Level: Level 3

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CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

Question

ONDO TELECOMS LIMITED

Ondo Telecoms Limited is one of the biggest telecoms companies in Abuja. One month after the year-end, the Chief Finance Officer (CFO), while reviewing the company’s activities came up with the following issues for the year ended 30 September, 2014:

(a) The Board of Directors is not impressed with the performance of the Home Broadband operating segment which posted a loss of N1.7 billion in 2014 financial year following another loss of N0.8 billion in the 2013 financial year.

(b) The carrying amount of the assets in the segment is N4.3 billion as at 30 September, 2014 and N4.5 billion as at 30 September, 2013. Professional valuers were engaged and they came up with a fair value of N4.2 billion as at 30 September, 2013.

(c) The Board of Directors made the final decision in June 2014 to sell off the assets in this segment and concentrate on other business lines. Since the beginning of September, four serious bidders have been negotiating with Ondo. The board anticipates the sale to be concluded by the end of May 2015 with the transaction cost of N0.3 million.

(d) On 1 November 2013, Ondo Telecoms Limited acquired a block of flats with an estimated useful life of 50 years at a total cost of N225 million. The blocks of flats are to be rented out to its employees and engineers at market prices. The decision to acquire the block of flats was made by the board due to the need to have the engineers close to the head office to attend to technical issues immediately they arise.

(e) Professional valuers were engaged to value the flats as at 30 September, 2014 and a fair value of N232 million was determined.

(f) International Telecom Limited, which acquired Edo Communications Limited during the year, has just published its results. Edo Communications Limited was a direct competitor to Ondo Telecoms Limited and does similar business. The CFO noted that International Telecom Ltd. shows an asset of N110 million arising from Edo Communication Limited customer lists’. This made the CFO realize how valuable the customer details are and has engaged a professional valuer who valued them at N98 million.

(g) Over the years, Ondo Telecoms Limited’s main business has been the provision of mobile and fixed landlines services as well as broadband services. In July 2013, Ondo Telecoms Limited bid for the award of a subscription television license from the government.

(h) Ondo Telecoms Limited won the bid and paid N560 million for a five-year license beginning 1 October 2013. The license is transferred and at the time of winning the bid, the fair value of the license was estimated at N580 million. Due to the slow uptake of the television business, the license was revalued at N420 million as at 30 September, 2014 by a professional valuer.

Required:
Advise, with suitable computations, how the above transactions should be accounted for in the financial statements of Ondo Telecoms Limited under IFRS for the year ended 30 September, 2014.

Answer

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Tags: Held for Sale, IFRS Compliance, Impairment testing, Intangible Assets, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – May 2015 – L3 – Q6 – Ethical Issues in Corporate Reporting

Analyze the financial reporting needs and efficiency challenges of not-for-profit organizations, including asset valuation at cost vs. fair value.

Question

NICE & DICE

NICE & DICE is a large charity located in Abuja and set up to provide support and assistance to disadvantaged people in major cities. Most of the charity’s income comes from members of the public through direct cash collections and regular monthly payments from donors. The other source of funding comes from government bodies who give grants to support specific projects that are recognized as being beneficial to the public good.

The charity publishes a detailed annual report. Performance is described largely in terms of an analysis of income received and the manner in which it has been spent. The trustees are concerned that this type of analysis does not really reflect the performance of the charity. They would like to report performance in terms of the work done rather than in terms of cash inflows and outflows. They want donors to appreciate how efficient the charity is.

The statement of financial position of the charity is a typical one for a large organization. NICE & DICE owns numerous properties in Abuja, some of which have been owned for many years. These are shown at historical cost less depreciation. The trustees do not wish to revalue the properties because this will create the impression that the charity is wealthy and that it does not require further financial support.

