Program: PROFESSIONAL PROGRAM

Search 500 + past questions and counting.

  • Filter by Professional Bodies

  • Filter by Subject

  • Filter by Series

  • Filter by Topics

  • Filter by Levels

  • 15 Marks

AAA – May 2022 – L3 – Q7 – Risk Management in Audits

Evaluate key risk areas for auditors in consolidating Nigerian and UK company accounts, considering transfer pricing and related party transactions.

BARCHI International Limited is a company with corporate registrations in both the United Kingdom (U.K.) and Nigeria. The Chairman of the company is based in Nigeria and from time to time travels to the U.K. to oversee the office there and order for the purchase of some of the articles for sale. To ensure steady supply of the products, some of the products are also ordered from China. The purchases from the U.K. are charged to the Nigerian entity in pound sterling, while the purchases from China are charged to the Nigerian company in American dollars.

In September 2020, the Chairman embarked on a trip to Dubai for two weeks where he spent part of his annual holiday. During this period, he hosted a couple of friends with the costs that were paid for by the company as the costs were above his approved annual holiday expenses. He subsequently traveled to the U.K. and was quarantined for two weeks due to COVID-19 before moving to the usual business lodge that he uses. Despite using that period to oversee the U.K. company, all the costs incurred were borne by the Nigerian company.

The products bought in the U.K. and sent to Nigeria were charged at cost plus 25%, while the Nigerian company was responsible for insurance and freight. The goods purchased from China were forwarded to Nigeria at the cost of landing in Nigeria plus 30%. The China-made products are less expensive and therefore give better profits despite the cost of the long-distance freight.

Money was transferred to the Chairman’s account for the company’s purchases in the U.K., the purchases made in China, and the Chairman’s personal expenses. An agent in China bought the goods which were paid for by the Chairman.

The U.K. company staff handled the documentation of all the transactions of the Chairman while there and transferred them to Nigeria subject to the approval of the Chairman.

Separate records were not maintained for the Chairman’s expenses in the U.K. However, his comparison of the results of the two units showed that for the immediate past financial year, the Nigerian company had performed sub-optimally and way below the targeted profit in relation to the U.K. company. The Chairman is very unhappy about this as he expects that his personal visit to the U.K. would reduce the purchasing and associated costs.

It is usual for the Chairman to account for the cost of purchases based on his personal expenses attributable to each purchase together with the actual cost of purchases. The U.K. component is elated about this costing method which favors it and would wish that this arrangement continues.

The two units prepare separate financial statements which are audited by separate accounting firms before the two financial statements are consolidated in Nigeria for the Chairman’s evaluation.

Required:

Evaluate, with appropriate justifications, from the scenario above, the areas of risk which the auditor needs to consider. (15 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AAA – May 2022 – L3 – Q7 – Risk Management in Audits"

  • 15 Marks

AAA – May 2022 – L3 – Q6 – Ethical Issues in Auditing

Prepare a manual on external auditor eligibility and discuss auditor objectives under ISA 200.

The accountancy profession earns confidence and public respect partly as a result of its self-regulatory mechanism, application of legal principles, and professional standards.

This issue became a subject of discussion when a group of business owners who just incorporated their companies were deliberating on who should carry out an audit and what are the guiding principles for determining the performance of such responsibility.

Required:

a. Prepare a manual to enable the discussants to understand this professional member’s eligibility to act as an external auditor. (9 Marks)

b. Discuss the objectives of an auditor in accordance with ISA 200: Overall objectives of the independent auditor and the conduct of an auditor in accordance with International Standards on Auditing. (6 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AAA – May 2022 – L3 – Q6 – Ethical Issues in Auditing"

  • 15 Marks

AAA – May 2022 – L3 – Q5 – Regulatory Framework and Professional Standards

Discuss arguments for and against audit exemption for small companies and evaluate considerations for auditing small entities.

The Companies and Allied Matters Act, 2020 has classifications and responsibilities for various types of companies incorporated under it. A particular class that has received more attention in recent times and in the Act is small companies.

