Topic: Financial Reporting Standards and Their Applications

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

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

Question

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

Answer

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Tags: Contractual Performance Obligations, Financial Reporting Standards, IFRS 15, Revenue Recognition, Software Licensing
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: Nov 2024

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

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

Question

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.

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

Answer

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Tags: Accounting Standards, Contracts with Customers, IFRS 15, Performance Obligations, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: Nov 2024

FR – Dec 2022 – L2 – Q2d – Structured Entities

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

Question

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.

Answer

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Tags: Control, Corporate Reporting, Disclosure, IFRS 12, Operating Agreement, Structured Entity
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: Nov 2024

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

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.

Answer

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Tags: Amortization, Capitalization, IAS 38, Intangible Assets, Licensing, Revaluation Model, Software Costs, Valuation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: Nov 2024

FR – Nov 2024 – L2 – Q2a – Provisions and Contingent Liabilities

Determining the correct accounting treatment for warranty obligations and legal provisions in Kamara LTD’s financial statements.

Question

Kamara LTD manufactures and sells health equipment and has a financial year-end of March 2024. It offers a one-year guarantee for equipment supplied directly to clients. One of the company’s clients is suing the business at the financial year-end for failing to fix equipment within the guarantee period. The company argues that the issue is due to the client disregarding usage instructions, and Kamara LTD believes it is not liable.

Kamara LTD’s lawyer has advised that it is more likely than not that the company will not be found liable. If found liable, the company is estimated to incur legal expenses of approximately GH¢24,000.

Kamara LTD also manufactures another line of equipment sold to wholesalers. During the financial year, it sold 3,200 items of this equipment, which come with a one-year repair guarantee. Based on past experience, 10% of items sold are returned for repairs. Of these returns:

70% require minor repairs at a cost of GH¢64 per item.
30% require significant repairs at a cost of GH¢200 per item.

Required:
Determine the correct accounting treatment to deal with the above issues in the books of Kamara LTD for the year ended 31 March 2024.

Answer

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Tags: Accounting Treatment, Contingent Liabilities, Expected Value Calculation, IAS 37, Legal Expenses, Provisions, Warranty Obligations
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: Nov 2024

FR – May 2020 – L2 – Q2a – Revenue Recognition under IFRS 15

Determine the appropriate accounting treatment for a sales transaction with a free two-year maintenance contract under IFRS 15.

Question

Ejura Ltd (Ejura) is a manufacturing and retail company that prepares financial statements in accordance with International Financial Reporting Standards (IFRS) up to 31 December each year.

In order to generate or improve sales on one of its older products, Ejura offered a promotion named ‘something for free.’ The promotion included free maintenance services for the first two years. On 1 October 2019, under the promotional offer, Ejura sold goods to a supermarket chain for GH¢4.4 million. A two-year maintenance contract would normally be sold for GH¢0.5 million, and the list price of the product would normally be GH¢5 million. The transaction has been included in revenue at GH¢4.4 million.

Required:
In accordance with IFRS 15: Revenue from Contracts with Customers, justify the appropriate accounting treatment for the above transaction in the financial statements of Ejura for the year ended 31 December 2019.

Answer

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Tags: Contracts with Customers, Deferred Income, IFRS 15, Revenue
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2020

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

Question

Asamankese Ltd (Asamankese) purchased a 6% GH¢50 million bond on 1 August 2018 at a 10% discount to par value. Expenses of purchase were GH¢500,000. The bond is due for redemption on 31 July 2028 at par. The effective annual interest rate to maturity is 7.3%. Asamankese intends to hold the bond until its maturity date.

Required:
In accordance with IFRS 9: Financial Instruments, how much should be recognized in Asamankese’s financial statements in respect of the above transaction for the year ended 31 July 2019 (to two decimal places)?

