Subject: CORPORATE REPORTING

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  • 5 Marks

CR – May 2018 – L3 – Q2a – IAS 19 Employee Benefits

Calculate the net actuarial gain/loss and net pension liability for a defined benefit plan under IAS 19.

Zumah Ltd operates a defined benefit pension plan for its employees. On 1 April 2015, the fair value of the pension plan assets was GH¢8,200,000, and the present value of the pension plan liabilities was GH¢8,500,000. The actuary estimated that the service cost for the year to 31 March 2016 was GH¢2,100,000. The pension plan paid GH¢500,000 to retired members, and Zumah Ltd paid GH¢1,900,000 in contributions to the pension plan in the year to 31 March 2016. The actuary estimated that the discount rate for the year to 31 March 2016 was 6%.

On 31 March 2016, Zumah Ltd announced improvements to the benefits offered by the pension plan to all its members. The actuary estimated that the past service cost associated with these improvements was GH¢2,000,000. At 31 March 2016, the fair value of the pension plan assets was GH¢10,200,000, and the present value of the pension plan liabilities (including the past service costs) was GH¢12,500,000.

Required:
In accordance with IAS 19 Employee Benefits:
i) Calculate the net actuarial gain or loss that will be included in Zumah Ltd’s other comprehensive income for the year ended 31 March 2016. (3 marks)
ii) Calculate the net pension asset or liability that will be included in Zumah Ltd’s statement of financial position as at 31 March 2016. (2 marks)

  • 5 Marks

CR – May 2018 – L3 – Q1b – Consolidated Financial Statements

Calculate the consolidated gain or loss on disposal of a 60% equity interest and explain accounting for the remaining investment.

On 30 June 2016, Afoko Ltd acquired a 100% interest in Anyidohu Ltd, a public limited company, for a cash consideration of GH¢195 million. Anyidohu’s identifiable net assets were fair valued at GH¢160 million. On 30 November 2017, Afoko disposed of 60% of the equity of Anyidohu when its identifiable net assets were GH¢180 million. Of the increase in net assets, GH¢15 million had been reported in profit or loss, and GH¢5 million had been reported in other comprehensive income as a gain on an available-for-sale financial asset. The sale proceeds were GH¢115 million, and the remaining equity interest was fair-valued at GH¢65 million. Afoko could still exert significant influence after the disposal of the interest.

Required:
Calculate the consolidated gain or loss arising on the disposal of the equity interest in Anyidohu Ltd and explain how the investment in Anyidohu Ltd is accounted for after the disposal of 60% of equity.

Afoko Ltd

Commentary/Justification:
After the disposal of 60% of equity, Afoko Ltd retains significant influence over Anyidohu Ltd. As a result, Anyidohu becomes an associate, and Afoko Ltd should account for the remaining investment using the equity method. Under the equity method, the investment is initially measured at the fair value of the retained equity interest (GH¢65 million). The group’s share of subsequent profits, comprehensive income, or losses of Anyidohu will be recognized in the group’s financial statements and will increase or decrease the carrying amount of the investment.

  • 6 Marks

CR – May 2019 – L3 – Q2a – Financial instruments: Recognition and measurement corporate reporting

The question requires the accounting treatment for the issue of a subsidized loan granted by Chereponi Ltd to a charity, applying IFRS 9 Financial Instruments.

Chereponi Ltd (Chereponi) is a listed manufacturing company. Chereponi granted a loan of GH¢25 million to a homeless charity for the building of a community centre. The loan was granted on 1 January 2018 and is repayable on maturity in four years’ time. Interest, which is subsidized, is to be charged one year in arrears at 4%, but Chereponi assesses that a normal rate for such a loan would have been 8%. Chereponi recorded a financial asset at GH¢25 million and reduced this by the interest received each year.

Required:
In accordance with IFRS 9: Financial Instruments, recommend with justification the required accounting treatment for the issue of the loan to the homeless charity in the financial statements of Chereponi for the year ended 31 December 2018. (6 marks)

The fair value of the bond is determined by calculating the present value of all future cash receipts using the prevailing market interest rate for a similar financial instrument. This will result in a lower figure than the amount advanced. The difference is recognised in profit or loss.

