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  • 3 Marks

FR – May 2016 – L2 – Q3e – Financial Reporting Standards and Their Applications

Identify three factors in determining functional currency under IAS 21.

The functional currency, according to IAS 21 The Effects of Changes in Foreign Exchange Rates, is the currency of the primary economic environment where the entity operates.

Required:
Identify THREE factors in accordance with IAS 21 that an entity will consider in determining its functional currency.

  1. The currency that mainly influences sales prices for goods and services provided by the entity. This is usually the currency in which the entity generates its primary revenue.
  2. The currency of the country whose competitive forces and regulations mainly determine the sales prices of goods and services. This reflects the broader economic environment that affects pricing decisions.
  3. The currency that mainly influences labor, materials, and other costs of providing goods and services. This focuses on the currency in which the entity incurs its most significant operating expenses.

These factors help determine the currency that most accurately reflects the economic conditions under which the entity operates.

  • 5 Marks

FR – May 2016 – L2 – Q3c – Financial Reporting Standards and Their Applications

Describe the accounting treatment of goodwill for ABC's financial statements, including directors' views on recognizing goodwill.

You are the finance director of ABC Company. ABC is preparing its financial statements for the year ended 31st December 2015. The following item has been brought to your attention:

ABC acquired the entire share capital of XYZ Ltd during the year. The acquisition was achieved through a share exchange. The terms of the exchange were based on the relative values of the two companies obtained by capitalizing the companies’ estimated cash flows. When the fair value of XYZ’s Ltd identifiable net assets was deducted from the value of the company as a whole, its goodwill was calculated at GH¢2.5 million. A similar exercise valued the goodwill of ABC at GH¢4 million. The directors wish to incorporate both goodwill values in the companies’ consolidated financial statements.

Required:
Describe how ABC should treat the item in its financial statements for the year ended 31st December 2015, commenting on the directors’ views where appropriate.

ABC Ltd
Whilst it is acceptable to value the goodwill of GH¢2.5 million for XYZ (the subsidiary) on the basis described in the question and include it in the consolidated balance sheet, the same treatment cannot be afforded to ABC’s own goodwill.

The calculation may indeed give a realistic value of GH¢4 million for ABC’s goodwill, and there may be no difference in nature between the goodwill of the two companies. However, it must be realized that ABC’s goodwill is internal goodwill, and International Financial Reporting Standards (IFRSs) prohibit the recognition of internally generated goodwill in the financial statements.

The main basis of this conclusion is one of reliable measurement. The value of acquired (purchased) goodwill can be evidenced by the method described in the question (there are also other acceptable methods), but this method of valuation is not acceptable for recognizing internal goodwill.

Correct interpretation within IAS 38 and IFRS 3 prohibits recognizing internal goodwill in the financial statements.

  • 5 Marks

FR – May 2016 – L2 – Q3b – Financial Reporting Standards and Their Applications

Show the initial accounting treatment of the bond in accordance with IFRS for Naniama Ltd's convertible bonds.

Naniama Ltd issued 3,000 convertible bonds at par. The bonds are redeemable in 4 years’ time at their par value of GH¢100 per bond. The bonds pay interest annually in arrears at an interest rate (based on nominal value) of 5%. Each bond can be converted at the maturity date into 5 GH¢1.00 shares. The prevailing market interest rate for four-year bonds that have no right of conversion is 8%. The present value at 8% of GH¢1 receivable at the end of:

  • Year 1: 0.926
  • Year 2: 0.857
  • Year 3: 0.794
  • Year 4: 0.735

Required:
Show the initial accounting treatment of the bond in accordance with International Financial Reporting Standards (IFRS).

