Series: NOV 2021

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  • 15 Marks

CR – Nov 2021 – L3 – Q4a – Business valuations

Determine the value of shares of Aboto Ltd using multiple valuation methods including net assets, price-earnings ratio, dividend yield, and discounted cash flow

Aboto Ltd is a private company in the printing industry. It was established by the Aboto family some twenty years ago with Mrs. Aboto as the Managing Director. The business has grown in size over the years, and the directors are now considering listing the company on the Ghana Stock Exchange. The financial statements of the company for the year 2020 are given below:

Additional Information:

  1. The Share Capital of Aboto Ltd consists of ordinary share capital of no par value issued at GH¢100 per share.
  2. An independent valuer estimated the fair value of the Property, Plant & Equipment at GH¢500,000. Valuation charges of 2% have not been accrued for in the above accounts.
  3. The inventory includes obsolete items worth GH¢5,000 being held despite persistent advice by the auditors to have them written off.
  4. Receivables include an amount of GH¢12,000 resulting from the bankruptcy of a major customer. Aboto Ltd is not likely to realize any amount from this, but the directors have refused to make any provision.
  5. The patents represent a right to sell a special product. This product is expected to generate cash flows of GH¢2,000 per annum indefinitely.
  6. The discounted present value of future cash payments in respect of the debentures is GH¢20,000.
  7. Profits after tax of Aboto Ltd over the past four years were as follows:
    Year Profits (GH¢)
    2019 38,000
    2018 36,000
    2017 32,000
    2016 30,000
  8. A corporate plan prepared by the directors of Aboto Ltd in 2018 included the following positions:
  9. The price-earnings ratio and a dividend yield of quoted companies in the same industry Aboto Ltd operates are 8 and 4%, respectively.
  10. The net assets of Aboto Ltd as at 31 December 2019 were GH¢251,100.
  11. The cost of capital of Aboto Ltd is 20%.
  12. Investing in unlisted securities is about 20% more risky than investing in listed securities.

Required:

Determine the value to be placed on each share of Aboto Ltd using the following methods of valuation:

i) Net assets (4 marks)
ii) Price-earnings ratio (4 marks)
iii) Dividend yield (3 marks)
iv) Discounted cash flow (4 marks)

i) Net Assets Valuation:
The net asset method values a company’s shares based on the difference between the fair value of its assets and liabilities.

iv) Discounted Cash Flow (DCF) Method:
The DCF method values shares by calculating the present value of future cash flows using a discount rate of 20% (cost of capital).

  • 10 Marks

CR – Nov 2021 – L3 – Q3c – Regulatory Framework and Ethics

Assess the ethical principles breached in a workplace scenario and recommend actions in accordance with the IFAC Code of Ethics.

Linda is a junior member of an audit firm and has just returned to work after taking compassionate leave to care for her sick mother. For financial reasons, Linda needs to work full-time. Linda has been having difficulties with her mother’s home care arrangements, causing her to miss several team meetings, which usually occur at the start of each day, and she needs to leave work early as well.

In terms of her capabilities, Linda is very competent at her work, but her frequent absence puts severe pressure on her and her overworked colleagues. Linda’s manager knows that workflow through the practice is coming under intense pressure, and in order that the team’s output is not affected, had a discussion with the audit team on Linda’s circumstances. This has, however, led to some members of the audit team undermining Linda at every given opportunity, putting Linda under even greater stress.

