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 2018 – L2 – Q2e- Financial Reporting Standards and Their Applications

This question tests the explanation of temporary differences in relation to deferred tax liabilities and assets under IAS 12.

Question

In accordance with IAS 12: Income Taxes, deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.

Required:
Explain temporary differences.

Answer

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Tags: Deferred Tax, IAS 12, Income Tax, Temporary Differences
Level: Level 2

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

FR – Nov 2018 – L2 – Q2d- Financial Reporting Standards and Their Applications

This question tests the classification of events after the reporting period as either adjusting or non-adjusting.

Question

The following events occurred after the year end, but before the financial statements were authorised for issue:

Enactment by the government of a revised tax rate affecting the amount of the settlement of the deferred tax liability included in the financial statements.
A share split in respect of the earnings per share calculation.
Criteria being met in order to classify non-current assets as held for sale.
A material, but not fundamental, error arising in the comparative figures.

Required:
In accordance with IAS 10: Events after the reporting period, explain with justification whether each of the above is an adjusting or a non-adjusting event after the reporting period.

Answer

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Tags: Adjusting Events, Deferred Tax, Earnings Per Share, IAS 10, Non-adjusting Events
Level: Level 3

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

FR – Nov 2018 – L2 – Q2c- Financial Reporting Standards and Their Applications

This question requires calculating the adjustments to opening retained earnings and profit or loss due to changes in accounting policies and estimates.

Question

Talensi, a company reporting under IFRS, is considering making the following changes to its financial statements for the year ended 31 December 2017. Talensi presents one year of comparative information.

Changing the method of depreciation of its plant from straight-line depreciation over five years (with a nil residual value) to reducing balance at 20% per annum with effect from 1 January 2017. The plant originally cost GH¢100 million on 1 January 2015.
Changing the basis of valuation of certain non-seasonal inventories from first-in, first-out (FIFO) to weighted average cost (WAC). Inventories were valued as follows under the two different methods:

31 December 2015 31 December 2016 31 December 2017

FIFO: GH¢64 million FIFO: GH¢66 million FIFO: GH¢71 million

WAC: GH¢62 million WAC: GH¢63 million WAC: GH¢67 million
Changing the revenue recognition basis for certain seasonal goods that were first sold in 2015 such that revenue is recognised on delivery to the customer rather than on shipment. This has arisen as a result of a change in delivery arrangements such that, with effect from 1 January 2017, risks are now borne by Talensi until delivery has been made to the customer.

2015 2016 2017

Revenue based on shipment date: GH¢50 million GH¢86 million GH¢90 million

Revenue based on delivery date: GH¢46 million GH¢84 million GH¢88 million

31 December 2015	31 December 2016	31 December 2017
FIFO: GH¢64 million	FIFO: GH¢66 million	FIFO: GH¢71 million
WAC: GH¢62 million	WAC: GH¢63 million	WAC: GH¢67 million

2015	2016	2017
Revenue based on shipment date: GH¢50 million	GH¢86 million	GH¢90 million
Revenue based on delivery date: GH¢46 million	GH¢84 million	GH¢88 million

The cost of the seasonal goods is consistently 80% of sales price.

Profit (calculated using existing policies and accounting estimates) was GH¢240 million for the year ended 31 December 2017.

Required:
Calculate the adjustment to opening retained earnings in the statement of changes in equity (including 2016 comparative figures) in the financial statements for the year ended 31 December 2017 and profit or loss for the year ended 31 December 2017.

Answer

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Tags: Changes in Accounting Policies, Depreciation, IAS 8, Inventory Valuation, Retained Earnings, Revenue Recognition
Level: Level 2

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

FR – Aug 2022 – L2 – Q2b – Financial Reporting Standards and Their Applications

Explain the key concepts of accounting policies, changes in accounting estimates, and prior period errors as per 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. The standard requires compliance with any specific IFRS applying to a transaction, event, or condition, and provides guidance on developing accounting policies for other items that result in relevant and reliable information.

Required:

Explain the following in accordance with IAS 8:

i) Accounting policies (2 marks)
ii) A change in accounting estimate (2 marks)
iii) Prior period errors (2 marks)

Answer

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Tags: Accounting estimates, Accounting Policies, Financial Statements, IAS 8, Prior Period Errors
Level: Level 2

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

Aug 2022 – L2 – Q2a – Financial Reporting Standards and Their Applications

Discuss the accounting treatment of specific transactions for Hiba Ltd under IFRS for the year ending December 31, 2021.

Question

Hiba Ltd is a Ghanaian company located in the Bono region, and the directors are unsure of the implications of the International Financial Reporting Standards (IFRSs) on the following specific transactions that took place during the accounting period:

i) On 1 January 2021, Hiba sold one of its mining equipment to Wontumi Ltd for GH¢900,000. The carrying amount of the equipment before the transaction was GH¢500,000, with a remaining useful life of 10 years. On the same day, Hiba entered into a contract with Wontumi Ltd to use the equipment for 5 years, with annual payments of GH¢200,000 payable in arrears. The fair value of the equipment was GH¢800,000, and the interest implicit in the lease was 10% per annum. The sale satisfies the performance obligation criteria in IFRS 15.

ii) On 1 January 2021, Hiba issued 1.5 million shares at GH¢1 each for GH¢1.5 million. Each share is convertible on 31 December 2025 into 2 ordinary shares with a par value of GH¢0.10 each. Interest is payable at 8% per annum. The market interest rate for similar debt without a conversion option was 11%.

iii) On 1 January 2021, Hiba received notice of a lawsuit from an ex-employee claiming unjust dismissal, with an 85% chance of losing the case and being required to pay GH¢1.275 million by 1 January 2022. Based on legal advice, Hiba recorded a provision of GH¢1 million and made no further adjustments. The cost of capital is 9%, and the discount factor at 9% for one year is 0.9174.

