Topic: Financial Reporting Standards and Their Applications

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  • 5 Marks

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

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

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

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  • 5 Marks

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

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

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.

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.

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  • 3 Marks

FR – Dec 2022 – L2 – Q2d – Structured Entities

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

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.

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  • 7 Marks

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:

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.

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  • 6 Marks

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.

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.

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  • 7 Marks

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.

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.

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  • 5 Marks

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.

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)?

 

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  • 5 Marks

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.

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)?

 

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  • 3 Marks

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.

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.

 

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  • 5 Marks

FR – May 2020 – L2 – Q5c – Functional Currency

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

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)

 

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  • 7 Marks

FR – Nov 2021 – L2 – Q2a – Financial Reporting Standards and Their Applications

This question deals with the application of IFRS 9 in financial instruments and the recognition of revenue under IFRS 15.

Manu Ltd (Manu) is a private company that prepares financial statements in compliance with International Financial Reporting Standards (IFRSs). Financial statements for the year ended 31 December 2020 are being prepared, and the following transactions occurred.

i) On 1 September 2020, Manu purchased 100,000 ordinary shares on the stock exchange for speculative reasons (making a profit) at a price of GH¢1.20 per share and paid a transaction cost of GH¢1,250. On 31 December 2020, the shares were now trading at GH¢1.32 per share on the stock exchange, and Manu received a dividend of GH¢15,000 on the shares.
(3 marks)

ii) Manu issued GH¢360,000 of redeemable 2% Preference shares at a discount of 14% on 1 January 2020. Issue costs were GH¢5,265. The shares will be redeemed on 31 December 2022 at par. Interest is paid annually in arrears, and the effective interest rate is 8%.
(4 marks)

Required:
In accordance with IFRS 9: Financial Instruments, explain how to account for the above transactions in the statement of profit or loss and statement of financial position for the year ended 31 December 2020.

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  • 3 Marks

FR – May 2016 – L2 – Q3e – Financial Reporting Standards and Their Applications

Identify three factors in determining functional currency under IAS 21.

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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  • 5 Marks

FR – May 2016 – L2 – Q3c – Financial Reporting Standards and Their Applications

Describe the accounting treatment of goodwill for ABC's financial statements, including directors' views on recognizing goodwill.

You are the finance director of ABC Company. ABC is preparing its financial statements for the year ended 31st December 2015. 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 2015, commenting on the directors’ views where appropriate.

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  • 5 Marks

FR – May 2016 – L2 – Q3b – Financial Reporting Standards and Their Applications

Show the initial accounting treatment of the bond in accordance with IFRS for Naniama Ltd's convertible bonds.

Naniama 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 the 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).

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  • 12 Marks

FR – May 2016 – L2 – Q3a – Financial Reporting Standards and Their Applications

Calculate basic and diluted earnings per share for Ghana Trust for the years ended 31st March 2014 and 2015.

(i) The issued share capital of Ghana Trust, a publicly listed company on the Ghana Stock Exchange, at 31st March 2013 was GH¢10 million. Its shares are denominated at 25 pesewas each. Ghana Trust’s earnings attributable to its ordinary shareholders for the year ended 31st March 2013 were also GH¢10 million, giving an earnings per share of 25 pesewas.

Year ended 31st March 2014:
On 1st July 2013, Ghana Trust issued eight million ordinary shares at full market price. On 1st January 2014, 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 2014 were GH¢13.8 million.

Year ended 31st March 2015:
On 1st October 2014, Ghana 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 Ghana Trust’s ordinary shares immediately prior to the offer was GH¢2.40 each. Earnings attributable to shareholders for the year ended 31st March 2015 were GH¢19.5 million.

Required:
Calculate Ghana Trust’s earnings per share for the years ended 31st March 2014 and 2015 including comparative figures. (7 marks)

(ii) On 1st April 2015, Ghana Trust issued GH¢20 million 8% convertible loan stock at par. The terms of the conversion (on 1st April 2018) 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 2015, the directors of Ghana Trust were awarded share options on 12 million ordinary shares exercisable from 1st April 2018 at GH¢1.50 per share. The average market value of Ghana Trust’s ordinary shares for the year ended 31st March 2015 was GH¢2.50 each. The income tax rate is 25%. Earnings attributable to ordinary shareholders for the year ended 31st March 2015 were GH¢25,200,000. The share options have been correctly recorded in the statement of profit or loss.