Your audit team has been approached by a few of these small companies for guidance on the issue and your team has been assigned this responsibility. Part of the concerns of your firm is whether or not those small companies merit the concerns of regulatory authorities and the accounting firms that have to be responsible for their audit.

Your team has a number of young assistants who are yet to understand the differences and therefore need enlightenment on this as part of the training programs.

Required:

a. Discuss the arguments for and against the exemption of small companies from audit. (10 Marks)

b. On the basis that an audit may be conducted for a small entity, evaluate the points the auditors would consider. (5 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AAA – May 2022 – L3 – Q5 – Regulatory Framework and Professional Standards"

  • 20 Marks

AAA – May 2022 – L3 – Q4 – Ethical Issues in Auditing

Discuss correspondence with previous auditors, reasons for change in appointments, and client identification under AML regulations.

The idea to incorporate Peters & Shamsudeen Haulages Limited was mooted in London and it was incorporated on the return of Alhaji Shamsudeen to Nigeria. He met Peters during his stay in the UK. They had a good relationship which started in a coffee shop. As they met regularly in this shop, what to do on Alhaji Shamsudeen’s return to Nigeria became the subject of discussion. Based on their experiences, the idea of Peters & Shamsudeen Haulages Limited was birthed. Alhaji Shamsudeen subsequently returned to Nigeria, incorporated the company, obtained the appropriate expatriate quota, and Mr. Peters came in and started running the company.

On commencement, Sejumade Uzoma & Co was appointed the company’s external auditors. Whilst Mr. Peters was around, there was a good working relationship between the company and the audit firm.

After about nine years, Mr. Peters returned to the UK, leaving the company in the hands of Alhaji Shamsudeen. Subsequently, Sejumade Uzoma & Co started receiving complaints from Alhaji Shamsudeen and his key accounting staff. These complaints were rife even before the ninth month of the current year that Sejumade Uzoma & Co. decided not to continue with the engagement. The audit fee for the previous year had about thirty percent outstanding at this stage.

This was the position when Alhaji Shamsudeen approached your partner at Musa, Edewo & Co. (Chartered Accountants). Their discussion was fruitful for your firm, hence it was agreed by the partners that full professional procedures would be applied as normal. Part of the information available on interaction is that the year is almost ending, and there was uncertainty about the firm that will do the audit before the engagement of your firm. You have the responsibility of assisting your partner in ensuring that proper documentations would be done without any compromise.

Required:

a. According to professional requirements, discuss the issues your firm is expected to address in her correspondence with Sejumade Uzoma & Co. (10 Marks)

b. Evaluate the various circumstances that would lead to change in professional appointment. (5 Marks)

c. In consideration of the client, analyze the procedures necessary for proper client identification in accordance with anti-money laundering requirements. (5 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AAA – May 2022 – L3 – Q4 – Ethical Issues in Auditing"

  • 20 Marks

AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information

Discuss auditor assurance work on prospective financial information, cash flow forecast procedures, and forming an opinion on PFI.

Tijara Nigeria Limited has a credit facility of N6 million with Godiya Bank. The facility was due to expire on December 31, 2021. The overdraft in the recently audited statement of financial position as at September 30, 2021 is N5.5 million. The directors of Tijara have started negotiations with their bankers for a renewal of the facility and to increase the amount to N9 million. To support this request, the bank has asked Tijara to provide a business plan for the coming twelve months consisting of a cash flow forecast supported by a forecast income statement and statement of financial position.

The management of Tijara has produced a cash flow forecast for the period October 1, 2021, to September 30, 2022, and, at the request of the bank, has asked an auditor to examine and report on it.

