Tag (SQ): Financial Statements

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  • 15 Marks

FR – L2 – Q10 – Accounting policies and changes in estimates

Show how a change in accounting policy for borrowing costs is reflected in the statement of changes in equity for 20X4 per IAS 8.

AccraTech Company has previously written off any expenditure on borrowing costs in the period in which it was incurred.
The company has appointed new auditors this year. They have expressed the view that the previous recognition of borrowing costs in the statement of profit or loss was in error. The company has decided to correct the error retrospectively in accordance with IAS 8.
The financial statements for 20X3 and the 20X4 draft financial statements, both reflecting the old policy, show the following:

Statement of changes in equity (extract)

20X3 20X4
Retained earnings Retained earnings
GH₵000 GH₵000
22,500 23,950
3,200 4,712
(1,750) (2,500)
23,950 26,162

Opening balance
Profit after tax for the period
Dividends paid
Closing balance

Borrowing costs written off were GH₵500,000 in 20X3 and GH₵600,000 in 20X4.
The directors have calculated that borrowing costs, net of depreciation which should have been included in property, plant and equipment had the correct policy been applied, are as follows:

GH₵000
At 30 December 20X2
At 31 December 20X3
At 31 December 20X4

Had the correct policy been in force depreciation of GH₵450,000 would have been charged in 20X3 and GH₵870,000 in 20X4.

Required
Show how the change in accounting policy must be reflected in the statement of changes in equity for the year ended 31 December 20X4. Work to the nearest GH₵000.

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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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  • 20 Marks

FR – L2 – Q6 – Conceptual Framework

Explain understandability, comparability, and the role of consistency in accounting policy changes in financial reporting.

The IASB’s Conceptual Framework for Financial Reporting states that the qualitative characteristics of financial statements are the attributes that make financial information useful.

Two of the enhancing qualitative characteristics of useful financial information contained in the IASB’s Conceptual Framework for Financial Reporting are understandability and comparability.

Required:

(a). Explain the meaning and purpose of the above characteristics in the context of financial reporting and discuss the role of consistency within the characteristic of comparability in relation to changes in accounting policy.

(b). Recognition in financial reporting is the process of incorporating into the financial statements an item that meets the definition of an element of financial statements and satisfies specified criteria.

Required:

State the criteria for recognition of an element of financial statements in financial reporting.

(c). The conceptual framework includes the measurement bases of the elements of the financial statements together with recognition criteria for them.

Required:

Explain the FOUR bases of measurement used in the financial statements.

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  • 10 Marks

FR – L2 – Q3 – Conceptual Framework for Financial Reporting

Appraise the validity of a statement claiming the statement of financial position is sufficient for assessing business performance, defining key terms.

“A statement of financial position is a snapshot of a business at a point in time. It shows the assets that an entity owns and the liabilities that it owes. This is all that is required to convey a business’s performance, position and adaptability.

As income generated and expenses incurred by a business are already reflected within the assets and liabilities shown in the statement of financial position, a statement of profit or loss is a superfluous statement.”

Required

Briefly appraise the validity of the above statement, defining the words underlined.

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  • 14 Marks

FM – L2 – Q121 – Cost of capital

Estimate the required rate of return for Kofi Textiles Ltd's equity stock, considering industry return and marketability risk.

Kofi Textiles Ltd is a Kumasi-based textile company owned and managed by its two founders. The company has been selling to only domestic consumers in Nigeria since inception. The founders think it is time to extend the operations of the company to foreign markets, particularly those in neighbouring West African countries. Moving into foreign markets requires additional financing and capabilities, which the company does not have. The owners have agreed on ceding 40% stake in their company to a strategic investor who would provide the additional financing and capabilities needed to compete successfully in the international business environment. However, they are not sure of what range of prices to accept for the shares they would give up.

Below is a summary of financial data for Kofi Textiles Ltd for the recent financial year:

Item Amount
Issued shares 2 million
After-tax profit GH₦’000 9,600
Total dividends GH₦’000 1,920
Property, plant and equipment GH₦’000 50,500
Current assets GH₦’000 25,300
Long-term borrowings GH₦’000 9,100
Current liabilities GH₦’000 11,100

The following information is relevant to the position and value of Kofi Textiles Ltd:
(1) The assets of Kofi Textiles Ltd were valued just after the recent financial statements were published. Inventories and trade receivables, which are included in current assets, were written down by GH₦80,000 and GH₦95,000 respectively. Property, plant and equipment were valued at GH₦52,400,000.
(2) Kofi Textiles Ltd falls into the textile and apparel industry. The average P/E ratio for listed equity stocks in the industry is 10. The average required return on listed equity stocks in the industry is 16%.
(3) Marketability of shares in Kofi Textiles Ltd is limited as its equity stock is not listed on the stock exchange. Consequently, investors demand a marketability risk premium of 7% above the industry average required return on equity in order to invest in the equity stock of Kofi Textiles Ltd.
(4) Earnings and dividends of Kofi Textiles Ltd are expected to grow by 5% every year to perpetuity.