Required:

i) In accordance with the IFAC’s code of ethics, assess THREE (3) possible fundamental ethical principles that might have been breached. (5 marks)
ii) Recommend the possible actions that the manager should take as a member of the Institute of Chartered Accountants, Ghana in dealing with this ethical dilemma. (5 marks)

Part (i): Ethical Principles Potentially Breached

The IFAC Code of Ethics identifies several fundamental ethical principles that professionals are required to uphold. In this case, three possible ethical principles might have been breached:

  1. Integrity:
    • Linda might have compromised her integrity by not fully disclosing her limitations to her employer, especially regarding her ability to meet work commitments while caring for her sick mother. It is important for professionals to be honest and straightforward in their professional and personal dealings.
  2. Professional Competence and Due Care:
    • Although Linda is acknowledged to be competent at her job, her ability to deliver due care and commitment to the role is being impacted by her frequent absences and early departures. This situation might lead to a breach of the principle that requires professionals to maintain the knowledge and skills to ensure that clients or employers receive competent professional service.
  3. Objectivity:
    • The manager’s approach to addressing Linda’s situation could potentially breach objectivity. The discussion with the audit team about Linda’s personal challenges might have resulted in biased treatment of Linda by her colleagues. The principle of objectivity requires that personal bias should not affect professional judgment or actions.
  4. Confidentiality (Additional point):
    • The manager’s discussion of Linda’s personal situation with the audit team might have breached confidentiality. Personal information about employees should not be disclosed without consent unless required by law or professional duty.

Part (ii): Recommended Actions for the Manager

The manager should follow the guidelines of the IFAC Code of Ethics to resolve the ethical dilemma while protecting Linda’s professional standing and ensuring the audit team’s productivity is not compromised:

  1. Open Communication with Linda:
    • The manager should have a direct and confidential discussion with Linda to fully understand her situation and determine if adjustments can be made to her work schedule, such as offering flexible hours, remote work options, or reducing her workload temporarily.
  2. Confidentiality:
    • The manager must maintain strict confidentiality about Linda’s personal matters and remind the audit team that her circumstances should not be disclosed or discussed inappropriately.
  3. Address Colleagues’ Behavior:
    • The manager should address the undermining behavior of Linda’s colleagues. A meeting with the audit team should emphasize professionalism, respect, and collaboration, and ensure that personal circumstances do not lead to any harassment or inappropriate treatment.
  4. Workplace Adjustments:
    • Where possible, the manager should consider offering workplace adjustments to Linda, such as flexible hours or task reassignments, to help balance her responsibilities at home and work.
  5. Performance Management:
    • The manager should monitor both Linda’s performance and the team’s output to ensure that business needs are met. If Linda’s situation continues to affect her performance significantly, a long-term solution may need to be considered, including potential leave options or reassigning Linda to a less demanding role.
  6. Document All Steps:
    • The manager should document all actions taken to resolve this ethical dilemma, including meetings with Linda and any decisions made, in case there is a need to justify these actions in the future.
  • 5 Marks

CR – Nov 2021 – L3 – Q3b – Financial instruments: Recognition and measurement Corporate reporting

Advise Ajara Ltd on the accounting treatment of receivables factoring arrangements, both with and without recourse, under IFRS 9.

Ajara Ltd has two receivables that it has factored to a factoring agency, the GBB Bank, in return for immediate cash proceeds of less than the face value of the invoices for the year ended 31 December 2020. Both receivables are due from long-standing customers who are expected to pay in full and on time. In addition, Ajara Ltd has agreed to a three-month credit period with both customers.

  • The first receivable is for GH¢400,000, and in return for assigning the receivable, Ajara Ltd has just received from the factor GH¢360,000. Under the terms of the factoring arrangement, this is the only money that Ajara Ltd will receive regardless of when or even if the customer settles the debt; that is, the factoring arrangement is said to be “without recourse.”
  • The second receivable is for GH¢200,000, and in return for assigning the receivable, Ajara Ltd has just received GH¢140,000. Under the terms of this factoring arrangement, if the customer settles the account on time, then a further GH¢10,000 will be paid by the factoring agency, the GBB Bank to Ajara Ltd, but if the customer does not settle the account in accordance with the agreed terms, then the receivable will be reassigned back to Ajara Ltd who will then be obliged to refund to the factor the original GH¢140,000 plus a further GH¢20,000. This factoring arrangement is said to be “with recourse.”

