Tag (SQ): Financial Reporting

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  • 20 Marks

FR – L2 – Q50 – Corporate Reporting and Compliance

Calculate Sheen Ltd's corporate income tax liability for the year ended 31 December 20X6.

Continuing from the previous year. The following information is relevant for the year ended 31st December 20X6.
(a) Interest payable/Interest receivable
Sheen Ltd still has GH₵25,000 of 8% convertible loan stock in issue and still retains its holding in the debentures purchased in 20X5.
(b) Provision for warranty
During the year Sheen Ltd had paid out GH₵500 in warranty claims and provided for a further GH₵2,000.
(d) Development costs
During 20X6 Sheen Ltd has capitalised development expenditure of GH₵17,800 in accordance with the provisions of IAS 38. Assume that tax relief on this expenditure is taken in full in the period in which it is incurred.
(e) Further information
Profit before taxation
Depreciation charged
Tax allowable depreciation
175,000
18,500
24,700
(f) Entertainment
Sheen Ltd paid for a large office party during 20X6 to celebrate a successful first two years of the business. This cost GH₵20,000. Assume that this expenditure is not tax deductible.
Tax is chargeable at a rate of 30%.

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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  • 6 Marks

FR – L2 – Q44 – Provisions

Explain accounting treatment for decommissioning costs of a mining site under IAS 37, including calculations.

The following information relates to the financial statements of Kumasi Ltd for the year to 31 March 20X4.

The mining division of Kumasi Ltd has a 3 year operating licence from an overseas government. This allows it to mine and extract copper from a particular site. When the licence began on 1 April 20X3, Kumasi Ltd started to build on the site. The cost of the construction was GH¢500,000.

The overseas country has no particular environmental decommissioning laws. In response to the global sustainability agenda, Kumasi Ltd has developed its own policy for sustainable operations. It has made information about this policy public and has provided examples to demonstrate that it is a responsible company that believes in restoring mining sites at the end of the extraction period. The cost of removing the construction at the end of the three years is estimated to be GH¢100,000.

The cost of the site currently shown in the trial balance is GH¢500,000. The company has a cost of borrowing of 10%.

Required

Explain the correct accounting treatment for the above (with calculations if appropriate).

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  • 10 Marks

FR – L2 – Q38 – Financial Reporting Standards and Their Applications

Define non-current assets held for sale and discontinued operations, and explain the usefulness of discontinued operations information.

(a) State the definition of both non-current assets held for sale and discontinued operations and explain the usefulness of information for discontinued operations.

Adenta Holdings is in the process of preparing its financial statements for the year ended 31 October 20X4. The company’s main activity is in the travel industry mainly selling package holidays (flights and accommodation) to the general public through the Internet and retail travel agencies. During the current year the number of holidays sold by travel agencies declined dramatically and the directors decided at a board meeting on 15 October 20X4 to cease marketing holidays through its chain of travel agents and sell off the related high-street premises. Immediately after the meeting the travel agencies’ staff and suppliers were notified of the situation and an announcement was made in the press. The directors wish to show the travel agencies’ results as a discontinued operation in the financial statements to 31 October 20X4. Due to the declining business of the travel agents, on 1 August 20X4 (three months before the year-end) Adenta Holdings expanded its Internet operations to offer car hire facilities to purchasers of its Internet holidays.

The following are Adenta Holdings’s summarised statement of profit or loss results – years ended 31 October:

20X4 Total 20X4 Travel Agencies 20X3 Total 20X3 Travel Agencies
Revenue 39,000 14,000 40,000 18,000
Cost of sales (36,000) (16,500) (32,000) (15,000)
Gross profit/(loss) 3,000 (2,500) 8,000 3,000
Operating expenses (2,600) (1,500) (2,000) (1,500)
Profit/(loss) for period 400 (4,000) 6,000 1,500

Required:

(b) Discuss whether the directors’ wish to show the travel agencies’ results as a discontinued operation is justifiable.