The Audit Manager, who has recently completed Tijara’s audit, has been asked to make a preliminary examination of the cash flow forecast and supporting materials. The manager has made the following observations:

  1. The cash flows from sales are based on the assumption of an overall increase in sales of 24% compared to the previous financial year. Analysis shows that this is based on an increase in selling price of 5% and an increase in the volume of sales of 18%. Just over a quarter of all Tijara sales are made to foreign customers.
  2. The cost of sales in the recently audited comprehensive income to September 30, 2021, was 80% of sales revenue, giving a gross profit of 20%. In the forecast income statement for the year to September 30, 2022, the cost of sales has fallen to 72%, giving a gross profit of 28%. Manufacturing costs are made up of equal proportions of materials, labor, and production overheads.
  3. The trade receivables collection period used in the cash flow forecast to September 30, 2022, is 61 days. In the year to September 30, 2021, this period averaged 93 days. Management has stated that it is its intention to inform all customers of a new standard 60-day credit period. In addition, an early settlement discount of 1% will apply to customers who settle their accounts within 30 days of the statement. Conversely, the credit period for trade payables has been extended from an average of 45 days in the current year to 90 days in the forecast.
  4. The cash flow forecast showed that the maximum credit required during the period would rise to nearly N9 million in August 2022.

Required:

a. Describe the general approach to the assurance work an auditor should consider before accepting the engagement of a reporting accountant on Prospective Financial Information (PFI) under ISAE 3400: The Examination of Prospective Financial Information. (8 Marks)

b. Detail the procedures applicable to the cash flow forecast of Tijara for the year to September 30, 2022. (7 Marks)

c. Prepare a summarized presentation of what the reporting accountant should consider in forming an opinion on prospective financial information (PFI). (5 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AAA – May 2022 – L3 – Q3 – Audit of Prospective Financial Information"

  • 20 Marks

AAA – May 2022 – L3 – Q2 – Assurance Engagements

Discuss due diligence processes and provide IFRS 16 guidance on lease recognition, measurement, and disclosure.

Pegrace Nigeria Limited (PNL), your audit client, is a national hotel group with substantial cash resources. Its accounting functions are well managed and the group’s accounting policies are rigorously applied. The company’s financial year-end is December 31.

The company has been seeking to acquire a construction company for some time in order to bring in-house the building and refurbishment of hotels and related leisure facilities, like swimming pools, volleyball courts, and restaurants. The management has recently identified Robin Construction Company Limited (RCCL) as a potential target and has urgently requested that you undertake a limited due diligence review.

Further to the preliminary talks between the management of RCCL and PNL, you were provided with the following brief on Robin Construction Company Limited:

  1. The Chief Executive, Managing Director, and Finance Director are all family members and major shareholders. The company has an established reputation for quality constructions.
  2. Due to a recession in the building business, the company has been operating at its overdraft limit for the last 18 months and has been close to breaching debt obligations on several occasions.
  3. Robin’s accounting policies are generally less prudent than those of Pegrace (assets are depreciated over longer estimated useful lives).
  4. Contract revenue is recognized on the percentage of completion method, measured by reference to costs incurred to date. Provisions are made for loss-making contracts.
  5. The company’s management team includes a qualified and experienced quantity surveyor, whose main responsibilities are:
    • Supervising quarterly physical counts at major construction sites;
    • Comparing costs to date against quarterly rolling budgets; and
    • Determining profits or losses, by contract, at each financial year-end.
  6. Labour force is provided under subcontracts. During construction, the regulatory body visited the site and discovered non-compliance with site health and safety regulations.

In February 2021, Robin received a claim that a site on which it built a housing development in Banana Estate was not properly drained and is now sinking. Residents are demanding rectification and asking for payment or damages. Robin has referred the matter to its legal counsel and denied all liability, as the site preparation was subcontracted to Sahara Services Company Limited. No provisions have been made in respect of the claims, nor has any disclosure been made.

The auditor’s report on Robin’s financial statements for the year ended December 31, 2020, was signed, without modification, in March 2021.

Required:

a. Prepare a document to give the explanatory meaning of the term ‘due diligence’ and subsequently discuss items to investigate in a due diligence exercise. (12 Marks)

b. Advise on how to recognize, measure, present, and disclose leases as required by IFRS 16. (8 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AAA – May 2022 – L3 – Q2 – Assurance Engagements"

  • 30 Marks

AAA – May 2022 – L3 – Q1 – Quality Control in Audit Firms

Discuss ISQC 1 quality control requirements for leadership, ethics, engagements, human resources, monitoring, and documentation.

A firm of Chartered Accountants has 25 partners and 100 audit staff. The firm provides a range of audit, assurance, tax and advisory/consultancy services. The firm has offices around the country and clients ranging from sole traders to limited liability companies.