Required:

Advise the directors of Ajara Ltd on the proper accounting treatment of the monies received under the terms of the two factoring arrangements in the financial statements for the year ended 31 December 2020 in accordance with IFRS 9: Financial Instruments.

The accounting treatment of factoring arrangements depends on whether the receivables have been derecognised or not. IFRS 9: Financial Instruments provides the principles for determining whether a financial asset (such as a receivable) should be derecognised when it is transferred to a factoring agency.

First Receivable (Without Recourse):

In the first arrangement, Ajara Ltd has transferred the receivable for GH¢400,000 and received GH¢360,000 from the factor, with no further rights or obligations. This is a non-recourse factoring arrangement, meaning that the risk of non-payment (bad debt) has been transferred to the factoring agency, the GBB Bank. Since Ajara Ltd no longer bears the risk associated with the receivable, the receivable should be derecognised from its financial statements.

  • Accounting Treatment:
    • The receivable should be derecognised from Ajara Ltd’s statement of financial position.
    • The GH¢360,000 received should be recorded as cash, and a loss on factoring of GH¢40,000 should be recognised in the statement of profit or loss.

Second Receivable (With Recourse):

In the second arrangement, Ajara Ltd has transferred the receivable for GH¢200,000 and received GH¢140,000 from the factor. However, the factoring arrangement includes a recourse provision, meaning that if the customer does not pay, Ajara Ltd remains liable and will have to refund the factor the GH¢140,000 plus an additional GH¢20,000. Since Ajara Ltd retains significant risks associated with the receivable (i.e., the risk of non-payment), the receivable should not be derecognised under IFRS 9.

  • Accounting Treatment:
    • The GH¢140,000 received should be recorded as a liability (loan from the factor) in Ajara Ltd’s statement of financial position.
    • The receivable of GH¢200,000 should remain recognised as an asset in the statement of financial position until the risk is fully transferred or the customer settles the debt.

Summary of Accounting Treatment:

  • Without Recourse (First Receivable):
    • Derecognise receivable
    • Recognise cash of GH¢360,000 and a loss of GH¢40,000.
  • With Recourse (Second Receivable):
    • Do not derecognise receivable.
    • Recognise GH¢140,000 as a liability.
  • 5 Marks

CR – Nov 2021 – L3 – Q3a – Foreign currency

Explain the disclosure requirements when financial information is presented using convenience translation in a different currency under IAS 21.

An entity sometimes displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency simply by translating all amounts at end-of-period exchange rates. This is sometimes called a convenience translation. A result of making a convenience translation is that the resulting financial information does not comply with all IFRS, particularly IAS 21: The Effects of Changes in Foreign Exchange Rates.

Required:

Explain the disclosure requirements when convenience translation is used to display financial information.

When an entity uses convenience translation to display its financial information, it is important to make specific disclosures to ensure that users of the financial statements are aware of the nature and limitations of the translated information. IAS 21: The Effects of Changes in Foreign Exchange Rates provides guidance on the required disclosures when convenience translation is used.

The following disclosure requirements must be met:

  1. Identify the Information as Supplementary:
    • The entity must explicitly state that the information presented in the alternative currency is supplementary and does not comply with IFRS. This is necessary to avoid misleading users into thinking that the information presented in the translated currency is in full compliance with IFRS standards.
  2. Disclosure of Currency Used:
    • The entity should clearly disclose the currency in which the supplementary information is displayed. This will help users understand the basis of the translation and its potential limitations.
  3. Disclosure of Functional Currency:
    • The entity must disclose its functional currency (the currency of the primary economic environment in which it operates) in the notes to the financial statements. This is crucial because it provides context for the convenience translation.
  4. Method of Translation:
    • The entity should disclose the method of translation used to arrive at the translated financial information. This includes specifying the exchange rates applied, particularly whether the translation was done using end-of-period exchange rates or some other method.

These disclosures help ensure transparency and enable users to assess the limitations and usefulness of the convenience translation in making economic decisions.

