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 – Nov 2019 – L2 – Q5d – Group Financial Statements and Consolidation

Identify factors causing negative goodwill and explain its accounting treatment in consolidated financial statements.

Question

Negative Goodwill is based on the accounting concept of Goodwill, an intangible asset that represents the worth of a company’s brand name, patents and other intellectual property, customer base, licenses, and other items that are difficult to put an amount on but help to make a company valuable. When the price paid is less than the actual value of the company’s net tangible assets, negative goodwill results.

Required:
In accordance with IFRS 3: Business Combinations, identify THREE (3) factors that account for negative goodwill and indicate its accounting treatment when it occurs in the preparation of consolidated financial statements.

Answer

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Tags: Business Combinations, Consolidation, Financial Reporting, IFRS 3, Negative Goodwill

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

FR – Nov 2023 – L2 – Q2a – Financial Reporting Standards and Their Applications

Calculate the maximum amount of borrowing costs that could potentially be capitalised in accordance with IAS 23 for Banda Ltd.

Question

Banda Ltd (Banda) incurred the following borrowing costs during the financial year-end 31 December 2022:

GH¢
Overdraft interest
Foreign currency loan interest (correctly translated into GH¢)
Foreign currency exchange differences on equity
In addition, a three-year fixed rate GH¢2.4 million loan was borrowed on 1 January 2022 at 6.5%. A loan set-up fee (transaction costs) of GH¢24,000 was incurred. This increased the effective interest rate on the loan to 6.88%.

Required:
In accordance with IAS 23: Borrowing Costs, calculate the maximum amount that could potentially be capitalised as borrowing costs for the year-end 31 December 2022 (assuming an asset was being financed using all available finance).

Answer

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Tags: Borrowing Costs, Capitalisation, Foreign Currency Loan, IAS 23, Interest expense

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

FR – Nov 2021 – L2 – Q5c – Financial Reporting Standards and Their Applications

Distinguishing between government grants and government assistance with examples of each in accordance with IAS 20.

Question

In accordance with IAS 20: Accounting for Government Grants and Disclosure of Government Assistance, distinguish between government grants and government assistance, giving two examples each. (5 marks)

Answer

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Tags: Disclosure, Financial Reporting, Government Assistance, Government Grants, IAS 20
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2021

FR – May 2017 – L2 – Q2d – Financial Reporting Standards and Their Applications

Recommend accounting treatments for equity shares and bonds in accordance with IFRS 9.

Question

Bawaleshie Ltd controls the following financial assets at its reporting date of 31 January 2017:

i) An investment in the equity shares of Obojo Ltd was purchased during April 2016 for GH¢2.6 million. The fair value of this investment at 31 January 2017 was GH¢2.8 million. Bawaleshie Ltd decided at the date of purchase to recognize any fair value gains and losses through other comprehensive income.
(2 marks)

ii) An investment in a bond issued by Shiashie Ltd on 1 February 2016. This bond cost GH¢10 million (equal to its par value) and entitles Bawaleshie Ltd to 8% interest per annum on the anniversary of the bond’s issue. The principal is to be returned on 31 January 2021. It is the intention of Bawaleshie Ltd to retain the bond in order to collect the contracted cash flows on the due dates.
(3 marks)

Required:
Recommend how the above financial assets should be accounted for at 31 January 2017 in accordance with the requirements of IFRS 9 Financial Instruments.

Answer

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Tags: Bonds, Equity Investment, Fair Value, Financial instruments, IFRS 9
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2017

FR – May 2017 – L2 – Q2c – Financial Reporting Standards and Their Applications

Explain deferred tax, identify reasons for deferred tax increase, and explain overprovision in the income statement.

Question

The draft financial statements for the year ended 31 March 2015 for Kobby Ltd include the following:

Required:
i) Explain how deferred tax arises.
(2 marks)

ii) Identify the most likely reason for the increase of GH¢200,000 in the deferred tax provision for the year to 31 March 2015.
(2 marks)

iii) Explain what the over provision of GH¢50,000 in the income statement represents.
(2 marks)

Answer

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Tags: Deferred Tax, IAS 12, Income Tax, Overprovision, Taxation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2017

FR – May 2017 – L2 – Q2b – Financial Reporting Standards and Their Applications

Calculate the capitalised costs for the construction of an office building.