Answer

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Tags: Amortized Cost, Bonds, Effective Interest Rate, IFRS 9
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2020

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

Question

Answer

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Tags: Amortized Cost, Bonds, Effective Interest Rate, IFRS 9
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2020

FR – May 2020 – L2 – Q2d – Accounting for Government Grants under IAS 20

Explain the financial reporting treatment of government grants in Dambai Ltd’s financial statements under IAS 20.

Question

Dambai Ltd is a large manufacturing company. During the year, it decided to relocate some operations to a regional development area, which offers attractive labour costs and tax incentives. The regional government agreed to contribute GH¢200,000 as a result of Dambai setting up in the regional development area. There are no particular conditions as to what the money should be spent on. The cash was received on 1 August 2019.

Required:
In accordance with IAS 20: Accounting for Government Grants and Disclosure of Government Assistance, explain the financial reporting treatment of the above in the financial statements of Dambai for the year ended 31 December 2019.

Answer

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Tags: Financial Reporting, Government Grants, IAS 20, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2020

FR – May 2020 – L2 – Q5c – Functional Currency

Discuss the functional currency concept in accordance with IAS 21 and how it is determined.

Question

Discuss what is meant by the concept of an entity’s functional currency and how it may be determined in accordance with IAS 21: The Effects of Changes in Foreign Exchange Rates. (5 marks)

Answer

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Tags: Foreign Exchange Rates, Functional Currency, IAS 21
Level: Level 1

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2020

FR – April 2022 – L2 – Q2d – Conceptual Framework for Financial Reporting

Explain the definition of investment property under IAS 40 and discuss the differences between the fair value model and revaluation model for investment properties.

Question

d) The recognition, measurement, and disclosure of an Investment Property in accordance with IAS 40: Investment Property appears straightforward. However, this could get complicated when measured either under the fair value model or under the revaluation model.

Required:
i) Define Investment Property under IAS 40 and explain the rationale behind its accounting treatment. (2 marks)

ii) Explain how the treatment of an investment property carried under the fair value model differs from an owner-occupied property carried under the revaluation model. (2 marks)

Answer

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Tags: Fair Value Model, IAS 40, Investment Property, Owner-Occupied Property, Revaluation Model, Valuation Models
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: APR 2022

FR – Nov 2023 – L2 – Q2c – Financial Reporting Standards and Their Applications

Determine the amounts to be recognized in profit or loss and other comprehensive income for Wenchi Ltd in respect of an office building.

Question

Wenchi Ltd (Wenchi) is a real estate development company. On January 1, 2022, Wenchi’s office building had a net carrying value of GH¢13.5 million. The property became vacant on April 1, 2022, and was leased to a third party. On October 1, 2022, the property was added to inventory for sale after the lease expired. The property was sold in December 2022 for GH¢16 million.

Required:
In accordance with IFRS, determine the amounts to be recognized in profit or loss and other comprWenchi Ltd (Wenchi) is a real estate development company which has been operating for several years. On January 1, 2022, the office building of Wenchi had a net carrying value of GH¢13.5 million. The cost model was used to value the property. No depreciation had been incurred because the expected residual value was more than the cost due to a buoyant real estate market.

The property became vacant as a result of relocating the company’s operations, and on April 1, 2022, a third party (Dormaa Ltd) was given a six-month short lease to occupy it. The property’s fair value at the time it was leased out was GH¢16.5 million.

Wenchi made the choice to add the property to its inventories of properties for sale in the regular course of business once the lease expired. The property was valued at GH¢15.75 million at 1 October 2022. The property was sold in December 2022 for GH¢16 million.

Required:
In accordance with IFRS, determine the amounts to be recognized in profit or loss and in other comprehensive income in respect of the property for the year ended 31 December 2022.ehensive income in respect of the property for the year ended 31 December 2022.

Answer

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Tags: Fair Value Model, IAS 40, nt Property, Profit or Loss, Revaluation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications, Investment Property
Series: NOV 2023

FR – Nov 2023 – L2 – Q2b – Financial Reporting Standards and Their Applications

Explain the financial reporting treatment of a lease transaction for Fugu Ltd in accordance with IFRS 16.

