Level: Level 3

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FM – May 2022 – L3 – Q5 – Cost of Capital

Calculate market value WACC for JP and discuss its preference over book value WACC for investment appraisals.

Question

The directors of Jindadi Plc. (JP), an Abuja-based entertainment company, are currently considering the appropriate cost of capital to use in appraising capital investments. It is the policy of the company to assess the financial viability of all capital projects using the net present value criterion.

You have been provided with some financial information about the company.

JP has an equity beta of 1.2, and the ex-dividend market value of the company’s equity is N1 billion. The ex-interest market value of the convertible bonds is N168 million, and the ex-dividend market value of the preference shares is N50 million.

The convertible bonds of JP have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption date are both on the same date in five years’ time. The current ordinary share price of JP is expected to increase by 4% per year for the foreseeable future.

The equity risk premium is 5% per year, and the risk-free rate of return is 4% per year. JP pays profit tax at an annual rate of 30% per year.

Required:

a. Calculate the market value after-tax weighted average cost of capital of JP, explaining clearly any assumptions you make. (10 Marks)

b. Discuss why market value weighted average cost of capital is preferred to book value weighted average cost of capital when making investment decisions. (5 Marks)

Answer

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Tags: Book value, Convertible Bonds, Investment decisions, Market Value, Preference shares, WACC
Level: Level 3

Topic: Cost of capital

FM – May 2022 – L3 – Q4 – Treasury Management

Discuss the roles of a treasury department and analyze its operation as a profit versus cost centre.

Question

he finance director of Keyman Plc. has recently reorganised the finance department following a number of years of growth within the business, which now includes a number of overseas operations. The company has created separate treasury and financial control departments.

Required:

a. Describe the main responsibilities of a treasury department, and comment on the advantages to Keyman Plc. of having separate treasury and financial control departments. (14 Marks)

b. Identify the advantages and disadvantages of operating the treasury department as a profit centre rather than a cost centre. (6 Marks)

Answer

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Tags: Cost Centre, Financial Control, Organizational Structuring, Profit Centre, Treasury Roles
Level: Level 3

Topic: Treasury management

FM – May 2022 – L3 – Q3 – Investment Appraisal Techniques

Calculate NPV of an investment, discuss inflation's impact, and recommend an optimal project under capital constraints.

Question

Opeyemi operates in an economy that has almost zero inflation. Management ignores inflation when evaluating investment projects because it is very low and considered insignificant. Opeyemi is evaluating a number of similar, alternative investments. The company uses an after-tax cost of capital of 6% and has already completed the evaluation of two investments.

The third investment is a new product that would be produced on a just-in-time basis and is expected to have a life of three years. This investment requires an immediate cash outflow of N200,000, which does not qualify for tax depreciation. The expected residual value at the end of the project’s life is N50,000.

A draft financial statement showing the values that are specific to this investment for the three years is as follows:

Year	1	2	3
Sales	230,000	350,000	270,000
Production Costs:
Materials	54,000	102,000	66,000
Labour	60,000	80,000	70,000
Other*	80,000	90,000	80,000
Profit	36,000	78,000	54,000
Closing Receivables	20,000	30,000	25,000
Closing Payables	6,000	9,000	8,000

*Other production costs shown above include depreciation calculated using the straight-line method.

The company is liable to pay corporate tax at a rate of 30% of its profits. One half of this is payable in the same year as the profit is earned, and the remainder is payable in the following year.

Required:

a. Calculate the net present value of the above investment proposal. (14 Marks)

b. Explain how the above investment project would be appraised if there were to be a change in the rate of inflation, so that it became too significant to be ignored. (3 Marks)

c. The evaluation of the other two investments is shown below:

Investment	Initial Investment	Net Present Value
W	300,000	75,000
Y	100,000	27,000

The company only has N400,000 of funds available. All of the investment proposals are non-divisible. None of the investments may be repeated.

Required:

Recommend, with supporting calculations, which of the three investment proposals should be accepted. (3 Marks)

Answer

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Tags: Financial management, Inflation impact, Investment Selection, NPV Calculation
Level: Level 3

Topic: Investment Appraisal Techniques

FM – May 2022 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluate the financing options for Effe's expansion and provide advice on creditworthiness for a bond investment.

Question

Effe is a Nigerian company specialising in the provision of information systems solutions to large corporate organisations. It is going through a period of rapid expansion and requires additional funds to finance the long-term working capital needs of the business.

Effe has issued one hundred million N1 ordinary shares, which are listed on the stock market at a current market price of N15 with typical increases of 10% per annum expected in the next five years. Dividend payout is kept constant at a level of 10% of post-tax profits. Effe also has N1,000 million of bank borrowings.