Cash flows and present value calculation:

Year Cash Flow (GH¢m) Discount Factor @ 8% Present Value (GH¢m)
2017 1 0.93 0.93
2018 1 0.86 0.86
2019 1 0.79 0.79
2020 26 0.74 19.24

Total Present Value: 21.82 GH¢ million

Accounting treatment:

  • The fair value of the loan is calculated by scheduling the cash flows due to take place over the life of the loan and discounting them to present value at the unsubsidised rate of interest of 8%.
  • The making of the loan should have been accounted for as:
Debit Amount (GH¢m)
Financial Asset 21.8
Profit or Loss 3.2
Credit Amount (GH¢m)
Cash 25

The asset is then held at amortised cost.

At 1 January 2017:
Interest rate 8%, Cash received GH¢1 million

Financial Asset Debit (GH¢m)
21.8 1.7

Correcting entries in the financial statements for 2018:

Debit Amount (GH¢m)
SPLOCI 3.2
Financial Asset 1.7
Credit (Financial Asset) 3.2
SPLOCI (Profit or Loss) 1.7
  • 15 Marks

CR – May 2018 – L3 – Q1a – Consolidated Financial Statements

Prepare consolidated financial statements for Sawaba Group, including a foreign subsidiary, for the year ended 31 December 2017.

Sawaba Ltd (Sawaba) is a listed entity incorporated in Ghana with the object of producing and selling Designed clothing. The functional and presentation currency of Sawaba is the Ghana cedi (GH¢). In its quest to extend its market outside Ghana, the directors of the company decided to acquire a subsidiary in Nigeria. The corporate name of the investee entity is Enugu Plc (Enugu).

In pursuit to its agenda, Sawaba acquired 4,044,000 of the shares in Enugu for GH¢1,680,000 on 31 December 2014 when Enugu’s retained earnings stood at ₦5,752,000. Enugu operates as an autonomous subsidiary. Its functional currency is the Nigerian Naira (₦). The fair value of the identifiable net assets of Enugu were equivalent to their book values at the acquisition date.

The draft financial statements of Sawaba and its subsidiary, Enugu for 2017 financial year are set out below.

Statements of Profit or Loss and Comprehensive Income for the year ended 31 December 2017

i) Exchange rates moved as follows:
31 December 2014 ₦4.40 = GH¢1.00
31 December 2015 ₦4.16 = GH¢1.00
31 December 2016 ₦4.00 = GH¢1.00
15 May 2017 ₦3.90 = GH¢1.00
31 December 2017 ₦3.60 = GH¢1.00
Average for 2017 ₦3.75 = GH¢1.00

ii) Enugu paid an interim dividend of ₦7,488,000 on 15 May 2017. Sawaba also paid an interim dividend of GH¢1,400,000 on 30 September 2017. No other dividends were paid or declared in 2017.

iii) Assessment of consolidation goodwill for impairment indicated nil impairment in the consolidated financial statements by 31 December 2017. No goodwill impairment had been recognised in the previous years.

iv) Group policy is to measure non-controlling interests at fair value at the acquisition date. The fair value of the non-controlling interests in Enugu was measured at GH¢540,000 on 31 December 2014.

Required:
Prepare the consolidated statements of profit or loss and other comprehensive income, an extract from the statement of changes in equity for income surplus for the year ended 31 December 2017 and the consolidated statement of financial position at 31 December 2017 for Sawaba Group.

Sawaba Group
Consolidated Statement of Profit or Loss and other comprehensive
Income for year ended 31 December 2017

  • 20 Marks

CR – May 2019 – L3 – Q1 – Consolidated financial statements | Business combinations and consolidation

The question requires the preparation of a consolidated statement of profit or loss and other comprehensive income for HO group for the year ended 30 September 2018, including adjustments for intra-group sales, goodwill impairment, and partial disposal of a subsidiary.

On 1 October 2016, HO acquired 60% of the equity interest of Sunyani, a public limited company in Ghana. The purchase consideration is made up of cash of GH¢40 million and the fair value of the identifiable net assets acquired was GH¢55 million at that date. The fair value of the non-controlling interest (NCI) in Sunyani was GH¢22.5 million on 1 October 2016.

HO wishes to use the ‘full goodwill’ method for all acquisitions. The share capital and retained earnings of Sunyani were GH¢12.5 million and GH¢32.5 million respectively, and other components of equity were GH¢3 million at the date of acquisition. The excess of the fair value of the identifiable net assets at acquisition is due to non-depreciable land. Goodwill has been tested for impairment annually and as at 30 September 2017 had reduced in value by 20%. However, at 30 September 2018, the impairment of goodwill had reversed and goodwill was valued at GH¢1 million above its original value. This upward change in value has already been included in the draft financial statements of HO below prior to the preparation of the group accounts.