  • 6 Marks

CR – Nov 2021 – L3 – Q2c – IAS 38: Intangible Assets

Advise Zunka Ltd on how to account for the cost of adapting equipment and the provision for potential damages in a legal case for patent infringement.

Zunka Ltd (Zunka) is a private pharmaceutical company in Ghana, which imports medical equipment manufactured under a patent. Zunka subsequently adapts the equipment to fit the market in Ghana and sells the equipment under its own brand name. Zunka originally spent GH¢6 million in developing the know-how required to adapt the equipment, and, in addition, it costs GH¢100,000 to adapt each piece of equipment. Zunka has capitalised the cost of the know-how and the cost of adapting each piece of equipment sold as patent rights.

Zunka is being sued for patent infringement by Sajida Ltd (Sajida), the owner of the original patent, on the grounds that Zunka has not materially changed the original product by its subsequent adaptation. If Sajida can prove infringement, the court is likely to order Zunka to pay damages and stop infringing its patent. Zunka’s lawyers are of the view that the court could conclude that Sajida’s patent claim is not valid.

Sajida has sued Zunka for GH¢10 million for using a specific patent and a further GH¢16 million for lost profit due to Zunka being a competitor in the market for this product. Zunka has offered GH¢14 million to settle both claims but has not received a response from Sajida.

As a result, the directors of Zunka estimate that the damages it faces will be between the amount offered by Zunka and the amount claimed by Sajida. The directors of Zunka would like advice as to whether they have correctly accounted for the costs of the adaptation of the equipment and whether they should make a provision for the potential damages in the above legal case in the financial statements for the year ended 31 March 2021.

Required:

Advise the directors of Zunka on how the above transaction should be accounted for in its financial statements for the year ended 31 March 2021 in accordance with relevant International Financial Reporting Standards (IFRS).

In accordance with IAS 38: Intangible Assets, the three features to intangible assets are:

  1. Identifiability: The asset must be separable or arise from contractual or other legal rights.
  2. Control: The entity controls the future economic benefits of the asset.
  3. Future Economic Benefits: The asset will generate probable future economic benefits.

In addition, the cost of the intangible asset should be capable of reliable measurement. Development costs are capitalised only after the technical and commercial feasibility of the asset have been established. The entity must intend and be able to complete the intangible asset, and either use it or sell it, and be able to demonstrate how the asset will generate future economic benefits.

It appears in principle that the above criteria may have been satisfied in the case of the costs of adapting the medical equipment imported by Zunka Ltd. However, only the costs incurred in developing the initial know-how of GH¢6 million may be capitalised, as these are the costs of establishing the technical and commercial feasibility of the equipment.

The costs of adapting each piece of equipment of GH¢100,000 are simply production costs to be included in cost of sales, and if the equipment is not sold, they should be included in the inventory valuation of the equipment.

Provisions under IAS 37:

IAS 37: Provisions, Contingent Liabilities, and Contingent Assets requires that a provision be recognised if the following conditions are met:

  1. There is a present obligation (legal or constructive) due to a past event.
  2. It is probable that an outflow of economic resources will be required to settle the obligation.
  3. The amount of the obligation can be estimated reliably.

An outflow of economic resources is deemed probable when the outflow of resources is more likely than not to occur. For an estimate of the amount of the obligation to be reliable, it is sufficient if a range of probable outcomes can be determined.

The amount recognised as a provision should be the best estimate of the expenditure that an entity would rationally pay to settle. Zunka Ltd’s lawyers feel that the court could conclude that the patent claim is not valid. However, Zunka Ltd has offered GH¢14 million to settle both claims without going to court. Therefore, this implies that Zunka Ltd believes that it is more likely than not that a present obligation exists, resulting from a past event.