It is estimated that a further N300 million is required to satisfy the funding requirements of the business for the next five-years beginning July 1, 2021. Two major institutional shareholders have indicated that they are not prepared to invest further in Effe at the present time and so a rights issue is unlikely to succeed. The directors are therefore considering various forms of debt finance. Three alternative structures are under discussion as shown below:

Five-year unsecured bank loan at a fixed interest rate of 7% per annum;
Five-year unsecured bond with a coupon of 5% per annum, redeemable at par and issued at a 6% discount; and
A convertible bond, issued at par, with an annual coupon rate of 4.5% and a conversion option in five years’ time of five shares for each ₦100 nominal of debt.

There have been lengthy boardroom discussions on the relative merits of each instrument. Summarised below are the queries of three different directors concerning the instruments.

Director A: “The bank loan would seem to be more expensive than the unsecured bond. Is this actually the case?”
Director B: “Surely, the convertible bond would be the cheapest form of borrowing with such a low interest rate?”
Director C: “If we want to increase our equity base, why use a convertible bond, rather, than a straight equity issue?”

Required:

a. Write a response to the queries raised by the three directors and advise on the most appropriate financing instrument for Effe. In your answer, include calculations of appropriate yield for each instrument. Ignore tax. (15 Marks)
b. Advise a prospective investor in the five-year unsecured bond issued by Effe on what information he should expect to be provided with and what further analysis he should undertake in order to assess the credit worthiness of the proposed investment. (5 Marks)

Answer

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Tags: Convertible Bonds, Credit Analysis, Debt Instruments, Equity Financing, Yield Calculations
Level: Level 3

Topic: Financing Decisions and Capital Markets

FM – May 2022 – L3 – Q1 – Business Valuation Techniques

Estimate VT's valuation using FCFE, CAPM, and terminal value assumptions for three-year cash flow forecasts.

Question

Vico Tony (VT) is a software design company established six years ago. The company is owned by five directors. Since establishment, the company has developed rapidly. VT finds it difficult to obtain bank finance and relies on a long-term strategy of using internally generated funds to finance expansion. The directors are therefore giving consideration to the possibility of floating the company on the stock market. As a first step, you have been appointed by the directors to advise on the current value of the business under their ownership.

The company’s most recent statement of profit or loss and the extracted balances from the latest statement of financial position are as follows:

During the current year:

Depreciation is charged at 10% per annum on the year-end non-current assets balance before accumulated depreciation, and is included in other operating costs in the statement of profit or loss.
The investment in net working capital is expected to increase in line with the growth in gross profit.
Other operating costs consisted of:

Sales and variable costs are projected to grow at 9% per annum and fixed costs are projected to grow at 6% per annum.
The company pays interest on its outstanding loan of 7.5% per annum and incurs tax on its profits at 30%, payable in the following year. The company does not currently pay dividends.

One of your first tasks is to prepare for the directors a forward cash flow projection for three years and to value the firm on the basis of its expected free cash flow to equity. In discussion with them, you note the following:

The company will not dispose of any of its non-current assets but will increase its investment in new non-current assets by 20% per annum. The company’s depreciation policy matches the currently available tax allowable depreciation. This straight-line write-off policy is not likely to change;
The directors will not take a dividend for the next three years but will then review the position taking into account the company’s sustainable cash flow at that time;
The level of loan will be maintained at ₦1.98 billion and interest rates are not expected to change.
For estimating the appropriate required return on equity, it is decided to make use of the capital asset pricing model (CAPM). The challenge, however, is that since the company is not quoted, an appropriate beta factor does not exist. You have found a listed company, Konputer Limited (KL) that is into software development. KL is also into computer hardware retailing. It has the following financial statistics:

About 60% of the market value of KL is attributed to the software development division, while 40% of the value is attributed to computer hardware retailing. The computer hardware retailing division has an equity beta of 0.8.
Risk-free rate is 4% and the market risk premium is 8%.
VT has maintained a long-term debt/(debt+equity) ratio of 20%.

Required:

a. Provide an estimate of the appropriate rate of return to be used for the valuation of VT. Round your answer to the nearest whole number. (7 Marks)
b. Prepare a three-year cash flow forecast for the business on the basis described above highlighting the free cash flow to equity in each year. (14 Marks)
c. Estimate the value of the business based on the expected free cash flow to equity and a terminal value based on a sustainable growth rate of 4% per annum thereafter. (Note: Irrespective of your answer in (a), assume required return of 17%). (5 Marks)
d. Advise the directors on the assumptions and the uncertainties within your valuation. (4 Marks)

Answer

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Tags: Business Valuation, CAPM, Financial Projections, Free Cash Flow to Equity
Level: Level 3

Topic: Business Valuation Techniques

ATAX – May 2022 – L3 – Q7 – Petroleum Profits Tax (PPT)

Identify allowable expenses under the PIA and explain implications of mergers in upstream petroleum operations.

