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- 7 Marks
Question
Manu Ltd (Manu) is a private company that prepares financial statements in compliance with International Financial Reporting Standards (IFRSs). Financial statements for the year ended 31 December 2020 are being prepared, and the following transactions occurred.
i) On 1 September 2020, Manu purchased 100,000 ordinary shares on the stock exchange for speculative reasons (making a profit) at a price of GH¢1.20 per share and paid a transaction cost of GH¢1,250. On 31 December 2020, the shares were now trading at GH¢1.32 per share on the stock exchange, and Manu received a dividend of GH¢15,000 on the shares.
(3 marks)
ii) Manu issued GH¢360,000 of redeemable 2% Preference shares at a discount of 14% on 1 January 2020. Issue costs were GH¢5,265. The shares will be redeemed on 31 December 2022 at par. Interest is paid annually in arrears, and the effective interest rate is 8%.
(4 marks)
Required:
In accordance with IFRS 9: Financial Instruments, explain how to account for the above transactions in the statement of profit or loss and statement of financial position for the year ended 31 December 2020.
Answer
i) Accounting for ordinary shares (equity financial asset):
- The shares were purchased for speculative reasons; hence they should be classified as equity investment (equity financial asset) at fair value through profit or loss.
- They should be initially measured at their fair value: GH¢120,000 (GH¢1.20 x 100,000 shares). The transaction cost of GH¢1,250 should be expensed to the statement of profit or loss.
- At 31 December 2020, the shares should be remeasured at their fair value of GH¢132,000 in the statement of financial position, and the fair value movement (gain) of GH¢12,000 (GH¢132,000 – GH¢120,000) should be reported in the statement of profit or loss.
- The dividend received of GH¢15,000 should be reported in the statement of profit or loss as investment income.
| Classification: | 0.5 mark |
| Initial measurement: | 1 mark |
| Subsequent measurement: | 1 mark |
| Treatment of dividends: | 0.5 marks|
ii) Accounting for redeemable preference shares (financial liability at amortised cost):
- The bond is classified as a financial liability at amortised cost, and there is no intention to trade in the liability.
- The preference shares should be initially measured at their fair value of GH¢304,335 (calculated in Working 1 below).
- At 31 December 2020, the shares should be remeasured at their amortised cost of GH¢321,482 (calculated in Working 2 below).
- Effective interest of GH¢24,347 (calculated in Working 2) should be reported in the statement of profit or loss.
Workings:
| Working 1: Initial fair value calculation | GH¢’000 |
|---|---|
| Nominal value | 360,000 |
| Discount 14% | (50,400) |
| Issue costs | (5,265) |
| Net proceeds (initial fair value) | 304,335 |
| Working 2: Amortised cost calculation | |
| Year | Opening balance (GH¢) | Effective interest (8%) (GH¢) | Coupon paid (2%) (GH¢) | Closing balance (GH¢) |
|---|---|---|---|---|
| 2020 | 304,335 | 24,347 | (7,200) | 321,482 |
| Classification: | 0.5 mark |
| Initial measurement: | 0.5 mark |
| Subsequent measurement (statement of financial position): | 0.5 mark |
| Statement of profit or loss treatment: | 0.5 mark |
| Working 1: | 1 mark |
| Working 2: | 1 mark |
Total: 7 marks
- Topic: Financial Reporting Standards and Their Applications
- Series: NOV 2021
- Uploader: Dotse