Past Questions & Answers
- 20 Marks
CR – May 2021 – L3 – Q4 – Business Combinations (IFRS 3)
Evaluate the impact of restructuring plans on individual and group accounts for Tanimo PLC and its subsidiaries.
Question
Emili PLC and Wagbo PLC are both public limited companies wholly owned by Tanimo PLC, also a public limited company. Tanimo group PLC operates in the agro-allied industry; but the directors felt that the current structure does not serve their intended purpose and are therefore considering two different restructuring plans for the group.
The statements of financial position of Tanimo PLC and its subsidiaries Emili PLC and Wagbo PLC as at May 31, 2021, are as follows:
Statements of Financial Position as at May 31, 2021
| Item | Tanimo PLC (Nm) | Emili PLC (Nm) | Wagbo PLC (Nm) |
|---|---|---|---|
| Property, Plant, and Equipment | 600 | 200 | 45 |
| Cost of Investment in Emili PLC | 60 | – | – |
| Cost of Investment in Wagbo PLC | 70 | – | – |
| Net Current Assets | 160 | 100 | 20 |
| Total Assets | 890 | 300 | 65 |
| Equity & Liabilities: | |||
| Share Capital (Ordinary Shares of N1 each) | 120 | 60 | 40 |
| Retained Earnings | 770 | 240 | 25 |
| Total Equity & Liabilities | 890 | 300 | 65 |
Tanimo PLC acquired the investment in Wagbo PLC on June 1, 2015, when the company’s retained earnings balance was N20 million. The fair value of the net assets of Wagbo PLC on June 1, 2015, was N60 million.
Emili PLC was incorporated by Tanimo PLC on June 1, 2015, and has always been a wholly owned subsidiary. The fair value of the net assets of Emili PLC as at May 31, 2021, was N310 million, and of Wagbo PLC, it was N80 million. The fair values of the net current assets of both Emili PLC and Wagbo PLC are approximately the same as their carrying amounts.
The directors are not certain what effects the following plans would have on the individual accounts of the companies and the group accounts. Local companies’ legislation requires that the amount at which share capital is recorded is dictated by the nominal value of the shares issued, and if the value of the consideration received exceeds that amount, the excess is recorded in the share premium account. Shares cannot be issued at a discount. In the case of a share-for-share exchange, the value of the consideration can be deemed to be the carrying amount of the investment exchanged.
It is the group’s policy to value non-controlling interests at its proportionate share of the fair value of the subsidiary’s identifiable net assets.
The two different plans to restructure the group are as follows:
- Plan 1
- Emili PLC is to purchase the whole of Tanimo’s PLC investment in Wagbo PLC.
- The directors are undecided as to whether the purchase consideration should be 50 million N1 ordinary shares of Emili PLC or a cash amount of N75 million.
- Plan 2
- The assets and trade of Wagbo PLC are to be transferred to Emili PLC at their carrying amount.
- Wagbo PLC would initially become a non-trading company.
- The consideration for the transfer will be N60 million, which will be left outstanding on the intercompany account between Emili PLC and Wagbo PLC.
Required:
Discuss the key considerations and the accounting implications of the above plans for the Tanimo PLC group. Your answer should show the potential impact on the individual accounts of Tanimo PLC, Emili PLC, and Wagbo PLC and the group accounts after each plan has been implemented.
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- 20 Marks
CR – Dec 2020 – L3 – Q3 – Regulatory Environment for Corporate Reporting
Discuss SEC risk management provisions and analyse components of effective risk reports and their benefits to financial institutions.
Question
Exposure to a variety of risks may affect the ability to achieve corporate objectives, thereby making risk management a corporate governance issue. Risk reports enable stakeholders to evaluate the importance attached to risk management and the company’s effectiveness in managing identified risks. Therefore, risk reports boost shareholders’ confidence that the company has adopted a responsible attitude towards risk.
As part of the regulatory framework to manage risk, the Securities and Exchange Commission (SEC) provided several guidelines for rules and content of effective risk reports.
Required:
a. Discuss the regulatory risk management provisions by SEC in Nigeria. (10 Marks)
b. Analyse the components of effective risk reports and state the benefits of their application to financial institutions in Nigeria. (10 Marks)
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- 20 Marks
CR – Dec 2020 – L3 – Q2 – Presentation of Financial Statements (IAS 1)
Assess the performance of two companies using financial ratios and draft a report for investment decisions.