Required:
(a) Prepare a report to the trustees of Nice & Dice advising them on the reasons why specialized entities are required to publish detailed information about their activities. (5 Marks)
(b) Analyze the problems of quantifying and reporting the efficiency of not-for-profit organizations such as Nice & Dice. (5 Marks)
(c) Discuss the decision of the trustees to value its properties at cost less depreciation rather than at fair value. (5 Marks)

Answer

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Tags: Charity Reporting, Efficiency Measurement, Fair Value, Historical Cost, Not-for-Profit Reporting
Level: Level 3

Topic: Ethical Issues in Corporate Reporting

CR – May 2015 – L3 – Q5 – Introduction to Corporate Reporting

Discuss the need for IFRS for SMEs and evaluate simplified recognition principles for reducing reporting burdens on Jossy Limited.

Question

International Financial Reporting Standards (IFRS) for Small and Medium-Sized Entities (SMEs)

International Financial Reporting Standards (IFRS) for small and medium size entities (SMEs) was mandatorily adopted in Nigeria as at January 1, 2014. Entities that do not meet the IFRS for SME criteria shall report using Small and Medium Size Entities Guidelines on Accounting (SMEGA).

Jossy Limited has total costs excluding land of two-hundred million naira. Being a family business, the labor force totaled 150 workers with an annual turnover of N18 million. The management of this company sought your advice to have better understanding of some of the recognition and measurement principles of SMEs.

Required:
(a) Justify the need for IFRS for SMEs financial statements. (6 Marks)
(b) Assess the circumstances of Jossy Limited and advise on the principal recognition and measurement principles that will reduce the company’s reporting burden. (9 Marks)

Answer

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Tags: IFRS for SMEs, Measurement Principles, Recognition Principles, Simplified Financial Reporting, SME Reporting
Level: Level 3

Topic: Introduction to Corporate Reporting

CR – May 2015 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Discuss implications of changes in accounting policy for intangible assets and demonstrate retrospective application in financial statements.

Question

LIKELY EFFECT LIMITED

Likely Effect Limited has shown a sincere intention to be IFRS compliant. Among a number of events and transactions, there is the need to change the accounting policies of the company in trying to comply with a few other standards. As the Consultant of the company, your attention was drawn to the fact that prior to 2013, the company had capitalized training costs.

According to IAS 38, training cost is regarded as an internally generated intangible asset and cannot be capitalized. Therefore, there is the need for a change of accounting policy which must be applied retrospectively.

The training costs capitalized in 2012 was N6m while the total for periods before 2012 was N12m.
Training costs incurred in 2013 is N4.5m. Retained earnings were N600m and N649m at the beginning and end of 2012 respectively. The corporate income tax rate is 30% for the relevant periods. Additional information available is given below:

	2013 (N’M)	2012 (N’M)
Income tax expense	24	21
Profit after tax	56	49
Share capital	50	50

Required:

(a) Advise the directors on the implication of the change in accounting standard relating to treatment of intangible assets and tax effect on the company. (5 Marks)

(b) Prepare statements of profit or loss and other comprehensive income and changes in equity showing a retrospective application of the change in policy. (7 Marks)

Answer

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Tags: Accounting Policy Change, Financial Reporting Adjustments, IAS 38, IAS 8, Intangible Assets, Retrospective Adjustment, Tax Effects, Training Costs
Level: Level 3

Topic: Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

CR – May 2015 – L3 – Q3 – Emerging Trends in Corporate Reporting

Analyze financial statements of two companies and discuss limitations of ratio analysis.

Question

Real Expansion Plc is a large group that seeks to grow by acquisition. The directors have identified two potential entities and obtained copies of their financial statements. The accountant of the company computed key ratios to evaluate the performance of these companies relating to:

Profitability and returns;
Efficiency in the use of assets;
Corporate leverage; and
Investor-based decisions.

The computation generated hot arguments among the directors, and they decided to engage a Consultant to provide expert advice on which company to acquire.