Question

In the last three years, some major oil producing companies have decided to divest their investments from the Nigerian oil and gas sector. One of the reasons for this might be the new global energy order, which seems to favour the evolution of a “green environment” as against the present use of hydrocarbons with its inherent environmental degradation and pollution.

Similarly, in response to the yearnings of various stakeholders in the oil and gas sector, the Federal Government enacted the Petroleum Industry Act (PIA) 2021. Generally, the Act provides the legal, governance, regulatory, and fiscal framework for the Nigerian petroleum industry, the development of host communities, and for related matters.

Notable commentators and professionals in the sector suggest that the divestment of major oil and gas operators in Nigeria could be beneficial to local investors if funds are sourced and deployed to businesses in the sector. Mergers and acquisitions of indigenously owned oil-producing companies have been noted as one valuable option in this regard.

Required:

a. In respect of the Petroleum Industry Act 2021, identify the expenses allowable in the computation of adjusted profit of a company in upstream petroleum operations. (6 Marks)
b. Identify and explain SIX implications of mergers and acquisitions in respect of a situation where a new company takes over an existing company. (9 Marks)

Answer

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Tags: Acquisitions, Allowable expenses, Mergers, Petroleum Industry Act, Tax implications, Upstream Operations
Level: Level 3

Topic: Petroleum Profits Tax (PPT)

ATAX – May 2022 – L3 – Q6 – Taxation of Non-Resident Companies and Individuals

Discuss the tax implications of an overseas branch and compute the associated tax liabilities.

Question

Maigona Agro Limited is a Nigerian company operating in the agricultural sector. It has a large expanse of land in the Northern part of the country, which is used strictly for the cultivation of cotton seeds. As a result of the collapse of the textile/garment industry, specifically due to the unfavourable business climate in Nigeria, the company in 2015 established a branch, BAM Textile Mills, in the United Kingdom. Part of the cotton produced locally is sold to BAM Textile Mills at a competitive price, for the production of finished product (branded textile clothing).

A tax dispute recently arose between the Management of Maigona Agro Limited and officials of the Federal Inland Revenue Service (FIRS) on the correct assessment of profits made by BAM Textile Mills. The Managing Director is of the opinion that the tax paid by BAM Textile Mills in the United Kingdom should be the final tax since the company is only an overseas branch. He further averred that the provisions of the Companies and Allied Matters Act 2020 (as amended) are only applicable to companies incorporated in Nigeria. The Managing Director was furious when the company received a reminder of notice of assessment from the FIRS and has therefore threatened to approach the Tax Appeal Tribunal for redress.

You have been engaged by the company as its Tax Consultant to provide professional advice on the tax implication of the profit made by BAM Textile Mills, UK and possibly representation at the Tax Appeal Tribunal sittings. The statement of profit or loss for the year ended October 31, 2021 (BAM Textile Mills’ result has been converted to Nigerian Naira at the prevailing exchange rate) and other relevant documents were handed over to you by the Managing Director.

The extracts from the statements of profit or loss of the two corporate entities revealed the following:

	Maigona Agro Ltd (N’000)	BAM Textile Mills (N’000)	Total (N’000)
Gross Turnover	975,100	1,820,500	2,795,600
Less:
Cost of materials/inputs	350,200	672,000	1,022,200
Salaries and Wages	122,530	400,400	522,930
Administrative Expenses	45,700	110,900	156,600
Depreciation	75,600	147,300	222,900
Donation	8,500	0	8,500
Share of Head Office Expenses	33,300	50,000	83,300
Income Tax Paid in the UK	0	72,200	72,200
Total Expenses	635,830	1,452,800	2,088,630
Net Profit	339,270	367,700	706,970

Additional Information:

The capital allowances of Maigona Agro Limited in respect of plant and equipment, farming tools, and other qualifying capital expenditure as agreed with the tax authorities was N45,000,000. The amount of capital allowances of N57,000,000 claimable by BAM Textile Mills on qualifying assets was also certified by the tax authorities.
Included in the donation was N5,000,000 given to victims of the COVID-19 (Omicron variant) pandemic in Nigeria.
The UK tax rate is assumed to be 35%.

Required:

a. Advise the management of Maigona Agro Limited on the tax implications of the overseas branch. (4 Marks)
b. Compute the tax liabilities of the company in line with your submission in (a) above. (11 Marks)

Answer

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Tags: Double Taxation, Overseas Branches, Tax Appeal Tribunal, Tax Compliance, Tax disputes, Tax implications
Level: Level 3

Topic: Taxation of Non-Resident Companies and Individuals

ATAX – May 2022 – L3 – Q5 – Ethical Issues in Tax Practice

Identify ethical issues in a tax engagement and discuss punitive measures for ensuring adherence to ethical and legal standards.

