X4.

(b) Discuss the matters to consider in determining whether an investment in another company constitutes associated company status.

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  • 20 Marks

FR – L2 – Q90 – Business Combinations

Prepare goodwill calc and consol. stmt of profit/loss for Vantage Ltd's 90% acquisition of Green Ltd, incl. fair value adj and intragroup sales.

Below is the formatted response for Question 90 from the provided documents, adhering to the specified structure and requirements. The question has two parts (90a and 90b), which are treated as separate questions since they can stand alone. The tables, financial statements, and answers are rendered exactly as in the attachment, with only the names of the companies and dates altered for copyright purposes. A summary report of changes is included at the end.

====================================================================== Question Title: FR – L2 – Q90a – Business Combinations
Level: LEVEL 2
Professional Bodies: Institute of Chartered Accountants, Ghana (ICAG)
Programs: PROFESSIONAL PROGRAM
Subjects: Financial Reporting
Topics: Business Combinations (IFRS 3)
Total Marks: 15
Question Tags: Consolidation, Goodwill, Non-controlling Interest, Fair Value, Intragroup Transactions, Associates
Question Short Summary: Prepare goodwill calc and consol. stmt of profit/loss for Vantage Ltd’s 90% acquisition of Green Ltd, incl. fair value adj and intragroup sales.

Question:

On 1 January 20X9, Vantage Ltd acquired 18m of the equity shares of Green Ltd in a share exchange in which Vantage Ltd issued two new shares for every three shares it acquired in Green Ltd. This gave Vantage Ltd a holding of 90%. Additionally, on 31 December 20X9, Vantage Ltd will pay the shareholders of Green Ltd GH¢1.76 per share acquired. Vantage Ltd’s cost of capital is 10% per annum.

At the date of acquisition, shares in Vantage Ltd and Green Ltd had market prices of GH¢6.50 and GH¢2.50 each respectively.

Statement of Profit or Loss for the year ended 30 September 20X9

Vantage Green
GH¢’000 GH¢’000
Revenue 129,200 76,000
Cost of sales (102,400) (52,000)
Gross profit 26,800 24,000
Distribution costs (3,200) (3,600)
Administrative expenses (7,600) (4,800)
Investment income 1,000 –
Finance costs (840) –
Profit before tax 16,160 15,600
Income tax expense (5,600) (3,200)
Profit for the year 10,560 12,400

Equity as at 1 October 20X8

Vantage Green
Stated capital 120,000 30,000
Income surplus 108,000 12,400

The following information is relevant:

(i) At the date of acquisition the fair values of Green Ltd’s assets and liabilities were equal to their carrying amounts with the exception of two items:

  1. An item of plant had a fair value of GH¢3.6 million above its carrying amount. The remaining life of the plant at the date of acquisition was three years. Depreciation is charged to cost of sales.
  2. Green Ltd had a contingent liability which Vantage Ltd estimated to have a fair value of GH¢900,000. This has not changed as at 30 September 20X9. Green Ltd has not incorporated these fair value changes into its financial statements.

(ii) Vantage’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, Green Ltd’s share price at the date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.

(iii) Sales from Vantage Ltd to Green Ltd throughout the year ended 30 September 20X9 had consistently been GH¢1.6 million per month. Vantage Ltd made a mark-up of 25% on these sales. Green Ltd had GH¢3 million of these goods in inventory as at 30 September 20X9.

(iv) Vantage Ltd’s investment income is a dividend received from its investment in a 40% owned associate which it has held for several years. The underlying earnings for the associate for the year ended 30 September 20X9 were GH¢4 million.

Required

(a) Calculate the goodwill arising on the acquisition of Green Ltd and prepare the consolidated statement of profit or loss for Vantage Ltd for the year ended 30 September 20X9.

(b) Discuss the matters to consider in determining whether an investment in another company constitutes associated company status.

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  • 20 Marks

FR – L2 – Q75 – Statement of Cash Flows

Prepare a cash flow statement for Apex Ltd for 20X9 per IAS 7 and analyze gross profit margin changes.