HO group:

Draft statements of profit or loss and other comprehensive income for the year ended 30 September 2018

HO (GH¢’000) Sunyani (GH¢’000) Kumasi (GH¢’000)
Revenue 200,000 57,500 35,000
Cost of sales (156,000) (32,500) (18,000)
Gross profit 44,000 25,000 17,000
Other income 10,500 3,500 1,000
Administrative costs (7,500) (4,500) (6,000)
Other expenses (17,500) (9,500) (4,000)
Operating profit 29,500 14,500 8,000
Finance costs (2,500) (1,500) (2,000)
Finance income 3,000 2,500 4,000
Profit before tax 30,000 15,500 10,000
Income tax expense (9,500) (4,500) (2,500)
Profit for the year 20,500 11,000 7,500
Other comprehensive income – revaluation surplus 5,000 – –
Total comprehensive income for year 25,500 11,000 7,500

The following information is relevant:

i) HO disposed of an 8% equity interest in Sunyani on 30 September, 2018 for a cash consideration of GH¢9 million and had accounted for the gain or loss in other income. The carrying value of the net assets of Sunyani Ltd at 30 September, 2018 was GH¢60 million before any adjustments on consolidation. HO accounts for investments in subsidiaries using IFRS 9 financial instruments and has made an election to show gains and losses in other comprehensive income. The carrying value of the investment in Sunyani was GH¢45 million at 30 September 2017 and GH¢47.5 million at 30 September, 2018 before the disposal of the equity interest.

ii) HO acquired 60% of the equity interest of Kumasi Ltd, a limited liability company also in Ghana on 30 September, 2016. The purchase consideration was cash of GH¢35 million. Kumasi’s identifiable net assets were fair valued at GH¢43 million and the non-controlling interest had a fair value of GH¢14 million at that date. On 1 April 2018, HO disposed off a 40% equity interest in Kumasi for a consideration of GH¢25 million. Kumasi’s identifiable net assets were GH¢45 million and the value of the non-controlling interest was GH¢17 million at the date of disposal. The remaining equity interest was fair valued at GH¢20 million. After the disposal, HO exerts significant influence. Any increase in net assets since acquisition has been reported in profit or loss and the carrying value of the investment in Kumasi had not changed since acquisition. Goodwill had been tested for impairment and found that no impairment was required. No entries had been made in the financial statements of HO for this transaction other than for cash received.

iii) HO sold inventory to Sunyani for GH¢6 million at fair value. HO made a loss on the transaction of GH¢1 million and Sunyani still holds GH¢4 million in inventory at the year end.

iv) On 1 October 2016, HO purchased an item of property, plant and equipment for GH¢6 million and this is being depreciated using the straight line basis over 10 years with a nil residual value. At 30 September 2017, the asset was revalued to GH¢6.5 million but at 30 September 2018, the value of the asset had fallen to GH¢3.5 million. HO uses the revaluation model to value its non-current assets. The effect of the revaluation at 30 September 2018 had not been taken into account in total comprehensive income but depreciation for the year had been charged.

v) On 1 October 2016, HO made an award of 4,000 share options to each of its seven directors. The condition attached to the award was that the directors must remain employed by HO for three years. The fair value of each option at the grant date was GH¢100 and the fair value of each option at 30 September 2018 was GH¢110. At 30 September 2017, it was estimated that three directors would leave before the end of three years. Due to an economic downturn, the estimate of directors who were going to leave was revised to one director at 30 September 2018. The expense for the year as regards the share options had not been included in profit or loss for the current year and no director had left by 30 September 2018.

Required:
Prepare a consolidated statement of profit or loss and other comprehensive income for the year ended 30 September 2018 for the HO group.

HO Ltd
Group: statement of profit or loss and other comprehensive income for the year
ended 30 September 2018

All workings should be rounded off to the nearest GH¢000

 

Note:
Subsidiary status is maintained for Sunyani Ltd since as at 30 September 2018, HO Ltd
controlled 52% (60% – 8%).
For Kumasi Ltd, there will be six months subsidiary status (up to 1 April 2018), and
six months associate status (up to 30 September 2018).

