Topic: Financial Reporting Standards and Their Applications

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  • 7 Marks

FR – Nov 2023 – L2 – Q2c – Financial Reporting Standards and Their Applications

Determine the amounts to be recognized in profit or loss and other comprehensive income for Wenchi Ltd in respect of an office building.

Wenchi Ltd (Wenchi) is a real estate development company. On January 1, 2022, Wenchi’s office building had a net carrying value of GH¢13.5 million. The property became vacant on April 1, 2022, and was leased to a third party. On October 1, 2022, the property was added to inventory for sale after the lease expired. The property was sold in December 2022 for GH¢16 million.

Required:
In accordance with IFRS, determine the amounts to be recognized in profit or loss and other comprWenchi Ltd (Wenchi) is a real estate development company which has been operating for several years. On January 1, 2022, the office building of Wenchi had a net carrying value of GH¢13.5 million. The cost model was used to value the property. No depreciation had been incurred because the expected residual value was more than the cost due to a buoyant real estate market.

The property became vacant as a result of relocating the company’s operations, and on April 1, 2022, a third party (Dormaa Ltd) was given a six-month short lease to occupy it. The property’s fair value at the time it was leased out was GH¢16.5 million.

Wenchi made the choice to add the property to its inventories of properties for sale in the regular course of business once the lease expired. The property was valued at GH¢15.75 million at 1 October 2022. The property was sold in December 2022 for GH¢16 million.

Required:
In accordance with IFRS, determine the amounts to be recognized in profit or loss and in other comprehensive income in respect of the property for the year ended 31 December 2022.ehensive income in respect of the property for the year ended 31 December 2022.

c)

(7 marks)

  • 5 Marks

FR – Nov 2023 – L2 – Q2b – Financial Reporting Standards and Their Applications

Explain the financial reporting treatment of a lease transaction for Fugu Ltd in accordance with IFRS 16.

Fugu Ltd (Fugu) operates in the automobile industry. The following transaction relates to Fugu for the year-end 31 July 2023: On August 1, 2022, Fugu entered into a ten-year lease, agreeing to pay GH¢3 million annually in arrears in exchange for the use of a building. The present value of the minimum lease payments was GH¢20.13 million at 1 August 2022, and the useful economic life of the building was 50 years. Fugu’s cost of capital is 8%.

Required:
In accordance with IFRS 16: Leases, show the financial reporting treatment of the above transactions in the financial statements of Fugu for the year ended 31 July 2023.

b) Leases


(5 marks)

  • 3 Marks

FR – Nov 2023 – L2 – Q2d – Financial Reporting Standards and Their Applications

Explain the financial reporting treatment of decommissioning costs in the financial statements of Taini Ltd under IAS 37.

Taini Ltd (Taini) is a listed mining company that operates in the Bono Region with a ten-year term concession commencing on 1 April 2022. After the expiry of the current mining term, Taini has a duty to rehabilitate the area. These rehabilitations are anticipated to cost GH¢12.09 million on April 1, 2032. On April 1, 2022, the present value of the restoration cost was calculated using the company’s 8% cost of capital at GH¢5.6 million.

Required:
In accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets, explain the financial reporting treatment of the above transaction in the financial statements of Taini Ltd for the year ended 31 March 2023.

Any amount recorded at the present value of future cash flows should be adjusted as time passes. The adjustment allows for the fact that the time to maturity is shorter. The adjustment is measured as the opening balance multiplied by the original discount rate.

Here, GH¢5.6 million × 8% gives GH¢0.448 million. This is charged (debited) to profit or loss (finance costs) and increases the present value of the provision (credit entry).

Debit profit or loss GH¢0.448 million
Credit provision for restoration GH¢0.448 million
Alternatively:

DR Non-current Asset GH¢5.6 million

CR Provision for decommissioning cost GH¢5.6 million
(To initially recognise the asset and liability relating to decommissioning cost.)

DR Statement of profit or loss (depreciation) GH¢0.56 million

CR Non-current asset GH¢0.56 million
(To recognise depreciation charge for the year.)

