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  • 20 Marks

FR – Nov 2023 – L2 – Q3 – . Preparation of Financial Statements

Prepare the statement of profit or loss and other comprehensive income and the statement of financial position for Sompa Plc.

The following trial balance relates to Sompa Plc (Sompa) as at 30 June 2023:
Additional information:
i) Revenue includes a GH¢15 million sale made on 1 January 2023 of maturing goods, which are not biological assets. The cost of the goods at the date of sale was GH¢10 million.
Sompa is still in possession of the goods (but they have not been included in the inventory count). Sompa has the option to repurchase the goods at any time within three years of the sale at a price of GH¢15 million plus interest of 10% per annum. On 30 June 2023, the option had not been exercised but it is likely that it will be exercised before the date it lapses.
ii) Sompa commenced a research and development project on 1 January 2023. It spent GH¢5 million per month on research until 31 March 2023. The project then passed on into the development stage with an GH¢8 million per month spending from 1 April 2023 to 30 June 2023, when the development of the project was completed. However, on 1 May 2023, the directors of Sompa were confident that the new product would be a commercial success. Expensed research and development costs should be charged to cost of sales.
ii) Non current assets:
Sompa’s property is carried at fair value which at 30 June 2023 was GH¢145 million. The remaining life of the property at the beginning of the year (1 July 2022) was 15 years. Sompa does not make an annual transfer to retained earnings in respect of excess depreciation on revaluation. The company pays tax on profits at the rate of 25%. Plant and equipment is depreciated at 15% per annum using the reducing balance method. No depreciation has yet been charged on any non current asset for the year ended 30 June 2023. All depreciation is charged to cost of sales.
iv) The 5% loan note was issued on 1 July 2022 at its nominal value of GH¢100 million incurring direct issue costs of GH¢2.5 million which have been charged to administrative expenses. The loan note will be redeemed after three years at a premium which gives the loan note an effective finance cost of 8% per annum. Annual interest was paid on 30 June 2023.
v) At 30 June 2023, the financial asset equity investments had a fair value of GH¢48 million. There were no acquisitions or disposals of these investments during the year.
vi) A provision of GH¢6 million for current tax for the year ended 30 June 2023 is required.
Additionally, GH¢4 million increase in the deferred tax provision is to be charged to profit or loss.
vii) Sompa paid a dividend of GH¢0.20 per share on 30 March 2023, which was followed by an issue of 50 million equity shares at their full market value of GH¢1.70. At 1 July 2022, Sompa had in issue 100 million shares at full market value of GH¢1 each.
Required: Prepare for Sompa Plc:
a) The Statement of Profit or Loss and other Comprehensive Income for the year ended 30 June 2023.
b) The Statement of Financial Position as at 30 June 2023.
(10 marks)

a) Statement of Profit or Loss and Other Comprehensive Income for the year ended
30 June 2023

b) Statement of Financial Position as at 30 June 2023


Non-current liabilities

Note: The ‘sale’ of the maturing goods is in substance a loan of GH¢15 million carrying interest at 10% per annum. This is because the option is almost certain to be exercised because the expected value of the goods of GH¢25 million is considerably higher than the cost of buying them back.

5. Income tax expense

  • 6 Marks

FR – Nov 2019 – L2 – Q2b – Financial Reporting Standards and Their Applications

Calculation of amounts recognized in profit or loss and other comprehensive income related to property revaluation and depreciation.

RoyCo acquired a brand new property (land and buildings) on 1 January 2016 for GH¢40 million (including GH¢15 million for the land). The asset was revalued on 31 December 2017 to GH¢43 million (including GH¢16.6 million for the land). The buildings element was depreciated over a 50-year useful life to a zero residual value. The useful life and residual value did not subsequently need revision. On 31 December 2018, the property was revalued downwards to GH¢35 million (including GH¢14 million for the land) due to a recession.
The company makes a transfer from revaluation surplus to retained earnings in respect of realised profit.

Required:
Calculate the amounts recognised in profit or loss and in other comprehensive income for the years ended 31 December 2017 and 31 December 2018. (6 marks)

b) Revaluation of Property plant and equipment

Alternative presentation

(18 ticks evenly distributed for 6 marks)

  • 10 Marks

AA – Nov 2021 – L2 – Q4a – Completion Procedures and Reporting

Discusses audit procedures for non-depreciation of buildings and the impact on the audit report if unresolved.

ou are an audit intern in Transparency & Associates, a firm of Chartered Accountants. This year, one of your new clients is Obuse Ltd, a company having net assets of GH¢20,000,000. The audit work has been completed, but there is one outstanding matter you are currently investigating; the directors have decided not to provide depreciation on buildings in the financial statements, although International Financial Reporting Standards suggest that depreciation should be provided. The estimated depreciation is GH¢500,000.