Extracts from these financial statements are given below:

Required:

(a) As the Consultant to the company, carry out a financial analysis on the financial statements and advise the company appropriately. (15 Marks)

(b) State the major limitations of ratio analysis for performance evaluation. (5 Marks)

Answer

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Tags: Efficiency, Financial Ratios, Investor decision, Leverage, Performance Evaluation, Profitability
Level: Level 3

Topic: Emerging Trends in Corporate Reporting

CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

Question

The following transactions relate to Alilerimba Limited:

Convertible Bonds
- On July 1, 2011, Alilerimba Limited issued 400,000 convertible bonds with a 3-year tenure and a total fair value of N4 million, which is also the par value.
- The bonds carried an interest rate of 16% per annum, payable annually in arrears, while similar bonds without the conversion option carried an interest rate of 19% per annum on the same date.
- The company incurred 10% issue costs. If the investors did not convert to shares, the bonds would have been redeemed at par.
- At maturity (June 30, 2014), all bonds were converted into 1 million ordinary shares with a nominal value of N4 per share. No conversions were allowed before maturity.
- The directors are uncertain how to account for the bonds up to the date of conversion. They were informed that the effective interest rate, considering issue costs, was 24%.
Revenue Recognition for Handsets
- Alilerimba purchases handsets at N120,000 each and sells them to customers at N90,000, provided the customers also purchase prepaid credit cards.
- Prepaid credit cards are sold for N12,600 each and expire after six months. The average unused credit per card at expiry is N1,800.
- Selling costs for the handsets are estimated at N600 per unit.
- Alilerimba also sells handsets to dealers for N50,000 each, invoicing them for this amount. Dealers are allowed to return the handsets until a service contract is signed by a customer. When a service contract is signed, the handset is given to the customer free of charge.
- Dealers receive a commission of N168,000 per customer connection. Net of the handset cost (N90,000), Alilerimba pays N78,000 to dealers for each customer connection.
- Handsets cannot be sold separately by dealers, and the service contract has a 12-month duration. Dealers do not sell prepaid phones, and Alilerimba earns monthly revenue from the service contracts.
- The Chief Operating Officer, a non-accountant, has requested an explanation of the accounting principles and practices to apply for handset purchases and revenue recognition.
Preference Shares
- Alilerimba Limited issued 8% preference shares with a redemption feature that entitles holders to receive cash.

Required:

Advise the directors of Alilerimba Limited on:
(a) The accounting treatment for the convertible bonds. (12 Marks)
(b) The accounting principles and practices to apply for the purchase of handsets and recognition of revenue from customers and dealers. (6 Marks)
(c) The provisions of IAS 32 regarding the presentation in financial statements of financial instruments entitling holders to receive cash with a redemption feature. (2 Marks)

(Total: 20 Marks)

Answer

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Tags: Convertible Bonds, Financial instruments, IAS 18, IAS 32, Preference shares, Revenue Recognition
Level: Level 3

CR – May 2015 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013, considering acquisitions and adjustments.

Question

Barewa Plc has two subsidiary companies and one associate. Since the adoption of International Financial Reporting Standards (IFRS) by companies listed on the Nigeria Stock Exchange, Barewa has been preparing its consolidated financial statements in accordance with the provisions of International Financial Reporting Standards (IFRSs).

The draft Statements of Financial Position of Barewa and its two subsidiaries as at 31 May, 2013 are as follows:

Assets	Barewa (N’m)	Megida (N’m)	Mindara (N’m)
Non-current assets
Plant	2,650	2,300	1,610
Investments – Megida	3,000
Investments – Mindara	1,280
Associate (Calamari)	200
Available for sale	510	60	50
Total Non-current assets	7,640	2,360	1,660
Current assets
Inventory	1,350	550	730
Trade receivables	910	450	320
Cash and cash equivalent	1,020	1,000	80
Total Current assets	3,280	2,000	1,130
Total Assets	10,920	4,360	2,790

Equity and Liabilities
Share capital	5,200	2,200	1,000
Retained earnings	2,400	1,500	800
Other components of equity	120	40	70
Total equity	7,720	3,740	1,870
Non-current liabilities
Long-term loans	1,200	150	50
Deferred tax	250	90	30
Total non-current liabilities	1,450	240	80
Current liabilities
Trade payables	1,150	300	600
Current tax payables	600	80	240
Total current liabilities	1,750	380	840
Total Equity and Liabilities	10,920	4,360	2,790