DR Statement of profit or loss (unwound discount) GH¢0.448 million

CR Provision for decommissioning cost GH¢0.448 million
(To recognise the unwound discount on the liability for the year.)

(Total: 3 marks)

  • 5 Marks

FR – Nov 2023 – L2 – Q5b – Financial Reporting Standards and Their Applications

Explain the accounting treatment of an event after the reporting period for a specific type of inventory

Kaime Ltd (Kaime) deals in cosmetics and make-up manufacturing and with year-end 31
December 2022. Its date of authorization of financial statements for issue was 9 February 2023 and the annual general meeting is scheduled on 8 March 2023. The following event occurred:
A particular type of inventory held by Kaime at a different location was recorded at its cost of GH¢598,000 at 31 December 2022 in the statement of financial position. The entity sold 70% of this inventory for GH¢364,000 on 15 January 2023, incurring a commission expense of 15% of the selling price of the inventory. The remaining 30% of the inventory are estimated to be realised at cost.

Required:
In accordance with IAS 10: Events after the Reporting Period, explain the appropriate accounting treatment of the event in the financial statements of Kaime for the year ended 31 December 2022

This will be treated as an adjusting event as the sale of inventory after the reporting date reflects that the NRV of inventory is less than the cost.

The NRV of 70% inventory is GH¢309,400 calculated using the selling price of GH¢364,000 less commission expense of GH¢54,600 (GH¢364,000 × 15%), and it has a cost of GH¢418,600 (GH¢598,000 × 70%).

NRV = 364,000 – 54,600 = 309,400

Value of Inventory = GH¢309,400 + (30% of 598,000) = GH¢309,400 + GH¢179,400 = GH¢488,800

Inventory write-down = GH¢598,000 – GH¢488,800 = GH¢109,200 (in SOP/L).

(Marks are evenly spread using ticks = 5 marks)

  • 3 Marks

FR – Nov 2019 – L2 – Q2a – Financial Reporting Standards and Their Applications

Treatment of under-provision of tax for Daaho Ltd for the year ending 31 August 2019. Question:

Daaho Ltd (Daaho) manufactures and distributes security equipment. Daaho prepares financial statements in accordance with International Financial Reporting Standards (IFRS) up to 31 August each year.

On 31 August 2019, the taxation liability account in the books of Daaho Ltd showed a debit balance of GH¢17,500 after paying the 2018 liability. The estimated liability for 2019 is GH¢84,500 and no entry has yet been made to record this.

Required:
Explain the appropriate accounting treatment of the above transaction for the year ending 31 August 2019.
(3 marks)

  • A debit balance on the tax account (GH¢17,500) represents under-provision of tax for the previous year (2018). This must be added to the income tax charge for the current year.
  • This means the under-provision should be added to the estimated tax liability for 2019 and treated as the income tax expense for 2019. Thus, a total of GH¢102,000 (GH¢17,500 + GH¢84,500) should be recorded as the income tax expense for 2019.
  • The estimated tax liability of GH¢84,500 should be reported as a current liability in the statement of financial position.

Marks allocation:
Identification of debit balance of GH¢17,500 as under-provision for 2018:
1 mark
Income tax expense GH¢102,000:
1 mark
Current liability of GH¢84,500:
1 mark

  • 6 Marks

FR – Nov 2019 – L2 – Q2b – Financial Reporting Standards and Their Applications

Calculation of amounts recognized in profit or loss and other comprehensive income related to property revaluation and depreciation.

RoyCo acquired a brand new property (land and buildings) on 1 January 2016 for GH¢40 million (including GH¢15 million for the land). The asset was revalued on 31 December 2017 to GH¢43 million (including GH¢16.6 million for the land). The buildings element was depreciated over a 50-year useful life to a zero residual value. The useful life and residual value did not subsequently need revision. On 31 December 2018, the property was revalued downwards to GH¢35 million (including GH¢14 million for the land) due to a recession.
The company makes a transfer from revaluation surplus to retained earnings in respect of realised profit.