The amount of the provision may not correspond to the amount which has been offered to Sajida Ltd, as there is no certainty that Sajida Ltd will accept the offer. Therefore, as it is difficult to determine the amount of the provision within a range of probable outcomes, IAS 37 states that where a continuous range of possible outcomes exists, and each point in that range is as likely as any other, the mid-point of the range should be used.

Thus, Zunka Ltd should recognise a provision of GH¢10 million in its financial statements at 31 March 2021 and disclose the uncertainties relating to the amount or timing of these cash outflows.

  • 7 Marks

CR – Nov 2021 – L3 – Q2b – IFRS 15: Revenue from Contracts with Customers

Determine how Barikisu Ltd should account for revenue and costs related to a construction contract with a customer under IFRS 15.

On 1 January 2020, Barikisu Ltd (Barikisu) entered into a contract with a customer to construct a specialised building for a consideration of GH¢2 million plus a bonus of GH¢0.4 million if the building is completed within 18 months. The estimated cost to construct the building is GH¢1.5 million. If the customer terminates the contract, Barikisu can demand payment for the cost incurred to date plus a mark-up of 30%. However, on 1 January 2020, due to factors outside of its control, such as the weather and regulatory approval, Barikisu is not sure whether the bonus will be achieved.

As at 31 December 2020, Barikisu has incurred a cost of GH¢1.0 million. They are still unsure as to whether the bonus target will be met. Therefore, Barikisu decided to measure progress towards completion based on the cost incurred. To date, Barikisu has received GH¢1 million from the customer.

Required:

Recommend to the directors of Barikisu how this transaction should be accounted for in the financial statements for the year ended 31 December 2020 in accordance with relevant International Financial Reporting Standards (IFRS).

Constructing the building is a single performance obligation in accordance with IFRS 15: Revenue from Contracts with Customers.

The bonus is a variable consideration. It is excluded from the transaction price because it is not highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The construction of the building should be accounted for as an obligation settled over time. Barikisu Ltd should recognise revenue based on progress towards satisfaction of the construction of the building.

  • 7 Marks

CR – Nov 2021 – L3 – Q2a – IFRS 2: Share-based Payments | IFRS 13: Fair Value Measurement

Advise Mariam Plc on the correct accounting treatment for share appreciation rights (SARs) in compliance with IFRS 2 and IFRS 13.

On 1 April 2018, Mariam Plc granted 500 share appreciation rights (SARs) to its 300 employees. All of the rights vested on 31 March 2020 and can be exercised from 1 April 2020 up to 31 March 2022. At the grant date, the value of each SAR was GH¢10, and it was estimated that 5% of the employees would leave during the vesting period. The fair value of the SARs is as follows:

Date Fair Value of SAR (GH¢)
31 March 2019 9
31 March 2020 11
31 March 2021 12

All the employees who were expected to leave the employment did leave the company as expected before 31 March 2020. On 31 March 2021, 60 employees exercised their options when the intrinsic value of the right was GH¢10.50 and were paid in cash. Mariam Plc is, however, confused as to whether to account for the SARs under IFRS 2: Share-based Payment or IFRS 13: Fair Value Measurement and would like to be advised as to how the SARs should have been accounted for from the grant date to 31 March 2021.

Required:

Advise Mariam Plc on how the above transactions should be accounted for in its financial statements with reference to relevant International Financial Reporting Standards (IFRS).

Mariam Limited will account for this transaction under the provisions of IFRS 2: Share-based Payments. IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements). IFRS 13 specifically excludes transactions covered by certain other standards, including share-based payment transactions within the scope of IFRS 2: Share-based Payment and leasing transactions within the scope of IFRS 16: Leases.

Thus, share-based payment transactions are outside the scope of IFRS 13. For cash-settled share-based payment transactions, the fair value of the liability is measured in accordance with IFRS 2 initially, at each reporting date, and at the date of settlement using an option pricing model. Unlike equity-settled transactions, the measurement reflects all conditions and outcomes on a weighted average basis. Any changes in fair value are recognised in profit or loss in the period.