(a) Apex Ltd is a wholesaler and retailer of office furniture. Extracts from the company’s financial statements are set out below:

Statement of profit or loss and other comprehensive income for the year ended:

31 March 20X9 31 March 20X8
GH₵’000 GH₵’000 GH₵’000 GH₵’000
Revenue: 12,800 26,500
53,000 65,800 28,500 55,000
Cost of sales (43,800) (33,000)
Gross profit 22,000 22,000
Operating expenses (11,200) (6,920)
Finance costs:
– loan notes (380) (180)
– overdraft (220) (600) – (180)
Profit before tax 10,200 14,900
Income tax expense (3,200) (4,400)
Profit for the year 7,000 10,500
Other comprehensive income:
Gain on property revaluation 5,000 1,200
Total comprehensive income 12,000 11,700

Statement of changes in equity for the year ended 31 March 20X9

Stated Capital GH₵’000 Capital Surplus GH₵’000 Income Surplus GH₵’000 Total GH₵’000
Balances b/f 8,500 2,500 15,800 26,800
Share issue 12,900 12,900
Comprehensive income 5,000 7,000 12,000
Dividends paid (4,000) (4,000)
Balances c/f 21,400 7,500 18,800 47,700

Statements of financial position as at 31 March:

20X9 GH₵’000 20X9 GH₵’000 20X8 GH₵’000 20X8 GH₵’000
Assets
Non-current assets
Property, plant and equipment 43,200 30,600
43,200 30,600
Current assets
Inventories 7,800 5,600
Trade receivables 8,900 4,800
Cash and cash equivalents 600 1,200
17,300 11,600
Total assets 60,500 42,200
Equity and liabilities
Equity
Stated capital 21,400 8,500
Capital surplus 7,500 2,500
Income surplus 18,800 15,800
47,700 26,800
Non-current liabilities
Loan notes 5,000 3,000
Current liabilities
Trade payables 4,800 6,900
Bank overdraft 600 1,500
Taxation 2,400 4,000
7,800 12,400
Total equity and liabilities 60,500 42,200

The following information is also relevant:
(i) During the year, property, plant and equipment costing GH₵2,600,000 was acquired.
(ii) The depreciation charge for the year to 31 March 20X9 was GH₵2,800,000. There were no disposals of non-current assets during the year.
(iii) The increase in loan notes was due to an issue of further notes at par on 1 April 20X8.

Required:
Prepare a statement of cash flows for Apex Ltd for the year ended 31 March 20X9 in accordance with IAS 7, using the indirect method.

(b) In the year to 31 March 20X9, the directors of Apex Ltd decided to source their supplies from a new supplier located in Kumasi. The new supplier offered a 10% reduction in the cost of purchases compared with the previous supplier. However, the new supplier offered a shorter period of credit than the previous supplier (all purchases are on credit). In order to encourage higher sales, Apex Ltd increased its credit period to its customers, and some of the cost savings (on trade purchases) were passed on to customers by reducing selling prices on both cash and credit sales by 5% across all products.

Required:
(i) Calculate the gross profit margin that you would have expected Apex Ltd to achieve for the year ended 31 March 20X9 based on the selling and purchase price changes described by the directors. (2 marks)
(ii) Comment on the directors’ surprise at the unchanged gross profit and suggest what other factors may have affected gross profit for the year ended 31 March 20X9.

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  • 15 Marks

FR – L2 – Q74 – Statement of Cash Flows

List four advantages of cash flow accounting as per IAS 7.

IAS 7 Statement of Cash Flows states that additional information may be relevant to users in understanding the financial position and liquidity of an entity.

(a) State FOUR advantages of cash flow accounting.

(b) Highlight THREE of the disclosures which are required by the Standard (with comments) by the management of the entity when preparing the statement of cash flow

(c) Nexis Limited’s statement of profit or loss for the year ended 31 December 20X4 and statement of financial position as at 31 December 20X3 and 20X4 are as follows:

NEXIS LIMITED
Statement of profit or loss for the year ended 31 December 20X4

GH¢’m
Revenue 360
Raw Materials consumed 35
Staff costs 47
Depreciation 59
Loss on disposal of non-current assets 9
150
Operating profit before interest and tax 210
Interest payable 14
Profit before tax 196
Taxation 62
134

NEXIS LIMITED
Statement of Financial Position as at 31 December 20X4

20X4 GH¢’m 20X3 GH¢’m
Non-Current Assets
Cost 798
Depreciation 159
639
Current Assets
Inventory 12 10
Trade receivable 38 29
Bank 24 28
74 67
Total Assets 713
Equity and liabilities
Share capital 198 182
Retained earnings 358 291
556 473
Non-current liabilities
Long-term loans 100 250
Current liabilities
Trade payables 6 3
Taxation 51 43
57 46
Total equity and liabilities 713

Dividend paid was GH¢33 million.
During the year, the company paid GH¢45 million for a new piece of machinery.