Question

Mr. Barau Olubami completed his first degree in a reputable university in Nigeria seven years ago. After the compulsory youth service, he wrote and passed the professional examination and was subsequently admitted as an associate member of the Institute of Chartered Accountants of Nigeria. He had four-year training in a professional audit firm before he decided to establish his accounting firm. The firm consists of him as the principal partner, two accounting graduates (as Assistant Auditors/Consultants), a secretary, and an office assistant.

Within six months of his professional practice, he was able to get three clients to which he provides services, that include preparation of tax records, computation of end-of-year tax liabilities, filing of tax returns, advisory to clients on tax matters, compliance with tax legislations, and management of tax audit and investigation.

In one of the social events he attended with his father, he was introduced to Mr. Chidi Odamo, his father’s schoolmate in his polytechnic days. Mr. Odamo is the Chief Executive of Odamo Nigeria Limited, a company that manufactures paints. In a private chat they both had, Mr. Odamo complained bitterly that his current tax consultant has not been helping him to pay less amount of tax liability to the relevant tax authorities, unlike what his friends in the same industry are enjoying through the assistance of their tax consultants. Mr. Olubami informed Mr. Odamo that he knew his current tax consultant very well as he was his senior in the university. He also submitted that his (Olubami’s) firm is the tax consultant to another company in the same industry with Odamo Nigeria Limited. He then promised Mr. Odamo that if he is given the tax consultancy/audit work, he knows how to resolve the issue with the tax officials and the company will be the better for it.

The engagement with the current tax consultant was terminated two weeks after Mr. Odamo and Mr. Olubami had a “fruitful” discussion and the latter’s firm was appointed as the company’s new tax consultant after both parties agreed to a clause in the engagement contract that aside from the professional fees, the firm is entitled to 20% of tax saved.

During the review of previous tax returns filed with and tax paid to the tax authority, he observed a significant material error of the sum of N3 million made by the tax authority in favour of his client (Odamo Nigeria Limited). Since this could not be regarded as tax saved by his firm, he decided not to inform the company as this is considered as “by-gone.”

During the course of the year’s tax audit, documents and information received from the company’s accountant were not independently validated. These documents were sent to the two Assistant Auditors to work with. Specifically, sales were grossly understated; the cost of new vehicle and furniture and fittings were understated while some expenses incurred were overstated.

At the completion of the work done by the two Assistant Auditors/Consultants, Mr. Olubami held a meeting with the company’s Managing Director and presented a draft report, which showed that the company’s total tax liability for the year was N12 million. He promised him that with the assistance of his “contact” at the Revenue Service, the tax liability would be reduced to N7 million. The company’s Managing Director advised him to go ahead and file appropriate returns as the matter was fully settled. Self-assessment returns were filed and perhaps with the connivance of unscrupulous tax officials, the company paid N7 million tax liability. However, if a thorough job was done, the company’s tax payable for the year would have been N18.25 million.

Required:

a. Examine TEN ethical issues that arose from the tax engagement. (10 Marks)
b. What are the punitive measures put in place to ensure that accountants in practice adhere to legal and ethical issues when preparing tax returns? (5 Marks)

Answer

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Level: Level 3

Topic: Ethical Issues in Tax Practice

ATAX – May 2022 – L3 – Q4 – Taxation of Specialized Businesses

Compute tax liabilities and discuss incentives for Dutse Mines in mining solid minerals

Question

———————————————————————
Question:

As investors and policymakers adapt to the global energy transition in a bid to offer an effective hedge against swings in oil prices, the Federal Government has recognised that it is beneficial for the country to diversify its economy. The attention of the country is now towards the development of the solid minerals sector. The Nigeria Minerals and Mining Act 2007 (as amended) was enacted to regulate the industry. Incentives for operators in the sector are as provided for in Section 5 of the Act.

One of the earliest investors in the mining sector, Dutse Mines (Nigeria) Limited, was granted a mining title by the Mining Cadastre Office (MCO) for exploitation of limestone in Nkalagu in the south-eastern zone of Nigeria in 2008. In spite of so many challenges the company is facing, it has managed to remain afloat in business.

The company has, of recent, been having tax disputes with the relevant tax authority, and your firm of chartered accountants has been engaged to help resolve them. In the 2022 tax returns filed by the company, the major area of dispute between the company and the tax authority was disparity in the treatment of certified exploration and processing expenditure of ₦60,000,000 incurred during the course of the year.

