Series: NOV 2021

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  • 3 Marks

PT – Nov 2021 – L2 – Q2d – Value-Added Tax (VAT), Customs, and Excise Duties

Explain what constitutes exempt supplies under the VAT Act.

What constitutes exempt supplies?

A supply is exempt when the consumer of the goods and/or services is not liable to pay VAT by law. The VAT Act specifically exempts the following items from VAT:

  1. A supply of agricultural and aquatic food products in a raw state produced in Ghana.
  2. A supply of specific live animals bred or raised in Ghana (e.g., cattle, sheep, goats, pigs, poultry).
  3. A supply of the following agricultural inputs: fishing equipment, boats, nets, and other exclusive items.
  • 2 Marks

PT – Nov 2021 – L2 – Q2c – Value-Added Tax (VAT), Customs, and Excise Duties

Explain under what condition goods applied for own consumption are treated as supply of goods.

Under what condition are goods applied for own consumption treated as supply of goods?

Goods are applied to own use when a taxable person parts with ownership of the goods. In such cases, it is deemed as a supply of goods and is made on the date on which the goods are first applied to own use. The taxable person must account for the goods alongside other supplies.

  • 4 Marks

PT – Nov 2021 – L2 – Q2b – Withholding Tax Administration

Explain the objectives of the Withholding VAT Scheme introduced by the Ghana Revenue Authority.

One of the innovations by the Ghana Revenue Authority is the introduction of the Withholding VAT Scheme. The scheme is aimed at promoting tax compliance.

Required:
Explain FOUR (4) objectives of the scheme.

The objectives of the Withholding VAT Scheme are:

  1. Reduces Nil and Non-Filers: Reduces the number of nil and non-filers, as surveillance and monitoring ensure that deception in filing is minimized.
  2. Reduces Future Uncollectible Debts: The scheme collects VAT upfront from major consumers, thus reducing future uncollectible debts.
  3. Increases Voluntary Registration: Taxpayers, knowing they are being monitored, voluntarily comply with the obligations under the law.
  4. Improves Revenue Flows: The government can raise revenue through this medium, promoting compliance and ensuring efficient collection.
  5. Enhances Compliance: The scheme has generally improved compliance among taxpayers.
  6. Promotes Fair Application of Tax Laws: Ensures that the tax laws are fairly applied to all taxpayers.
  • 6 Marks

PT – Nov 2021 – L2 – Q2a – Value-Added Tax (VAT), Customs, and Excise Duties

Explain the circumstances under which a taxable supply requires an adjustment in taxable value.

There are circumstances where a taxable supply by a taxable person will require adjustment so that the trader pays the required taxes to the Ghana Revenue Authority.

Required:
Explain THREE (3) of such circumstances.

The following are the circumstances that may lead to the adjustment of the taxable value:

  1. Cancellation of Supply: The supply is canceled.
  2. Variation of Supply: The nature of the supply has been fundamentally varied or altered.
  3. Alteration of Agreed Consideration: The previously agreed consideration for the supply has been altered by agreement with the recipient of the supply, whether due to an offer of a discount or for any other reason.
  4. Return of Goods or Services: The goods or services, or part of them, have been returned to the supplier.
  5. Incorrect VAT Invoice: The taxable person making the supply has given a VAT invoice in relation to the supply, and the amount shown on the invoice as the VAT charged on the supply is incorrect because of the occurrence of any one or more of the events mentioned above.
  6. Incorrect Output VAT: The taxable person making the supply has filed a return for the period in which the supply was made and has accounted for an incorrect amount of output VAT on that supply due to any of the above events.
  7. Bad Debts: Where there are bad debts resulting from goods or services supplied.
    (Any 3 points @ 2 marks each = 6 marks)
  • 5 Marks

PT – Nov 2021 – L2 – Q1d – Tax Administration

Explain the advantages of self-assessment for both the government and the taxpayer.