The quality control partner has recently resigned. He has not yet been replaced as the Board of Partners of the firm has not been able to find a suitable replacement. Before his departure, the quality control partner was in the process of implementing a system of ethical compliance for assurance staff. Based on the foregoing, staff would be required to confirm in writing their compliance with the Code of Ethics, hence, implementation of this system is incomplete.

Oshodi Plc is one of the firm’s largest clients for which the firm provides audit, tax, and other advisory services. A new engagement partner has been assigned to the audit, as the previous partner in charge was the one who resigned. The fee for the audit work and other services has been set at the same level as the previous year in spite of the fact that additional work will need to be performed because Oshodi Plc has introduced a new computerized system. The starting date of the audit has been delayed due to problems with the new system. The management of Oshodi Plc was very insistent that the fee should not be increased as a result of this.

Required:

Discuss the requirements of ISQC 1: International Standard on Quality Control on overall audit firm level, which address each of the following:

a. Leadership responsibilities for quality (3 Marks)
b. Ethical requirements (5 Marks)
c. Acceptance and continuance of engagements (5 Marks)
d. Human resources (5 Marks)
e. Engagement performance (5 Marks)
f. Monitoring (4 Marks)
g. Documentation (3 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "AAA – May 2022 – L3 – Q1 – Quality Control in Audit Firms"

  • 15 Marks

FM – May 2022 – L3 – Q7 – Dividend Policy

Brief on various dividend concepts, including residual theory, clientele effect, and signaling.

You are required to provide a briefing on the following dividend concepts:
a. Residual theory of dividends (3 Marks)
b. Clientele effect (3 Marks)
c. Asymmetric information (2 Marks)
d. Signaling properties of dividends (3 Marks)
e. The ‘bird-in-the-hand’ argument (4 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2022 – L3 – Q7 – Dividend Policy"

  • 3 Marks

FM – May 2022 – L3 – Q6b – Financial Risk Management

Calculate the number of put options needed to delta-hedge a short position.

In your personal investment portfolio, you have gone short (i.e., you have sold) 110,000 units of Big Bank plc. Call and put options exist on the bank’s shares. You decide to hedge your position using put options on the bank’s shares. For the relevant option, you know that:
N(d1) = 0.45

You are required to calculate how many put options you will need to buy or sell to delta-hedge. Be specific.

 

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2022 – L3 – Q6b – Financial Risk Management"

  • 12 Marks

FM – May 2022 – L3 – Q6a – Foreign Exchange Risk Management

Evaluate hedging methods for a UK supplier payment of £5 million in three months.

a. You have worked with a major oil servicing company in Nigeria, with headquarters in the USA, for the past six years. Recently you completed your ICAN examinations, and you have been asked to join the international treasury department in New York City for a two-year attachment. The company is due to pay a UK supplier the sum of ₤5million in three months’ time. Your team is considering alternative methods of hedging the expected payment against adverse movements in exchange rate.

You are required to advise the company which of the following hedging strategies should be adopted for the payment due to be made in three months. Show all workings:
i. Forward contract (2 Marks)
ii. Currency futures (5 Marks)
iii. Currency options (5 Marks)

 

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2022 – L3 – Q6a – Foreign Exchange Risk Management"

  • 9 Marks

FM – May 2023 – L3 – Q5a – Strategic Performance Measurement

Evaluate TAXIM Plc’s financial performance in achieving profit growth, EPS growth, and shareholder return objectives.

The following financial information relates to TAXIM Plc, a listed company:

Year 2021 2020 2019
Profit before interest and tax (₦m) 18.3 17.7 17.1
Profit after tax (₦m) 12.8 12.4 12.0
Dividends (₦m) 5.1 5.1 4.8
Equity market value (₦m) 56.4 55.2 54.0

TAXIM Plc has 12 million ordinary shares in issue and has not issued any new shares in the period under review. The company is financed entirely by equity.

The annual report of TAXIM Plc states that the company has three financial objectives:

  • Objective 1: To achieve growth in profit before interest and tax of 4% per year.
  • Objective 2: To achieve growth in earnings per share of 3.5% per year.
  • Objective 3: To achieve total shareholder return of 5% per year.