Your firm is provided with the following extracts (and supporting documents) from the books of the company for the year ended December 31, 2021:

Additional Information:

Sundry income included ₦8,500,000 realised as profit from disposal of the old excavating machine.
Allowance for doubtful debts consisted of:
- Bad debts written off: ₦2,500,000
- General allowance for doubtful debts: ₦10,500,000
- Specific allowance for doubtful debts: ₦8,000,000
- Loan to customer written off: ₦5,000,000
Donation included ₦5,000,000 given to victims of environmental degradation, as part of the company’s social responsibility to the host community.
Legal fees included ₦750,000 paid as a penalty for late filing of tax returns.
The tax written down values of qualifying capital expenditure at the end of 2021 tax year were:
- Motor vehicles (2 years remaining): ₦25,000,000
- Furniture and fittings (utilised for 2 years): ₦22,500,000
- Mining expenditure (6 years remaining): ₦40,000,000

Required:

As the Manager (Tax Matters) assigned to handle this matter, you are to forward the report to your Senior Partner (Tax Matters) showing:

a. Computation of tax liabilities of the company for the relevant assessment year (14 Marks).
b. Comments on tax incentives available to a company in the mining of solid minerals in Nigeria (6 Marks).

Answer

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Tags: Allowable and Disallowable Expenses, Mining Taxation, Tax Incentives, Tax Liability Computation
Level: Level 3

Topic: Taxation of Specialized Businesses

ATAX – May 2022 – L3 – Q3 – Capital Gains Tax (CGT)

Address the principles of disposal under CGT Act, and compute CGT for transactions in Ikeja, Calabar, Abuja, and Kano.

Question

Disposal of assets is an important concept in the determination of capital gains tax payable. Section 6 of the Capital Gains Tax Act 2004 (as amended) specifically provides that a disposal of assets by a person occurs where any capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition, or any other disposition of assets, notwithstanding that no asset is acquired by the person paying the capital sum. In the same vein, Section 2 (4) of the Finance Act 2020 states the period for filing of self-assessment returns and when payment of the tax computed in respect of chargeable assets disposed of is to be made.

Nice-One Nigeria Limited, a manufacturing concern, with head office in Calabar and branches in Ikeja, Kano, and Abuja, has been in business for several years, reporting its accounts to December 31 of every year. The extracts from the books of accounts of the company during the year ended December 31, 2021, revealed the following transactions:

(i) Disposal of an option
On February 1, 2021, the company sold an option on a piece of land in Ikeja for the sum of ₦8,500,000 to Eco-Raheem Limited, which subsequently exercised the right by purchasing the land for ₦32,200,000.

(ii) Acquisition of asset in exchange for debt
On March 15, 2021, one of the company’s debtors in Calabar, Mr. Baba Tee, reached an agreement with the company by exchanging his piece of land, which was valued at ₦15,000,000, for the debt of ₦13,500,000. The company, on May 7, 2021, disposed of the land for ₦18,000,000. Incidental expenses incurred towards the disposal of the land were ₦250,000.

(iii) Disposal of a building
The company has a staff estate, which comprises five buildings in its Abuja branch. In order to source funds to construct a new staff estate in Kano, the company, on August 12, 2021, sold one of its buildings in the Abuja estate for ₦110,000,000. The cost of acquisition of the five buildings in the estate was ₦250,000,000. The cost of acquisition of the building sold was ₦75,000,000, while the remaining buildings unsold were professionally valued at ₦240,000,000. The company also incurred for the purpose of the disposal of the building, ₦400,000 on building repairs and a professional valuer’s fee of ₦1,100,000.

(iv) Disposal of industrial plants
One of the company’s industrial plants in the Kano branch, which cost ₦4,500,000, was disposed of on September 15, 2021, for ₦6,000,000. A new plant was bought for the purpose of the company’s operations the following month for ₦8,000,000. During the installation of the new plant, it was found that the plant could not efficiently satisfy the requirements of the company and it was subsequently sold on December 2, 2021, as “second-hand” for ₦7,300,000. The company incurred the sum of ₦25,000 as disposal expenses.

The Managing Director of the company is of the opinion that issues around the transactions undertaken by the company in the financial year are “technical,” which only competent professional accountants with experience in tax matters can conveniently handle. Accordingly, your firm of accountants was contacted to help provide tax advice on each of the above transactions.

Required:

You have been directed by your firm’s Head (Tax Matters) to take charge of the assignment and submit a report to him by the close of work in three days.

Your report should specifically cover:
(a) The principles of disposal as provided for in Section 6 of the Capital Gains Tax Act 2004 (as amended) (3 Marks).
(b) Computation of capital gains tax payable and when the tax due is to be paid to the relevant tax authority for the following stated transactions:
i. Disposal of an option in Ikeja branch (2 Marks).
ii. Acquisition of asset in exchange for debt in Calabar head office (3 Marks).
iii. Disposal of a building in Abuja branch (4 Marks).
iv. Disposal of industrial plants in Kano branch (8 Marks).