The following information is relevant to the preparation of the group financial statements:

Acquisition of Megida Plc
- Date of Acquisition: 1 June 2012
- Barewa acquired 80% of the equity interest in Megida Plc.
- At the date of acquisition, Megida’s retained earnings were N1.36 billion, and other components of equity amounted to N40 million.
- There had been no new issuance of share capital by Megida since the acquisition date.
- The consideration for the acquisition was N3 billion in cash.
- The fair value of Megida’s identifiable net assets at acquisition was N4 billion, with the excess attributed to an increase in the value of non-depreciable land.
- An independent valuation determined that the fair value of the non-controlling interest (NCI) in Megida on 1 June 2012 was N860 million.
- Barewa’s policy is to measure NCI based on their proportionate share in the identifiable net assets of the subsidiary, not at fair value (full goodwill method).
Acquisition of Mindara Plc
- Date of Acquisition: 1 June 2012
- Barewa acquired 70% of the ordinary shares of Mindara Plc.
- The consideration for the acquisition included:
  - An upfront payment of N1.28 billion.
  - A contingent consideration requiring Barewa to pay the former shareholders 30% of Mindara’s profits on 31 May 2014 for each of the financial years ending 31 May 2013 and 31 May 2014. This arrangement was valued at N120 million as of 1 June 2012 and remains unchanged. It has not been included in the financial statements.
- The fair value of the identifiable net assets at acquisition was N1.76 billion. This included retained earnings of N550 million and other components of equity of N70 million.
- There had been no new issuance of share capital by Mindara since the acquisition date.
- The excess fair value of the net assets was due to an increase in property, plant, and equipment (PPE), which is depreciated on a straight-line basis over seven years.
- The fair value of the non-controlling interest (NCI) in Mindara was N530 million on the acquisition date.
Investment in Calamari Plc
- On 1 June 2011, Barewa acquired a 10% interest in Calamari Plc for N80 million. This was classified as an available-for-sale investment.
- As of 31 May 2012, the value of this investment had increased to N90 million.
- On 1 June 2012, Barewa acquired an additional 15% interest in Calamari for N110 million, achieving significant influence.
- Calamari recorded profits after dividends of N60 million and N100 million for the financial years ending 31 May 2012 and 31 May 2013, respectively.
Equity Instrument Purchase
- On 1 June 2012, Barewa purchased an equity instrument valued at 100 million pesos, classified as available-for-sale.
- Relevant exchange rates:
  - 31 May 2012: N5.1 to 1 peso.
  - 31 May 2013: N5.0 to 1 peso.
- The fair value of the instrument as of 31 May 2013 was 90 million pesos, reflecting an impairment that Barewa has not recorded.
Loan to a Director
- A loan of N10 million to a director has been included in cash and cash equivalents.
- The loan is repayable on demand with no specific repayment date.
- The directors believe that this treatment complies with International Financial Reporting Standards (IFRS), as no IFRS explicitly prohibits showing the loan as cash.
Goodwill Impairment
- There is no impairment of goodwill arising from the acquisitions.

Required

Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013.

Answer

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Tags: Consolidation, Equity Accounting, Financial Statements, Goodwill Calculation, Group Accounting, Impairment, Non-Controlling Interests, Subsidiary Acquisition
Level: Level 3

Topic: Consolidated Financial Statements (IFRS 10)

AAA – May 2016 – L3 – Q6 – Audit Reporting

Discuss audit work and written representation letter for legal claims, outstanding balances, and investments.