TAXIM Plc has a cost of equity of 12% per year. 

Required:
Analyse and discuss the extent to which TAXIM Plc has achieved each of its stated objectives. (9 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2023 – L3 – Q5a – Strategic Performance Measurement"

  • 20 Marks

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

The directors of Kenny plc wish to make an equity issue to finance an ₦800 million expansion scheme, with an expected net present value of ₦110 million. It is also to re-finance an existing 15% term loan of ₦500 million and pay off a penalty of ₦35 million for early redemption of the loan.

Kenny has obtained approval from its shareholders to suspend their pre-emptive rights and for the company to make a ₦1,500 million placement of shares, which will be at the price of 185 kobo per share. Issue costs are estimated to be 4 per cent of gross proceeds. Any surplus funds from the issue will be invested in commercial paper, which is currently yielding 9 per cent per year.

Kenny’s current capital structure is summarised below:

₦ million
Ordinary shares (25 kobo per share) 800
Share premium 1,120
Revenue reserves 2,310
Total Equity 4,230
15% term loan 500
11% bond 900
Total Capital 5,630

The company’s current share price is 190 kobo, and bond price is ₦102. Kenny can raise bond or medium-term bank finance at 10 per cent per year.

The stock market may be assumed to be semi-strong form efficient, and no information about the proposed uses of funds from the issue has been made available to the public.

Taxation may be ignored.

Required:

a. Discuss FOUR factors that Kenny’s directors should have considered before deciding which form of financing to use. (6 Marks)

b. Explain what is meant by pre-emptive rights, and discuss their advantages and disadvantages. (4 Marks)

c. Estimate Kenny’s expected share price once full details of the placement, and the uses to which the finance is to be put, are announced. (8 Marks)

d. Suggest two reasons why the share price might not move to the price that you estimated in (c) above. (2 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets"

  • 20 Marks

FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques

Evaluate Tinco Limited's expansion project using financial metrics, assess sensitivity to contribution and tax rate changes, and incorporate capital allowances.

Tinco Limited (TL) is considering an expansion project. The project will involve the acquisition of an automated production machine costing ₦11,000,000 and payable now. The machine is expected to have a disposal value at the end of 5 years, which is equal to 10% of the initial expenditure.

The following schedule reflects a recent market survey regarding the estimated annual sales revenue from the expansion project over the project’s five-year life:

Level of Demand ₦’000 Probability
High 16,000 0.25
Medium 12,000 0.50
Low 8,000 0.25

It is expected that the contribution to sales ratio will be 50%. Additional expenditure on fixed overheads is expected to be ₦1,800,000 per annum. TL incurs a 20% tax rate on corporate profits. Corporate tax is paid one year in arrears.

TL’s after-tax nominal (money) discount rate is 15.5% per annum. A uniform inflation rate of 5% per annum will apply to all costs and revenues during the life of the project. All of the values above have been expressed in terms of current prices.

You can assume that all cash flows occur at the end of each year and that the initial investment does not qualify for capital allowances.

Required:

a.
i. Evaluate the proposed expansion from a financial perspective. (10 Marks)
ii. Calculate and interpret the sensitivity of the project to changes in:

  • The expected annual contribution (3 Marks)
  • The tax rate (2 Marks)

b.
You have now been advised that the capital cost of the expansion will qualify for written down allowances at the rate of 25% per annum on a reducing balance basis. Also, at the end of the project’s life, a balancing charge or allowance will arise equal to the difference between the scrap proceeds and the tax written down value.

You are required to calculate the financial impact of these allowances. (5 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques"

  • 20 Marks

FM – May 2023 – L3 – Q2 – Business Valuation Techniques

Analyze AHP’s intrinsic value using fundamental and technical analysis, apply the dividend valuation model, and evaluate EMH implications.

You are a Financial Analyst at Tayo Research Group (TRG). You begin valuing Aba Hotels Plc (AHP), a thinly and infrequently traded stock currently selling at 217 kobo, cum 2021 dividend.