Answer

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Tags: Capital gains tax, CGT Act, Compliance, Disposal of assets
Level: Level 3

Topic: Capital Gains Tax (CGT)

ATAX – May 2023 – L3 – Q3 – Transfer Pricing

Explain transfer pricing compliance, declaration, and disclosure requirements along with arm's length comparability factors.

Question

Transfer pricing has become a topical fiscal policy issue globally due to the need for governments to prevent tax evasion and economic double taxation. Developing countries are encouraged to establish regulations to protect their tax bases while maintaining investor confidence.

NADA Incorporated, a multinational company headquartered in Quebec, Canada, plans to establish a textile company in northern Nigeria. While reviewing the Nigerian Income Tax (Transfer Pricing) Regulations 2018, the board of directors identified uncertainties around transfer pricing documentation and arm’s length comparability factors.

You are engaged as the company’s Tax Consultant to clarify these issues.

Required:

Send a report to the Managing Director of PROMOT Link, explaining:

(a) Transfer pricing compliance report (3 Marks)
(b) Transfer pricing declaration form to be submitted to the Federal Inland Revenue Service (FIRS) (6 Marks)
(c) Transfer pricing disclosure form to be submitted to the FIRS (6 Marks)
(d) Arm’s length comparability factors in transfer pricing (5 Marks)

Answer

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Tags: Arm's Length Comparability, Compliance Reporting, Disclosure Requirements, Transfer Pricing
Level: Level 3

Topic: Transfer Pricing

ATAX – May 2023 – L3 – Q2 – Emerging Trends in Taxation

Discuss risks, mitigation measures, roles, benefits, and challenges of technology in accounting and tax practice.

Question

Tax legislations are becoming increasingly complex, creating more risks for professional accountants and tax practitioners. The role of technology in running a contemporary accounting firm and/or tax practice is evolving rapidly, bringing new layers of complexity and regulatory pressure.

Your firm of chartered accountants is organizing an in-house training for the newly employed audit officers. You have been mandated by the Senior Partner to prepare a paper on: “Risk and Role of Technology in Accounting/Tax Practice.”

Required:

As the paper presenter, prepare a paper for the training addressing the following:

(a) Risks of running a professional accounting firm and/or tax practice (4 Marks)
(b) Measures to mitigate the identified risks (5 Marks)
(c) Roles of technology in running a contemporary accounting/tax practice (3 Marks)
(d) Benefits and challenges of adopting technology by professionals in accounting firms and/or tax practices (8 Marks)

Answer

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Tags: Professional Practices, Risk Management, Risk Mitigation, Technology Adoption, Technology in Accounting
Level: Level 3

Topic: Emerging Trends in Taxation

ATAX – May 2023 – L3 – Q1 – Taxation of Specialized Businesses

Analyze the tax implications for Hyland Nigeria Ltd, including adjusted profit, tax payable, dividend tax implications, and tax benefits for reconstituted companies.

Question

Hyland Nigeria Limited commenced business as a manufacturer of stationery on January 1, 2021. The company, in December 2020, acquired all the assets and liabilities of a foreign company operating in Nigeria, Lowland Incorporated, and reconstituted it for turnaround and profitability.

The directors of the newly reconstituted company have considered the draft financial statements and annual tax returns for the year ended December 31, 2021. During a board meeting, there was disagreement over the tax treatment of dividends received (N3,600,000) from equity holdings in another Nigerian public limited liability company. The dividends are also part of the proposed profits to be distributed to shareholders.

Additionally, one director suggested that as a reconstituted company, Hyland Nigeria Limited may qualify for tax reliefs or incentives that could positively affect profitability. Following the board’s decision, the Managing Director contacted your firm to provide professional advice on these matters.

The following financial information is extracted from the company’s records:

The following additional relevant information was provided:
(i) Subscription and donations consisted of:

(ii) Allowance for doubtful debts included:

(iii) Repairs and maintenance was made up of:

(iv) Legal and professional fees included:

(v) Other operating expenses were:

(vi) Tax written down values of qualifying capital expenditure (QCE) as at December 31, 2020:

(vii) Additional assets acquired during the year ended December 31, 2021:

(viii) Unrelieved losses as at December 31, 2020 was N55,900,000.
(ix) Unutilised capital allowances as at December 31, 2020 was N16,155.000.

Required:

Calculate the Adjusted Profit of the company for the year ended December 31, 2021.
Compute the Tax Payable for the relevant assessment year.
Provide professional advice on the tax implications of the dividends received for the company and its shareholders.
Comment on tax benefits/incentives applicable to a reconstituted company in Nigeria as per the Companies Income Tax Act 2004 (as amended).