Required:
Calculate Ghana Trust’s basic and diluted earnings per share for the year ended 31st March 2015. (5 marks)

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  • 5 Marks

FR – March 2024 – L2 – Q5d – Financial Reporting Standards and Their Applications

Identify factors that indicate significant influence under IAS 28.

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Required:
Outline FIVE (5) factors/conditions that indicate significant influence (other than shareholding).
(5 marks)

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  • 5 Marks

FR – March 2024 – L2 – Q5c – Financial Reporting Standards and Their Applications

Identify the qualities required in information when management uses judgment in developing accounting policies under IAS 8.

According to IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors, when an IFRS specifically applies to a transaction, other event, or condition, the accounting policy applied to that item shall be determined by applying the IFRS. In the absence of an IFRS that specifically applies to a transaction, other event, or condition, management shall use its judgment in developing and applying an accounting policy that results in information that has certain qualities.

Required:
Identify the qualities that must be present in the resultant information when management of an entity uses its judgment in developing and applying an accounting policy.
(5 marks)

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  • 7 Marks

FR – March 2024 – L2 – Q2c – Financial Reporting Standards and Their Applications

Accounting treatment of distribution rights purchased by Mankeni Ltd in accordance with IAS 38.

Mankeni Ltd (Mankeni) is one of Africa’s leading entertainment companies which creates and secures the rights to phenomenal content from all over the world. Mankeni has entered into the following transactions during the financial year ended 30 November 2023:
i) On December 1, 2022, Mankeni purchased the sole West African distribution rights for a special digital set-top box for home entertainment. The rights were purchased for GH¢5.25 million over a three-year period.
(3 marks)

ii) Mankeni started working on building the brand and increasing sales of the item mentioned in (i) above on December 1, 2022. Due to the enormous success of this endeavour, the “Mankeni” brand became popular. Mankeni wishes to include the brand in its financial statements for the year ended 30 November 2023 at its estimated fair value of GH¢30 million.
(2 marks)

iii) Mankeni wishes to replicate its West African success in Eastern African countries by selling the product in other markets. The company has spent GH¢1.25 million during the year researching the Eritrea market and wishes to capitalise this expenditure as an intangible asset.
(2 marks)

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  • 4 Marks

FR – March 2024 – L2 – Q2b – Financial Reporting Standards and Their Applications,

Explain the differences between operating segments and reportable segments as per IFRS 8.

IFRS 8: Operating Segments requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments. Information is based on internal management reports, both in the identification of operating segments and measurement of disclosed segment information. It applies to the separate or individual financial statements of an entity and to the consolidated financial statements of a group.

Required:
Distinguish between operating segments and reportable segments.

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  • 9 Marks

FR – March 2024 – L2 – Q2a – Financial Reporting Standards and Their Applications

Evaluate financial reporting treatment of Sikapa and Cocoa bonds in accordance with IFRS 9: Financial Instruments.

Kombra Ltd (Kombra) is a market leader in the printing and publishing industry. To benefit from a potential future decline in interest rates, Kombra invests in bonds and issues callable bonds. It occasionally trades these bonds by immediately flipping them for a profit. Others are held for the long term.

Kombra purchased two bonds on 1 January 2023. Details of the two particular bonds are as follows:

Sikapa Bond Cocoa Bond
Nominal value of bond GH¢47.25 million GH¢31.5 million
Coupon rate 4% 5%
Purchase price of bond GH¢40.425 million GH¢29.4 million
Effective yield to maturity 6.75% 7.8%

The Sikapa bond was bought with the intention of keeping it for a long time and withdrawing the interest and principal as they fall due.

The Cocoa bond was bought at a deep discount, and the aim is to wait until the market value increases, and then sell it at a profit. The Cocoa bond had a fair value of GH¢28.875 million as of December 31, 2023.

In both situations, the coupon, which is due on December 31 each year, has been paid as agreed.

Required:
In the case of each bond above, show the financial reporting treatment required by IFRS 9: Financial Instruments for the year ended 31 December 2023. Show all workings clearly.

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