Required
Prepare a Statement of Cash Flows for Nexis Limited for the year ended 31 December 20X4, in accordance with the requirements of IAS 7, using the indirect method.

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  • 20 Marks

FR – L2 – Q69 – Presentation of Financial Statements

Prepare Nova Bekasi Ltd's statement of profit or loss and financial position for 20X5 per IAS 1, considering inventory, depreciation, tax, and goodwill impairment.

NOVA BEKASI LIMITED
The list of balances of Nova Bekasi Limited shows the following balances at 31 December 20X5.

Dr GH₵’000 Cr GH₵’000
Share capital (600,000 shares) 320
General reserve 20
Accumulated profit 1 January 20X5 50
Inventory (goods for resale) at 1 January 20X5 60
Revenue 1,000
Purchases 540
Purchases returns 26
Sales returns 28
Carriage outwards 28
Warehouse wages 80
Sales representatives salaries 60
Administrative wages 40
Warehouse plant and equipment – cost 126
Accumulated depreciation – 1 January 20X5 50
Delivery vehicle hire 20
Goodwill 100
Distribution expenses 10
Administrative expenses 30
Directors’ salaries (charge to administrative expenses) 30
Rental income 16
Trade receivables 330
Cash at bank 60
Trade payables 60
1,542 1,542

Additional information
(1) Inventory (goods for resale) at 31 December 20X5 amounted to GH₵100,000.
(2) Annual depreciation on warehouse plant and equipment of GH₵32,000 should be provided.
(3) Income tax for 20X5 should be taken as GH₵50,000.
(4) The recoverable amount of goodwill was only GH₵90,000.

Required
Prepare the company’s statement of profit or loss for the year to 31 December 20X5 and a statement of financial position at that date in accordance with IAS 1 Presentation of Financial Statements.

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  • 30 Marks

FR – L2 – Q63 – Earnings Per Share

Calculate EPS for Accra Trust for 20X8 and 20X9, including comparatives, after share issues.

(a) (i) The issued share capital of Accra Trust, a publicly listed company on the Accra Stock Exchange, at 31st March 20X7 was GH¢10 million. Its shares are denominated at 25 pesewas each. Accra Trust’s earnings attributable to its ordinary shareholders for the year ended 31st March 20X7 were also GH¢10 million, giving an earnings per share of 25 pesewas.

Year ended 31st March 20X8
On 1st July 20X7 Accra Trust issued eight million ordinary shares at full market price. On 1st January 20X8 a bonus issue of one new ordinary share for every four ordinary shares held was made. Earnings attributable to ordinary shareholders for the year ended 31st March 20X8 were GH¢13.8 million.

Year ended 31st March 20X9
On 1st October 20X8 Accra Trust made a rights issue of shares of two new ordinary shares at a price of GH¢1.00 each for every five ordinary shares held. The offer was fully subscribed. The market price of Accra Trust’s ordinary shares immediately prior to the offer was GH¢2.40 each. Earnings attributable to shareholders for the year ended 31st March 20X9 were GH¢19.5 million.

Required:
Calculate Accra Trust’s earnings per share for the years ended 31st March 20X8 and 20X9 including comparative figures.

(a) (ii) On 1st April 20X9 Accra Trust issued GH¢20 million 8% convertible loan stock at par. The terms of the conversion (on 1st April 20Y2) are that for every GH¢100 of loan stock, 50 ordinary shares will be issued at the option of loan stockholders. Alternatively, the loan stock will be redeemed at par for cash. Also, on 1st April 20X9 the directors of Accra Trust were awarded share options on 12 million ordinary shares exercisable from 1st April 20Y2 at GH¢1.50 per share. The average market value of Accra Trust’s ordinary shares for the year ended 31st March 20X9 was GH¢2.50 each. The income tax rate is 25%. Earnings attributable to ordinary shareholders for the year ended 31st March 20X9 were GH¢25,200,000. The share options have been correctly recorded in the statement of profit or loss.