Question

Fugu Ltd (Fugu) operates in the automobile industry. The following transaction relates to Fugu for the year-end 31 July 2023: On August 1, 2022, Fugu entered into a ten-year lease, agreeing to pay GH¢3 million annually in arrears in exchange for the use of a building. The present value of the minimum lease payments was GH¢20.13 million at 1 August 2022, and the useful economic life of the building was 50 years. Fugu’s cost of capital is 8%.

Required:
In accordance with IFRS 16: Leases, show the financial reporting treatment of the above transactions in the financial statements of Fugu for the year ended 31 July 2023.

Answer

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Tags: Financial Reporting Treatment, IFRS 16, Leases, Present Value, Right-of-Use Asset

Topic: Financial Reporting Standards and Their Applications, Leases
Series: NOV 2023

FR – Nov 2023 – L2 – Q2d – Financial Reporting Standards and Their Applications

Explain the financial reporting treatment of decommissioning costs in the financial statements of Taini Ltd under IAS 37.

Question

Taini Ltd (Taini) is a listed mining company that operates in the Bono Region with a ten-year term concession commencing on 1 April 2022. After the expiry of the current mining term, Taini has a duty to rehabilitate the area. These rehabilitations are anticipated to cost GH¢12.09 million on April 1, 2032. On April 1, 2022, the present value of the restoration cost was calculated using the company’s 8% cost of capital at GH¢5.6 million.

Required:
In accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets, explain the financial reporting treatment of the above transaction in the financial statements of Taini Ltd for the year ended 31 March 2023.

Answer

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Tags: Contingent Liabilities, Decommissioning Costs, IAS 37, Provisions, Rehabilitation Costs
Level: Level 2

Topic: Financial Reporting Standards and Their Applications, Provisions and Contingent Liabilities
Series: NOV 2023

FR – Nov 2023 – L2 – Q5b – Financial Reporting Standards and Their Applications

Explain the accounting treatment of an event after the reporting period for a specific type of inventory

Question

Kaime Ltd (Kaime) deals in cosmetics and make-up manufacturing and with year-end 31
December 2022. Its date of authorization of financial statements for issue was 9 February 2023 and the annual general meeting is scheduled on 8 March 2023. The following event occurred:
A particular type of inventory held by Kaime at a different location was recorded at its cost of GH¢598,000 at 31 December 2022 in the statement of financial position. The entity sold 70% of this inventory for GH¢364,000 on 15 January 2023, incurring a commission expense of 15% of the selling price of the inventory. The remaining 30% of the inventory are estimated to be realised at cost.

Required:
In accordance with IAS 10: Events after the Reporting Period, explain the appropriate accounting treatment of the event in the financial statements of Kaime for the year ended 31 December 2022

Answer

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Tags: Events After Reporting Period, Financial Statements, IAS 10, Inventory
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2023

FR – Nov 2019 – L2 – Q2a – Financial Reporting Standards and Their Applications

Treatment of under-provision of tax for Daaho Ltd for the year ending 31 August 2019. Question:

Question

Daaho Ltd (Daaho) manufactures and distributes security equipment. Daaho prepares financial statements in accordance with International Financial Reporting Standards (IFRS) up to 31 August each year.

On 31 August 2019, the taxation liability account in the books of Daaho Ltd showed a debit balance of GH¢17,500 after paying the 2018 liability. The estimated liability for 2019 is GH¢84,500 and no entry has yet been made to record this.

Required:
Explain the appropriate accounting treatment of the above transaction for the year ending 31 August 2019.
(3 marks)

Answer

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Tags: Current Liabilities, Income Tax, Provision, Taxation Liability

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2019

FR – Nov 2019 – L2 – Q2b – Financial Reporting Standards and Their Applications

Calculation of amounts recognized in profit or loss and other comprehensive income related to property revaluation and depreciation.