Required:
i) State FOUR (4) additional audit procedures and actions you should take in respect of the above matter.
(6 marks)

ii) What should be the impact on the audit report if the issue remains unresolved at the reporting stage of the audit?

i) Additional audit procedures and actions

  1. Review the audit file – Ensure that sufficient appropriate audit evidence has been collected regarding the decision not to depreciate buildings.
  2. Verify compliance with IFRS – Ensure that GAAP (Generally Accepted Accounting Principles) or IFRS guidelines on depreciation apply to the specific buildings owned by Obuse Ltd.
  3. Discuss with directors – Meet with the directors to confirm their reasons for not depreciating buildings and to explain the potential consequences.
  4. Warn of possible modified audit report – Inform the directors that failure to provide depreciation may lead to a modified audit report.
  5. Assess materiality – Determine the effect of the depreciation issue on the financial statements, evaluating whether the misstatement is material.
  6. Obtain written representation – Secure a letter of representation from the directors confirming that depreciation will not be charged on buildings.

(6 marks)

ii) Impact on the audit report if unresolved
If the issue remains unresolved, the auditor must consider the materiality of the misstatement. The estimated depreciation of GH¢500,000 represents 2.5% of the company’s net assets, which is material. The audit report will need to be qualified with an “except for” opinion due to the material misstatement. The basis for qualification should be included in the report, explaining the disagreement regarding depreciation.

(4 marks)

  • 6 Marks

FR – May 2017 – L2 – Q5c – Corporate Reporting and Compliance

Identify the advantages and disadvantages of international harmonisation of accounting standards for multinational companies.

Generally, there are advantages of global harmonisation of financial reporting standards to countries around the world, including Ghana.

Required:
Identify THREE advantages and THREE disadvantages of international harmonisation of accounting standards to multinational companies operating in Ghana.

Advantages of International Harmonisation of Accounting Standards:

  1. Comparability of Financial Statements:
    Harmonisation ensures that financial statements are comparable across different countries. This benefits multinational companies by making it easier for investors and stakeholders to assess and compare performance across various markets.
  2. Simplification of Accounting Practices:
    With one set of global standards (e.g., IFRS), multinational companies do not need to maintain different accounting policies for each country they operate in. This simplifies financial reporting, reduces administrative costs, and promotes consistency.
  3. Access to International Capital Markets:
    Harmonisation enables multinational companies to access international capital markets more easily, as financial statements prepared under globally accepted standards are more readily understood and accepted by investors and regulators across different jurisdictions.

Disadvantages of International Harmonisation of Accounting Standards:

  1. Cultural and Economic Differences:
    International harmonisation may not account for the unique cultural and economic environments of different countries, including Ghana. Some companies may find that certain aspects of IFRS are not well-suited to local business practices or economic conditions.
  2. Implementation Costs:
    Adopting international standards can be costly for companies, especially those that need to retrain staff, upgrade accounting systems, and make adjustments to comply with new regulations. This may be a burden on smaller companies or companies in developing economies.
  3. Loss of Flexibility:
    Harmonisation may reduce the flexibility that local accounting standards offer in reflecting specific national regulations or business environments. For instance, some aspects of local laws might conflict with IFRS, creating challenges in compliance for multinational companies.
  • 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.

  1. The currency that mainly influences sales prices for goods and services provided by the entity. This is usually the currency in which the entity generates its primary revenue.
  2. The currency of the country whose competitive forces and regulations mainly determine the sales prices of goods and services. This reflects the broader economic environment that affects pricing decisions.
  3. The currency that mainly influences labor, materials, and other costs of providing goods and services. This focuses on the currency in which the entity incurs its most significant operating expenses.

These factors help determine the currency that most accurately reflects the economic conditions under which the entity operates.

  • 5 Marks

FR – May 2016 – L2 – Q3d – Role of the IASB and Standard-Setting Process

Discuss the standard-setting process adopted by the IASB.

As a newly qualified accountant with The Institute of Chartered Accountants (Ghana) (ICAG), you are asked to make a short presentation to the rest of the staff in the accounting and finance department of your employer who are themselves yet to join ICAG as students about the standard-setting process adopted by the International Accounting Standards Board (IASB).

Required:
Discuss the standard-setting process as adopted by the IASB to these junior staff.

