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 – May 2018 – L2 – Q5c – Financial Reporting Standards and Their Applications

Identify two differences between the cost model and revaluation model for Property, Plant, and Equipment.

Question

Once an entity has recognized an item of Property, Plant, and Equipment as an asset in its books, the entity can choose between two models (or methods) to account for the asset in subsequent measurement periods, that is, the period(s) after the asset has been acquired and before its disposition. The two models are the cost model and the revaluation model. The entity shall apply the same model to the entire class of property, plant, and equipment to which that asset is of similar nature and use in the entity’s operations.

Required:
Identify TWO differences between the cost and revaluation model for the measurement of Property, Plant, and Equipment. (4 marks)

Answer

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Tags: and Equipment, Cost Model, IAS 16, Plant, Property, Revaluation Model
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2018

FR – Nov 2016 – L2 – Q2c – Financial Reporting Standards and Their Applications

Calculate the carrying amount of investment property in accordance with IAS 40.

Question

c) Tanoso owns the following properties as at 31 December 2015:

Property	Fair Value (GH¢million)
Land with future use undetermined	3.2
Factory rented to Tanoso’s subsidiary under an operating lease	2.4
10-floor office building (fair value is equal per floor), 3 floors used as the subsidiary’s head office, and 7 floors rented to third parties under an operating lease	15.0
Empty building held for capital appreciation, but not leased out	4.1

Tanoso’s accounting policy is to hold its investment properties under the fair value model and its land and buildings under the revaluation model.

Required:
In accordance with IAS 40 Investment Property, calculate the carrying amount to be recognised as investment property in Tanoso’s consolidated financial statements as at 31 December 2015.

Answer

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Tags: Fair Value Model, IAS 40, Investment Property, Property Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2016

FR – Nov 2016 – L2 – Q2b – Financial Reporting Standards and Their Applications

Identify the conditions under which it may be appropriate to change accounting policy in accordance with IAS 8.

Question

According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, an entity must select and apply its accounting policies consistently from one period to the next and among various items in the financial statements. However, an entity may change its accounting policies under certain conditions.

Required:
Identify the circumstances under which it may be appropriate to change accounting policy in accordance with the guidance given in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Answer

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Tags: Accounting Policies, Change in Accounting Policies, Financial Reporting Standards, IAS 8
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2016

FR – Nov 2016 – L2 – Q2a – Financial Reporting Standards and Their Applications

Prepare financial statement extracts showing how the lease transaction of Asokwa Ltd should be treated for the year ended 31 December 2014.

Question

You are employed as the Financial Accountant for Asokwa Ltd. Asokwa Ltd leased a new piece of equipment from Amakom Ltd for three years commencing on 30 September 2014. The fair value of the equipment is GH¢70,000. A deposit of GH¢4,000 was payable on 30 September 2014 followed by six half-yearly payments of GH¢13,500, payable in arrears, and commencing on 31 March 2015. Asokwa Ltd allocates finance charges on a sum of the period digits basis.

Required:
Prepare financial statement extracts showing how the lease transaction of Asokwa Ltd should be treated for the year ended 31 December 2014.

Answer

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Tags: Finance lease, Financial Statements, IFRS 16, Lease Accounting
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2016

FR – May 2018 – L2 – Q2e – Financial Reporting Standards and Their Applications

Identify the criteria to be met for an asset to be classified as held for sale in accordance with IFRS 5.

Question

In accordance with IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations, a non-current asset (disposal group) is classified as “held for sale” if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. However, to qualify to be classified as held for sale, a detailed criteria must be met.

Required:
Identify any TWO criteria to be met before an asset can be classified as held for sale. (2 marks)

Answer

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Tags: Discontinued Operations, Held for Sale, IFRS 5, Non-current Assets
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2018

FR – May 2018 – L2 – Q2d – Financial Reporting Standards and Their Applications

Discuss the accounting treatment for the revaluation of an intangible asset for 2016 and 2017 in accordance with IAS 38.

Question

Delali Ltd adopts the revaluation model for subsequent measurement of its intangible assets in accordance with IAS 38: Intangible Assets. The policy of Delali is to revalue its intangible asset at the end of each year. An intangible asset with an estimated useful life of 9 years was acquired on 1 January 2016 for GH¢45,000. It was revalued to GH¢54,400 on 31 December 2016, and the revaluation surplus was correctly recognized on that date. As at 31 December 2017, the asset was revalued at GH¢32,000.

