Question Tag: Fair Value

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  • 20 Marks

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

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

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)

a) Calculation of ratios for 2018:

(1 mark each for correct computation of ratios x 5 ratios = 5 marks)

b) Analyses of the performance of Hukpor Limited using the ratios computed:



(2 marks each for analysis of performance x 5 ratios = 10 marks)

c) Limitations of Ratio Analysis

  • Although ratios are useful as a starting point in financial analysis, they are not an end in themselves. Ratios can be used as indicators of what to pursue in a more detailed analysis.
  • Different companies often use different accounting methods (e.g. FIFO versus LIFO inventory valuation) and this can have an impact on the financial ratios that does not reflect real differences in the operations and financial health of the companies.
  • Making comparisons across industries can be difficult. Companies in different industries tend to have different financial ratios.
  • Since the ratios are based on accounting statements, they measure what has happened in the past and not necessarily what will happen in the future.
  • Business conditions: You need to place ratio analysis in the context of the general business environment. For example, 60 days of sales outstanding for receivables might be considered poor in a period of rapidly growing sales,but might be excellent during an economic contraction when customers are in severe financial condition and unable to pay their bills.
  • Interpretation: It can be quite difficult to ascertain the reason for the results of a ratio. For example, a current ratio of 2:1 might appear to be excellent, until you realize that the company just sold a large amount of its stock to bolster its cash position. A more detailed analysis might reveal that the current ratio will only temporarily be at that level,and will probably decline in the near future.
  • Company strategy: It can be dangerous to conduct a ratio analysis comparison between two firms that are pursuing different strategies. For example, one company may be following a low-cost strategy, and so is willing to accept a lower gross margin in exchange for more market share. Conversely, a company in the same industry is focusing on a high customer service strategy where its prices are higher and gross margins are higher, but it will never attain the revenue levels of the first company.

(1 mark for each limitation well explained x 5 limitations = 5 marks)

  • 5 Marks

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

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

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.

i) The investment in the equity shares of Obojo Ltd is classified as a financial asset at fair value through other comprehensive income (FVOCI), as Bawaleshie Ltd made an election to do so at the date of purchase. At 31 January 2017, the shares should be revalued to their fair value of GH¢2.8 million, resulting in a fair value gain of GH¢200,000 (GH¢2.8 million – GH¢2.6 million). This gain will be recognised in other comprehensive income and reported in equity under reserves.
Journal Entry:
Dr Financial Assets GH¢200,000
Cr Other Comprehensive Income GH¢200,000
(Fair value gain on investment in shares of another entity)
(2 marks)

ii) The bond investment is measured at amortised cost because Bawaleshie Ltd intends to hold the bond to collect the contractual cash flows (interest and principal payments). The interest for the year (8% of GH¢10 million = GH¢800,000) should be accrued, even though it is not payable until 1 February 2017. The fair value of the bond at 31 January 2017 is irrelevant for measurement purposes under the amortised cost model.
Journal Entry:
Dr Interest Receivable GH¢800,000
Cr Profit or Loss GH¢800,000
(Interest accrued to Bawaleshie Ltd on bond investment)
(3 marks)

  • 5 Marks

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.

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.

Step 1: Calculate the impairment loss

  • The carrying amount of the cash-generating unit (CGU) is GH¢155 million.
  • The recoverable amount is the higher of the value in use (GH¢85 million) and the fair value less costs of disposal (GH¢75 million). Therefore, the recoverable amount is GH¢85 million.
  • The impairment loss is the difference between the carrying amount and the recoverable amount:
    Impairment loss = GH¢155 million – GH¢85 million = GH¢70 million.

Step 2: Allocation of impairment loss

  • According to IAS 36, the impairment loss should be allocated first to goodwill, then to other assets on a pro-rata basis based on their carrying amounts, excluding any assets that are already at their fair value (e.g., technology, which is now worthless, and other net assets, which are at their net realisable value).