Question
Heritage Limited and Legacy Limited are two competitors in the merchandising and retailing sector of the economy. At a time when the sector is faced with escalating fuel prices and economic recession, both companies have shown resilience and adaptability. The financial statements of the companies for the year ended December 31, 2020, are as follows:
Statements of Profit or Loss for the Year Ended December 31, 2020:
| Item | Heritage Limited (N’000) | Legacy Limited (N’000) |
|---|---|---|
| Revenue | 150,000 | 700,000 |
| Cost of Sales | (60,000) | (210,000) |
| Gross Profit | 90,000 | 490,000 |
| Interest | 500 | 12,000 |
| Distribution Costs | 13,000 | 72,000 |
| Administrative Expenses | 15,000 | 35,000 |
| Total Expenses | 28,500 | 119,000 |
| Profit Before Tax | 61,500 | 371,000 |
| Income Tax Expense | (16,605) | (100,170) |
| Profit for the Year | 44,895 | 270,830 |
Statements of Financial Position as at December 31, 2020:
| Item | Heritage Limited (N’000) | Legacy Limited (N’000) |
|---|---|---|
| Assets: | ||
| Non-Current Assets: | ||
| Property | – | 500,000 |
| Plant and Equipment | 190,000 | 280,000 |
| Total Non-Current Assets | 190,000 | 780,000 |
| Current Assets: | ||
| Inventories | 12,000 | 26,250 |
| Trade Receivables | 37,500 | 105,000 |
| Bank | 500 | 22,000 |
| Total Current Assets | 50,000 | 153,250 |
| Total Assets | 240,000 | 933,250 |
| Equity & Liabilities: | ||
| Equity: | ||
| Share Capital | 156,000 | 174,750 |
| Retained Earnings | 51,395 | 390,830 |
| Total Equity | 207,395 | 565,580 |
| Non-Current Liabilities: | ||
| Long-Term Debt | 10,000 | 250,000 |
| Current Liabilities: | ||
| Trade Payables | 22,605 | 117,670 |
| Total Liabilities | 32,605 | 367,670 |
| Total Equity & Liabilities | 240,000 | 933,250 |
The Board of Directors of Patrimony Investments PLC is considering a proposal to buy into one of the companies to enhance the reported profit and stability of the company after the investment.
Required:
a. Assess the relative performance of the two companies for the year ended December 31, 2020, with three suitable ratios each for:
- Profitability and efficiency
- Liquidity and solvency
(8 Marks)
b. Draft a report on the computed ratios for the consideration of the Board of Directors of Patrimony Investments PLC to appropriately guide the Board in deciding on the proposal to buy into any one of the companies.
(12 Marks)
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- 30 Marks
CR – May 2022 – L3 – Q1 – Leases (IFRS 16)
Adjust lease accounting for right-of-use asset and lease liability in compliance with IFRS 16.
Question
The draft financial statements of Gbola Limited group and its investee companies Tanko Limited and Eze Limited at December 31, 2018 are shown below:
Draft Statements of Profit or Loss for the Year Ended December 31, 2018
| Item | Gbola Limited (N’000) | Tanko Limited (N’000) | Eze Limited (N’000) |
|---|---|---|---|
| Revenue | 17,070 | 7,320 | 2,235 |
| Cost of Sales | (8,640) | (3,210) | (885) |
| Gross Profit | 8,430 | 4,110 | 1,350 |
| Other Operating Expenses | (2,070) | (810) | (600) |
| Profit from Operations | 6,360 | 3,300 | 750 |
| Interest Expense | (570) | (660) | (210) |
| Profit Before Tax | 5,790 | 2,640 | 540 |
| Income Tax Expense | (810) | (360) | (90) |
| Profit for the Year | 4,980 | 2,280 | 450 |
Draft Statements of Financial Position as at December 31, 2018
Additional Information
- On January 1, 2014, Gbola Limited acquired 9,000,000 ordinary shares in Tanko Limited for N23,250,000 when the reserves of Tanko Limited were N3,000,000.
- A new asset with a fair value of N1,500,000 was acquired during the year under a lease agreement by Gbola Limited. A clause in the lease agreement stipulated that N300,000 payments must be paid on December 31, each year for six years, starting from December 31, 2018. The interest rate implicit in the lease is 5.47%. Gbola Limited treated this as an operating expense; because the only accounting entry that the company believes must be made in relation to this asset is the N300,000 payment it has made.