Required:
Calculate the amounts recognised in profit or loss and in other comprehensive income for the years ended 31 December 2017 and 31 December 2018. (6 marks)

b) Revaluation of Property plant and equipment

Alternative presentation

(18 ticks evenly distributed for 6 marks)

  • 4 Marks

FR – Nov 2019 – L2 – Q2d – Financial Reporting Standards and Their Applications

Accounting treatment of an event after the reporting period, involving inventory loss due to flooding.

Nabdam Ltd operates in the media and publications industry and reports under IFRS. The 2018 financial statements of Nabdam Ltd are still in draft form. The audit is ongoing, and the company intends to authorise the financial statements in April 2019.

Nabdam Ltd rents a distribution warehouse in Korle, located beside the River Odorna. On 3 January 2019, the River Odorna burst its banks, and GH¢650,000 of Nabdam’s inventory was destroyed by the flood. The inventory was not insured, and Nabdam will not receive any compensation for the loss. The company is not sure how to account for this event. The destroyed inventory is included in the inventory figure that is disclosed on Nabdam’s draft statement of financial position at 31 December 2018.

Required:
Explain with justification, the appropriate accounting treatment of the above transaction. (4 marks)

  • The applicable accounting standard is IAS 10: Events After the Reporting Period. IAS 10 defines events after the reporting period as events, both favorable and unfavorable, that occur between the end of the reporting period and the date on which the financial statements are authorized for issue.
  • Events after the reporting period can be classified as either adjusting or non-adjusting events. Adjusting events provide evidence of conditions that existed at the end of the reporting period. Non-adjusting events, on the other hand, are indicative of conditions that arose after the reporting period.
  • In this case, the flood and the destruction of the inventory occurred on 3 January 2019, which is after the 31 December 2018 reporting date. Since the flood occurred after the reporting period, it is a non-adjusting event.
  • Therefore, the GH¢650,000 loss should not be adjusted in the 2018 financial statements. However, due to the materiality of the loss, disclosure is required. Nabdam Ltd should disclose the nature of the event and provide an estimate of its financial effect (GH¢650,000) in its 2018 financial statements.

Marks allocation:
Correct identification of IAS 10 as the relevant standard: 1 mark
Explanation of the distinction between adjusting and non-adjusting events: 1 mark
Classification of the event as non-adjusting: 1 mark
Disclosure requirement due to materiality: 1 mark

  • 20 Marks

FR – Nov 2019 – L2 – Q4 – Financial Statement Analysis

Assessment of impairment loss for a cash-generating unit including intangible assets and goodwill.

Hukpor Ltd (Hukpor) manufactures a variety of consumer products. The company’s founders have managed the company for thirty years and are now interested in selling the company and retiring. Seekers Ltd is looking into the acquisition of Hukpor and has requested the company’s latest financial statements and selected financial ratios in order to evaluate Hukpor’s financial stability and operating efficiency. The summary of information provided by Hukpor is presented below:

Statements of Financial Position as at 31 December


Selected Financial Ratios of Hukpor Ltd for 2017
Current ratio 1.61:1
Acid-test ratio 0.64:1
Inventory turnover 3.17 times
Times interest earned 8.55 times
Debt-to-equity ratio 86%
Required:
a) Calculate ratios for the years 2018 for Hukpor in comparison with ratios for 2017. (5 marks)
b) For each of the ratios computed for 2018, analyse Hukpor’s performance for 2018 based
on the results of the ratio computed, in comparison with the results for 2017. (10 marks) c) Explain FIVE (5) limitations of accounting ratios. (5 marks)
(Total: 20 marks)

a) Calculation of ratios for 2018:

(1 mark each for correct computation of ratios x 5 ratios = 5 marks)

b) Analyses of the performance of Hukpor Limited using the ratios computed:



(2 marks each for analysis of performance x 5 ratios = 10 marks)

c) Limitations of Ratio Analysis

  • Although ratios are useful as a starting point in financial analysis, they are not an end in themselves. Ratios can be used as indicators of what to pursue in a more detailed analysis.
  • Different companies often use different accounting methods (e.g. FIFO versus LIFO inventory valuation) and this can have an impact on the financial ratios that does not reflect real differences in the operations and financial health of the companies.
  • Making comparisons across industries can be difficult. Companies in different industries tend to have different financial ratios.
  • Since the ratios are based on accounting statements, they measure what has happened in the past and not necessarily what will happen in the future.
  • Business conditions: You need to place ratio analysis in the context of the general business environment. For example, 60 days of sales outstanding for receivables might be considered poor in a period of rapidly growing sales,but might be excellent during an economic contraction when customers are in severe financial condition and unable to pay their bills.
  • Interpretation: It can be quite difficult to ascertain the reason for the results of a ratio. For example, a current ratio of 2:1 might appear to be excellent, until you realize that the company just sold a large amount of its stock to bolster its cash position. A more detailed analysis might reveal that the current ratio will only temporarily be at that level,and will probably decline in the near future.
  • Company strategy: It can be dangerous to conduct a ratio analysis comparison between two firms that are pursuing different strategies. For example, one company may be following a low-cost strategy, and so is willing to accept a lower gross margin in exchange for more market share. Conversely, a company in the same industry is focusing on a high customer service strategy where its prices are higher and gross margins are higher, but it will never attain the revenue levels of the first company.

(1 mark for each limitation well explained x 5 limitations = 5 marks)

  • 5 Marks

FR – Nov 2019 – L2 – Q5c – Financial Reporting Standards and Their Applications

Calculate amounts recognized in Profit or Loss and Other Comprehensive Income for foreign property purchased and revalued.

On 1 August 2018, Charlie Ltd, whose functional currency is the cedi, bought a property in Morocco for DH40 million. The property had a 20-year useful economic life with no residual value estimated. On 31 July 2019, the property was revalued to DH45 million.

Exchange rates were:

1 January 2018: GH¢1 = DH 1.32
1 August 2018: GH¢1 = DH 1.25
31 July 2019: GH¢1 = DH 1.125
Required:
In accordance with IAS 21: The Effects of Changes in Foreign Exchange Rates and IAS 16: Property, Plant & Equipment, how much should be recognized in the Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 July 2019?

  • Initial recognition and measurement:
    The property is recognized at the rate on 1 August 2018:
    Cost of property: DH40 million ÷ 1.25 = GH¢32 million
  • Depreciation for the year:
    GH¢32 million ÷ 20 years = GH¢1.6 million (charged to profit or loss)
  • Carrying value at year end:
    GH¢32 million – GH¢1.6 million = GH¢30.4 million
  • Revaluation at 31 July 2019:
    Revalued amount: DH45 million ÷ 1.125 = GH¢40 million
  • Revaluation gain:
    GH¢40 million – GH¢30.4 million = GH¢9.6 million (credited to Other Comprehensive Income)
  • 4 Marks

FR – Nov 2019 – L2 – Q5d – Group Financial Statements and Consolidation

Identify factors causing negative goodwill and explain its accounting treatment in consolidated financial statements.

Negative Goodwill is based on the accounting concept of Goodwill, an intangible asset that represents the worth of a company’s brand name, patents and other intellectual property, customer base, licenses, and other items that are difficult to put an amount on but help to make a company valuable. When the price paid is less than the actual value of the company’s net tangible assets, negative goodwill results.

Required:
In accordance with IFRS 3: Business Combinations, identify THREE (3) factors that account for negative goodwill and indicate its accounting treatment when it occurs in the preparation of consolidated financial statements.

Factors Accounting for Negative Goodwill:
1. Bargain Purchase: This occurs when the acquirer negotiates the purchase consideration effectively, leading to a price lower than the fair value of the acquiree’s net assets.
2. Distressed Sale: Negative goodwill may arise when the acquired company is under financial pressure or is in a forced sale situation, resulting in a lower purchase price.
3. Lack of Knowledge by the Acquiree: If the acquiree is unaware of the true value of their business during the sale, this can lead to negative goodwill.
Accounting Treatment of Negative Goodwill:

  • According to IFRS 3: Business Combinations, when negative goodwill arises, the acquirer must reassess the identification and measurement of all identifiable assets, liabilities, and contingent liabilities of the acquiree.
  • Once the reassessment confirms that negative goodwill exists, it should not be capitalized. Instead, the negative goodwill is recognized immediately in the Statement of Profit or Loss as a gain on acquisition.

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