  1. Issues Paper:
    IASB staff prepare an issues paper, including studying the approach of national standards setters and identifying key accounting issues.
  2. SAC Consultation:
    The Standards Advisory Council (SAC) is consulted about the advisability of adding the topic to the IASB’s agenda.
  3. Discussion Document:
    A Discussion Document may be published for public comment, allowing stakeholders to provide input on the proposed standard.
  4. Exposure Draft:
    An Exposure Draft is published for public comment. This draft represents the first version of the proposed standard and invites further feedback.
  5. International Financial Reporting Standard (IFRS) Finalization:
    After considering all comments received during the exposure draft period, the IFRS is finalized. The final standard must be approved by at least 8 votes (out of 14) from the IASB board members.
    The final standard includes both a basis for conclusions and any dissenting opinions.

Each step is part of a thorough process to ensure that new or revised standards are well-considered, incorporating global perspectives and feedback.

 

  • 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.

ABC Ltd
Whilst it is acceptable to value the goodwill of GH¢2.5 million for XYZ (the subsidiary) on the basis described in the question and include it in the consolidated balance sheet, the same treatment cannot be afforded to ABC’s own goodwill.

The calculation may indeed give a realistic value of GH¢4 million for ABC’s goodwill, and there may be no difference in nature between the goodwill of the two companies. However, it must be realized that ABC’s goodwill is internal goodwill, and International Financial Reporting Standards (IFRSs) prohibit the recognition of internally generated goodwill in the financial statements.

The main basis of this conclusion is one of reliable measurement. The value of acquired (purchased) goodwill can be evidenced by the method described in the question (there are also other acceptable methods), but this method of valuation is not acceptable for recognizing internal goodwill.

Correct interpretation within IAS 38 and IFRS 3 prohibits recognizing internal goodwill in the financial statements.

  • 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).

Naniama Ltd

GHC
Non-current liabilities:
Financial liability component of convertible bond (W1) = 270,180

Equity:
Equity component of convertible bond = GH¢300,000 – GH¢270,180 = 9,820

Working

Fair value of equivalent non-convertible debt:

  • Present value of principal payable at end of 4 years (3,000 x GH¢100 = GH¢300,000 x 0.735) = GH¢220,500

Present value of interest annuity payable annually in arrears for 4 years:

  • Year 1: (5% x GH¢300,000) = GH¢15,000 x 0.926 = GH¢13,890
  • Year 2: GH¢15,000 x 0.857 = GH¢12,855
  • Year 3: GH¢15,000 x 0.794 = GH¢11,910
  • Year 4: GH¢15,000 x 0.735 = GH¢11,025

Total present value of interest payments = GH¢49,680

Total value of financial liability = GH¢270,180

  • 5 Marks

FR – March 2024 – L2 – Q5b – Conceptual Framework for Financial Reporting

Discuss the reasons for the need of a conceptual framework in the standard-setting process.

Discuss FIVE (5) reasons for the need of a conceptual framework in the standard-setting process.
(5 marks)

  1. Consistency in Standards Development:
    A conceptual framework provides a structured basis for developing consistent accounting standards. Without it, there could be a risk of setting standards in an ad-hoc or piecemeal manner, leading to inconsistencies across different standards.
  2. Address Emerging Accounting Issues:
    The framework helps guide the development of new standards in response to emerging accounting issues, such as new types of transactions or financial instruments. It ensures that new standards are based on agreed-upon principles, rather than short-term fixes.
  3. Assists in Interpretation of Standards:
    It helps preparers and users of financial statements interpret and apply standards, particularly in complex or ambiguous situations. The framework provides a foundation for making judgments when a specific accounting issue is not covered by a standard.
  4. Enhances Credibility of Financial Reporting:
    A well-defined conceptual framework enhances the credibility of financial reporting by ensuring that the standards are grounded in clear, transparent principles. This improves users’ confidence in the accuracy and relevance of financial information.
  5. Reduces Political and Lobbying Pressure:
    The framework provides a robust set of principles that reduces the influence of political or lobbying pressures in the standard-setting process. It ensures that standards are set based on the needs of users and sound accounting principles, rather than being influenced by vested interests.

(Marks evenly spread = 5 marks)

  • 20 Marks

FR – March 2024 – L2 – Q3 – Preparation of Financial Statements

Preparation of the statement of comprehensive income for Skolom Ltd.

The following figures have been extracted from the accounting records of Skolom Ltd on 31 December 2022:

Additional information provided includes notes on Skolom Ltd’s agency arrangements with Keke Ltd, joint venture details, and depreciation policies.

Required:
Prepare for Skolom Ltd in accordance with International Financial Reporting Standards (IFRSs):
a) Statement of Comprehensive Income for the year ended 31 December 2022
b) Statement of Financial Position as at 31 December 2022

 

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