Allocation of impairment loss:

Asset Carrying Amount (GH¢million) Impairment Allocation (GH¢million) Carrying Amount after Impairment (GH¢million)
Goodwill 20 (20) 0
Technology 5 (5) 0
Equipment 10 (5) 5
Land 50 (25) 25
Buildings 30 (15) 15
Other net assets 40 0 40
Total 155 (70) 85

Explanation of Allocation:

  • Goodwill is written off first: GH¢20 million impairment allocated to reduce goodwill to GH¢0.
  • Technology is worthless, so GH¢5 million is written off entirely.
  • The remaining GH¢45 million impairment is allocated pro-rata to equipment, land, and buildings based on their carrying amounts.

Step 3: Final carrying amounts after impairment

  • The total carrying amount of the CGU after impairment is GH¢85 million, matching the recoverable amount.

Impairment loss calculation: 1 mark
Allocation of impairment to goodwill and assets:  2 marks
Calculation of final carrying amounts:  2 marks

Total: 5 marks

  • 20 Marks

FR – May 2016 – L2 – Q2 – Group Financial Statements and Consolidation

Prepare a consolidated statement of financial position and calculate the non-controlling interest for H Plc, and explain the need to consolidate fair values.

On 1st April 2014, H Plc. acquired four million of the ordinary shares of S Ltd, paying GH¢4.50 each. At the same time, H Plc also purchased GH¢500,000 of S Ltd 10% redeemable preference shares. At the acquisition date, the retained earnings of S Ltd were GH¢8,400,000.

Reproduced below are the draft statements of financial positions of the two companies at 31st March 2015:

Extracts from the statement of profit or loss of S Ltd, before intra group
adjustments, for the year to 31st March 2015 are:

The following information is relevant:

  1. Included in the land and buildings of S Ltd is a large area of development land at a cost of GH¢5 million. Its fair value at the date S Ltd was acquired was GH¢7 million, and by 31st March 2015, this had risen to GH¢8.5 million. The group valuation policy for development land is to carry it at fair value and not depreciate it.
  2. At the date of acquisition of S Ltd, its plant and equipment included plant that had a fair value of GH¢4 million in excess of its carrying value. This plant had a remaining life of 5 years. Depreciation is calculated on a straight-line basis.
  3. During the year, S Ltd sold goods to H Plc. for GH¢1.8 million. S Ltd adds a 20% mark-up on cost to all its sales. Goods with a transfer price of GH¢450,000 were included in the inventory of H Plc. at 31st March 2015. The balance on the current accounts between H Plc. and S Ltd was GH¢240,000 on 31st March 2015.
  4. An impairment test carried out at 31st March 2015 showed that consolidated goodwill was impaired by GH¢1,488,000.
  5. S Ltd had paid its preference dividends in full and ordinary dividends of GH¢500,000.

Required:

  1. Prepare the consolidated statement of financial position of H Plc. as at 31st March 2015.
  2. Calculate the non-controlling interest in the adjusted profit of S Ltd for the year to 31st March 2015.
  3. Explain why IFRS 3 Business Combinations requires an acquirer to consolidate the fair values of the assets and liabilities of an acquired subsidiary, at the acquisition date.

(a) Consolidated Statement of Financial Position of H Plc. as at 31st March 2015

Workings
1. Group structure

 

2. Net Assets:

 

3. Goodwill computation

Note: proportionate method is required as the question is silent of fair value method.

 

4. Consolidated income surplus

 

5. Non-Controlling interest

 

b) Non-controlling interest in the adjusted profit of H LTD for the year ended March
2015.

The profits after tax are GHC2,925, but the preference dividends would have been paid,
as distributable profits exist. The ordinary NCI is 20% of the retention.

(c) Explanation of IFRS 3 Requirements

IFRS 3 requires the consolidation of the fair values of the assets and liabilities of an acquired subsidiary at the acquisition date to:

  • Ensure that goodwill is measured reliably and consistently across acquisitions and companies.
  • Prevent specific assets and liabilities from being incorrectly attributed to goodwill.
  • Enable the post-acquisition profits to be more accurately reported.
  • 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.