For estimating AHP’s required return on equity, TRG uses the capital asset pricing model (CAPM) approach, but you think its equity beta of 1.20 is not reliable because of the stock’s extremely thin trading volume. You have therefore obtained the beta and other pertinent data for Eko Hotel Plc (EHP) – (See Table 1), a midsized company in the same industry with high liquidity trading on the Nigerian Stock Exchange.

Table 1: Valuation Data for EHP

Parameter Value
Asset beta 0.763
Debt beta 0.150
Debt ratio (D/D+E) 0.60
Effective tax rate (%) 30%

Summarised financial data for AHP is shown below:

Statement of Profit or Loss Account

Year 2019 2020 2021*
Sales (₦’000) 305,500 357,600 409,200
Taxable income (₦’000) 40,500 49,000 56,700
Taxation (₦’000) (14,175) (17,150) (19,845)
Post-tax income (₦’000) 26,325 31,850 36,855
Dividend (₦’000) (9,340) (10,228) (11,200)
Retained earnings (₦’000) 16,985 21,622 25,655

Statement of Financial Position

Year 2021*
Non-current assets (₦’000) 216,800
Current assets (₦’000) 158,000
Current liabilities (₦’000) (104,800)
Net assets (₦’000) 270,000
Ordinary shares (₦0.50 par value) 80,000
Reserves (₦’000) 130,000
15% Bond 2026 (₦100 par value) 60,000

(*2021 figures are unaudited)

Other Relevant Information:

  1. It has been estimated that the debt/equity ratio of AHP is 0.16 and the beta of its debt is 0.2.
  2. The risk-free rate is 12% and the market risk premium is 5%.
  3. AHP has an effective tax rate of 35%.
  4. As a result of recent capital investment, stock market analysts expect post-tax earnings and dividends to increase by 25% for two years and then revert to the company’s existing growth rates.

Required:

a. Stock market analysts sometimes use fundamental analysis and sometimes technical analysis to forecast future share prices.
What are fundamental analysis and technical analysis? (4 Marks)

b. Using the dividend valuation model, estimate what a fundamental analyst might consider to be the intrinsic (or realistic) value of the company’s shares.
Comment upon the significance of your estimate for the fundamental analyst. (12 Marks)

c. Explain whether your answer to (b) above is consistent with the semi-strong and strong forms of the efficient markets hypothesis (EMH), and comment upon whether financial analysts serve any useful purpose in an efficient market. (4 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2023 – L3 – Q2 – Business Valuation Techniques"

  • 4 Marks

FM – May 2023 – L3 – Q1b – Mergers and Acquisitions

Discuss the typical factors included in takeover regulations across countries.

b. The regulation of takeovers varies from country to country.

Outline the typical factors that such a regulation includes. (4 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2023 – L3 – Q1b – Mergers and Acquisitions"

  • 26 Marks

FM – May 2023 – L3 – Q1a – Business Valuation Techniques

Evaluate ZL's valuation using multiple methods and recommend whether KK should acquire ZL. Discuss takeover regulation factors.

KK, a company quoted on the Stock Exchange, has cash balance of ₦230 million which are currently invested in short-term money market deposits. The cash is intended to be used primarily for strategic acquisitions, and the company has formed an acquisition committee with a remit to identify possible acquisition targets. The committee has suggested the purchase of ZL, a company in a different industry that is quoted on the AIM (Alternative Investment Market). Although ZL is quoted, approximately 50% of its shares are still owned by three directors. These directors have stated that they might be prepared to recommend the sale of ZL, but they consider that its shares are worth ₦220 million in total.

Summarised financial data:

Economic data:

  • Risk-free rate of return: 6% p.a.
  • Market return: 14% p.a.
  • Inflation rate: 2.4% p.a., expected to remain stable.

Expected effects of the acquisition:

  1. 50 employees of ZL would immediately be made redundant at an after-tax cost of ₦12 million. Pre-tax annual wage savings are expected to be ₦7.50 million (at current prices) for the foreseeable future.
  2. Some land and buildings of ZL would be sold for ₦8 million (after tax).
  3. Pre-tax advertising and distribution savings of ₦1.50 million per year (at current prices) would be possible.
  4. The three existing directors of ZL would each be paid ₦1 million per year for three years for consultancy services. This amount would not increase with inflation.