State TWO (2) advantages each of self-assessment to the government and the taxpayer. (5 marks)

 

Advantages to the Government:

  • It ensures prompt payment of taxes.
  • It avoids delays in the issuance of assessments.
  • It saves time for Revenue Officers that can be used for other equally important work.
  • It reduces collection costs for the Ghana Revenue Authority.
    (Any 2 points @ 1.25 marks each = 2.5 marks)

Advantages to the Taxpayer:

  • Taxpayers know their business and circumstances better and can thus make the best of estimates.
  • The taxpayers are given the benefit to revise their estimates.
  • There is a healthy interaction between the taxpayers and the Ghana Revenue Authority.
  • It promotes accurate record keeping for the taxpayers.
  • 5 Marks

PT – Nov 2021 – L2 – Q1c – Tax Administration

Describe the circumstances under which the Commissioner-General may issue a pre-emptive tax assessment.

In the circumstances specified in section 28 (3) of the Revenue Administration Act, 2016 (Act 915), the Commissioner-General may make a pre-emptive assessment of tax payable or to become payable by a person under a tax law, whether or not the person is required to file tax returns.

Required:
Under what circumstances would the Commissioner-General make a pre-emptive assessment?

The Commissioner-General may make a pre-emptive assessment of tax payable or to become payable by a person under the following circumstances:

  • The person becomes bankrupt.
  • The taxpayer is wound-up.
  • The taxpayer goes into liquidation.
  • The Commissioner-General believes on reasonable grounds that the person is about to leave the country indefinitely.
  • When the taxpayer is about to cease activity or business in the country.
  • When the taxpayer has committed an offense under a tax law.
  • The Commissioner-General considers it appropriate, including where the person fails to maintain adequate documentation.
  • 5 Marks

PT – Nov 2021 – L2 – Q1b – Overview of the Ghanaian Tax System and Fiscal Policy

Explain the types of fiscal policies and their effects on economic fluctuations and government revenue.

Countries worldwide experience fluctuations in economic activity, which affects the consistency in government revenue generation. For example, when income levels are high, all other things being equal, tax revenue rises. Conversely, when income levels fall, tax revenue drops, requiring government policies to address the fluctuations. Governments, therefore, employ expansionary and contractionary fiscal policies to moderate the effects of such fluctuations.

Required:
Explain the following forms of fiscal policy:
i) Automatic Stabilisers
ii) Discretionary Fiscal Policy

i) Automatic Stabilisers
Some tax and expenditure programs change automatically with the level of economic activity. These are called Automatic Stabilizers. Automatic stabilisers refer to how fiscal instruments (taxes and government spending) influence the growth rate and help counter swings in the economic cycle.

  • In a period of high economic growth, automatic stabilisers will help to reduce the growth rate. With higher growth, the government will receive more tax revenues as people earn more and pay more income tax. With higher growth, there will also be a fall in unemployment, so the government will spend less on unemployment benefits.
  • In a recession, economic growth becomes negative. However, automatic stabilisers will help to limit the fall in growth. With lower incomes, people pay less tax, and government spending on unemployment benefits will increase. This helps limit the fall in aggregate demand.
    (2.5 marks)

ii) Discretionary Fiscal Policy
Discretionary fiscal policy refers to deliberate changes in taxes or spending. The government cannot control certain aspects of the economy related to fiscal policy. For example:

  • The government can control tax rates but not tax revenue, which depends on household income and corporate profits.
  • Government spending depends on government decisions and the state of the economy.

Discretionary fiscal policy can be divided into two:

  • Expansionary fiscal policy: This increases government expenditures and/or decreases taxes, causing the government’s budget deficit to increase or its budget surplus to decrease. This policy will shift the aggregate demand curve to the right.
  • Contractionary fiscal policy: This decreases government expenditures and/or increases taxes, causing the government’s budget deficit to decrease or its budget surplus to increase, shifting the aggregate demand curve to the left.
    (2.5 marks)
  • 5 Marks

PT – Nov 2021 – L2 – Q1a – Income Tax Liabilities

Assess the tax payable on a capital transfer from retained earnings to stated capital based on the details provided.