Answer

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Tags: Adjusted Profit Computation, Dividend Tax Implications, Tax Benefits, Tax Payable Computation
Level: Level 3

Topic: Taxation of Specialized Businesses

CR – May 2023 – L3 – Q7b – Segment Reporting (IFRS 8)

Advise on reportable operating segments based on IFRS 8 criteria for Jafuwara PLC

Question

Jafuwara PLC is a public limited company trading in six business areas, each reported separately in its internal accounts provided to the Chief Operating Decision Maker (CODM). The results of these segments for the year ended December 31, 2021, are as follows:

Operating Segment Information as at Dec. 31, 2021

Required:

Draft a report addressed to the directors of Jafuwara PLC advising them on which of the operating segments constitute a ‘reportable’ operating segment for the year ended December 31, 2021, in accordance with IFRS 8. (7 Marks)

Answer

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Tags: CODM, IFRS 8, Operating segments, Reportable Segments
Level: Level 3

Topic: Segment Reporting (IFRS 8)

CR – May 2023 – L3 – Q7a – Segment Reporting (IFRS 8)

Advise on whether research and development laboratories should be reported as separate segments under IFRS 8.

Question

Fine Face (FF) Limited produces and sells a range of body care products through three separate divisions. Additionally, the company has two laboratories responsible for research and development activities.

First Laboratory:
- Funded internally and centrally for each of the three sales divisions.
- Does not perform research and development activities for external entities.
- Each division is allocated a budget for purchasing research and development services from the laboratory.
- The laboratory is directly accountable to the divisional heads for this expenditure.
Second Laboratory:
- Performs contract investigation activities for other laboratories and body care companies.
- Earns 75% of its revenue from external customers, representing 18% of the organization’s total revenue.
- The head of the second laboratory is directly accountable to the Chief Operating Decision Maker (CODM), and the CODM regularly reviews its performance, operating activities, resource allocation, and financial results.

Fine Face Limited is uncertain whether the two laboratories should be reported as separate segments under IFRS 8 – Operating Segments.

Required:

Advise the directors of Fine Face Limited on this issue. (8 Marks)

Answer

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Tags: Chief Operating Decision Maker (CODM), IFRS 8, Operating segments, R&D
Level: Level 3

Topic: Segment Reporting (IFRS 8)

CR – May 2023 – L3 – Q6b – Ethical Issues in Corporate Reporting

Discuss the ethical implications and possible actions for alleged unethical behavior in a corporate takeover.

Question

On your first day at Omoge Nigeria Plc as the Chief Financial Officer (CFO) of the company, you were sitting in the staff canteen where you overheard a conversation between two Admin Officers. They were gossiping about Mr. Adamu Salisu, the Finance Director.

According to their conversation, Mr. Adamu Salisu may have been involved in unethical activities related to Omoge Nigeria Plc’s takeover of Bobo Limited.

Key details include:

Mr. Salisu’s wife, Mrs. Salisu, was a director at Bobo Limited prior to the takeover and owned 30% of its shares.
It is alleged that Mr. Salisu substantially overpaid for Bobo Limited and facilitated the overpayment to benefit his wife.
The alleged unethical act involved colluding with his wife to falsify records submitted to the accountant conducting due diligence for the takeover.
Mr. Salisu is reportedly not well-liked by staff, who consider him intimidating and appear pleased at the prospect of him losing his job.

Required:

Discuss the ethical implications of the above and the possible actions that may arise from the incident. (5 Marks)

Answer

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Tags: Conflict of Interest, Corporate Governance, Ethics, Professional Integrity
Level: Level 3

Topic: Ethical Issues in Corporate Reporting

CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

Question

Omoge Nigeria PLC has the following share options scheme for its directors as of May 31, 2021:

The price of the company’s shares as of:

May 31, 2021: ₦8 per share
May 31, 2020: ₦8.50 per share

Key details:

Directors must be working for Omoge Nigeria PLC on the vesting dates for the options to vest.
No directors have left the company since the share options were issued, and none are expected to leave before June 2023.
The options can be exercised on the first day of the month in which they vest.
In accordance with IFRS 2, an expense of ₦600,000 was charged to profit in the year ended May 31, 2020, and the cumulative expense for the two years ended May 31, 2021, is ₦2,200,000.
Tax allowances arise when the options are exercised and are based on the option’s intrinsic value at the exercise date.
Assume a tax rate of 30%.

Required:

Evaluate the deferred tax implications of the share options for the year ended May 31, 2020, and May 31, 2021. (10 Marks)

Answer

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Tags: Deferred Tax, IAS 12, IFRS 2, Share Options, Tax Allowances
Level: Level 3

Topic: Share-Based Payments (IFRS 2)

CR – May 2023 – L3 – Q5b – Presentation of Financial Statements (IAS 1)

Discuss the importance of optimal disclosure and barriers to reducing excessive disclosures in annual reports.