Required:
Discuss the accounting treatment required in the 2016 and 2017 financial statements. (4 marks)

Answer

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Tags: Amortisation, IAS 38, Intangible Assets, Revaluation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2018

FR – May 2018 – L2 – Q2c – Financial Reporting Standards and Their Applications

Calculate the Earnings per Share for 2017 and 2016 in accordance with IAS 33 after a rights issue by Abu Ltd.

Question

Abu Ltd had 100,000 shares in issue, but then makes a 1 for 5 rights issue on 1 October 2017 at a price of GH¢1. The market value on the last day of quotation with rights was GH¢1.60. Total earnings are GH¢50,000 in 2017, and GH¢40,000 in 2016.

Required:
Calculate the Earnings per Share for the year ended 31 December 2017 and the corresponding figure for 2016 in accordance with IAS 33: Earnings per Share. (4 marks)

Answer

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Tags: Earnings Per Share, EPS, IAS 33, Rights Issue
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2018

FR – May 2018 – L2 – Q2b – Financial Reporting Standards and Their Applications

Calculate the carrying amount of a plant asset after applying impairment losses as at 31 March 2018 in line with IAS 36.

Question

Devine Education Ltd acquired an item of plant at a cost of GH¢800,000 on 1 April 2016. The plant had an estimated residual value of GH¢50,000 and an estimated useful life of five years, neither of which has changed. Devine Education Ltd uses straight-line depreciation.

On 31 March 2018, Devine Education Ltd was informed by a major customer (who buys products produced by the plant) that it would no longer be placing orders with Devine Education Ltd. Even before this information was known, Devine Education Ltd had been having difficulty finding work for this plant. It now estimates that net cash inflows earned from the plant for the next three years will be:

Year ended	GH¢’000
31 March 2019	220.00
31 March 2020	180.00
31 March 2021	170.00

Devine Education Ltd has confirmed that there is no market in which to sell the plant as at 31 March 2018, but is confident that it can still be sold for its original estimated realisable value on 31 March 2021. Devine Education Ltd’s cost of capital is 10%, and the following values should be used:

Value of GH¢1 at:
End of year 1	0.91
End of year 2	0.83
End of year 3	0.75

Required:
In line with IAS 36: Impairment of Assets, calculate the carrying amount of the asset above as at 31 March 2018 after applying any impairment losses. (Note: Calculations should be to the nearest GH¢1,000). (6 marks)

Answer

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Tags: Depreciation, Discounted Cash Flow, IAS 36, Impairment of Assets
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2018

FR – May 2018 – L2 – Q2a – Financial Reporting Standards and Their Applications

Explain the two ways that the Directors of Sea Fishing Ltd can account for the grant in line with relevant accounting standards.

Question

On 1 October 2016, the Government of Ghana awarded Sea Fishing Ltd one of six licenses issued to operate a production facility for five years. A subsidised sum of GH¢1 million was paid by Sea Fishing Ltd for the license. The Government of Ghana considers the difference between the nominal value and its fair value, which is GH¢3,000,000, as a grant to Sea Fishing Ltd.

Required:
Explain the TWO ways that the Directors of Sea Fishing Ltd can account for this transaction. (Apply the relevant accounting standards). (4 marks)

Answer

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Tags: Government Grant, IAS 20, IFRS, Intangible Assets
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2018

FR – Aug 2022 – L2 – Q5b – Financial Reporting Standards and Their Applications

Determine whether Rivoli Hotel Ltd’s disposal and refurbishment decisions meet the criteria for classification as discontinued operations under IFRS 5.

Question

Rivoli Hotel Ltd’s sole activity is the operation of hotels in major cities across Ghana. After a period of declining profitability due to the COVID-19 pandemic, the company made the following decisions during the year ended 30 April 2022:

i) Rivoli Hotel Ltd disposed of all its hotels in City A.

ii) Rivoli Hotel Ltd refurbished all its hotels in City B to target the holiday and tourism market, shifting away from business clients.

Required:

Treating the two decisions separately, justify whether they meet the criteria for being classified as discontinued operations in the financial statements of Rivoli Hotel Ltd for the year ended 30 April 2022.

Answer

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Tags: Classification of Operations, Discontinued Operations, Financial Statements, IFRS 5, Operations Disposal
Level: Level 2