Question

RoyCo acquired a brand new property (land and buildings) on 1 January 2016 for GH¢40 million (including GH¢15 million for the land). The asset was revalued on 31 December 2017 to GH¢43 million (including GH¢16.6 million for the land). The buildings element was depreciated over a 50-year useful life to a zero residual value. The useful life and residual value did not subsequently need revision. On 31 December 2018, the property was revalued downwards to GH¢35 million (including GH¢14 million for the land) due to a recession.
The company makes a transfer from revaluation surplus to retained earnings in respect of realised profit.

Required:
Calculate the amounts recognised in profit or loss and in other comprehensive income for the years ended 31 December 2017 and 31 December 2018. (6 marks)

Answer

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Tags: Depreciation, Financial Reporting, IFRS, Property Valuation, Revaluation

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2019

FR – Nov 2019 – L2 – Q2d – Financial Reporting Standards and Their Applications

Accounting treatment of an event after the reporting period, involving inventory loss due to flooding.

Question

Nabdam Ltd operates in the media and publications industry and reports under IFRS. The 2018 financial statements of Nabdam Ltd are still in draft form. The audit is ongoing, and the company intends to authorise the financial statements in April 2019.

Nabdam Ltd rents a distribution warehouse in Korle, located beside the River Odorna. On 3 January 2019, the River Odorna burst its banks, and GH¢650,000 of Nabdam’s inventory was destroyed by the flood. The inventory was not insured, and Nabdam will not receive any compensation for the loss. The company is not sure how to account for this event. The destroyed inventory is included in the inventory figure that is disclosed on Nabdam’s draft statement of financial position at 31 December 2018.

Required:
Explain with justification, the appropriate accounting treatment of the above transaction. (4 marks)

Answer

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Tags: Adjusting Event, Financial Reporting, IAS 10, Inventory Loss, Non-adjusting Event

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2019

FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis

Assessment of impairment loss for a cash-generating unit including intangible assets and goodwill.

Question

Hukpor Ltd (Hukpor) manufactures a variety of consumer products. The company’s founders have managed the company for thirty years and are now interested in selling the company and retiring. Seekers Ltd is looking into the acquisition of Hukpor and has requested the company’s latest financial statements and selected financial ratios in order to evaluate Hukpor’s financial stability and operating efficiency. The summary of information provided by Hukpor is presented below:

Statements of Financial Position as at 31 December

Selected Financial Ratios of Hukpor Ltd for 2017
Current ratio 1.61:1
Acid-test ratio 0.64:1
Inventory turnover 3.17 times
Times interest earned 8.55 times
Debt-to-equity ratio 86%
Required:
a) Calculate ratios for the years 2018 for Hukpor in comparison with ratios for 2017. (5 marks)
b) For each of the ratios computed for 2018, analyse Hukpor’s performance for 2018 based
on the results of the ratio computed, in comparison with the results for 2017. (10 marks) c) Explain FIVE (5) limitations of accounting ratios. (5 marks)
(Total: 20 marks)

Answer

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Tags: Cash-Generating Unit, Fair Value, IAS 36, Impairment, Value in Use
Level: Level 2

FR – Nov 2019 – L2 – Q5c – Financial Reporting Standards and Their Applications

Calculate amounts recognized in Profit or Loss and Other Comprehensive Income for foreign property purchased and revalued.

Question

On 1 August 2018, Charlie Ltd, whose functional currency is the cedi, bought a property in Morocco for DH40 million. The property had a 20-year useful economic life with no residual value estimated. On 31 July 2019, the property was revalued to DH45 million.

Exchange rates were:

1 January 2018: GH¢1 = DH 1.32
1 August 2018: GH¢1 = DH 1.25
31 July 2019: GH¢1 = DH 1.125
Required:
In accordance with IAS 21: The Effects of Changes in Foreign Exchange Rates and IAS 16: Property, Plant & Equipment, how much should be recognized in the Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 July 2019?

Answer

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Tags: Financial Reporting, Foreign Exchange, IAS 16, IAS 21, Property Revaluation