Always remember that impairments recorded against goodwill can never be reversed.
The goodwill in Sunyani Ltd has been increased to GH¢8.5 million (GH¢7.5 million +
GH¢1 million). But impairments recorded against goodwill can never be reversed. As
a result, an amount of GH¢2.5 million (that is, GH¢8.5 million – GH¢6 million) needs
to be charged to profit or loss to undo the reversal and in order to reduce the goodwill
to the right amount of GH¢6 million. This is thus added to other expenses in the
consolidated statement of profit or loss for the year. Notice that in the case of Kumasi
Ltd, the goodwill is not impaired.
(W3)Disposal of shares in Sunyani Ltd
HO, the parent company has not lost control in the disposal transaction over Sunyani
Ltd. Therefore, no profit or loss on disposal should be calculated and recorded in the
consolidated financial statements.
A profit on disposal will have been recorded in the individual accounts of HO,
calculated as:

GH¢000
Proceeds from sale of 8% shares in Sunyani                                                     9,000

Carrying amount of investment disposed (8/60 x GH¢47.5 million)         (6,333)

Profit                                                                                                                          2,667

This profit on disposal must be removed from other income in the consolidated
statement of profit or loss. There will be no consolidated profit or loss on disposal
because control over the subsidiary has not been lost. The current year gain on the
investment in Sunyani Ltd of GH¢2.5 million (GH¢ 47.5 million – GH¢ 45 million) must
also be removed from other comprehensive income.

(W4) Disposal of shares in Kumasi Ltd
Gain on disposal of 40% shares in Kumasi Ltd would be as follows:

Where the control over an investment has been lost as a result of disposal of shares
during the accounting period, then a profit or loss on disposal must be calculated and
included in the consolidated statement of profit or loss. In addition, the results of
Kumasi Ltd should only be consolidated in the statement of profit or loss and other
comprehensive income for the six months to 1 April 2018. Thereafter Kumasi Ltd
should be accounted for using the equity method under IAS 28.
(W5) Intra-group sale
IFRS 10 states that intra-group trading must be eliminated from consolidated revenue
and costs of sales. Any unrealized profits should also be eliminated by increasing cost
of sales. However, if a loss is made on intra-group trading, it may suggest that the
value of the goods have fallen and therefore that the loss is actually realized. The loss
on the sale of the inventory is not eliminated from group profit or loss. Because the
sale is at fair value, the inventory value must have been impaired and therefore the
loss sale must remain realized. However, the revenue and cost of sales GH¢6 million
will be eliminated as normal.

Revaluation loss of property, plant and equipment is first of all charged to other
comprehensive income to the extent that a revaluation reserve or surplus exists for the
specific asset. After that, any excess revaluation loss is recorded in profit or lost as an
expense. In this case, GH¢1, 178 is included in other expenses.
(W7) Share options
The expense of on equity-settled share-based payment scheme with employees is
valued using the fair value of the option at the grant date. This expense is spread over
the vesting period based on the number of options expected to vest. The other side of
the double entry is recorded in equity.

 

  • 20 Marks

CR – April 2022 – L3 – Q5 – Analysis and interpretation of financial statements

Write a report analyzing the financial performance and financial position of Azure Plc using financial ratios and sector averages.

Azure Plc is a company that trades its ordinary shares on the Ghana Stock Exchange. Below are the statements of profit or loss for the year ended 31 December 2020 and for the first three quarters in 2020 published in line with the Ghana Stock Exchange regulations:

Statements of profit or loss of Azure Plc:

Description Year Ended 31 Dec 2020 (Audited) Quarter 3 (Unaudited) Quarter 2 (U

naudited)

 Quarter 1 (Unaudited)
Revenue GH¢ 2,829 million GH¢ 544 million GH¢ 810 million GH¢ 624 million
Cost of sales (GH¢ 1,754 million) (GH¢ 346 million) (GH¢ 489 million) (GH¢ 412 million)
Gross profit GH¢ 1,075 million GH¢ 198 million GH¢ 321 million GH¢ 212 million
Other operating income GH¢ 72 million GH¢ 32 million GH¢ 21 million GH¢ 23 million
Administrative expenses (GH¢ 572 million) (GH¢ 94 million) (GH¢ 183 million) (GH¢ 146 million)
Distribution costs (GH¢ 265 million) (GH¢ 73 million) (GH¢ 62 million) (GH¢ 65 million)
Finance costs (GH¢ 15 million) (GH¢ 11 million) (GH¢ 2 million) (GH¢ 2 million)
Profit before tax GH¢ 295 million GH¢ 52 million GH¢ 95 million GH¢ 22 million
Tax (GH¢ 101 million) (GH¢ 17 million) (GH¢ 31 million) (GH¢ 11 million)
Profit for the year GH¢ 194 million GH¢ 35 million GH¢ 64 million GH¢ 11 million