Required:
Calculate Accra Trust’s basic and diluted earnings per share for the year ended 31st March 20X9 (comparative figures are not required).
You may assume that both the convertible loan and the directors’ options are dilutive.

(b) Nsawam Ltd issued 3,000 convertible bonds at par. The bonds are redeemable in 4 years’ time at their par value of GH¢100 per bond. The bonds pay interest annually in arrears at an interest rate (based on nominal value) of 5%. Each bond can be converted at the maturity date into 5 GH¢1.00 shares. The prevailing market interest rate for four-year bonds that have no right of conversion is 8%.

The present value at 8% of GH¢1 receivable at end of:
Year 1 0.926
Year 2 0.857
Year 3 0.794
Year 4 0.735

Required:
Show the initial accounting treatment of the bond in accordance with International Financial Reporting Standards (IFRS Accounting Standards).

(c) You are the finance director of ABC Company. ABC is preparing its financial statements for the year ended 31st December 20X9. The following item has been brought to your attention:

ABC acquired the entire share capital of XYZ Ltd during the year. The acquisition was achieved through a share exchange. The terms of the exchange were based on the relative values of the two companies obtained by capitalizing the companies’ estimated cash flows. When the fair value of XYZ’s Ltd identifiable net assets was deducted from the value of the company as a whole, its goodwill was calculated at GH₵2.5 million. A similar exercise valued the goodwill of ABC at GH₵4 million. The directors wish to incorporate both goodwill values in the companies’ consolidated financial statements.

Required:

Describe how ABC should treat the item in its financial statements for the year ended 31st December 20X9 commenting on the directors’ views, where appropriate.

(d) As a newly qualified accountant with The Institute of Chartered Accountants (Ghana) (ICAG), you are asked to make a short presentation to the rest of the staff in the accounting and finance department of your employer who are themselves yet to join ICAG as students about the standard setting process adopted by the International Accounting Standards Board.

Required:

Discuss the standard setting process as adopted by the IASB to these junior staff.

(e) The functional currency according to IAS 21 The Effects of Changes in Foreign Exchange Rates is the currency of the primary economic environment where the entity operates.

Required:

Identify THREE factors in accordance with IAS 21 that an entity will consider in determining its functional currency.

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  • 12 Marks

FR – L2 – Q60 – Financial Reporting Standards and Their Applications

Prepare a note for Bawku Limited’s financial statements disclosing related party transactions per IAS 24 for 20X4.

Bawku Limited is engaged in the manufacturing of specialized spare parts for automobile assemblers. During the year 20X4, the company has undertaken the following transactions with its related parties:
(i) Sales of GH₵500 million were made to its only subsidiary Akyem Auto Limited (AAL). Being the subsidiary, a special discount of GH₵25 million was allowed to AAL.
(ii) AAL returned spare parts worth GH₵5.5 million.
(iii) Raw materials of GH₵5 million were purchased from Asante Enterprises, which is owned by the wife of the CFO of Bawku Limited.
(iv) Equipment worth GH₵3 million was purchased from Kofi Limited (KL). The wife of the Production Director of the company is a director in KL.
(v) The company awarded a contract for supply of two machines amounting to GH₵7 million per machine to an associated company.
(vi) In 20X2, an advance of GH₵2 million was given to the Chief Executive of the company. During the year 20X4, he repaid GH₵0.3 million. The balance outstanding as on December 31, 20X4 was GH₵1,100,000.

Required
Prepare a note for inclusion in the company’s financial statements in accordance with the requirement of IAS 24 Related Party Disclosures.

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  • 20 Marks

FR – L2 – Q51 – Corporate Reporting and Compliance

Calculate Sharp Ltd's corporate income tax liability for 20X6 at a 34% tax rate.

SHARP LTD (IV)
Using the information provided in “Sharp Ltd III” and assume that Sharp Ltd is subject to a higher tax rate of 34% in 20X6.

Required
(a) Calculate the corporate income tax liability for the year ended 31st December 20X6.

(b) Calculate the deferred tax balance that is required in the statement of financial position as at 31st December 20X6.

(c) Prepare a note showing the movement on the deferred tax account and thus calculate the deferred tax charge for the year ended 31st December 20X6.

(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense for the year ended 31st December 20X6.

(e) Prepare a note to reconcile the product of the accounting profit and the tax rate to the tax expense for year ended 31st December 20X6.

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