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  • 6 Marks

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

Prepare extracts for the Statement of Financial Position and Statement of Profit or Loss for Kundugu Ltd in 2020 and 2021, accounting for a lease agreement under IFRS 16.

b) Kundugu Ltd (Kundugu) is a manufacturing company located in the Savannah Region. The reporting date of Kundugu is 31 December, and the company reports under International Financial Reporting Standards (IFRSs). Kundugu intends to expand its production to take advantage of emerging economic activities in the new region.

On 1 January 2020, the company entered into a lease agreement for production equipment with a useful economic life of 8 years. The lease term is for four years, and Kundugu agrees to pay annual rent of GH¢50,000 commencing on 1 January 2020 and annually thereafter. The interest rate implicit in the lease is 7.5%, and the lessee’s incremental borrowing rate is 10%. The present value of lease payments not yet paid on 1 January 2020 is GH¢130,026. Kundugu paid legal fees of GH¢1,000 to set up the lease.

Required:
Prepare extracts for the Statement of Financial Position and Statement of Profit or Loss for 2020 and 2021, showing how Kundugu should account for this transaction. (6 marks)

Kundugu Ltd
Statements of financial position extract as at 31st
December 2020

Kundugu Ltd


Annual depreciation = GHS181,026 ÷ 4 years GHS 45,257
Initial recognition of right-of-use asset 1 mark Initial recognition of lease liability 0.5 marks
Lease schedule 1.5 mark
SOFP (Extract) 2 marks
SOPL (Extract) 1 mark

  • 20 Marks

FR – Nov 2015 – L2 – Q5 – Group Financial Statements and Consolidation

This question involves calculating goodwill on acquisition and preparing a consolidated statement of profit or loss for VM Ltd for the year ended 30 September 2012, including intragroup adjustments.

On 1 January 2012, VM Ltd acquired 18 million of the equity shares of GR Ltd in a share exchange in which VM Ltd issued two new shares for every three shares it acquired in GR Ltd. This gave VM Ltd a holding of 90%. Additionally, on 31 December 2012, VM Ltd will pay the shareholders of GR Ltd GHS 1.76 per share acquired. VM Ltd’s cost of capital is 10% per annum.

At the date of acquisition, shares in VM Ltd and GR Ltd had market prices of GHS 6.50 and GHS 2.50 each, respectively.

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 2012

Description VM (GHS ‘000) GR (GHS ‘000)
Revenue 129,200 76,000
Cost of sales (102,400) (52,000)
Gross profit 26,800 24,000
Distribution costs (3,200) (3,600)
Administrative expenses (7,600) (4,800)
Investment income 1,000 –
Finance costs (840) –
Profit before tax 16,160 15,600
Income tax expense (5,600) (3,200)
Profit for the year 10,560 12,400

Equity as at 1 October 2011

Description VM (GHS ‘000) GR (GHS ‘000)
Stated capital 120,000 30,000
Income surplus 108,000 70,000

The following information is relevant:

(i) At the date of acquisition, the fair values of GR Ltd’s assets and liabilities were equal to their carrying amounts with the exception of two items:

  1. An item of plant had a fair value of GHS 3.6 million above its carrying amount. The remaining life of the plant at the date of acquisition was three years. Depreciation is charged to cost of sales.
  2. GR Ltd had a contingent liability which VM Ltd estimated to have a fair value of GHS 900,000. This has not changed as at 30 September 2012.

GR Ltd has not incorporated these fair value changes into its financial statements.

(ii) VM Ltd’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, GR Ltd’s share price at the date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.

(iii) Sales from VM Ltd to GR Ltd throughout the year ended 30 September 2012 had consistently been GHS 1.6 million per month. VM Ltd made a mark-up of 25% on these sales. GR Ltd had GHS 3 million of these goods in inventory as at 30 September 2012.

(iv) VM Ltd’s investment income is a dividend received from its investment in a 40% owned associate, which it has held for several years. The underlying earnings for the associate for the year ended 30 September 2012 were GHS 4 million.

(v) Although GR Ltd has been profitable since its acquisition by VM Ltd, the market for GR Ltd’s product has been badly hit in recent months, and VM Ltd had calculated that the goodwill has been impaired by GHS 4 million as at 30 September 2012.