Additional information:
The following ratios have been calculated for the relevant sector for the year ended 31 December 2020:

  • Return on year-end capital employed: 18.30%
  • Return on year-end equity: 16.05%
  • Profit (before interest and tax) margin: 12.1%
  • Gross profit margin: 43.22%
  • Current ratio: 2.60
  • Quick ratio: 1.25
  • Assets turnover: 1.02
  • Debt-to-equity ratio: 30.50%

Required:
Write a report to the Board of Directors of Azure Plc, analyzing the financial performance and financial position of the company using the above information to assist the Board in determining whether strategic adjustments are required and where, if any.
(20 marks)

Report:

To: Board of Directors of Azure Plc
From: Accountant
Date: 10 January, 2021
Subject: Analysis of the Financial Performance and Position of Azure Plc

Introduction:
This report discusses the financial performance and position of Azure Plc for the year ended 31 December 2020, relative to its sector average on the basis of profitability, liquidity, and gearing ratios.

Profitability:
Profitability reflects how well resources are deployed to generate income. It is about how efficient and effective the company is in controlling operational costs while maximizing its asset utilization.

  • Return on Capital Employed (ROCE):
    Azure Plc’s ROCE of 20.13% marginally exceeds the sector average of 18.3%, indicating Azure’s better efficiency in using its resources to generate profits. The company has utilized its net assets more effectively than competitors, as demonstrated by its higher asset turnover ratio.
  • Gross Profit Margin:
    Azure Plc’s gross profit margin of 38% is lower than the sector average of 43.22%, suggesting that Azure has not been able to control its cost of production as effectively as its competitors.
  • Operating Profit Margin:
    Azure’s operating profit margin of 10.96% is also below the sector’s 12.1%. This suggests that Azure is not as effective in controlling its operating costs, particularly in comparison to competitors.
  • Return on Equity (ROE):
    Azure’s ROE of 15.68% is slightly below the sector’s 16.05%, implying that Azure is less efficient in generating returns for shareholders relative to the equity capital employed.

Liquidity:
Liquidity refers to the ability of the company to meet its short-term obligations.

  • Current Ratio:
    Azure’s current ratio of 2.42 is slightly below the sector average of 2.60, suggesting that the company has fewer liquid resources available to meet its short-term liabilities compared to its competitors.
  • Quick Ratio:
    Azure’s quick ratio of 1.39 exceeds the sector average of 1.25, indicating that Azure is in a better position than its competitors to meet short-term liabilities without relying on inventories.

Gearing:
Gearing reflects the financial risk of the company by comparing debt levels to equity.

  • Debt-to-Equity Ratio:
    Azure’s debt-to-equity ratio of 24.6% is lower than the sector average of 30.5%, suggesting that Azure carries less financial risk compared to its competitors. The lower gearing ratio indicates that Azure is less dependent on debt financing and has a stronger financial position.

Conclusion:

Azure Plc has shown mixed results in its financial performance. While its asset utilization and gearing position are stronger than the sector average, its profitability margins and liquidity are weaker. The company should focus on improving cost control and operating efficiency to enhance profitability and liquidity.

Report:

To: Board of Directors of Azure Plc
From: Accountant
Date: 10 January, 2021
Subject: Analysis of the Financial Performance and Position of Azure Plc

Introduction:
This report discusses the financial performance and position of Azure Plc for the year ended 31 December 2020, relative to its sector average on the basis of profitability, liquidity, and gearing ratios.

Profitability:
Profitability reflects how well resources are deployed to generate income. It is about how efficient and effective the company is in controlling operational costs while maximizing its asset utilization.