Therefore, the SARs would be accounted for as follows:

Statement of Profit or Loss for the year ended (Extracts):

Year Staff Costs (GH¢)
2019 641,250
2020 926,250
2021 97,500

Statement of Financial Position Extract as at (Extracts):

Year SARs Liabilities (GH¢)
2019 641,250
2020 1,567,500
2021 1,350,000
  • 20 Marks

CR – Nov 2021 – L3 – Q1 – Consolidated Financial Statements

Prepare consolidated financial statements for Rafco Group including an income statement and a statement of financial position as of December 31, 2020, incorporating intragroup transactions, intergroup sales, and impairment adjustments.

On 1 January 2016, Rafco Ltd acquired 4,500,000 GH¢1 ordinary shares of Namco Ltd for GH¢12,000,000. The balance on Namco Ltd retained earnings as at this date was GH¢2,350,000. On 1 January 2018, Namco Ltd acquired 2,560,000 GH¢1 ordinary share of Tedco Ltd for GH¢6,000,000 when Tedco Ltd retained earnings as at that date was GH¢1,600,000.

The Financial Statements of Rafco Ltd, Namco Ltd, and Tedco Ltd for the year ended 31 December 2020 are as follows:

Additional Information:

  1. It is the group’s policy to value the non-controlling interest at fair value at the date of acquisition. The fair value of the non-controlling interest in Namco Ltd on 1 January 2016 was GH¢800,000. The fair value of the non-controlling interest in Tedco Ltd on 1 January 2018 was GH¢1,440,000.
  2. In 2020, Tedco Ltd made intragroup sales to Namco Ltd for GH¢768,000, making a profit of 25% on cost, and GH¢120,000 of these goods were in inventory as at 31 December 2020.
  3. Namco Ltd also made intragroup sales to Rafco Ltd for GH¢416,000, making a profit of 33 1/3% on cost, and GH¢96,000 of these goods were in inventory as at 31 December 2020.
  4. On 1 January 2020, Rafco Ltd sold a group of machines to Namco Ltd at their agreed fair value of GH¢3 million. The carrying amount of the machines was GH¢2 million. The estimated remaining useful life of the machines at the date of the sale was four years.
  5. An impairment test at 31 December 2020 on the consolidated goodwill of Namco Ltd and Tedco Ltd concluded that it should be written down by GH¢150,000 and GH¢100,000, respectively. No other assets were impaired.

Required: Prepare for the Rafco Group a Consolidated Income Statement for the year ended 31 December 2020 and a Consolidated Statement of Financial Position as at that date.


Workings

  • 10 Marks

AT – Nov 2021 – L3 – Q5b – Tax administration in Ghana

Discuss challenges taxpayers face in complying with tax laws and propose interventions to improve voluntary tax compliance.

The world over is moving towards voluntary tax compliance. The Minister for Finance in his budget statement tasked Ghana Revenue Authority (GRA) to leverage on voluntary tax compliance. GRA intends to task students on the kind of intervention it needs to roll out to achieve Voluntary Tax Compliance.

Required:
Write formally to the Commissioner-General on why taxpayers find it difficult to comply with the tax laws and possible interventions to make taxpayers comply with their obligations.
(10 marks)

Student’s Address
Accra
12 January 2021

The Commissioner-General
Ghana Revenue Authority
Accra

Dear Sir,

Subject: Interventions to Enhance Voluntary Tax Compliance

I write to highlight key reasons why taxpayers find it challenging to comply with tax laws and offer suggestions for interventions that could improve voluntary tax compliance.