Naniama Ltd

GHC
Non-current liabilities:
Financial liability component of convertible bond (W1) = 270,180

Equity:
Equity component of convertible bond = GH¢300,000 – GH¢270,180 = 9,820

Working

Fair value of equivalent non-convertible debt:

  • Present value of principal payable at end of 4 years (3,000 x GH¢100 = GH¢300,000 x 0.735) = GH¢220,500

Present value of interest annuity payable annually in arrears for 4 years:

  • Year 1: (5% x GH¢300,000) = GH¢15,000 x 0.926 = GH¢13,890
  • Year 2: GH¢15,000 x 0.857 = GH¢12,855
  • Year 3: GH¢15,000 x 0.794 = GH¢11,910
  • Year 4: GH¢15,000 x 0.735 = GH¢11,025

Total present value of interest payments = GH¢49,680

Total value of financial liability = GH¢270,180

  • 12 Marks

FR – May 2016 – L2 – Q3a – Financial Reporting Standards and Their Applications

Calculate basic and diluted earnings per share for Ghana Trust for the years ended 31st March 2014 and 2015.

(i) The issued share capital of Ghana Trust, a publicly listed company on the Ghana Stock Exchange, at 31st March 2013 was GH¢10 million. Its shares are denominated at 25 pesewas each. Ghana Trust’s earnings attributable to its ordinary shareholders for the year ended 31st March 2013 were also GH¢10 million, giving an earnings per share of 25 pesewas.

Year ended 31st March 2014:
On 1st July 2013, Ghana Trust issued eight million ordinary shares at full market price. On 1st January 2014, a bonus issue of one new ordinary share for every four ordinary shares held was made. Earnings attributable to ordinary shareholders for the year ended 31st March 2014 were GH¢13.8 million.

Year ended 31st March 2015:
On 1st October 2014, Ghana Trust made a rights issue of shares of two new ordinary shares at a price of GH¢1.00 each for every five ordinary shares held. The offer was fully subscribed. The market price of Ghana Trust’s ordinary shares immediately prior to the offer was GH¢2.40 each. Earnings attributable to shareholders for the year ended 31st March 2015 were GH¢19.5 million.

Required:
Calculate Ghana Trust’s earnings per share for the years ended 31st March 2014 and 2015 including comparative figures. (7 marks)

(ii) On 1st April 2015, Ghana Trust issued GH¢20 million 8% convertible loan stock at par. The terms of the conversion (on 1st April 2018) are that for every GH¢100 of loan stock, 50 ordinary shares will be issued at the option of loan stockholders. Alternatively, the loan stock will be redeemed at par for cash. Also, on 1st April 2015, the directors of Ghana Trust were awarded share options on 12 million ordinary shares exercisable from 1st April 2018 at GH¢1.50 per share. The average market value of Ghana Trust’s ordinary shares for the year ended 31st March 2015 was GH¢2.50 each. The income tax rate is 25%. Earnings attributable to ordinary shareholders for the year ended 31st March 2015 were GH¢25,200,000. The share options have been correctly recorded in the statement of profit or loss.

Required:
Calculate Ghana Trust’s basic and diluted earnings per share for the year ended 31st March 2015. (5 marks)

a)
(i)

Without the bonus issue this would give an EPS of 30p (13.8m/46m x 100).

The bonus issue of one for four would result in 12 million new shares giving a
total number of ordinary shares of 60 million. The dilutive effect of the bonus
issue would reduce the EPS to 24p (30p x 48m/60m).
The comparative EPS (for 2013) would be restated at 20p (25p x 48m/60m).
EPS year ended 31 March 2015:
The rights issue of two for five on 1 October 2014 is half way through the
year. The theoretical ex rights value can be calculated as:

Weighting:

EPS is therefore 25P (GHC19.5m/78m x 100).
The comparative (for 2014) would be restated at 20P (24Px 2.00/2.40).

(ii) The basic EPS for the year ended 31 December 2015 is 30p (GHC25.2m/84m x
100).

Dilution
Convertible loan stock:

  • On conversion, loan interest of GH¢1.2 million after tax would be saved (GH¢20 million x 8% x (100% – 25%)), and a further 10 million shares would be issued (GH¢20m/GH¢100 x 50).