Required:

(a) Calculate the goodwill on acquisition of GR Ltd.
(5 marks)

(b) Prepare the consolidated statement of profit or loss for VM Ltd for the year ended 30 September 2012.
(15 marks)

(Total: 20 marks)

(a) Goodwill at acquisition

Description GHS ‘000
Consideration transferred
– Stated capital (12m x GHS 6.50) 78,000
– Deferred consideration (18m x GHS 1.76 x 1/1.1) 28,800
Total consideration transferred 106,800
Fair value of non-controlling interest (NCI) 5,000
Total consideration plus NCI 111,800
Fair value of GR Ltd’s net assets at acquisition
– Stated capital (30,000)
– Income surplus (70,000 + (12,400 x 3/12)) (73,100)
– Fair value adjustment to plant (3,600)
– Contingent liability 900
Net assets (105,800)
Goodwill 6,000

(b) VM LTD GROUP – CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 30 SEPTEMBER 2012

Description GHS ‘000
Revenue (129,200 + (76,000 x 9/12) – 14,400 (W2)) 171,800
Cost of sales (102,400 + (52,000 x 9/12) – 14,400 + 600 (W2) + 900 (W3)) (128,500)
Gross profit 43,300
Distribution costs (3,200 + (3,600 x 9/12)) (5,900)
Administrative expenses (7,600 + (4,800 x 9/12) + 4,000 goodwill impairment) (15,200)
Finance costs (W4) (3,000)
Share of profit of associate (4,000 x 40%) 1,600
Profit before tax 20,800
Income tax expense (5,600 + (3,200 x 9/12)) (8,000)
Profit for the year 12,800
Attributable to:
Owners of the parent 12,360
Non-controlling interest (W5) 440
Total profit for the year 12,800

Workings

1) Group structure
VM Ltd holds 90% of GR Ltd.

2) Intragroup trading

Description GHS ‘000
Intragroup sales (1,600 x 9 months) 14,400
Unrealized profit (GHS 3,000 x 25/125) 600

3) Fair value adjustment on plant

Description GHS ‘000
Fair value adjustment 3,600
Depreciation on adjustment (GHS 3,600 / 3 years x 9/12) (900)

4) Finance costs

Description GHS ‘000
VM Ltd finance costs 840
Unwinding of discount on deferred consideration ((28,800 x 10%) x 9/12) 2,160
Total finance costs 3,000

5) Non-controlling interest

Description GHS ‘000
Profit for the year (12,400 x 9/12) 9,300
Depreciation on fair value adjustment (900)
Goodwill impairment (4,000)
Total 4,400
NCI share (10%) 440

(b) VM LTD GROUP – CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 30 SEPTEMBER 2012

Description GHS ‘000
Revenue (129,200 + (76,000 x 9/12) – 14,400 (W2)) 171,800
Cost of sales (102,400 + (52,000 x 9/12) – 14,400 + 600 (W2) + 900 (W3)) (128,500)
Gross profit 43,300
Distribution costs (3,200 + (3,600 x 9/12)) (5,900)
Administrative expenses (7,600 + (4,800 x 9/12) + 4,000 goodwill impairment) (15,200)
Finance costs (W4) (3,000)
Share of profit of associate (4,000 x 40%) 1,600
Profit before tax 20,800
Income tax expense (5,600 + (3,200 x 9/12)) (8,000)
Profit for the year 12,800
Attributable to:
Owners of the parent 12,360
Non-controlling interest (W5) 440
Total profit for the year 12,800
  • 8 Marks

CR – Dec 2022 – L3 – Q2b – IFRS 16: Leases

Calculate lease liabilities and right-of-use assets for Zigi Plc under IFRS 16 for the years ended 2020 and 2021.

On 1 January 2020, Zigi Plc (Zigi) entered into a 6-year lease of a manufacturing plant with annual lease payments of GH¢5.5 million, starting from 31 December 2020. The lease agreement specified that the lease payments (except yearly baseline payments of GH¢1 million included in the GH¢5.5 million) would increase every two years on the basis of the Consumer Price Index (CPI) for the preceding 24 months. The CPI at the commencement date was 125. Additionally, Zigi is required to pay GH¢500,000 every year once cost savings in that year reach at least GH¢6 million. Zigi’s cost savings achieved with its other assets had been averaging GH¢5.1 million prior to 1 January 2020. The initial direct non-reimbursable cost incurred by Zigi was GH¢350,000.

The rate implicit in the lease, which should have been 12% per annum, was not readily determinable by Zigi. Zigi’s incremental borrowing rate was 14% per annum. At 31 December 2021, the CPI was revised to 138. The actual cost savings achieved by Zigi in the years ended 31 December 2020 and 31 December 2021 were GH¢5.3 million and GH¢6.8 million, respectively.

The cumulative discount factors based on 12% and 14% are provided below:

Years 12% 14%
6 4.11 3.89
5 3.60 3.43
4 3.04 2.91

Required:
In accordance with IFRS 16: Leases, explain how the above lease would affect Zigi’s financial statements for the years ended 31 December 2020 and 2021.
(Total: 8 marks)

 

 

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