Sikapa Bond
Initial Recognition Dr Financial assets: GH¢40.425 million Cr Cash: GH¢40.425 million
Subsequent Measurement Finance income at 6.75% of GH¢40.425 million = GH¢2.7 million Dr Financial assets: GH¢2.7 million
Cr Profit or loss (finance income): GH¢2.7 million
Interest Payment Dr Cash: GH¢1.89 million (4% of GH¢47.25 million) Cr Financial assets: GH¢1.89 million

For the Sikapa bond, as it was purchased with the intention of holding it for the long term and receiving the interest and principal as they fall due, it meets the criteria for classification under the amortised cost model.

Cocoa Bond
Initial Recognition Dr Financial assets: GH¢29.4 million Cr Cash: GH¢29.4 million
Interest Payment Dr Cash: GH¢1.575 million (5% of GH¢31.5 million) Cr Finance income: GH¢1.575 million
Fair Value Adjustment Fair value at year-end: GH¢28.875 million Dr Profit or loss (finance costs): GH¢0.525 million
Cr Financial assets: GH¢0.525 million

The Cocoa bond was purchased with the intention of being sold at a profit. Thus, under IFRS 9, this bond must be measured at fair value.

Workings:

  1. Sikapa Bond:
    • Effective interest rate: 6.75%
    • Coupon payment: 4% of GH¢47.25 million = GH¢1.89 million
    • Finance income: 6.75% of GH¢40.425 million = GH¢2.7 million
  2. Cocoa Bond:
    • Fair value at year-end: GH¢28.875 million
    • Loss on fair value: GH¢29.4 million – GH¢28.875 million = GH¢0.525 million
  • 5 Marks

FR – Nov 2016 – L2 – Q2e – Preparation of Financial Statements

Discuss how a plant classified as held for sale should be accounted for under IFRS 5.

Sofoline Ltd has a plant which cost GH¢40,000 and was purchased on 1 January 2013 with a useful life of 10 years. The plant was being used as part of its business operating capacity. On 30 June 2015, Sofoline Ltd made a decision to classify the plant as held for sale and an agent was appointed for the sale of the plant, which started being advertised at a selling price of GH¢29,000, which was considered to be its fair value. The selling expenses are estimated to be GH¢1,500. The asset has not yet been sold by the year-end of 31 December 2015, and it has a fair value less cost to sell of GH¢24,000 on this date.

Required:
Discuss how this will be accounted for in the financial statements of Sofoline Ltd for the year ended 31 December 2015 in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

Under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, non-current assets classified as held for sale should be measured at the lower of carrying amount and fair value less costs to sell. The following steps outline how the plant should be accounted for:

Conclusion:

    • The plant should be recognised as an asset held for sale at GH¢24,000 in the statement of financial position as of 31 December 2015.
    • A total impairment loss of GH¢6,000 (GH¢2,500 + GH¢3,500) should be recognised in the statement of profit or loss for the year.
  • 5 Marks

CR – Nov 2018 – L3 – Q2c – IFRS 13 Fair value measurement

Advise Gonja Ltd on the fair value measurement of its real estate-linked investment portfolio in the financial statements for 31 July 2018.

Gonja Ltd is an investment company that holds a portfolio of securities linked to the real-estate market in Ghana. The following information is available at 31 July 2018 regarding this portfolio:

  • The portfolio cost GH¢13 million 2 years ago.
  • Real-estate prices in Ghana are generally accepted to have dropped by 20-30% in the past 2 years.
  • The portfolio of securities held by Gonja is difficult to value, as there is no active market. However, the company has received an offer of GH¢2.6 million for this portfolio from an investor. It has no intention of accepting this offer, although similar companies have accepted offers from this investor due to financial difficulties.
  • A normal sale in the present climate could be reasonably expected to yield GH¢6 million, based on an analysis of transactions in similar assets.
  • Gonja’s valuation models suggest that the real estate market in Ghana will recover, and it expects that the portfolio will generate GH¢12 million (at present value) over the next three years.