Question

The following costs were incurred in 2016 in the design and construction of a new office building over a nine-month period during 2016:

Required:
In accordance with IAS 16 Property, Plant and Equipment, calculate the amount that should be capitalised as property in the financial statements for the year ending 31 December 2016.
(4 marks)

Answer

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Tags: Capitalisation of Costs, IAS 16, Office Building, Property Plant and Equipment
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2017

FR – May 2017 – L2 – Q2a – Financial Reporting Standards and Their Applications

Discuss how to account for the cost of site reclamation and the financial effects of an earthquake.

Question

Akakpo Ltd obtained a license free of charge from the government to dig and operate a gold mine. Akakpo Ltd spent GH¢6 million digging and preparing the mine for operation and erecting buildings on site. The mine commenced operations on 1 September 2014. The license requires that at the end of the mine’s useful life of 20 years, the site must be reclaimed, all buildings and equipment must be removed, and the site landscaped. At 31 August 2015, Akakpo Ltd estimated that the cost in 19 years’ time of the removal and landscaping would be GH¢5 million, and its present value is GH¢3 million.

On 31 October 2015, there was a massive earthquake in the area, and Akakpo Ltd’s mine shaft was badly damaged. It is estimated that the mine will be closed for at least six months and will cost GH¢1 million to repair.

Required:

i) Demonstrate how Akakpo Ltd should record the cost of the site reclamation as at 31 August 2015 in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
(3 marks)

ii) Explain how Akakpo Ltd should treat the effects of the earthquake in its financial statements for the year ended 31 August 2015 in accordance with IAS 10 Events after the Reporting Period.
(2 marks)

Answer

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Tags: Contingent Assets, Contingent Liabilities, Earthquake, Events after the Reporting Period, IAS 10, IAS 37, Provisions, Reclamation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2017

FR – Nov 2021 – L2 – Q2d – Financial Reporting Standards and Their Applications

This question covers the procedures for selecting and applying accounting policies in accordance with IAS 8.

Question

IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting and applying accounting policies, accounting for changes in estimates, and reflecting corrections of prior period errors.

Required:
Describe the procedures an entity shall apply in selecting an accounting policy.

Answer

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Tags: Accounting Policies, Changes in Estimates, IAS 8, Prior Period Errors
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2021

FR – Nov 2021 – L2 – Q2c – Financial Reporting Standards and Their Applications

This question addresses how to account for the impairment of a cash-generating unit under IAS 36, including the allocation of impairment to assets.

Question

Kwik Ltd (Kwik) runs a unit in Ablekuma Metropolis that has suffered a massive drop in income due to failure in its technology on 1 January 2018. As a result, the following carrying amounts were recorded in the books immediately before the impairment test.

Asset	Carrying Amount (GH¢million)
Goodwill	20
Technology	5
Equipment	10
Land	50
Buildings	30
Other net assets	40
Total	155

The value in use of the unit is estimated at GH¢85 million, and Kwik has received an offer of GH¢75 million for the unit. The technology is worthless following its complete failure. Other net assets include inventory, receivables, and payables. It is considered that the carrying amount of other net assets is a reasonable representation of its net realisable value.

Required:
In accordance with IAS 36: Impairment of Assets, show the accounting treatment for the above transactions.

Answer

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Tags: Allocation of Impairment, Cash-Generating Unit, Fair Value, Goodwill, Impairment, Value in Use
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2021

FR – Nov 2021 – L2 – Q2b – Financial Reporting Standards and Their Applications

This question requires the recognition of revenue under IFRS 15 for a contract with advance payments and the calculation of a significant financing component.

Question

Marshall Ltd (Marshall) is a manufacturing company that prepares Financial Statements in compliance with IFRSs and has a reporting date of 31 December. During the year to 31 December 2020, Marshall entered into a contract with a customer to manufacture and sell some goods such that the goods will be delivered (control of the goods vests with the customer) in two years. The contract has two payment options:

i) The customer can pay GH¢500,000 when the contract is signed, or

ii) GH¢650,000 in two years when the customer gains control of the goods.

Marshall’s incremental borrowing rate is 10%. The customer paid GH¢500,000 on 1 January 2020, when the contract was signed. Marshall intends to recognise revenue on this contract in the financial statements.

Required:
In accordance with IFRS 15: Revenue from Contract with Customers, explain (with supporting calculations) how Marshall should account for the above transactions for the years 2020 and 2021.

Answer

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Tags: Advance Payments, Contract with Customers, Financing Component, IFRS 15, Revenue Recognition
Level: Level 2