Required:
(a) Estimate an appropriate required rate of return on the equity stock of Kofi Textiles Ltd.

(b) Estimate a range of suitable considerations for 40% stake in Kofi Textiles Ltd using the net assets method, P/E ratio method, and dividend valuation method.

Answer:

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  • 20 Marks

PSAF – L2 – Q13.1 – Financial statements discussion and analysis

Discuss four general considerations for financial statement discussion and analysis per RPS 2.

(a) Discuss the four general considerations of financial statement discussion and analysis under the RPS 2.

(b) Discuss the typical content of financial statement discussion and analysis in line with RPS 2.

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  • 20 Marks

PSAF – L2 – Q12.3 – International public sector accounting standards

Prepare consolidated financial statements and notes for National Health Services and its hospitals for 2023 per IPSAS.

GHANA HEALTH SERVICE

Statements of Financial Performance for the year ended 31st December 2023

GHS Kolebu Saint H
GHC’000 GHC’000 GHC’000
Revenue
Tax revenue 100,000
GoG receipt 2,000
Non-exchange revenue 100,000 2,000 3,000
Internally generated revenue 5,000 400 200
Exchange revenue 5,000 400 200
Total revenue 105,000 2,400 3,200
Expenses
Compensation for employees 40,000 600 500
Depreciation & amortisation 500 300 200
Goods and services 25,000 600 400
Finance costs 1,600 500 100
Total expenses 67,100 2,000 1,200
Surplus for the period 37,900 400 2,000

Statements of Financial Position for the year ended 31 December 2023

GHS Kolebu Saint H
GHC’000 GHC’000 GHC’000
Assets:
Cash & cash equivalent 25,000 800 500
Receivable: GHS 900
Receivable: Others 62,000 700 400
Inventories 12,000 300 200
Current assets 99,000 2,700 1,100
Property, plant & equipment 140,000 40,000 67,100
Investment- Saint H 60,000
Non-current assets 200,000 40,000 67,100
Total Asset 299,000 42,700 68,200
Liabilities
Payable: Kolebu 900
Payable others 60,000 8,000 3,000
Current borrowings 90,000 2,000
Current liabilities 150,900 10,000 3,000
Borrowing 45,000 10,000 5,000
Non-current liabilities 45,000 10,000 5,000
Total liabilities 195,900 20,000 8,000
Net asset (liabilities) 103,100 22,700 60,200

Net Asset/Equity:

GHS Kolebu Saint H
GHC’000 GHC’000 GHC’000
Contribution from owners 60,000
Accumulated Surplus (deficit) 103,100 22,700 200
Total Asset/Equity 103,100 22,700 60,200

Additional information
(i) The Ghana Health Services (GHS) is a government agency responsible for overseeing the health sector. The Kwadwo Teaching Hospital is funded through government appropriations and internally generated funds approved by Parliament. The GHS appoints most of the hospital’s board members on behalf of the government. All employees at Kwadwo receive their salaries from the Consolidated Fund.
(ii) On July 1, 2023, the GHS established the Blessed Hospital to provide high-quality healthcare services in the country. The GHS has fully funded the hospital’s operations through equity and debt guarantees and has also appointed the hospital’s governing board.
(iii) The appropriations to Kwadwo cover employee compensation and goods and services expenses at a ratio of 60% to 40%, respectively.
(iv) At the end of the reporting period, the GHS owed Kwadwo GHC900,000 for services rendered to its staff. The GHS has committed to paying this amount by the end of the second quarter of the following year.
(v) The separate financial statements of the GHS, Kwadwo, and Blessed Hospital are prepared using the same accounting policies.

Required:
Prepare in accordance with the relevant IPSASs:
(a) A consolidated statement of financial performance for the year ended 31 December 2023.
(b) A consolidated statement of financial position as at 31 December 2023.
(c) Note to the accounts.

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  • 14 Marks

PSAF – L2 – Q12.1 – International public sector accounting standards

Assess if Zamunda government controls Zamunda Transport Agency per IPSAS 35.

Zamunda Transport Agency
(a) (i) A government has established a Zamunda Transport Agency. The Zamunda Transport Agency has assumed many responsibilities previously held by the government. The agency is responsible for the regional transportation network in the metro and regional areas of the jurisdiction, including public transport and major roads and bridges. The agency receives approximately 2/3rds of its funding for operations from a share of the government’s fuel taxes and general tax revenues. The remainder of the revenue for operations comes from non-government sources such as fares, advertising, and property development. The government contributes toward rapid transit projects. The agency has raised capital through significant borrowings that are guaranteed by the government. The agency is allowed to operate autonomously; however, the agency’s mandate is established by legislation, and the government sets the regional transportation vision. The government has the power to appoint and remove a majority of the members of the board of directors of the Zamunda Transport Agency. The government has never exercised this power. The agency’s board of directors is responsible for hiring, compensating, and monitoring the performance of the management and for providing oversight of the agency’s strategic planning, finances, major capital projects, and operations. The government has the power to veto operating and capital budgets, including fares and capital financing plans.