Required:

a. Calculate the value of ZL based upon:
i. The use of comparative P/E ratios (3 Marks)
ii. The dividend valuation model (4 Marks)
iii. The present value of relevant operating cash flows over a 10-year period (10 Marks)
iv. Provide an evaluation of each of the three valuation methods in (i) to (iii) above. (7 Marks)
v. Recommend whether KK should go ahead with the offer for ZL. (2 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "FM – May 2023 – L3 – Q1a – Business Valuation Techniques"

  • 15 Marks

ATAX – May 2023 – L3 – Q7 – Tax Incentives and Reliefs

Explore tax incentives for mining businesses, gas utilisation operations, and companies eligible for road infrastructure tax credit schemes.

Tax incentives are special exclusions, exemptions, deductions, or credits offered by the government to encourage specified activities. These incentives have sparked debates among Nigerian lawmakers, economists, accountants, tax practitioners, and the public.

The Federal Government remains optimistic that the positive effects of tax incentives on the economy outweigh the potential revenue loss.

A prominent businessman and Chairman of High Level Group of Companies approached your firm to provide professional advice on tax incentives available for companies in specific sectors.

Required:

As the officer designated by your firm, prepare a report to the Principal Partner for review, explaining the tax incentives available to:

  1. (a) Mining businesses under the Minerals and Mining Act 2007 (6 Marks)
  2. (b) Gas utilisation (downstream operations) businesses (5 Marks)
  3. (c) Companies eligible for the Road Infrastructure Tax Credit Scheme (4 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "ATAX – May 2023 – L3 – Q7 – Tax Incentives and Reliefs"

  • 15 Marks

ATAX – May 2023 – L3 – Q6 – Tax Impact of Financing Decisions

Discuss thin capitalisation concepts, related rules under the Finance Act 2019, and non-tax factors affecting corporate location decisions.

Tax planning is a right that taxpayers must exercise to reduce tax liability and improve profitability while fully complying with existing tax legislations to avoid penalties and further risks. Thin capitalisation and non-tax factors are important fiscal policy issues that corporate players and governments in different tax jurisdictions should not undermine.

Required:

  1. (a) Explain the concept of thin capitalisation and the problems it may create for both creditors and tax authorities. (5 Marks)
  2. (b) Discuss the thin capitalisation rules put in place by the Federal Government via the provisions of the Finance Act 2019. (4 Marks)
  3. (c) Explain briefly, six important non-tax factors that may affect the choice of location of a corporate entity by a holding company in another tax jurisdiction. (6 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "ATAX – May 2023 – L3 – Q6 – Tax Impact of Financing Decisions"

  • 15 Marks

ATAX – May 2023 – L3 – Q5 – Capital Gains Tax (CGT)

Analyze the tax implications of asset disposal and re-acquisition for Fashion Stitches Ltd.

Fashion Stitches Limited, Lagos, is a private limited liability company specializing in sewing and sales of clothes and allied materials for medium and upper-class clients in highbrow areas of the country.

The company has a core sewing staff, while other employees frequently travel to major cities such as Abuja, Kaduna, Ibadan, and Port Harcourt to receive orders from clients.

While reviewing their activities for the first quarter ended March 31, 2022, the Operating Officer noted that the recent increase in travel and staff costs, which had risen by over 150% compared to the corresponding period in 2021, negatively impacted the company’s financial performance.

Management decided to relocate the business to the Federal Capital Territory (FCT), Abuja, where over 75% of their clients reside. The move is planned for November 15, 2022, involving the disposal and re-acquisition of some assets required for the business.