Directors’ options:

  • Options for 12 million shares at GH¢1.50 each would yield proceeds of GH¢18 million. At the average market price of GH¢2.50 per share, this would purchase 7.2 million shares (GH¢18m/GH¢2.50). Therefore, the ‘bonus’ element of the options is 4.8 million shares (12m – 7.2m).
Using the above figures, the diluted EPS for the year ended 31st December 2015 is 26.7p (GH¢25.2m + GH¢1.2m)/(84m + 10m + 4.8m).

 

  • 5 Marks

FR – March 2024 – L2 – Q5d – Financial Reporting Standards and Their Applications

Identify factors that indicate significant influence under IAS 28.

Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Required:
Outline FIVE (5) factors/conditions that indicate significant influence (other than shareholding).
(5 marks)

The existence of significant influence by an investor is usually evidenced by one or more of the following factors, in accordance with IAS 28:

  1. Representation on the Board of Directors:
    Significant influence is likely when the investor has one or more seats on the board of directors or equivalent governing body of the investee. This allows the investor to participate in key decisions regarding the financial and operating policies of the investee.
  2. Participation in Policy-Making Processes:
    The ability to participate in decisions about dividends, operational strategies, budgets, or capital expenditures indicates significant influence. This involvement in decision-making is a strong indicator of influence over the investee’s activities.
  3. Material Transactions Between the Investor and Investee:
    Frequent or significant business transactions between the investor and the investee, such as sales or purchases of goods and services, demonstrate a relationship that supports significant influence.
  4. Interchange of Managerial Personnel:
    When an investor has the ability to appoint or influence the appointment of key management personnel within the investee, it shows that the investor has significant influence over operational decisions.
  5. Provision of Essential Technical Information:
    If the investor provides critical technical knowledge or expertise to the investee, this indicates that the investor has a role in shaping operational or strategic decisions, reflecting significant influence.

(Marks evenly spread = 5 marks)

  • 5 Marks

FR – March 2024 – L2 – Q5c – Financial Reporting Standards and Their Applications

Identify the qualities required in information when management uses judgment in developing accounting policies under IAS 8.

According to IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors, when an IFRS specifically applies to a transaction, other event, or condition, the accounting policy applied to that item shall be determined by applying the IFRS. In the absence of an IFRS that specifically applies to a transaction, other event, or condition, management shall use its judgment in developing and applying an accounting policy that results in information that has certain qualities.

Required:
Identify the qualities that must be present in the resultant information when management of an entity uses its judgment in developing and applying an accounting policy.
(5 marks)

When management uses judgment in developing and applying an accounting policy in the absence of a specific IFRS, the resultant information must have the following qualities:

  1. Relevance:
    The information should be relevant to users’ decision-making needs. This means that the accounting policies chosen must provide financial information that influences economic decisions and reflects the entity’s financial performance and position accurately.
  2. Faithful Representation:
    The information must faithfully represent the entity’s financial position, performance, and cash flows. It should capture the economic substance of transactions and not just their legal form, ensuring the financial information is complete, neutral, and free from bias.
  3. Neutrality:
    The financial information must be neutral, meaning it should not be manipulated to achieve a predetermined outcome. Accounting policies should be applied objectively without favoring one outcome over another.
  4. Prudence:
    The financial information must be prepared with caution, ensuring that assets and income are not overstated, and liabilities and expenses are not understated. Prudence ensures that uncertainties are appropriately accounted for.
  5. Completeness:
    The information provided must be complete in all material respects. This means all necessary information required to understand the entity’s financial position, performance, and cash flows should be included.

(Marks evenly spread = 5 marks)

  • 7 Marks

FR – March 2024 – L2 – Q2c – Financial Reporting Standards and Their Applications

Accounting treatment of distribution rights purchased by Mankeni Ltd in accordance with IAS 38.

