Series: NOV 2021

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  • 4 Marks

FR – Nov 2021 – L2 – Q2b – Financial Reporting Standards and Their Applications

This question requires the recognition of revenue under IFRS 15 for a contract with advance payments and the calculation of a significant financing component.

Marshall Ltd (Marshall) is a manufacturing company that prepares Financial Statements in compliance with IFRSs and has a reporting date of 31 December. During the year to 31 December 2020, Marshall entered into a contract with a customer to manufacture and sell some goods such that the goods will be delivered (control of the goods vests with the customer) in two years. The contract has two payment options:

i) The customer can pay GH¢500,000 when the contract is signed, or

ii) GH¢650,000 in two years when the customer gains control of the goods.

Marshall’s incremental borrowing rate is 10%. The customer paid GH¢500,000 on 1 January 2020, when the contract was signed. Marshall intends to recognise revenue on this contract in the financial statements.

Required:
In accordance with IFRS 15: Revenue from Contract with Customers, explain (with supporting calculations) how Marshall should account for the above transactions for the years 2020 and 2021.

Revenue Recognition Principles under IFRS 15:

  • IFRS 15 requires revenue to be recognised as each performance obligation is satisfied. An entity satisfies a performance obligation by transferring control of a promised good or service to the customer, which could occur over time or at a point in time.
  • In this contract, Marshall undertakes to transfer control of the goods in two years. Hence, the performance obligation has not been satisfied, and revenue cannot be recognised until the goods are delivered and control is transferred.

Advance Payment and Financing Component:

  • The customer made an advance payment of GH¢500,000 for goods to be delivered in two years. This represents a liability (revenue received in advance) and has a significant financing component.
  • The significant financing component must be accounted for separately. The advance payment effectively contains an implicit interest element since the customer could have alternatively paid GH¢650,000 after two years.

Calculation of the Financing Component:

  1. Finance Cost for 2020:
    • The interest rate is 10%.
    • Finance cost = GH¢500,000 x 10% = GH¢50,000.
    • This finance cost should be recognised in the statement of profit or loss for the year ended 31 December 2020.
    • The liability in the statement of financial position at the end of 2020 will be GH¢550,000 (GH¢500,000 + GH¢50,000).
  2. Finance Cost for 2021:
    • In 2021, interest is applied to the balance carried forward from 2020.
    • Finance cost = GH¢550,000 x 10% = GH¢55,000.
    • This finance cost should be recognised in the statement of profit or loss for the year ended 31 December 2021.
    • The liability in the statement of financial position at the end of 2021 will be GH¢605,000 (GH¢550,000 + GH¢55,000).

Summary:

For the year ending 31 December 2020:

  • Liability (deferred revenue): GH¢550,000
  • Finance cost: GH¢50,000

For the year ending 31 December 2021:

  • Liability (deferred revenue): GH¢605,000
  • Finance cost: GH¢55,000

Revenue recognition principle:  1 mark
Finance cost for 2020:  1 mark
Finance cost for 2021:  1 mark
Supporting calculations:  1 mark

Total: 4 marks

  • 7 Marks

FR – Nov 2021 – L2 – Q2a – Financial Reporting Standards and Their Applications

This question deals with the application of IFRS 9 in financial instruments and the recognition of revenue under IFRS 15.

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.

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

  • 20 Marks

FR – Nov 2021 – L2 – Q1 – Group Financial Statements and Consolidation

Prepare the Consolidated Statement of Financial Position for Sankofa Group considering investments, goodwill, and intra-group transactions.

The following statement of financial position relates to Sankofa and Kaakyire as at 31 October 2020.

Statement of Financial Position Sankofa (GH¢’000) Kaakyire (GH¢’000)
Non-current assets
Property, Plant and Equipment 37,000 30,000
Investment Property 5,000 –
Investments 24,000 –
Total Non-current assets 66,000 30,000
Current assets
Inventory 9,000 8,000
Other current assets 21,000 14,000
Total Current assets 30,000 22,000
Total assets 96,000 52,000
Equity and liabilities
Ordinary shares (issued @ GH¢2.50) 20,000 8,000
Retained earnings 26,000 16,000
Total Equity 46,000 24,000
Non-current liabilities
10% debentures 11,900 12,000
Current liabilities
Payables 38,100 16,000
Total Equity and liabilities 96,000 52,000

Additional information:
i) On 1 November 2018, Sankofa purchased 2.4 million of the ordinary shares of Kaakyire when Kaakyire’s retained earnings balance stood at GH¢11 million. There have been no movements in share capital since the acquisition. As part of the consideration given for the shares acquired, the shareholders of Kaakyire accepted 1 million shares worth GH¢7 million in Sankofa at acquisition. The remaining consideration was agreed to be paid on 31 October 2020 for GH¢12.1 million. The present values of GH¢1 receivable based on 10% (considered to be an appropriate discount rate for Sankofa) are as follows:

Present Value of GH¢1 receivable
In one year’s time:
In two years’ time:

Entries have been correctly passed for the effects of all of the above, including any unwound discounts, except for the final payment made on 31 October 2020.

ii) At acquisition, the fair values of Kaakyire’s assets, liabilities, and contingencies were equal to their carrying amounts, with the exception of the following assets:

Carrying amount (GH¢’000) Fair value (GH¢’000)
Trade receivables 1,250
Inventory 1,500
Properties 14,000

The properties had a remaining useful life of 10 years. No items of property were sold during the two years to 31 October 2020. The inventory and the receivable were realised during the post-acquisition period.

iii) On 1 November 2019, Kaakyire sold an item of plant to Sankofa for GH¢5 million. Kaakyire originally bought the plant from Gyidie for GH¢6 million, and Kaakyire had provided accumulated depreciation of GH¢2.2 million up to the date of sale. Kaakyire considered the plant to have a remaining useful life of 5 years at the date of transfer.

iv) The Investment Property in the books of Sankofa represents an office facility that was completed on 1 November 2018 at the cost of GH¢3.5 million. The useful economic life of the facility was estimated at 20 years. Immediately after the acquisition of Kaakyire, Sankofa began to rent this property out to Kaakyire under a lease agreement. Sankofa Group values its investment properties using the fair value model under IAS 40 Investment Properties and its owner-occupied properties using the cost model under IAS 16 Property, Plant and Equipment.

v) On 1 November 2019, Sankofa acquired 30% of the ordinary shares of Kaboom at the cost of GH¢6 million. During the year ended 31 October 2020, Kaboom reported a profit after tax of GH¢2 million. No dividends were paid or declared by Kaboom during the period. At year-end, Kaboom’s inventory included GH¢1.2 million worth of goods bought from Sankofa during the year to October 2020. Sankofa charges a 25% margin on all sales.

On 31 October 2019, Goodwill acquired in Kaakyire was attributed with an impairment loss of GH¢0.5 million. The group’s policy is to measure non-controlling interest at the proportion of the fair value of the subsidiary’s net assets.

Required:
Prepare the Consolidated Statement of Financial Position for the Sankofa Group as at 31 October 2020.

  • 5 Marks

PT – Nov 2021 – L2 – Q5c – Taxation of Capital Gains

Compute the appropriate tax for gifts received by Flowqueen for the 2020 year of assessment.

Flowqueen, a sole proprietor of Freddy Ent, was adjudged the best distributor of Mino Ltd for the year 2020 and received the following gifts:

  • 70 Inches Samsung LED valued at GH¢50,000 from Freddy Ltd.
  • Toyota saloon car worth GH¢80,000 from the clients of Freddy Ltd.

Her income from the business for the 2020 year of assessment amounted to GH¢120,000.

Required:
Compute the appropriate tax or taxes of Flowqueen for the 2020 year of assessment.

Computation of Tax for Flowqueen

Step 1: Gift Tax Calculation

The total value of gifts received by Flowqueen in 2020 is:

Alternatively, if the gifts are treated as part of Flowqueen’s income, her total taxable income becomes GH¢250,000 (GH¢120,000 + GH¢130,000), and the relevant taxes would apply to the entire amount.

  • 5 Marks

PT – Nov 2021 – L2 – Q5b – Taxation of Capital Gains

Calculate the capital gains tax on the sale of shares by Maame Adwoa Konadu Yiadom.

Maame Adwoa Konadu Yiadom is a shareholder of Asokwa Company Ltd, a company not listed on the Ghana Stock Exchange Market. Maame Adwoa Konadu Yiadom transacted the following business with Asokwa Company Ltd:

  • 1 January 2010 purchased 100,000 ordinary shares for GH¢50,000.
  • 30 June 2015 purchased 100,000 ordinary shares at a price of GH¢0.60 per share.
  • 1 January 2020 Maame Adwoa Konadu Yiadom accepted a rights offer of 1 share for every 10 shares held as at 31 December 2019 at a price of GH¢0.50 per share.
  • 31 December 2020 Maame Adwoa Konadu Yiadom sold 50,000 shares for GH¢60,000, paying a commission of 2% of the sale value to the brokerage firm that facilitated the sale. The current market price per share on the market is GH¢1.12 per share.

Required:
Calculate the capital gain tax, if any.

Computation of Cost of Shares:

  • 5 Marks

PT – Nov 2021 – L2 – Q5a – Withholding Tax Administration

State the merits and demerits of the withholding tax regime in Ghana

Withholding tax is deducted at source by an authorised agent and accounted later to the Commissioner-General of Ghana Revenue Authority.