(c) Assuming the closure of the travel agencies is a discontinued operation, prepare the (summarised) statement of profit or loss of Adenta Holdings for the year ended 31 October 20X4 together with its comparatives.

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  • 12 Marks

FR – L2 – Q19 – Inventories

Calculate closing inventory of finished goods for Kintampo Healthcare Limited using the weighted average cost method.

Kintampo Limited produces a single product. On July 31, 20X5, the finished goods inventory consisted of 4,000 units valued at GH₵220 per unit and the inventory of raw materials was worth GH₵540,000. For the month of August 20X5, the books of account show the following:

Raw material purchases GH₵1,250,000
Direct labour GH₵350,000
Selling costs GH₵150,000
Depreciation on plant and machinery GH₵100,000
Distribution costs GH₵120,000
Factory manager’s salary GH₵80,000
Indirect labour GH₵60,000
Indirect material consumed GH₵40,000
Other production overheads GH₵90,000
Other accounting costs GH₵200,000
Other administration overheads GH₵180,000

Other information:
(i) 8,000 units of finished goods were produced during August 20X5.
(ii) The value of raw materials on August 31, 20X5 amounted to GH₵600,000.
(iii) There was no work-in-progress at the start of the month. However, on August 31, the value of work-in-progress is approximately GH₵250,000.
(iv) 5,000 units of finished goods were available in inventory as on August 31, 20X5.

Required:
Compute the value of closing inventory of finished goods as on August 31, 20X5 based on weighted average cost method.

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  • 22 Marks

FR – L2 – Q13 – Revenue Recognition

Explain how performance obligations are identified under IFRS 15 for a contract to supply goods and services.

13 Davies Ltd

Davies Ltd manufactures and sells machines and has a 31 December year-end.

Customers are required to pay a deposit of 10% on order. The remaining 90% is paid on delivery.

Machines are delivered to customers by a third party. Within one week after delivery, Davies Ltd’s employees install the machines on customers’ premises. The installation required is not complex and is capable of being performed by several alternative service providers. Installation costs 1% of the transaction price.

A fee for a three year servicing contract amounting to 6% of the transaction price, are included in the final invoice.

Required

(a) Explain how performance obligations are identified when deciding how to account for a contract to supply goods and services in accordance with IFRS 15.

(b) Identify and explain the performance obligations that should be identified in the above contract.

Construct journals for the year end to 31 December to account for a sale of a single machine with a selling price of GH¢1,000,000 in each of the following circumstances.

(c) Circumstance 1: A customer orders the machine on 30 November. It is delivered and installed on 10 January.

(d) Circumstance 2: A customer orders the machine on 30 November. It is delivered on 20 December and installed on 10 January.

(e) Circumstance 3: A customer orders the machine on 30 November. It is delivered on 20 December and installed on 30 December.

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  • 20 Marks

FR – L2 – Q12 – Revenue Recognition

State IFRS 15's core principle for revenue recognition and list the five steps to apply it.

12 SALE OF GOODS AND LEISURE FACILITIES
“Revenue is income arising in the course of an entity’s ordinary activities.”
IFRS 15 sets out principles to be applied in order to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.

Required
(a) State the core principle described by IFRS 15 in the recognition of revenue and list the five steps to be followed in applying this core principle.

(b) Zest Ltd runs a health club which provides sports and leisure facilities. It charges a fixed annual subscription, payable in advance, which entitles members to use most of the facilities (e.g. gym, swimming pool). Additional fees are payable for specific activities (e.g. sauna, squash courts) as used.
Explain in detail how Zest Ltd should recognise revenue from membership subscriptions and additional activities.