Mankeni Ltd (Mankeni) is one of Africa’s leading entertainment companies which creates and secures the rights to phenomenal content from all over the world. Mankeni has entered into the following transactions during the financial year ended 30 November 2023:
i) On December 1, 2022, Mankeni purchased the sole West African distribution rights for a special digital set-top box for home entertainment. The rights were purchased for GH¢5.25 million over a three-year period.
(3 marks)

ii) Mankeni started working on building the brand and increasing sales of the item mentioned in (i) above on December 1, 2022. Due to the enormous success of this endeavour, the “Mankeni” brand became popular. Mankeni wishes to include the brand in its financial statements for the year ended 30 November 2023 at its estimated fair value of GH¢30 million.
(2 marks)

iii) Mankeni wishes to replicate its West African success in Eastern African countries by selling the product in other markets. The company has spent GH¢1.25 million during the year researching the Eritrea market and wishes to capitalise this expenditure as an intangible asset.
(2 marks)

i) This is an intangible asset, acquired as a separate asset for cash consideration. This should be capitalised at cost, GH¢5.25 million. The asset should be amortised over its useful economic life, in this case 3 years.
Amortisation to be charged in the year ended 30 November 2023 is GH¢1.75 million.

On initial recognition
Dr Intangible asset GH¢5.25m
Cr Cash GH¢5.25m

At the end of each year
Dr Profit or loss GH¢1.75m
Cr Accumulated amortisation – intangible asset GH¢1.75m

ii) The Mankeni Ltd brand falls into the category of an internally generated intangible asset. Under IAS 38, internally generated assets cannot be recognised unless they can be valued by reference to an active market in identical assets. Since every brand is unique, there cannot, by definition, be an active market in identical assets. The development of a brand does not meet the criteria for capitalising development costs. Hence, the costs of developing the brand must be expensed, and the fair value of the brand may not be recognised under IAS 38.

iii) The expenditure on researching the Eritrea market falls into the category of market research. IAS 38 specifically precludes the capitalisation of market research costs. Hence, the GH¢1.25 million must be expensed as incurred.

  • 4 Marks

FR – March 2024 – L2 – Q2b – Financial Reporting Standards and Their Applications,

Explain the differences between operating segments and reportable segments as per IFRS 8.

IFRS 8: Operating Segments requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments. Information is based on internal management reports, both in the identification of operating segments and measurement of disclosed segment information. It applies to the separate or individual financial statements of an entity and to the consolidated financial statements of a group.

Required:
Distinguish between operating segments and reportable segments.

Operating Segments Reportable Segments
An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker, and for which discrete financial information is available. Reportable segments are operating segments or aggregations of operating segments that meet specific quantitative thresholds. These thresholds include:
Revenue: Reportable if its reported revenue is 10% or more of the combined revenue, internal and external, of all operating segments.
Profit or Loss: Reportable if its reported profit or loss is 10% or more of the combined profit or loss of all operating segments that report a profit or a loss, whichever is greater.
Assets: Reportable if its assets are 10% or more of the combined assets of all operating segments.

The key difference between the two is that operating segments represent components of a business, whereas reportable segments meet certain thresholds and must be disclosed in the financial statements.

  • 9 Marks

FR – March 2024 – L2 – Q2a – Financial Reporting Standards and Their Applications

Evaluate financial reporting treatment of Sikapa and Cocoa bonds in accordance with IFRS 9: Financial Instruments.

Kombra Ltd (Kombra) is a market leader in the printing and publishing industry. To benefit from a potential future decline in interest rates, Kombra invests in bonds and issues callable bonds. It occasionally trades these bonds by immediately flipping them for a profit. Others are held for the long term.

Kombra purchased two bonds on 1 January 2023. Details of the two particular bonds are as follows:

Sikapa Bond Cocoa Bond
Nominal value of bond GH¢47.25 million GH¢31.5 million
Coupon rate 4% 5%
Purchase price of bond GH¢40.425 million GH¢29.4 million
Effective yield to maturity 6.75% 7.8%

The Sikapa bond was bought with the intention of keeping it for a long time and withdrawing the interest and principal as they fall due.