Required:
State TWO (2) merits and TWO (2) demerits of the withholding tax regime.

Merits of Withholding Tax

  1. Faster Mobilisation of Revenue: Withholding tax ensures faster mobilisation of revenue to the state, as the tax is collected upfront before returns are made.
  2. Expansion of Tax Net: It helps in expanding the tax net, bringing in taxpayers who may not otherwise be compliant.
  3. Accurate Determination of Taxpayer’s Turnover: By withholding tax at source, the authorities can more easily ascertain the taxpayer’s actual turnover and hence the correct income.
  4. Low Collection Costs: The system involves little to no additional cost for tax collection since the tax is collected directly by authorised agents.
  5. Time-Saving for Revenue Officers: The system saves time for revenue officers, allowing them to focus on other important duties.
    (Any 2 points @ 2.5 marks each = 5 marks)

Demerits of Withholding Tax

  1. Negative Impact on Business Cash Flow: A high rate of withholding tax can adversely affect a business’s cash flow and operating performance.
  2. Potential to Discourage Economic Effort: Withholding tax may discourage additional economic effort, such as part-time teaching or work, due to the perceived burden of high taxation.
  3. Locking up of Capital: Businesses may face liquidity challenges due to the locking up of capital in the form of prepaid taxes.
  • 4 Marks

PT – Nov 2021 – L2 – Q4b – Corporate Tax Liabilities

Explain the tax implications and rules governing the pooling system for depreciable assets.

A Class 1, 2, or 3 depreciable assets owned and employed by a person during a year of assessment in the production of income from a particular business shall, at the time the asset is first owned and employed by that person, be placed in a pool with all other assets of the same class owned and employed by that person in the business.

Required:
What are the implications and taxation rules governing the above statement?

The pooling system for depreciable assets involves the following implications and tax rules:

  1. Identity of Assets Lost in Pooling: Once assets are placed in a pool, their individual identities are lost. Assets are grouped together based on their class, and capital allowance is applied to the pool as a whole.
  2. Reducing Balance Method: Capital allowance is calculated using the reducing balance method, where the written-down value of the pool is depreciated each year.
  3. Treatment of Proceeds from Asset Disposal: When an asset is sold, the consideration received is deducted from the pool. The difference between the disposal proceeds and the pool’s depreciation basis at the end of the year is either included in income or claimed as a capital allowance.
  4. Dissolution of the Pool: If all assets in a pool are sold or realized before the end of a year of assessment, the pool is dissolved, and the gain or loss is calculated based on the difference between the consideration received and the remaining depreciation basis.

The formulas governing these are as follows:

  • If A > B, the difference is included in the taxpayer’s income.
  • If B > A, a capital allowance is granted.

Where:

  • A is the consideration received during the year for the assets.
  • B is the sum of the written-down value of the pool at the end of the previous year and any additions to the pool during the year.
  • 16 Marks

PT – Nov 2021 – L2 – Q4a – Corporate Tax Liabilities

Calculate the capital allowance claimable for NASA Ltd for the years 2017-2020 based on its non-current assets.

NASA Ltd commenced business on 1 October 2017, preparing accounts to 31 December each year. Accordingly, the company has the following extracts from its financial records on non-current assets:

Year 2017

  • Purchased Office furniture and fittings costing GH¢40,000.
  • Purchased office Air conditioners at the cost of GH¢20,000.
  • The company bought a land costing GH¢55,000.
  • Bought office building at the cost of GH¢700,000.
  • Purchased a computer at the cost of GH¢1,500.
  • Purchased office Photocopier at the cost of GH¢2,500.

Year 2018

  • Purchased a Television Set for the office at the cost of GH¢3,500.
  • Bought a 4×4 Vehicle (7-passenger-seater) for an amount of GH¢200,000.
  • Purchased a File Cabinet for GH¢2,000.

Year 2019

  • Exchanged the vehicle bought in 2018 for four plots of land valued at GH¢200,000.
  • Paid for a Trade Mark costing GH¢15,000, which was licensed for ten years.
  • Purchased a business that resulted in Goodwill of GH¢100,000. The company decided to amortize the goodwill over 20 years.

Year 2020

  • Bought a home-used motor vehicle at the cost of GH¢70,000.
  • Purchased office computers for GH¢5,000.
  • Purchased Trucks and Trailers for GH¢50,000.
  • Sold some of the office furniture for GH¢3,000.

Required:
Calculate the amount of capital allowance claimable for 2017, 2018, 2019, and 2020 years of assessment. (16 marks)

NASA Ltd

Computation of Capital Allowance (Amounts in GH¢)

 

  • 20 Marks

PT – Nov 2021 – L2 – Q3 – Income Tax Liabilities

Calculate Agyeiwaa Grace’s taxable income for the 2020 year of assessment and explain gains and profits from employment.