Required:
In accordance with IFRS 13: Fair Value Measurement, advise Gonja Ltd on the amount it should state its investment portfolio in its financial statements to 31 July 2018, assuming it wishes to use fair value as measured.

  • Fair Value Hierarchy:
    • IFRS 13 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy categorizes inputs into three levels:
      • Level 1: Quoted prices in active markets for identical assets.
      • Level 2: Inputs other than quoted prices that are observable, either directly or indirectly.
      • Level 3: Unobservable inputs, based on the entity’s own assumptions.
  • Valuation of the Portfolio:
    • No Active Market: There is no active market for Gonja Ltd’s real estate-linked securities portfolio. Therefore, Level 1 inputs are not available.
    • Offer of GH¢2.6 million: This offer represents a Level 3 input because it is based on the investor’s individual offer, but Gonja Ltd has no intention of accepting this offer, so it does not reflect a market price.
    • Expected Sale for GH¢6 million: The GH¢6 million expected sale value is based on transactions of similar assets and can be considered a Level 2 input. This is the most reliable estimate of fair value because it reflects observable data for similar assets in the market.
    • Valuation Models (GH¢12 million): The valuation model that predicts future recovery to GH¢12 million is a Level 3 input, as it is based on unobservable inputs and management’s expectations. This is less reliable than the Level 2 input.
  • Conclusion:
    • The most reliable and appropriate fair value under IFRS 13 would be GH¢6 million, based on the Level 2 inputs from transactions in similar assets. This reflects the market conditions more accurately than the Level 3 inputs from the valuation models or the unsolicited offer.
  • 5 Marks

CR – Nov 2018 – L3 – Q2b – Financial instruments: Recognition and measurement Corporate reporting

Recommend the financial reporting treatment for an interest-free government loan received by Bole Bamboi Ltd, including suitable calculations.

On 1 June 2017, Bole Bamboi Ltd (Bole Bamboi) purchased a factory building in a regional development area for GH¢4 million. It used the building to store some relocated equipment, but shortly after the purchase, the roof needed to be replaced. Bole Bamboi has been replacing the roof of the factory building with an environmentally friendly one, including insulation and integrated solar panels. The replacement of the roof will cost GH¢2 million. The cost of the replacement is to be incurred by Bole Bamboi; however, the Ministry of Trade and Industry advanced a 5-year, interest-free loan to Bole Bamboi on 1 July 2017 to finance the GH¢2 million cost. The loan has to be repaid in 5 equal annual instalments of GH¢400,000 beginning on 30 June 2018. An equivalent loan from Bole Bamboi’s bank with the same repayment terms would have been made at a fixed annual interest rate of 5% for the 5 years.

The present value of 5 annual payments of GH¢1 at 5% is GH¢4.32948.

Required:
In accordance with IFRS, recommend, with suitable calculations, the financial reporting treatment of the above items in the financial statements of Bole Bamboi for the year ended 31 December 2017.

  1. Initial Recognition of the Loan:
    • The interest-free loan should be initially recognized at its fair value, which is calculated by discounting the future repayments at the market rate of interest (5%).
    • The present value of the loan is calculated as follows:
      • Present value of loan = GH¢400,000 × 4.32948 = GH¢1,731,791.
    • The difference between the face value of the loan (GH¢2 million) and the present value of the loan (GH¢1,731,791) is recognized as deferred income, which represents a government grant.

    Journal Entries:

    • Debit Cash: GH¢2,000,000
    • Credit Loan (Liability): GH¢1,731,791
    • Credit Deferred Income (Government Grant): GH¢268,209
  2. Subsequent Measurement (Interest and Grant Amortization):
    • The loan liability should be unwound using the effective interest rate method. Interest expense is recognized on the loan liability at 5% per annum.
    • For the year ended 31 December 2017:
      • Interest expense = GH¢1,731,791 × 5% = GH¢86,590.
    • The government grant should be amortized to profit or loss to match the interest expense, ensuring the interest cost is offset by the grant. The amount of grant recognized as income in 2017 would be GH¢86,590, so that the net effect on profit or loss is neutral.