- Gbola Limited had an intangible asset of N750,000 for software in its statement of financial position. The directors of Gbola Limited believed that the software will have no recoverable value at the date of acquisition, and Tanko Limited wrote it off shortly after its acquisition.
- At the date of acquisition of Tanko Limited, the carrying amount of its property, plant, and equipment, considered to have a remaining life of 10 years, was N5,625,000 lower than its fair value.
- On January 1, 2017, Gbola Limited acquired 2,250,000 ordinary shares in Eze Limited for N6,000,000 when the reserves of Eze Limited were N1,350,000. The carrying amount of assets of Eze Limited was the same as their fair values at that date. Depreciation should be treated as an operating expense.
- A component used by both Tanko Limited and Eze Limited is produced by Gbola Limited, and it sells this component at a margin of 25%. Goods worth N780,000 were sold to Tanko Limited during the year. None of these goods had been sold by Tanko Limited at December 31, 2018. Gbola Limited also sold goods worth N1,200,000 to Eze Limited, and Eze Limited sold all of these goods as at December 31, 2018.
- N900,000 in respect of amounts owed by Tanko Limited and N525,000 in respect of amounts owed by Eze Limited were included in the receivables of Gbola Limited. The corresponding balances in Tanko Limited and Eze Limited payables were N600,000 and N525,000, respectively. On December 31, 2018, Tanko Limited sent a cheque of N300,000 to Gbola Limited.
- There has been no impairment for Eze Limited. However, the impairment test conducted on Tanko Limited’s goodwill showed that goodwill is being impaired by 10% per annum on a straight-line basis.
- Gbola Limited’s cash and cash equivalents included a Director’s loan of N1,500,000. The Directors are of the view that the inclusion does not contravene any International Financial Reporting Standard.
- The goodwill arising on the acquisition of Tanko Limited is being amortized over a 10-year period, though this practice contravenes IAS 36, which prohibits goodwill amortization and instead requires annual impairment tests.
a. Prepare the necessary adjustments to account for the lease contract based on additional information provided in (ii) above in accordance with IFRS 16. (5 Marks)
b. Prepare the consolidated statement of profit or loss and other comprehensive income for the group for the year ended December 31, 2018. (8 Marks)
c. Prepare the consolidated statement of financial position of Gbola Limited group as at December 31, 2018. (12 Marks)
d. Discuss the ethical implication of the Director’s action in note (ix) above. (5 Marks)
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- Tags: Depreciation, IFRS 16 Adjustments, Interest expense, Lease Liability, Right-of-Use Asset
- Level: Level 3
- Topic: Leases (IFRS 16)
- 15 Marks
AAA – May 2023 – L3 – Q7 – Forensic Auditing
Discuss ethical principles for fraud investigation, advise on evidence gathering procedures, and recommend laws and agencies for legal action.
Question
At the annual general meeting of Aggressive Bank Limited for the year 2020, shareholders raised concerns over increasing cases of customer complaints about fraud. Shareholders emphasized that drastic actions were required to avoid brand damage and reputational issues.
In performing their oversight functions, the audit committee commissioned the internal audit unit to investigate fraud issues and likely causes. The internal audit report highlighted the following issues:
- Hacking of Accounts: Unauthorized transfers due to poor information security systems.
- Forgery: Forged cheques, signatures, and withdrawal slips used in collusion with bank staff.
- Fictitious Accounts: Opening and operating fake accounts to facilitate illegal transfers due to incomplete KYC.
- Loans to Fictitious Borrowers: Fictitious loans issued via fake accounts.
- False Overtime Claims: Junior staff claiming overtime for hours not worked.
- Suppression of Cash/Cheques: Diversion of customer deposits and loan repayments into fictitious accounts.
- Alteration of Programs: Unauthorized access to systems to manipulate account balances.
Likely Causes:
- Weak internal controls and supervision.
- Non-compliance with KYC rules.
- Poor IT and database management.
- Negligence, inadequate training, and poor working conditions.
- Fear of reporting fraud to regulators due to reputational concerns.
The audit committee mandated management to engage a forensic expert to investigate and report on the matter within four weeks. Your firm has been appointed for this engagement.
Required:
(a) Discuss the ethical principles applicable to this situation. (5 Marks)
(b) Advise on the procedures to gather evidence for an acceptable report to management. (5 Marks)
(c) Recommend the agencies and relevant laws management should use to tackle these problems, where legal actions might be required. (5 Marks)
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