Question

Bob Removals Limited is a removals company. In the year ended December 31, 2015, the company made a trading profit of N800,000. You are the manager in charge of the audit.
The following issues have arisen:

(i) A customer is suing the company for N1 million for damage caused to antique furniture. The company is defending the claim and believes that the furniture was a reproduction as opposed to antique and therefore worth only N100,000.
(ii) A balance due from Safe Storage in respect of sub-contract work, of N300,000, has been outstanding for over six months. Your firm has been asked by Bob Removals’ accountant not to write to Safe Storage for direct confirmation of this amount as the latter company objects to such letters. You have been assured by the accountant that the relationship between the two companies is good and that the outstanding balance will be paid.
(iii) Bob Removals has recently invested in four new removal vans and is currently carrying out extensive refurbishment of its premises. As a result of this expenditure, the company has reached its overdraft limit of N500,000.

Required:

For each of the above issues:
a. State, with reasons, the audit work that you would expect to find when undertaking your review of the audit working papers for the year ended December 31, 2015.
b. Draft the relevant sections dealing with these issues of the written representation letter you would wish the directors to sign.

Answer

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Tags: Audit Procedures, Investment, Legal Claim, Outstanding Balance, Written Representation
Level: Level 3

Topic: Audit Reporting

AAA – May 2016 – L3 – Q5 – Ethical Issues in Auditing

Identify and discuss fraud and error in the audit of Badagry Yachting and Marina.

Question

Badagry Yachting and Marina (BYM) have a marina on the West Coast of Nigeria and a large sales operation dealing in yachts and speedboats. You are responsible for the audit of BYM and have found some potential causes of concern that could indicate fraudulent activity or financial misconduct within the company. In particular:

(i) 30% of the yachts on sale by BYM are supplied through one of the major international boating companies with a special finance arrangement deal. However, BYM have also obtained separate finance on these yachts, which are therefore in effect being ‘double financed’.
(ii) Ten yachts shown as assets by BYM cannot be located, with no explanation other than that they have not been sold. These yachts are worth approximately N50 million.
(iii) Long delays have occurred in performing reconciliations, with the last four months of reconciliations still not completed. At the time of the last reconciliation, material differences had been identified upon which no action appears to have been undertaken.
(iv) Sales have been overstated by N100 million in the current financial statements.
The finance director has been off sick with stress for the last five months and therefore has not been available to discuss any of the issues identified.

Required:

a. Explain the difference between fraud and error and how the issues shown here could be categorised as fraud or error. (6 Marks)
b. Discuss the role of management and the role of the auditor in the prevention and detection of fraud and error. (3 Marks)
c. Describe what steps you would take to further investigate and then report on the matters referred to above. (6 Marks)

Answer

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Tags: Audit Procedures, Error, Financial Misconduct, Fraud, Investigation
Level: Level 3

Topic: Ethical Issues in Auditing

AAA – May 2016 – L3 – Q4 – Audit Reporting

Review the suitability of proposed audit opinions for four audit clients and suggest necessary modifications.

Question

You are the manager responsible for four audit clients of Globe & Co, a firm of Chartered Accountants. The year-end in each case is June 30, 2015.
You are currently reviewing the audit working paper files and the audit seniors’ recommendations for the auditors’ reports. Details are as follows:

a. Red Co. Limited is a subsidiary of Yellow Holdings Plc. Serious going concern problems have been noted during this year’s audit. Red will be unable to trade for the foreseeable future unless it continues to receive financial support from the parent company. Red has received a letter of support (‘comfort letter’) from Yellow Holdings Plc.
The audit senior has suggested that due to the seriousness of the situation, the audit opinion must at least be qualified ‘except for’. (5 Marks)

b. Edo Co Plc has changed its accounting policy for goodwill during the year from amortisation over its estimated useful life to annual impairment testing. No disclosure of this change has been given in the financial statements. The carrying amount of goodwill in the statement of financial position as at June 30, 2015, is the same as at June 30, 2014, as management’s impairment test shows that it is not impaired.
The audit senior has concluded that a modification to the opinion is not required but suggests that attention can be drawn to the change by way of an emphasis of matter paragraph. (6 Marks)