    Journal Entries for 2017:

    • Debit Interest Expense: GH¢86,590
    • Credit Loan (Liability): GH¢86,590
    • Debit Deferred Income (Government Grant): GH¢86,590
    • Credit Other Income: GH¢86,590
  3. Amortization of the Government Grant:
    • The remaining deferred income will be amortized over the 5-year loan repayment period, offsetting the interest expense in each year.
  • 15 Marks

CR – May 2016 – L3 – Q2b – IAS 36: Impairment of assets

Advise on impairment effects on consolidated financial statements for various scenarios including subsidiaries, plant assets, and R&D projects.

AT Group Ltd is preparing its financial statements to 30th June 2015. The following situations have been identified by an impairment review team;

On 1st July 2014, AT Group Ltd acquired the whole share capital of two subsidiary companies, Accra Ltd and Tema Ltd, in separate acquisitions. Consolidated goodwill was calculated as follows;

Accra Ltd Tema Ltd GH¢’000 GH¢’000 Purchase Consideration 24,000 9,000 Estimated fair value of net assets (16,000) (6,000) Consolidated goodwill 8,000 3,000

i) A review of the fair value of each subsidiary’s net assets was undertaken in June 2015. Unfortunately both companies’ net assets had declined in value. The estimated value of Accra Ltd.’s net assets as at 1st July 2014 was now only GH¢15,000,000. This was due to more detailed information becoming available about the market value of its specialized properties. Tema Ltd.’s net assets were estimated to have a fair value of GH¢1,000,000 less than their carrying value. This fall was due to some physical damage occurring to its plant and machinery. (4 marks)

ii) AT Group Ltd has an item of earth moving plant, which is rented out to companies on short-term contracts. Its carrying value, based on depreciated historical cost is GH¢400,000. The estimated selling price of this asset is only GH¢250,000, with associated selling expenses of GH¢5,000. A recent review of its value in use based on its forecast future cash flows was estimated at GH¢500,000. Since this review was undertaken, there has been a dramatic increase in interest rates that has significantly increased the cost of capital used by AT Group Ltd to discount the future cash flows of the plant. (6 marks)

iii) AT Group Ltd is engaged in a research and development project to produce a new product. In the year to 30th June 2015, the company spent GH¢120,000 on research that concluded that there were sufficient grounds to carry the project on to its development stage and a further GH¢75,000 had been spent on development. At that date management having decided that they were not sufficiently confident in the ultimate profitability of the project wrote off all the expenditure to date to the income statement. In the current year further direct development costs have been incurred of GH¢80,000 and the development work is now complete with only an estimated GH¢10,000 of costs to be incurred in the future. Production is expected to commence within the next few months. Unfortunately the total trading profit from sales of the new product is not expected to be as good as market research data originally forecast and is estimated at only GH¢150,000. As the future benefits are greater than the remaining future costs, the project will be completed, but due to the overall deficit expected, the directors have again decided to write off all the development expenditure. (5 marks)

Required: Advise, with numerical illustrations where possible, how the information in (i) to (iii) above would affect the preparation of AT Group Ltd.’s consolidated financial statements to 30th June 2015.

i. On the acquisition of a subsidiary, the purchase consideration must be allocated to the fair value of its net assets with the residue being classed as goodwill (or negative goodwill if the assets have a greater fair value than the purchase consideration. IFRS 3 revised Business Combinations recognizes that it is not always possible to accurately determine the value of some assets at the date of acquisition and therefore allows a measurement period up to the end of the first full reporting period following the period of acquisition. As the revision to the value of Accra Ltd.’s assets was due to more detailed information becoming available, the fall in its asset values should be treated as an adjustment to provisional valuations made at the time of acquisition. In effect the net assets and goodwill should be restated to GH₵15,000,000 and GH₵9,000,000 respectively; the fall of GH₵1,000,000 is not an impairment loss and should not be charged to the income statement. The above assumes that the recoverable value of the company as a whole is greater than GH₵24,000,000.