The Cocoa bond was bought at a deep discount, and the aim is to wait until the market value increases, and then sell it at a profit. The Cocoa bond had a fair value of GH¢28.875 million as of December 31, 2023.

In both situations, the coupon, which is due on December 31 each year, has been paid as agreed.

Required:
In the case of each bond above, show the financial reporting treatment required by IFRS 9: Financial Instruments for the year ended 31 December 2023. Show all workings clearly.

Sikapa Bond
Initial Recognition Dr Financial assets: GH¢40.425 million Cr Cash: GH¢40.425 million
Subsequent Measurement Finance income at 6.75% of GH¢40.425 million = GH¢2.7 million Dr Financial assets: GH¢2.7 million
Cr Profit or loss (finance income): GH¢2.7 million
Interest Payment Dr Cash: GH¢1.89 million (4% of GH¢47.25 million) Cr Financial assets: GH¢1.89 million

For the Sikapa bond, as it was purchased with the intention of holding it for the long term and receiving the interest and principal as they fall due, it meets the criteria for classification under the amortised cost model.

Cocoa Bond
Initial Recognition Dr Financial assets: GH¢29.4 million Cr Cash: GH¢29.4 million
Interest Payment Dr Cash: GH¢1.575 million (5% of GH¢31.5 million) Cr Finance income: GH¢1.575 million
Fair Value Adjustment Fair value at year-end: GH¢28.875 million Dr Profit or loss (finance costs): GH¢0.525 million
Cr Financial assets: GH¢0.525 million

The Cocoa bond was purchased with the intention of being sold at a profit. Thus, under IFRS 9, this bond must be measured at fair value.

Workings:

  1. Sikapa Bond:
    • Effective interest rate: 6.75%
    • Coupon payment: 4% of GH¢47.25 million = GH¢1.89 million
    • Finance income: 6.75% of GH¢40.425 million = GH¢2.7 million
  2. Cocoa Bond:
    • Fair value at year-end: GH¢28.875 million
    • Loss on fair value: GH¢29.4 million – GH¢28.875 million = GH¢0.525 million
  • 4 Marks

FR – May 2018 – L2 – Q5c – Financial Reporting Standards and Their Applications

Identify two differences between the cost model and revaluation model for Property, Plant, and Equipment.

Once an entity has recognized an item of Property, Plant, and Equipment as an asset in its books, the entity can choose between two models (or methods) to account for the asset in subsequent measurement periods, that is, the period(s) after the asset has been acquired and before its disposition. The two models are the cost model and the revaluation model. The entity shall apply the same model to the entire class of property, plant, and equipment to which that asset is of similar nature and use in the entity’s operations.

Required:
Identify TWO differences between the cost and revaluation model for the measurement of Property, Plant, and Equipment. (4 marks)

Answer:

  • Cost Model:
    Under the cost model, Property, Plant, and Equipment (PPE) are carried at cost less accumulated depreciation and impairment losses. This model is more objective because it uses historical cost, which is definite and unchanging, but it provides less relevant, up-to-date information.
  • Revaluation Model:
    Under the revaluation model, PPE are carried at their fair value, which is the revalued amount less any subsequent accumulated depreciation and impairment losses. This model provides more relevant and current information about the asset’s value, but it is subjective as it relies on expert valuation, which can fluctuate based on market conditions. Revaluations must be done regularly when fair values can change significantly.

Other Differences:

  • Impact on Depreciation:
    The cost model provides lower depreciation as it is based on the original cost, while the revaluation model may increase depreciation because it is based on the revalued amount.
  • Complexity and Cost:
    The revaluation model requires expert valuations, making it more expensive and complex to apply compared to the cost model, which is simpler and cheaper.

(Any two points for 4 marks)

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