Challenges Faced by Taxpayers:

  1. Complexity of Tax Laws: Many taxpayers find the tax laws difficult to understand, which often leads to mistakes in filing tax returns or incorrect tax calculations.
  2. High Compliance Costs: Engaging tax professionals to assist in tax filings can be expensive, particularly for small and medium-sized enterprises (SMEs), which may not have the resources to bear these costs.
  3. Cumbersome Administrative Procedures: Lengthy and bureaucratic processes for filing tax returns, seeking tax refunds, or obtaining tax clearance certificates discourage compliance.
  4. Lack of Tax Education: Many taxpayers are not aware of the latest changes in tax laws or the proper procedures for filing returns, leading to non-compliance.
  5. Perception of Unfairness: Some taxpayers feel that the tax system is inequitable, particularly with high rates of tax penalties and interest on late payments, creating resentment and discouraging voluntary compliance.
  6. Fear of Penalties: Taxpayers may be reluctant to engage with the tax system due to the fear of penalties for past mistakes or omissions.
  7. Inadequate Support from GRA: Limited access to tax education and support services from the Ghana Revenue Authority (GRA) results in taxpayers struggling to comply with their obligations.

Proposed Interventions:

  1. Simplification of Tax Laws: The GRA should work on simplifying tax laws and providing easy-to-understand guidelines and explanations. This would reduce errors and misunderstandings, particularly for SMEs.
  2. Digitalization of Tax Processes: Streamlining tax filing and payment processes through an accessible and user-friendly online system would save taxpayers time and resources, encouraging higher compliance.
  3. Regular Tax Education Campaigns: Continuous education campaigns, seminars, and workshops tailored to the needs of different taxpayer categories would help increase awareness of tax obligations and changes in tax laws.
  4. Amnesty Programs: Offering tax amnesties periodically can encourage taxpayers to come forward and regularize their tax affairs without the fear of severe penalties for previous non-compliance.
  5. Taxpayer Support Services: Establishing dedicated taxpayer support centers and helplines to assist individuals and businesses with their tax filings can improve confidence in the system and foster compliance.
  6. Incentives for Early Payment: Offering incentives such as discounts or lower rates for early tax payments could motivate taxpayers to meet their tax obligations in a timely manner.
  7. Reduction of Penalties: Adjusting the penalty regime to make it less punitive and more supportive of taxpayers who make genuine errors would improve relations between GRA and taxpayers.

I hope these interventions will be helpful in promoting voluntary tax compliance across the country.

Yours faithfully,
Coke Fanta

  • 10 Marks

AT – Nov 2021 – L3 – Q5a – Petroleum operations

Explain taxation concepts in relation to petroleum operations, including surface rentals, stability agreements, and carried interest.

Explain the following concepts in relation to the taxation of petroleum operations:
i) Surface Rentals
ii) Stability Agreements
iii) Carried Interest
iv) Additional Carried Interest
(10 marks)

i) Surface Rentals
In petroleum operations, surface rentals are annual payments made by oil companies for the use of land or offshore blocks allocated for exploration or production. The rates charged depend on the phase of operations, and the rental amounts increase as operations move from exploration to production. These fees are payable per square kilometer and serve as compensation to the government for land use.

Phase of Operation Surface Rental Per Year
Initial exploration period GH¢30 per square km
1st Extension period GH¢50 per square km
2nd Extension period GH¢75 per square km
Development and production area GH¢100 per square km

ii) Stability Agreements
A stability agreement protects a petroleum company from adverse changes in tax laws or other fiscal obligations for a specified period (not exceeding 15 years) after the agreement is signed. This ensures that the company is not subject to changes in customs duties, royalties, and exchange control laws, which could negatively affect its operations.

iii) Carried Interest
Carried interest refers to the government’s entitlement to a share of the petroleum produced without having to contribute to exploration and development costs. In Ghana, the government, through the Ghana National Petroleum Corporation (GNPC), holds an initial carried interest of at least 15% in petroleum operations. The state only contributes towards production costs.

iv) Additional Carried Interest
In addition to the initial carried interest, the government has the option to acquire up to 5% additional participating interest in petroleum operations. The state must pay its proportionate share of development and production costs but not exploration and appraisal costs. This option is exercisable within a specified period after a commercial discovery is made.

 

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