The fall in value of Tema Ltd.’s assets is the result of events that occurred after the acquisition (i.e. physical damage to the plant) and this does constitute an impairment loss. The plant and machinery should be written down to its recoverable amount and the loss charged to the income statement. On the assumption that the recoverable value of the company as a whole has not fallen, goodwill will not be affected.

ii. On the basis of the original estimates, AT Group Ltd.’s earth – moving plant was not impaired, the value in use of GH₵500,000 being greater than its carrying value. However due to the dramatic increase in interest rates causing AT Group Ltd.’s cost of capital to increase, the value in use of the plant will have to be recalculated. As the discount rate has risen this will cause the value in use to fall. There is insufficient information to be able to quantify this fall. If the new discounted value is above the carrying value of GH₵400,000 there is still no impairment. If it is between GH₵245,000 and GH₵400,000, this will be the recoverable amount of the plant and it should be written down to this value. As the plant can be sold for GH₵250,000 less the selling costs of GH₵5,000; then GH₵245,000 is the least amount that the plant should be written down to even if its revised value in use is below this figure.

iii. The treatment of the research and development costs in the year to 30th June 2015 was correct due to the element of uncertainty at that date. The development costs of GH₵75,000 written off in that same period should not be capitalized at a later date even if the uncertainties leading to its original write off are favourably resolved. The treatment of the development costs in the year to 30th June 2015 is incorrect. The directors’ decision to continue the development is logical as at the time of the decision the future costs are estimated at only GH₵10,000 and the future revenues are expected to be GH₵150,000. It is also true that the project is now expected to lead to an overall deficit of GH₵135,000 (120+75+80+10-150 in GH₵’000). However at 30th June 2015, the unexpensed development costs of GH₵80,000 are expected to be recovered. Provided the criteria in IAS 38 Intangible Assets are met these costs of GH₵80,000 should be recognized as an asset in the statement of financial position and matched to the future earnings of the new product. Thus, the director’s logic of writing off the GH₵80,000 development costs at 30th June 2015 because of an expected overall loss is flawed. The directors do not have the choice to write off the development expenditure.

  • 20 Marks

CR – Nov 2023 – L3 – Q1 – Consolidated Financial Statements

Preparation of consolidated statement of profit or loss and other comprehensive income including adjustments for NCI, goodwill, and fair value.

Below are the statements of comprehensive income of Agingo Plc (Agingo), Telemo Plc (Telemo), and Zimbo Plc (Zimbo) for the year ended 31 March 2023:

Item Agingo (GH¢000) Telemo (GH¢000) Zimbo (GH¢000)
Revenue 432,840 302,988 259,704
Cost of sales (194,778) (136,345) (116,867)
Gross profit 238,062 166,643 142,837
Operating expenses (83,322) (58,325) (49,993)
Other income 10,821 7,575 6,493
Finance cost (5,952) (4,166) (3,571)
Profit before tax 159,609 111,727 95,766
Tax (39,902) (29,927) (27,134)
Profit for the year 119,707 81,800 68,632
Other comprehensive income 6,493 5,843 –
Total comprehensive income 126,200 87,643 68,632

Additional Information:

  1. Agingo held 15% of the equity shares of Telemo and acquired an additional 45% and 10% of the loan stock during the year.
  2. Fair value adjustments were made for the production machinery of Telemo, which had a useful life of 4 years.
  3. Agingo acquired 70% of Zimbo in 2016.
  4. Intercompany transactions occurred between Telemo and Agingo.
  5. There were shareholding increases and impairments during the year.
  6. Any intercompany dividends were excluded.

Required:
Prepare the consolidated statement of profit or loss and other comprehensive income of Agingo’s group for the year ended 31 March 2023. (All your workings are to be rounded to the nearest thousand).

3. Fair Value Adjustment: GH¢2 million increase in Telemo’s production machinery value.

 

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