Agyeiwaa Grace (Agyeiwaa), aged 56, is a foreign languages teacher at Mountaintop School, a private boarding school in Koforidua. Agyeiwaa has been in the teaching profession for the past 30 years. On 1 January 2020, the school promoted Agyeiwaa to head the languages department, which is a management position. She could also be subcontracted to other schools, institutions, and foreign language associations to assist their teachers and candidates during her free time. Agyeiwaa also holds a contract with the Ministry of Foreign Affairs and Regional Integration as an interpreter on a consultancy services basis.
On 5 January 2020, Agyeiwaa entered into a consultancy agreement with the Ministry of Education to translate some local textbooks. The project is for three years ending on 31 December 2022. Payment is only effected on completion of the translation of the textbooks, and the agreed amount is GH¢30,000 per translated textbook.

Details of Agyeiwaa’s income for the year ended 31 December 2020 are as follows:

Employment income and benefits
i) Agyeiwaa receives a gross monthly salary of GH¢4,000 and an annual bonus of GH¢12,000, payable in December.
ii) Responsibility allowance of GH¢6,960 per annum.
iii) Agyeiwaa makes use of a fully furnished house in the school’s staff residential area. The school deducts a monthly rent of GH¢100 from Agyeiwaa’s salary.
iv) Upon Agyeiwaa’s appointment as the languages department head, the school provided her with a new motor vehicle with fuel for her official use.
v) Agyeiwaa contributes 2.5% of her monthly salary to a registered pension fund. The school contributes 2.5% to a provident fund on behalf of Agyeiwaa.
vi) The school deducts her statutory social security contributions at source.
vii) Agyeiwaa received a total of GH¢12,000 inconvenience allowances from the Mountaintop School during the year.
viii) The school deducts the following amounts monthly from Agyeiwaa’s salary upon her instruction and pays the appropriate amounts to the institutions concerned:

  • Subscriptions to the Ghana National Association of Teachers: GH¢15
  • Life insurance policy to Royal Life Insurance Services: GH¢50

Other non-employment income
i) Agyeiwaa successfully translated four textbooks under the terms of her contract with the Ministry of Education during 2020.
ii) Agyeiwaa’s bank account was credited with a total of GH¢15,000, representing rental income collected by an estate agent regarding residential property owned by Agyeiwaa in Kumasi.
iii) Agyeiwaa services amounted to a gross of GH¢30,000 for her subcontract work with other schools and foreign language associations. Agyeiwaa paid Mountaintop School 10% of this amount under the terms of a standing arrangement for the use of the school’s resources.
iv) The Ministry of Foreign Affairs and Regional Integration paid Agyeiwaa GH¢9,250 net for her services as an interpreter during the year.

Required:
a) Calculate Agyeiwaa’s taxable income for the 2020 year of assessment. (14 marks)
b) Explain FOUR (4) possible individual gains and profits from an employment for a year of assessment. (6 marks

a) Agyeiwaa Grace

Computation of Taxable Income for the 2020 Year of Assessment

b) Possible Gains and Profits from Employment

The following are possible individual gains and profits from employment for a year of assessment:

  1. Salary, Wages, and Bonuses: Payments such as salary, wages, leave pay, and bonuses are considered part of employment gains.
  2. Allowances: Personal allowances like cost of living, subsistence, rent, entertainment, and travel allowances.
  3. Payments for Agreements to Conditions: Payments received for an individual’s agreement to employment conditions.
  4. Gifts and Benefits in Kind: Gifts or benefits received in respect of employment are taxable gains.
  5. Retirement Contributions: Contributions made to a retirement fund on behalf of the employee and retirement payments related to employment.
  6. Discharge of Expenses: Any payments that discharge expenses incurred by the individual or an associate of the individual.
  • 5 Marks

PT – Nov 2021 – L2 – Q2e – Tax Administration

Distinguish between defined benefit schemes and defined contribution schemes.

Distinguish between defined benefit schemes and defined contribution schemes.

Defined Benefit Schemes
A defined benefit scheme provides a clear and definite pension benefit upon retirement. The benefits are usually calculated based on the length of service and final salary or an average of the last few years’ salaries. In Ghana, the Basic National Social Security Scheme is a defined benefit scheme, managed by SSNIT, where participation is mandatory for public and private sector workers.

Defined Contribution Schemes
A defined contribution scheme involves contributions made by the employer and/or the employee. The contributions are invested, and the employee receives pension benefits based on the accumulated contributions and returns on the investments. The benefits are not fixed and depend on the performance of the investments. In Ghana, Tier 2 and Tier 3 pension schemes are defined contribution schemes, where contributions are managed by privately licensed providers.

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