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  • 20 Marks

FR – L2 – Q9 – Professional and Ethical Issues in Financial Reporting

Identify ethical issues in two cases involving financial reporting decisions by ICAG accountants

TWO CASES

Case 1
Kofi Mensah has been on a two-year study sabbatical in Canada and this is his first job on returning to work. Kofi Mensah qualified as an ICAG chartered accountant just before his sabbatical. He worked in a medium-sized practice with wide experience of clients in the mining, manufacturing, and agricultural sectors.
Volta Assurance Limited is a subsidiary of a listed group involved in financial services. The financial controller of Volta Assurance Limited has been on long-term sick leave. Kofi Mensah has been offered an appointment as temporary financial controller three months before the 31 December 20X9 year-end.
Kofi Mensah would be responsible for preparing the financial statements for the year ended 31 December 20X9. Key areas of the financial statements include lessor accounting, financial instruments, and insurance contracts.
During his interview for the post, the group finance director told Kofi Mensah that the group is looking for a strong financial position and performance from the subsidiary and that if Kofi Mensah helps deliver it, he is sure to obtain a permanent post in the group.

Case 2
Kwame Osei is an ICAG Chartered Accountant and works as a financial accountant working for Kumasi Builders plc.
Kumasi Builders plc is about to finalise its financial statements for the year ended 31 December 20X9 and will release its results in two days’ time.
One of Kwame Osei’s tasks during the frantic year-end work was to perform an impairment review on certain assets owned by the company. There were indications of impairment, but Kwame Osei’s calculation of recoverable amount showed that no assets were impaired.
Kwame Osei has just read an article on spreadsheet error. This led him to review the spreadsheets that he built to perform the recoverable amount calculations, and he has found an error in the logic. This error, if corrected, would have led to the company recognising a material impairment loss.
The loss, if recognised, would lead to the profit figure falling below the level at which Kwame Osei’s bonus is triggered. He is also concerned that his mistake will compromise his future promotion prospects.

Required
Identify and explain the ethical issues arising in the above cases.

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  • 9 Marks

FR – L2 – Q5 – Conceptual Framework for Financial Reporting

Explain relevance, faithful representation, and comparability in financial information per IASB's Conceptual Framework.

CHAPTER TWO
Chapter 2 of the IASB’s Conceptual Framework states that in order to be useful for decision making purposes information must have certain characteristics. It goes on to describe both fundamental and enhancing qualitative characteristics of financial information.
Fundamental qualitative characteristics are relevance and faithful representation. Enhancing qualitative characteristics include comparability.

Required
Explain what is meant by relevance, faithful representation and comparability and how they make financial information useful.

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  • 20 Marks

PSAF – L2 – Q13.4 – Budget Performance Analysis

Prepare a budget performance report for Nkong District Assembly based on the 2023 revenue and expenditure extract.

(a)

Prepare a budget performance report of Anlo District Assembly based on the extract below.

Annual budget GH¢’000 Revised budget GH¢’000 Actual performance GH¢’000
Decentralised transfer 32,000 35,000 42,000
Internally generated fund 56,000 45,000 33,000
Compensation 23,000 20,000 25,700
Goods and services 13,000 18,000 24,000
Non-financial asset 18,000 15,000 12,000

Answer:
Anlo District Assembly
Revenue and expenditure extract of Anlo District Assembly for the year ended 31 December 2023

Revised Budget GH¢ Actual Performance GH¢ Budget Outturn GH¢ Budget Outturn percentage (%)
Decentralised transfer 35,000,000 42,000,000 7,000,000 20.00
IGF 45,000,000 33,000,000 (12,000,000) (26.67)
Compensation 20,000,000 25,700,000 (5,700,000) (28.50)
Goods and services 18,000,000 24,000,000 (6,000,000) (33.33)
Non-financial asset 15,000,000 12,000,000 3,000,000 20.00

(b)

Write a report analyzing the budget outturn whilst assessing the likely causes of the variances during the year and discuss the limitations of your analysis.

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  • 20 Marks

PSAF – L2 – Q13.2 – Financial Statements Discussion and Analysis

Explain the relevance of financial statement discussion and analysis for a public healthcare facility.

The management of a Central Healthcare Facility demands that the Director of Finance should ensure that the financial statements of the entity are laid before the oversight board together with financial statement discussion and analysis. However, some members of the board question the relevance of the request.

Required:
(a) As the Director of Finance, explain the relevance of the request to the healthcare facility.

(b) Discuss the five limitations of financial statement discussion and analysis.

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