The following transactions took place between April and October 2022:

  1. Property Disposal and Acquisition:
    • The property (land and building) in Lagos, acquired in 2008 for N18,220,000, was sold for N65,100,000.
    • Incidental costs of disposal included:
      • Estate valuer’s fee: N1,627,500
      • Renovation expenses: N1,800,000
      • Advertisement cost: N250,000
    • A new property was purchased in the FCT for N80,000,000.
  2. Disposal and Re-Acquisition of Sewing Machines and Equipment:
    • Sewing machines and tailoring equipment, bought between 2015 and 2019 for N3,300,000, were disposed of for N2,800,000.
    • New machines and equipment were acquired for N7,130,000.
  3. Disposal and Re-Acquisition of Generating Set:
    • A 10 KVA generating set, which cost N1,500,000 in 2017, was disposed of for N1,900,000.
    • Another generating set was acquired for N2,450,000.

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "ATAX – May 2023 – L3 – Q5 – Capital Gains Tax (CGT)"

  • 20 Marks

ATAX – May 2023 – L3 – Q4 – Petroleum Profits Tax (PPT)

Calculate Jaga Petroleum's hydrocarbon tax and income tax liabilities under the Petroleum Industry Act.

Jaga Petroleum Limited was granted an oil mining lease (OML) in January 2001 for exploration of oil and gas in onshore and shallow water operations for twenty years and a further renewal of twenty years, if application is made.

At the expiration of the initial license on December 31, 2020, the company decided not to apply for an extension of its current license under the Petroleum Profit Tax regime and opted for automatic conversion on January 1, 2021, to the petroleum mining lease (PML) as enshrined in the Petroleum Industry Act 2021.

The following details were extracted from the financial statements of the company for the year ended December 31, 2021:

(i) Revenue:

Category Type Quantity (MB) Actual Price ($) Fiscal Price ($)
Crude oil sold Bonny light 7.5 75 77
Crude oil sold Forcados medium 5.2 69 70
Condensate from associated gas sold ABC condensate 4.0 55 54
Gas liquid from associated gas sold XYZ liquid 3.8 48 50

(ii) Expenses/Expenditure:

Item N’million
Royalty incurred and paid for 118,900
Production cost 112,660
Concession rentals 25,200
Repairs of plant, machinery, and fixtures 2,680
First exploration well costs 2,770
Repairs of production implement utensils 1,850
Cost of gas reinjection wells 1,250
NDDC charge 200
Purchase of information on existence of petroleum deposits 305
Customs duties 106
First two appraisal wells costs 3,900
Decommissioning and abandonment 1,500
Depreciation 2,820
Environmental remediation fund 1,800
State government ground rent fee 22
Finance costs 25
Host community costs 1,400
Miscellaneous expenses 1,129
Administrative costs 1,980

The following additional information was also made available:

(iii) First two appraisal wells costs consisted of 60% tangible costs and 40% intangible costs.
(iv) Expenditure for the purchase of information on existence of petroleum deposits included:

Item N’million
Acquisition of geophysical information 100
Geological data and information 120
Others 85
Total 305

(v) Miscellaneous expenses were:

Item N’million
Gas flare fee 720
Donations to orphanage homes 132
Terminalling cost 169
Stamp duty 18
Signature bonus paid for petroleum deposits 90
Total 1,129

(vi) Agreed capital allowances for the year was N4,500 million.
(vii) Production allowances after commencement of the Act:

Operation Type N’million
Onshore operations 800
Shallow water operations 1,100

(viii) Assume N440 is equivalent to US $1, and tax liabilities payable will be in local currency (Naira).

Required:

Compute for the relevant assessment year the company’s:

  1. Hydrocarbon tax liability (16 Marks)
  2. Companies income tax liabilities (4 Marks)

Login or create a free account to see answers

Login
Register

Find Related Questions by Tags, levels, etc.

Report an error
Report an error

You're reporting an error for "ATAX – May 2023 – L3 – Q4 – Petroleum Profits Tax (PPT)"

Elevate your professional expertise across key business domains with our comprehensive training programs

Our offerings

Contact Info

  • +233203701923
    +233543919232
  • info@nbcinstitute.com

Customer

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope
error: Content is protected !!
Oops!

This feature is only available in selected plans.

Click here to view all plans

Click on the login button below to login if you’re already subscribed to a plan or click on the upgrade button below to upgrade your current plan.

Login
Upgrade Plan

If you’re not subscribed to a plan, click on the button below to choose a plan

Subscribe to a plan