Required:
Discuss how the above transactions (i) – (iii) should be treated in Hiba’s financial statements for the year ending 31 December 2021 in accordance with IFRSs. (Show all calculations wherever possible).

Answer

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Tags: Financial instruments, IFRS 16, IFRS 9, Leases, Provisions, Revenue from Contracts
Level: Level 2

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

FR – Nov 2018 – L2 – Q2b- Financial Reporting Standards and Their Applications

This question relates to the impairment test of an asset, applying IAS 36.

Question

Due to a change in Pusiga Ltd’s production plans, an item of machinery with a carrying value of GH¢11 million at 31 December 2017 (after adjusting for depreciation for the year) may be impaired due to a change in use. An impairment test conducted on 31 December 2017 revealed its fair value less cost of disposal to be GH¢5 million. The machine is now expected to generate an annual net income of GH¢2 million for the next three years at which point the asset would be sold for GH¢2.4 million. An appropriate discount rate is 10%. Pusiga charges depreciation at 20% on a reducing balance method on machinery.

Note:

The present value of ordinary annuity of GH¢1 at 10% for one year, two years, and three years is 0.909, 1.736, and 2.487 respectively.
The present value of GH¢1 at 10% for one year, two years, and three years is 0.909, 0.826, and 0.751 respectively.

Required:
In accordance with IAS 36: Impairment of Assets, explain with justification the required accounting treatment in the financial statements of Pusiga Ltd for the year ended 31 December 2017.

Answer

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

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

FR – Nov 2018 – L2 – Q1a – Preparation of Financial Statements, Financial Reporting Standards and Their Applications

Explains the accounting treatment for deferred and contingent considerations during a subsidiary acquisition.

Question

Explain the accounting treatment for ‘deferred consideration’ and ‘contingent consideration’ in the context of the acquisition of a subsidiary by a parent entity.

Answer

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Tags: Acquisition, Consolidation, Contingent Consideration, Deferred Consideration
Level: Level 2

Topic: Financial Reporting Standards and Their Applications, Preparation of Financial Statements
Series: NOV 2018

FR – May 2019 – L2 – Q5b – Financial Reporting Standards and Their Applications

Calculation of accounting entries for machinery purchased under hire purchase and repossessed.

Question

Lease and hire purchase are very popular options for financing assets. These options vary from each other in many aspects: ownership of the asset, depreciation, rental payments, duration, tax impact, repairs and maintenance of the asset, and the extent of finance.

Thereatta Ltd is a listed advertising company operating in Ghana. The Board of Thereatta Ltd (Thereatta) was contemplating the most suitable option to finance one of its machinery before settling on Hire Purchase. On 1 January 2016, Thereatta acquired a machinery on hire-purchase basis from Askona Ltd agency. The terms of the Hire Purchase agreement require Thereatta to make four annual installments of GH¢6,000 each, payable at the end of each year. There is no down payment. Interest is charged at 20% per annum and is included in the annual installments.

Because of financial difficulties, Thereatta, after having paid the first and second installments respectively, could not pay the third yearly installment due on 31 December 2018, whereas the vendor repossessed the machinery. Thereatta provides depreciation on the machinery at 10% per annum according to the written-down value method.

Required:

Show the accounting treatment of the Machinery account and the account of Askona Ltd agency in the books of Thereatta. (All workings must be shown).

Answer

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Tags: Depreciation, Hire Purchase, Interest Calculations, Repossession
Level: Level 2

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

FR – May 2019 – L2 – Q2e – Financial Reporting Standards and Their Applications

Identification of key principles behind the accounting treatment for leases under IFRS 16.

Question

IFRS 16: Leases was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. However, early adoption is permitted, provided IFRS 15: Revenue from Contracts with Customers is implemented also. This standard applies to all leases, except those shorter than 12 months and small assets. It also brings additional disclosure requirements for both lessees and lessors. The IFRS brings significant changes to those leases formerly classified as operating leases under IAS 17: Leases, the previous standard.

Required:

Identify THREE (3) key principles behind the accounting treatment for leases as required by IFRS 16.

Answer

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Tags: Financial Liabilities, IFRS 16, Leases, Right-of-Use Assets
Level: Level 2

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

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

Treatment of Sukura Ltd’s investment in Awoshi Electronics under IFRS 9.

Question

Sukura Ltd entered into a contractual arrangement on 1 September 2018 with another company, Mammobi Ltd, setting up an unquoted entity, Awoshi Electronics. However, Sukura Ltd only has a 15% shareholding and does not have any influence in the day-to-day financial and operating policies. Sukura Ltd has recorded the investment in Awoshi Electronics at its cost on 1 September 2018, being the carrying amount of the equipment and cash transferred at that date. No subsequent changes were made to the carrying amount.

Required:

Advise the directors on the accounting treatment of the above in Sukura Ltd’s financial statements for the year ended 31 December 2018.

Answer

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Tags: Financial Asset, IFRS 9, Investment in Unquoted Shares
Level: Level 2