Question

There have been various arguments globally about the extent of disclosures in the annual reports of companies. Some argue that annual reports should include more extensive disclosures, while others believe that efforts should focus on reducing the quantity of information to avoid overwhelming users of financial statements.

The latter perspective suggests that excessive disclosure is burdensome and may obscure key information. Conversely, some argue that there is no such thing as providing too much useful information to users of financial statements.

Required:

Discuss why it is important to ensure that an optimal level of disclosure is made in annual reports. Also, identify and explain the barriers that may exist when trying to reduce excessive disclosure of information in an annual report. (7 Marks)

Answer

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Tags: Annual Reports, Barriers to Disclosure Reduction, Disclosures, Financial Reporting, IAS 1
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)

CR – May 2023 – L3 – Q5a – Emerging Trends in Corporate Reporting

Discuss four financial reporting issues companies should consider due to COVID-19.

Question

Most regulatory authorities in Nigeria, such as the Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), and Federal Inland and State Internal Revenue Services, issued conditional relief for meeting reporting deadlines for filing annual and other returns required by law during the pandemic.

However, companies still need to monitor further reporting updates and evaluate the current and potential effects that COVID-19 could have on their financial reporting.

Required:

Discuss FOUR financial reporting issues that should be considered by companies as a consequence of COVID-19. (8 Marks)

Answer

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Tags: COVID-19, Expected Credit Losses, Going Concern, Impairment, Revenue Recognition
Level: Level 3

Topic: Emerging Trends in Corporate Reporting

CR – May 2023 – L3 – Q4b – Events After the Reporting Period (IAS 10)

Advise on the correct accounting treatment and disclosures for Resource LTD’s sale.

Question

At August 31, 2016, Evolve LTD controlled a wholly owned subsidiary, Resource LTD, whose only assets were land and buildings, measured in accordance with International Financial Reporting Standards.

On August 1, 2016, Evolve LTD published a statement stating that a binding offer for the sale of Resource LTD had been made and accepted, and at that date, the sale was expected to be completed by August 31, 2016. The non-current assets of Resource LTD were measured at the lower of their carrying amount or fair value less costs to sell at August 31, 2016, based on the selling price in the binding offer. This measurement was in accordance with IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations.

However, Evolve LTD did not classify the non-current assets of Resource LTD as held for sale in the financial statements at August 31, 2016, because there were uncertainties regarding the negotiations with the buyer and a risk that the agreement would not be finalized. There was no disclosure of these uncertainties, and the original agreement was finalized on September 20, 2016.

Required:
Advise Evolve LTD on how the above transactions should be correctly dealt with in its financial statements with reference to relevant International Financial Reporting Standards. (10 Marks)

Answer

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Tags: Disclosure Requirements, Events After Reporting Period, Held for Sale, IFRS 5, Non-current Assets
Level: Level 3

Topic: Events After the Reporting Period (IAS 10)

Level: Level 3

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Discuss the tax implications of an overseas branch and compute the associated tax liabilities.

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Additional Information:

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Identify ethical issues in a tax engagement and discuss punitive measures for ensuring adherence to ethical and legal standards.

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Discuss risks, mitigation measures, roles, benefits, and challenges of technology in accounting and tax practice.

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Analyze the tax implications for Hyland Nigeria Ltd, including adjusted profit, tax payable, dividend tax implications, and tax benefits for reconstituted companies.

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CR – May 2023 – L3 – Q7b – Segment Reporting (IFRS 8)

Advise on reportable operating segments based on IFRS 8 criteria for Jafuwara PLC

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CR – May 2023 – L3 – Q7a – Segment Reporting (IFRS 8)

Advise on whether research and development laboratories should be reported as separate segments under IFRS 8.

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CR – May 2023 – L3 – Q6b – Ethical Issues in Corporate Reporting

Discuss the ethical implications and possible actions for alleged unethical behavior in a corporate takeover.

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CR – May 2023 – L3 – Q6a – Share-Based Payments (IFRS 2)

Evaluate the deferred tax implications of share options for May 31, 2020, and 2021.

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CR – May 2023 – L3 – Q5b – Presentation of Financial Statements (IAS 1)

Discuss the importance of optimal disclosure and barriers to reducing excessive disclosures in annual reports.

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CR – May 2023 – L3 – Q5a – Emerging Trends in Corporate Reporting

Discuss four financial reporting issues companies should consider due to COVID-19.

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CR – May 2023 – L3 – Q4b – Events After the Reporting Period (IAS 10)

Advise on the correct accounting treatment and disclosures for Resource LTD’s sale.

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