c. The directors’ report of Prompt Co Limited states that investment property rental forms a major part of revenue. However, a note to the financial statements shows that property rental represents only 1.6% of total revenue for the year. The audit senior is satisfied that the revenue figures are correct.
The audit senior has noted that an unmodified opinion should be given as the audit opinion does not extend to the directors’ report. (4 Marks)

d. Audit work on the after-date bank transactions of Twinkle Co Limited has identified a transfer of cash from Star Co. Limited. The audit senior assigned to the audit of Twinkle has documented that Twinkle’s finance director explained that Star commenced trading on July 20, 2015, after being set up as a wholly-owned foreign subsidiary of Twinkle.
The audit senior has noted that although no other evidence has been obtained, an unmodified opinion is appropriate because the matter does not impact on the current year’s financial statements. (5 Marks)

Required:
For each situation, comment on the suitability or otherwise of the audit senior’s proposals for the auditors’ reports. Where you disagree, indicate what audit report modification (if any) should be given instead.

Answer

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Tags: Accounting Policy Change, Audit opinion, Directors' Report, Emphasis of Matter, Going Concern, Subsidiary Transactions
Level: Level 3

Topic: Audit Reporting

CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

Question

ONDO TELECOMS LIMITED

(e) Professional valuers were engaged to value the flats as at 30 September, 2014 and a fair value of N232 million was determined.

Answer

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Tags: Held for Sale, IFRS Compliance, Impairment testing, Intangible Assets, Non-current Assets
Level: Level 3

Topic: Impairment of Assets (IAS 36)

CR – May 2015 – L3 – Q6 – Ethical Issues in Corporate Reporting

Analyze the financial reporting needs and efficiency challenges of not-for-profit organizations, including asset valuation at cost vs. fair value.

Question

NICE & DICE

Answer

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Tags: Charity Reporting, Efficiency Measurement, Fair Value, Historical Cost, Not-for-Profit Reporting
Level: Level 3

Topic: Ethical Issues in Corporate Reporting

CR – May 2015 – L3 – Q5 – Introduction to Corporate Reporting

Discuss the need for IFRS for SMEs and evaluate simplified recognition principles for reducing reporting burdens on Jossy Limited.

Question

International Financial Reporting Standards (IFRS) for Small and Medium-Sized Entities (SMEs)

Answer

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Tags: IFRS for SMEs, Measurement Principles, Recognition Principles, Simplified Financial Reporting, SME Reporting
Level: Level 3

Topic: Introduction to Corporate Reporting

CR – May 2015 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Discuss implications of changes in accounting policy for intangible assets and demonstrate retrospective application in financial statements.

Question

LIKELY EFFECT LIMITED

	2013 (N’M)	2012 (N’M)
Income tax expense	24	21
Profit after tax	56	49
Share capital	50	50

Required:

(a) Advise the directors on the implication of the change in accounting standard relating to treatment of intangible assets and tax effect on the company. (5 Marks)

(b) Prepare statements of profit or loss and other comprehensive income and changes in equity showing a retrospective application of the change in policy. (7 Marks)

Answer

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Tags: Accounting Policy Change, Financial Reporting Adjustments, IAS 38, IAS 8, Intangible Assets, Retrospective Adjustment, Tax Effects, Training Costs
Level: Level 3

Topic: Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

CR – May 2015 – L3 – Q3 – Emerging Trends in Corporate Reporting

Analyze financial statements of two companies and discuss limitations of ratio analysis.

Question

Profitability and returns;
Efficiency in the use of assets;
Corporate leverage; and
Investor-based decisions.

The computation generated hot arguments among the directors, and they decided to engage a Consultant to provide expert advice on which company to acquire.