Kawukudi Ltd intends to increase its capital requirement. Therefore, it applied to the Registrar General with the following:

Retained Earnings Account (GHȼ)

  • Balance b/fwd: 100,000
  • Transfer from income statement: 1,200,000
  • Transfer to stated capital: (600,000)
  • Balance c/fwd: 700,000

Required:
Assess with explanation the tax payable under this circumstance.

The transfer of GH¢600,000 as income from the income surplus account to the stated capital is referred to as ‘deemed dividend’. This implies that a tax at the rate of 8% shall be imposed on the transfer. Thus, 600,000 X 8% = GH¢48,000.
There will also be a stamp duty payment of 0.5%. Thus, 0.5% x 600,000 = GH¢3,000.

  • 20 Marks

CR – Nov 2021 – L3 – Q5 – Analysis and Interpretation of Financial Statements

Produce a report analyzing the cash flow performance of Saglema Plc relative to a competitor over two years and explain the uses and limitations of cash flow analysis.

You are the Senior Financial Accountant at Saglema Plc (Saglema), a company that manufactures and sells painting materials in the local market and around the West African sub-region. At the first one-on-one meeting with the recently appointed chairperson of your company’s governing board, she asked you to produce a concise report on Saglema’s cash flow performance relative to that of Adidome Plc (Adidome), a close competitor, over the last two years.

The following are the cash flow statements for the last two years for Saglema and Adidome:

Cash Flow Statements for the Year Ended 31 August 2020 (together with comparatives):

Required:

i) Produce a report showing the comparative analysis of the cash flow performance and situation of Saglema over the last two years, relative to that of Adidome. (15 marks)
ii) Explain TWO (2) uses and THREE (3) limitations of such analysis. (5 marks)

i) Comparative Cash Flow Analysis Report

To: Chairperson, Governing Board
From: Senior Financial Accountant
Date: 1/1/2021
Subject: Comparative Analysis of Cash Flow Performance – Saglema Plc vs. Adidome Plc

Introduction:

This report provides a comparative analysis of Saglema Plc’s cash flow performance relative to its competitor, Adidome Plc, over the financial years 2019 and 2020. The analysis focuses on key aspects of cash flows from operating, investing, and financing activities, highlighting significant trends, strengths, and challenges.

1. Net Cash Flow Movements:

Saglema Plc reported a net decrease in cash and cash equivalents of GH¢247,240 in 2020, while Adidome Plc experienced a net increase of GH¢371,440. The contrasting trends indicate that Adidome has improved its cash generation significantly over the past year, while Saglema faced challenges in maintaining its cash balances.

  • Saglema’s Decrease: The decline in Saglema’s cash reserves can be attributed to significant outflows for financing activities (loan repayments and dividends) and high capital expenditure on property and long-term investments.
  • Adidome’s Increase: Adidome’s improvement in cash balances is primarily driven by strong operational cash flows and lower investment outflows.

2. Cash Flows from Operating Activities:

Both companies generated positive cash flows from operating activities in 2020, indicating healthy operational performance. However, Adidome’s GH¢492,310 outperformed Saglema’s GH¢373,020.

  • Saglema’s Performance: Despite higher profits before tax and strong cash generation, Saglema saw reduced operational cash inflows compared to 2019 due to increased working capital needs, especially in receivables and payables management.
  • Adidome’s Improvement: Adidome’s operational cash flow surged dramatically from a negative GH¢240,070 in 2019 to a positive GH¢492,310 in 2020. This was due to improved working capital management, particularly in inventory turnover and better receivables collection.

3. Cash Flows from Investing Activities:

Both companies had significant outflows for investing activities, though Saglema’s cash outflow was much higher.