  • Return on Capital Employed (ROCE):
    Azure Plc’s ROCE of 20.13% marginally exceeds the sector average of 18.3%, indicating Azure’s better efficiency in using its resources to generate profits. The company has utilized its net assets more effectively than competitors, as demonstrated by its higher asset turnover ratio.
  • Gross Profit Margin:
    Azure Plc’s gross profit margin of 38% is lower than the sector average of 43.22%, suggesting that Azure has not been able to control its cost of production as effectively as its competitors.
  • Operating Profit Margin:
    Azure’s operating profit margin of 10.96% is also below the sector’s 12.1%. This suggests that Azure is not as effective in controlling its operating costs, particularly in comparison to competitors.
  • Return on Equity (ROE):
    Azure’s ROE of 15.68% is slightly below the sector’s 16.05%, implying that Azure is less efficient in generating returns for shareholders relative to the equity capital employed.

Liquidity:
Liquidity refers to the ability of the company to meet its short-term obligations.

  • Current Ratio:
    Azure’s current ratio of 2.42 is slightly below the sector average of 2.60, suggesting that the company has fewer liquid resources available to meet its short-term liabilities compared to its competitors.
  • Quick Ratio:
    Azure’s quick ratio of 1.39 exceeds the sector average of 1.25, indicating that Azure is in a better position than its competitors to meet short-term liabilities without relying on inventories.

Gearing:
Gearing reflects the financial risk of the company by comparing debt levels to equity.

  • Debt-to-Equity Ratio:
    Azure’s debt-to-equity ratio of 24.6% is lower than the sector average of 30.5%, suggesting that Azure carries less financial risk compared to its competitors. The lower gearing ratio indicates that Azure is less dependent on debt financing and has a stronger financial position.

 

  • 4 Marks

CR – April 2022 – L3 – Q4b – Business combinations and consolidation

Explain the reasons why it may be difficult to identify the acquirer in a business combination.

b) All business combinations are accounted for by the acquisition method, which involves identifying the acquirer. However, it might not be easy to identify the acquirer.

Required:
Explain TWO (2) reasons why it might be difficult to identify the acquirer.
(4 marks)

  • Business combinations by contract without legal ownership:
    In some business combinations, businesses are brought together by contract alone, meaning that neither entity has legal ownership of the other. This can create difficulty in identifying which entity is the acquirer since the determination is based on control rather than legal ownership.
  • Complexity of mergers and acquisitions involving a new parent entity or legal mergers:
    In cases where a new parent entity is created to facilitate a merger, or when entities merge through legal amalgamation, it becomes challenging to identify the acquirer. This is because there is no clear transfer of ownership, and the identification of the acquirer must be based on which entity ultimately controls the combined business.
  • 16 Marks

CR – April 2022 – L3 – Q4a – Financial instruments: Recognition and measurement Corporate reporting

Calculate the amount of share capital written off and prepare the revised statement of financial position for Ega Ltd after the financial reorganization.

a) Ega Ltd is a Private Limited Liability company operating in the agro-processing industry, currently facing trading difficulties. The most recent statement of financial position as at 31 March 2021 is as follows:

Additional information: The following financial reorganization scheme has been drawn up:

  1. Intangible fixed assets should be written off and remaining assets restated at their market values:
    • Land and Buildings: GH¢161m
    • Plant and Machinery: GH¢200m
    • Inventory: GH¢162m
    • Receivables: GH¢88m
  2. Ordinary share capital should be written down as necessary to enable assets and liabilities to be restated at realistic values and to clear the debit balance in retained earnings.
  3. The 12% debenture should be converted into 80 million ordinary shares at GH¢1 each.
  4. Directors should subscribe for a further 200 million ordinary shares at GH¢1 each to provide cash for the reorganization.
  5. The bank will convert GH¢200m of the overdraft into a 14% loan, repayable over four annual installments starting 31 December 2021.

Required:
i) Calculate the amount to be written off the existing share capital. (4 marks)

ii) Prepare a revised Statement of Financial Position of Ega Ltd as at 1 April 2021, incorporating the proposed scheme for reorganization. (6 marks)

iii) Provide an assessment of the proposal for the future prospects of the company. (6 marks)

i) Calculate the amount to be written off the existing share capital:

Description Amount (GH¢ million)
Goodwill 12
Development expenditure 15
Land and buildings (161 – 100) 61
Plant and machinery (362 – 200) 162
Inventory (235 – 162) 73
Receivables (93 – 88) 5
Retained earnings 94
Total to be written off 300

iii) Assessment of the proposal for the future prospects of the company:

  1. The full amount of the loss is to be borne by ordinary shareholders, which is entirely reasonable since they are last in line for repayment in the event of liquidation.
  2. The future prospects of the company must be carefully investigated. Past performance has been poor, and the bank must be convinced that loss-making activities have indeed been closed down and that management is capable of directing affairs more successfully in the future.
  3. The revised statement of financial position displays a sound financial position. Investigation must ensure that cash is sufficient to meet the cost of any planned investment in fixed assets plus associated working capital requirements.
  4. The bank is being asked to convert part of the overdraft into a longer-term loan, which is likely to improve the liquidity situation of the company and alleviate immediate financial pressures.
  5. The bank overdraft is secured on fixed assets, and since the fixed assets have been revalued at GH¢361 million, it is well-secured.
  6. The bank should ensure adequate security for the loan, potentially in the form of a fixed charge on land and buildings or a floating charge over the remaining assets.
  7. The bank would need to review the company’s budgets and projections to judge future development and assess how the cash raised from the new share issue will be utilized.
  • 10 Marks

CR – April 2022 – L3 – Q3b – Regulatory framework and ethics

Explain the ethical principles involved in the given scenario and recommend the appropriate actions based on the IFAC Code of Ethics.

b) You are a newly qualified accountant in your fifth year of employment in a limited liability company. Your immediate supervisor has been on sick leave, and you are due for study leave. You have been told by the Finance Director that, before you go on leave, you must finish a task that should have been completed by your immediate supervisor. The deadline suggested to complete the task appears unrealistic, given the complexity of the task.

You feel that you are not sufficiently experienced to complete the task alone and would need additional supervision to complete it to the required standard. The Finance Director appears unable to offer the necessary support in this regard. Should you try to complete the work within the proposed timeframe but fail to meet the expected quality, you could face repercussions on your return from study leave. You feel slightly intimidated by the Finance Director and also feel pressure to do what you can for the company in these challenging times.

Required:

i) Using the IFAC Code of Ethics as a guide, explain the ethical principles that apply in the above scenario. (5 marks)

ii) Recommend the possible actions that you should take as a member of the Institute of Chartered Accountants, Ghana (ICAG), in dealing with this ethical dilemma. (5 marks)

i) Ethical Principles:

  1. Integrity:
    You need to be open and honest about the situation with your Finance Director. You need to be straightforward with your Finance Director since it will not be right to attempt to complete work that is technically beyond your abilities, without proper supervision.
    In the first instance, you should attempt to resolve the issue with your Finance Director, although it may be necessary to involve the person responsible for training within the practice. You might, at an appropriate stage, suggest that the client be involved.
  2. Objectivity:
    The short period of time given to perform the work puts undue pressure on the trainee accountant, which breaches the principle of objectivity. There may be an element of bias towards the trainee accountant by his or her Finance Director.
  3. Professional Competence and Due Care:
    You are not technically competent in the complicated work given to you and while you will be learning on the job, the timeline is too tight to be able to exercise due diligence. It is virtually impracticable to complete the work within the time available and still act diligently to achieve the required quality of output. Discuss with the Finance Director supervisory arrangements and support to avoid doing poor work.
  4. Professional Behaviour:
    The practice firm that employs you is small and under pressure due to the sickness of a member of staff. However, the work you are being asked to perform is beyond the usual ability of a trainee at your level. Determine whether the deadline can be extended; when your colleague is expected to return from sick leave; and what other resources might be available to the practice. Consider the policies and procedures of the practice, as well as your professional body’s code of ethics. You cannot refuse to do the work as this will damage your reputation, and the reputation of the firm will also suffer if you attempt to perform the work without sufficient knowledge and support. Therefore, avoid discrediting yourself, the practice firm you work for, and the accountancy profession in general.

(4 points @ 1.25 marks each = 5 marks)

ii) Possible Actions:

  1. Explain to the Finance Director:
    You should explain to your Finance Director that you do not have sufficient time and experience to complete the work to a satisfactory standard. However, you should demonstrate a constructive attitude and suggest how the problem may be resolved. (Your professional body is available to advise you in this respect.) For example, you might suggest the use of a subcontract bookkeeper, or contacting the client to inquire if the deadline might be extended so that the work may be performed when you return from study leave or when your colleague returns from sick leave. You might also explore the possibility of assigning another member of staff to supervise your work.
  2. Seek support from a supervisor:
    If you feel that your Finance Director is being unsympathetic or simply fails to understand the issue, you should consider how best to raise the matter with the person within the practice responsible for training. It would be diplomatic to suggest to your Finance Director that you raise the matter together and present your respective views. This would have the added advantage of involving a third party.
  3. Avoid unethical action:
    It would be unethical to attempt to complete the work if you doubt your competence. However, simply refusing to, or resigning from your employment, would cause significant problems for both you and the practice. You could consult your professional body. If you seek advice from outside the practice (for example, legal advice), you should be mindful of the need for confidentiality as appropriate.
  4. Document all steps taken:
    You should document, in detail, the steps that you take in resolving your dilemma, in case your ethical judgment is challenged in the future.

(4 points @ 1.25 marks each = 5 marks)

  • 10 Marks

CR – April 2022 – L3 – Q3a – Financial instruments: Recognition and measurement

Account for finance lease and financial liability transactions according to relevant IFRS.

a) Zeus Ltd manufactures equipment for lease or sale. The following transactions relate to Zeus Ltd for the year ended 31 December 2020:

i) On 31 December 2020, Zeus Ltd leased out equipment under a 10-year finance lease. The selling price of the leased item was GH¢50 million, and the net present value of the minimum lease payments was GH¢47 million. The carrying value of the leased asset was GH¢40 million, and the present value of the residual value of the product when it reverts to Zeus Ltd at the end of the lease term is GH¢2.8 million. Zeus Ltd has shown sales of GH¢50 million and cost of sales of GH¢40 million in its financial statements.
(5 marks)

ii) On 1 January 2020, Zeus Ltd raised finance by issuing a two-year deeply discounted 2% bond with a nominal value of GH¢20,000 that was issued at a discount of 5% and is redeemable at a premium of GH¢2,150. There were no issue costs. The bond has an effective interest rate of 10%.
(5 marks)

Required:
Recommend to the directors of Zeus Ltd how the above transactions should be accounted for in the financial statements for the year ended 31 December 2020 in accordance with relevant International Financial Reporting Standards.

i) Zeus Ltd should have shown the lease receivable at the lower of the fair value of the asset and the present value of the minimum lease payments, i.e., GH¢47 million. Therefore, an adjustment of GH¢3 million will have to be made to profit or loss and the lease receivable. Similarly, the cost of the transaction should have been (GH¢40 – GH¢2.8) million, i.e., GH¢37.2 million, as the asset reverts to Zeus Ltd at the end of the lease. Therefore, an adjustment should be made to profit or loss and lease receivable of GH¢2.8 million.

  • Dr Profit or loss GH¢3 million
  • Cr Lease receivable GH¢3 million
  • Dr Lease receivable GH¢2.8 million
  • Cr Profit or loss GH¢2.8 million

(The net amount of GH¢0.2 million could be adjusted in this case.)
The finance lease receivable figure in the financial statements will be (GH¢50 – GH¢3 + GH¢2.8) million, i.e., GH¢49.8 million.

Statement of profit or loss for the year ended 31/12/20 – extract

Description Amount (GH¢ million)
Lease – revenue (3)
Lease – cost of sales 2.8

Statement of financial position as at 31/12/2020 – extract

Description Amount (GH¢ million)
Non-current assets: Lease receivable 49.80

ii) Zeus Ltd has a financial liability to be measured at amortised cost in accordance with IFRS 9. It is a financial liability because the company is raising finance. This financial liability is initially recorded at the fair value of the consideration received, that is, the net proceeds of the issue. This amount is then increased each year to redemption by interest added at the effective rate of 10% and reduced by the interest actually paid at 2%, with the result that the carrying amount at the end of the first year is at amortised cost.

Zeus Ltd has no issue costs, and the net proceeds are GH¢20,000 less 5% discount = GH¢19,000. The annual cash payment is the 2% coupon rate on the nominal value of the debt GH¢20,000.

Amortised Cost Table:

Reporting Date Bal b/fwd Effective Rate 10% Cash Paid @ 2% Bal c/fwd
31 Dec 2020 19,000 1,900 (400) 20,500
31 Dec 2021 20,500 2,050 (400) Nil
Total 3,950 (800) (22,150)

Statement of profit or loss extract for the year ended 31st December 2020:

Description Amount (GH¢)
Finance cost 1,900

Statement of financial position extract:

Description Amount (GH¢)
Financial Liability 20,500

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