Extracts from these financial statements are given below:

Required:

(a) As the Consultant to the company, carry out a financial analysis on the financial statements and advise the company appropriately. (15 Marks)

(b) State the major limitations of ratio analysis for performance evaluation. (5 Marks)

Answer

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Tags: Efficiency, Financial Ratios, Investor decision, Leverage, Performance Evaluation, Profitability
Level: Level 3

Topic: Emerging Trends in Corporate Reporting

CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

Question

The following transactions relate to Alilerimba Limited:

Convertible Bonds
- On July 1, 2011, Alilerimba Limited issued 400,000 convertible bonds with a 3-year tenure and a total fair value of N4 million, which is also the par value.
- The bonds carried an interest rate of 16% per annum, payable annually in arrears, while similar bonds without the conversion option carried an interest rate of 19% per annum on the same date.
- The company incurred 10% issue costs. If the investors did not convert to shares, the bonds would have been redeemed at par.
- At maturity (June 30, 2014), all bonds were converted into 1 million ordinary shares with a nominal value of N4 per share. No conversions were allowed before maturity.
- The directors are uncertain how to account for the bonds up to the date of conversion. They were informed that the effective interest rate, considering issue costs, was 24%.
Revenue Recognition for Handsets
- Alilerimba purchases handsets at N120,000 each and sells them to customers at N90,000, provided the customers also purchase prepaid credit cards.
- Prepaid credit cards are sold for N12,600 each and expire after six months. The average unused credit per card at expiry is N1,800.
- Selling costs for the handsets are estimated at N600 per unit.
- Alilerimba also sells handsets to dealers for N50,000 each, invoicing them for this amount. Dealers are allowed to return the handsets until a service contract is signed by a customer. When a service contract is signed, the handset is given to the customer free of charge.
- Dealers receive a commission of N168,000 per customer connection. Net of the handset cost (N90,000), Alilerimba pays N78,000 to dealers for each customer connection.
- Handsets cannot be sold separately by dealers, and the service contract has a 12-month duration. Dealers do not sell prepaid phones, and Alilerimba earns monthly revenue from the service contracts.
- The Chief Operating Officer, a non-accountant, has requested an explanation of the accounting principles and practices to apply for handset purchases and revenue recognition.
Preference Shares
- Alilerimba Limited issued 8% preference shares with a redemption feature that entitles holders to receive cash.

Required:

(Total: 20 Marks)

Answer

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Tags: Convertible Bonds, Financial instruments, IAS 18, IAS 32, Preference shares, Revenue Recognition
Level: Level 3

CR – May 2015 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013, considering acquisitions and adjustments.

Question

The draft Statements of Financial Position of Barewa and its two subsidiaries as at 31 May, 2013 are as follows:

Assets	Barewa (N’m)	Megida (N’m)	Mindara (N’m)
Non-current assets
Plant	2,650	2,300	1,610
Investments – Megida	3,000
Investments – Mindara	1,280
Associate (Calamari)	200
Available for sale	510	60	50
Total Non-current assets	7,640	2,360	1,660
Current assets
Inventory	1,350	550	730
Trade receivables	910	450	320
Cash and cash equivalent	1,020	1,000	80
Total Current assets	3,280	2,000	1,130
Total Assets	10,920	4,360	2,790

Equity and Liabilities
Share capital	5,200	2,200	1,000
Retained earnings	2,400	1,500	800
Other components of equity	120	40	70
Total equity	7,720	3,740	1,870
Non-current liabilities
Long-term loans	1,200	150	50
Deferred tax	250	90	30
Total non-current liabilities	1,450	240	80
Current liabilities
Trade payables	1,150	300	600
Current tax payables	600	80	240
Total current liabilities	1,750	380	840
Total Equity and Liabilities	10,920	4,360	2,790

The following information is relevant to the preparation of the group financial statements:

Acquisition of Megida Plc
- Date of Acquisition: 1 June 2012
- Barewa acquired 80% of the equity interest in Megida Plc.
- At the date of acquisition, Megida’s retained earnings were N1.36 billion, and other components of equity amounted to N40 million.
- There had been no new issuance of share capital by Megida since the acquisition date.
- The consideration for the acquisition was N3 billion in cash.
- The fair value of Megida’s identifiable net assets at acquisition was N4 billion, with the excess attributed to an increase in the value of non-depreciable land.
- An independent valuation determined that the fair value of the non-controlling interest (NCI) in Megida on 1 June 2012 was N860 million.
- Barewa’s policy is to measure NCI based on their proportionate share in the identifiable net assets of the subsidiary, not at fair value (full goodwill method).
Acquisition of Mindara Plc
- Date of Acquisition: 1 June 2012
- Barewa acquired 70% of the ordinary shares of Mindara Plc.
- The consideration for the acquisition included:
  - An upfront payment of N1.28 billion.
  - A contingent consideration requiring Barewa to pay the former shareholders 30% of Mindara’s profits on 31 May 2014 for each of the financial years ending 31 May 2013 and 31 May 2014. This arrangement was valued at N120 million as of 1 June 2012 and remains unchanged. It has not been included in the financial statements.
- The fair value of the identifiable net assets at acquisition was N1.76 billion. This included retained earnings of N550 million and other components of equity of N70 million.
- There had been no new issuance of share capital by Mindara since the acquisition date.
- The excess fair value of the net assets was due to an increase in property, plant, and equipment (PPE), which is depreciated on a straight-line basis over seven years.
- The fair value of the non-controlling interest (NCI) in Mindara was N530 million on the acquisition date.
Investment in Calamari Plc
- On 1 June 2011, Barewa acquired a 10% interest in Calamari Plc for N80 million. This was classified as an available-for-sale investment.
- As of 31 May 2012, the value of this investment had increased to N90 million.
- On 1 June 2012, Barewa acquired an additional 15% interest in Calamari for N110 million, achieving significant influence.
- Calamari recorded profits after dividends of N60 million and N100 million for the financial years ending 31 May 2012 and 31 May 2013, respectively.
Equity Instrument Purchase
- On 1 June 2012, Barewa purchased an equity instrument valued at 100 million pesos, classified as available-for-sale.
- Relevant exchange rates:
  - 31 May 2012: N5.1 to 1 peso.
  - 31 May 2013: N5.0 to 1 peso.
- The fair value of the instrument as of 31 May 2013 was 90 million pesos, reflecting an impairment that Barewa has not recorded.
Loan to a Director
- A loan of N10 million to a director has been included in cash and cash equivalents.
- The loan is repayable on demand with no specific repayment date.
- The directors believe that this treatment complies with International Financial Reporting Standards (IFRS), as no IFRS explicitly prohibits showing the loan as cash.
Goodwill Impairment
- There is no impairment of goodwill arising from the acquisitions.

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Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013.

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Tags: Consolidation, Equity Accounting, Financial Statements, Goodwill Calculation, Group Accounting, Impairment, Non-Controlling Interests, Subsidiary Acquisition
Level: Level 3

Topic: Consolidated Financial Statements (IFRS 10)

AAA – May 2016 – L3 – Q6 – Audit Reporting

Discuss audit work and written representation letter for legal claims, outstanding balances, and investments.

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AAA – May 2016 – L3 – Q5 – Ethical Issues in Auditing

Identify and discuss fraud and error in the audit of Badagry Yachting and Marina.

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AAA – May 2016 – L3 – Q4 – Audit Reporting

Review the suitability of proposed audit opinions for four audit clients and suggest necessary modifications.

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CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

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CR – May 2015 – L3 – Q5 – Introduction to Corporate Reporting

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Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

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CR – May 2015 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Barewa Group as of 31 May 2013, considering acquisitions and adjustments.

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AAA – May 2016 – L3 – Q6 – Audit Reporting

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AAA – May 2016 – L3 – Q4 – Audit Reporting

Review the suitability of proposed audit opinions for four audit clients and suggest necessary modifications.

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CR – May 2015 – L3 – Q7 – Impairment of Assets (IAS 36)

Evaluate the accounting treatment for non-current assets held for sale, impairments, and intangible assets for Ondo Telecoms Limited under IFRS.

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CR – May 2015 – L3 – Q5 – Introduction to Corporate Reporting

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Review the suitability of proposed audit opinions for four audit clients and suggest necessary modifications.

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