  • Saglema’s Outflows: Saglema invested GH¢270,690 in property and equipment and GH¢129,210 in long-term financial investments, indicating a strategy focused on asset acquisition and portfolio diversification. However, this led to a large cash outflow.
  • Adidome’s Outflows: Adidome’s investing activities were more modest, with outflows of GH¢87,180, mainly for property acquisitions.

4. Cash Flows from Financing Activities:

In financing activities, Saglema showed significant outflows due to loan repayments and dividend payments, while Adidome had a relatively smaller outflow.

  • Saglema’s Strategy: The repayment of loans and dividend payments led to a net outflow of GH¢275,560. These activities, coupled with limited new borrowings, led to pressure on its cash reserves.
  • Adidome’s Position: Adidome’s financing activities were minimal, leading to a net outflow of GH¢47,810. The strong cash inflows in 2019 from a rights issue have strengthened its financial position, reducing the need for further financing.

Conclusion:

While Saglema Plc continues to generate robust cash from its core operations, its high capital expenditures and financing obligations have placed pressure on cash balances. Adidome Plc, by contrast, has improved its operational performance and managed its cash flows effectively, leading to a substantial increase in cash reserves.

ii) Uses and Limitations of Cash Flow Analysis

Uses:

  1. Assessment of Liquidity:
    • Cash flow analysis provides a clear picture of the company’s ability to generate cash to meet its short-term obligations, helping assess liquidity and financial health.
  2. Performance Comparison:
    • Cash flow analysis enables comparison between companies, as seen in this case between Saglema and Adidome, offering insight into operational efficiency and financial management strategies.

Limitations:

  1. Non-Cash Items Exclusion:
    • Cash flow statements do not account for non-cash items such as depreciation and amortization, which can affect the assessment of long-term profitability.
  2. Limited Insight into Profitability:
    • While cash flows provide information on liquidity, they do not fully reflect profitability, as some profitable companies may have poor cash flow due to delays in receivables collection or high capital investments.
  3. Lack of Comparability:
    • Different industries or companies may have different cash flow requirements, which can make direct comparisons misleading if not properly contextualized.
  • 5 Marks

CR – Nov 2021 – L3 – Q4b – Consolidated Financial Statements

Explain the disclosure requirements for a parent company that is exempt from preparing consolidated financial statements and elects to prepare separate financial statements under IFRS 10.

What are the disclosure requirements of a parent company that is exempt from preparing consolidated financial statements and elects not to do so and instead prepares separate financial statements?

 

When a parent company is exempt from preparing consolidated financial statements under IFRS 10: Consolidated Financial Statements and chooses to prepare separate financial statements, it must comply with the specific disclosure requirements set out in the standard. The following disclosures are required:

  1. Statement of Exemption:
    • The parent company must explicitly state that the financial statements being presented are separate financial statements and that it has taken advantage of the exemption from consolidation.
  2. Disclosure of the Entity Providing Consolidated Financial Statements:
    • The parent company must disclose the name and principal place of business (and country of incorporation, if different) of the entity that prepares the consolidated financial statements in accordance with IFRS. It should also disclose the address where those consolidated financial statements can be obtained.
  3. List of Significant Investments:
    • A list of significant investments in subsidiaries, joint ventures, and associates should be disclosed. This list must include the following details for each investment:
      • The name of each investee.
      • The principal place of business (and country of incorporation, if different) of the investee.
      • The proportion of ownership interest and, if different, the proportion of voting rights held by the parent company.
  4. Accounting Method for Investments:
    • The parent company must describe the method used to account for its investments in subsidiaries, joint ventures, and associates in the separate financial statements. For instance, the parent might apply the cost method or the equity method as appropriate.

These disclosures are intended to provide transparency to users of the financial statements regarding the scope of the financial statements and the financial relationships of the parent company with its subsidiaries, joint ventures, and associates.

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