Required:
In line with IPSAS 35 Consolidated Financial Statements, assess whether the government has control over the Zamunda Transport Agency.                                                                                                                                                                                                             (ii)Discuss the procedures you will follow in preparation of the financial statements, given that control has been established in question (a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                     (b)

Zamunda Transport Agency

(b) Explain the following terms used in the IPSAS:

(i) Equity method of accounting;

(ii) Joint arrangement;

(iii) Economic entity view of financial reporting; and

(iv) Associate.

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  • 20 Marks

PSAF – L2 – Q11.4 – Preparation and presentation of financial statements for central government

Prepare the cash flow statement for Zamunda Central Government for 2024 with reconciliation notes.

The Central Government of Zamunda: Cash flows statement for the year ended 31st December 2024

Prepare the cash flow statement for the Central Government of Zamunda for the year ended 31st December 2024, based on the following data:

Cash flows from operating activities GHC million
Corporate income tax 38,000
Custom and excise duties 43,000
Value added taxes 45,000
Multilateral grants 16,000
Income tax (PAYE) 15,000
Fee and charges for services 10,000
Dividend and other investment income 7,000
Bilateral grants 12,000
Fines, penalties and forfeitures 9,000
Established post salaries (22,000)
Non-established post salaries (20,000)
13% SSF contribution for staff (7,000)
Staff allowances (8,000)
Administrative cost (15,000)
Seminar and workshops (12,000)
Training and capacity building (6,000)
Foreign travelling cost (5,000)
Repair and maintenance (8,000)
Domestic debt interest paid (12,000)
External debt interest paid (12,000)
Payments for subsidies on utilities (12,000)
Payment for subsidies on fuel (12,000)
Community empowerment program (12,000)
Support for social protection of aged widows (12,000)
Statutory transfers (12,000)
Other expenses (12,000)

Cash flows from investing activities GHC million
Recoveries of loans and advances 8,000
Payment for property, plant and equipment during year (18,000)
Payments for infrastructure during year (20,000)
Loans and advances granted during the year (13,000)

Cash flows from financing activities GHC million
External borrowing during the year 30,000
Domestic borrowing during the year 20,000
Repayment of external borrowing during the year (10,000)

Additional information for notes:

  • Surplus of revenue over expenses for the year ending 2024: GHC 23,200 million
  • Depreciation charged for the year: GHC 3,500 million
  • Increase in inventories: GHC (1,500) million
  • Taxes recoverable: GHC (16,200) million
  • Accrued expenses: GHC 11,000 million
  • Prepaid rent: GHC (5,000) million
    W1 Taxes recoverable GHC million
    Corporate income taxes 3,000
    Customs & excise duties 5,000
    VAT 6,000
    Personal Income Tax 4,000
    Total taxes receivable 18,000
    Less amount estimated as irrecoverable 1,800
    Taxes recoverable 16,200

    W2 Accrued expenses GHC million
    Domestic debt interest 3,000
    External debt interest 4,000
    Accrued salaries 4,000
    Total accrued expenses 11,000

    W3 Prepaid Rent GHC million
    Prepaid Rent 5,000

    Include a reconciliation note for surplus/deficit to cash flows from operating activities.

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  • 20 Marks

PSAF – L2 – Q11.3- Preparation and presentation of financial statements for local government

Prepare the statement of financial performance for Kweku District Assembly for 2024.

(a) Kweku District Assembly: Statement of financial performance for the year ended 31st December 2024

Prepare the statement of financial performance for Kweku District Assembly for the year ended 31st December 2024, based on the following data:

Revenue GHC’ million
Decentralised transfers 30,091
Internally generated funds 56,639
Grants 21,945

Expenses GHC’ million
Compensation 23,942
Use of goods and services 24,494
Social benefits 473
Other expenses 6,366
Consumption of fixed capital 15,650

(b)

Kweku District Assembly: Statement of financial position as at 31st December 2024

Prepare the statement of financial position for Kweku District Assembly as at 31st December 2024, based on the following data:

Current assets GHC’ million
Cash and bank 7,564
15% Fixed deposits 4,550
Advances and loans to staff 9,561
Prepaid rent expenses 450
Property rates receivable 2,250
Closing stock of waste bins 1,500
Closing inventories of consumables and fertilizer 1,000

Non-current assets GHC’ million
Land 5,000
Buildings 15,750
Market infrastructure 19,600
Furniture, fixtures & fittings 5,500

Current liabilities GHC’ million
Payables 13,745
Contract retention 5,520
Accruals 4,400

Non-current liabilities GHC’ million
Deferred grants 810

Accumulated fund GHC’ million
Accumulated fund 48,250

(c)

Kweku District Assembly: Statement of changes in net assets for the year ended 31st December 2024

Prepare the statement of changes in net assets for Kweku District Assembly for the year ended 31st December 2024, based on the following data:

Accumulated Fund GHC’ million
Balance b/f 10,500
Surplus 37,750

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