Corporate Reporting – NBC Institute

CR – May 2024 – L3 – SB – Q4b – Leases (IFRS 16)

Memo on IFRS 16 changes and right-of-use assets treatment for Ododoeye PLC

Question

As the financial controller of Ododoeye PLC, an NGX-quoted company, you are preparing the financial statements for the year ended March 31, 2023. Chief Okechukwu, the finance director, has requested the following information about the treatment of the company’s leased assets in view of IFRS 16-Leases:

Chief Okechukwu noticed a new component in the financial statements titled “right-of-use” relating to a leased warehouse. This component did not appear in previous years’ statements and has raised questions on its treatment under IFRS 16 compared to IAS 17.

Required:

Write an internal memo addressing Chief Okechukwu’s concerns and explaining:

The key changes under IFRS 16 related to right-of-use assets.
Accounting treatments for the right-of-use assets.
Financial statement impact of right-of-use assets.

Answer

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Tags: Corporate Reporting, Financial Statements, IFRS 16, Leases, NGX-Quoted Company, Right-of-Use Assets
Level: Level 3

Topic: Leases (IFRS 16)
Series: MAY 2024

CR – May 2024 – L3 – SB – Q4a – Leases (IFRS 16)

Explanation of IFRS 16 recognition and measurement for lessee lease obligations

Question

Lease gives lessees the right to use assets in return for the lessee accepting an obligation to make a series of payments to the owner of the assets (the lessor). The previous accounting rules set out in IAS 17-Leases focused on identifying leases that were economically similar to purchasing the assets being leased. However, IFRS 16-Leases was issued subsequently and applies to accounting periods beginning on or after January 1, 2019. Earlier application is also permitted. Therefore, IFRS 16 replaced IAS 17, introducing material changes to the requirements for recognition of rights and obligations under leasing arrangements.

Required:

i. Explain how IFRS 16 requires lessees to recognize and measure rights and obligations under lease arrangements. (4 Marks)

ii. Discuss how a lessee should measure the rights and obligation under short-term lease arrangements.

(4 Marks)

Answer

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Tags: Corporate Reporting, IFRS 16, Lease Obligations, Leases, Right-of-Use, Short-Term Leases
Level: Level 3

Topic: Leases (IFRS 16)
Series: MAY 2024

CR – May 2024 – L3 – SB – Q3 – Income Taxes (IAS 12)

Deferred tax impact analysis for asset purchase, fair value adjustments, and subsidiary profit

Question

Below is the statement of financial position (extract) of Bamboo PLC, a company with several subsidiaries across various regions, including one foreign subsidiary, Pako Limited, based in the USA:

Draft Statement of Financial Position
As at October 31, 2023

Assets	N’m
Deferred tax	77
Other non-current assets	2,329
Inventories and other current assets	1,150
Cash and cash equivalents	422
Total assets	3,978

Liabilities and Equity
Other non-current liabilities	1,671
Deferred tax liabilities	186
Payables and accruals	1,131
Total liabilities	2,988

Equity
Share capital	250
Share premium	120
Retained earnings	620
Total equity	990
Total liabilities and equity	3,978

During the preparation of the final draft of the financial statements, the following issues regarding deferred tax implications were raised:

Property, Plant, and Equipment
- On November 1, 2022, Bamboo PLC acquired an asset for N120 million, which qualified for a government capital grant of N20 million. The asset has a five-year useful life with straight-line depreciation. Capital allowances are restricted by the grant amount, and tax laws allow a 25% annual capital allowance rate.
Fair Value Adjustments
- Bamboo PLC acquired Iroko Limited for N100 million, with net assets fair valued at N80 million against a tax base of N70 million. The difference relates to property, plant, and equipment that Iroko Limited intends to hold long-term.
Profit from Foreign Subsidiary
- Bamboo PLC’s foreign subsidiary, Pako Limited, has $5,000 in undistributed post-acquisition profit, which would incur a N4 million tax if remitted to Nigeria. Bamboo PLC plans to retain these earnings for Pako Limited’s reinvestment.

Required:

a. Briefly explain and calculate, where applicable, the deferred tax implications for each transaction. (15 Marks)

b. Show the deferred tax effects on the draft statement of financial position for Bamboo PLC. (5 Marks)

Note: Use a 30% tax rate for calculations.

Answer

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Tags: Corporate Reporting, Deferred Tax, Fair Value Adjustments, Foreign subsidiary, Income Tax, Property
Level: Level 3

Topic: Income Taxes (IAS 12)
Series: MAY 2024

CR – May 2024 – L3 – SB – Q2 -Consolidated Financial Statements (IFRS 10)

Memo advising on acquisition decision based on financial analysis of Betta and Gamma Ltd.

Question

Alpha PLC is an entity which has grown in recent years by acquiring established businesses. Alpha PLC is contemplating acquiring Betta Limited and Gamma Limited, both operating in the same industry as Alpha PLC. The management of Alpha PLC has indicated a total acquisition price of N12 million for each company. The following financial statements provide insight into the performance and financial position of both Betta Limited and Gamma Limited as at September 30, 2020:

Statement of Profit or Loss (for the year ended September 30, 2020):

	Betta Ltd (N’000)	Gamma Ltd (N’000)
Revenue	25,000	40,000
Cost of sales	(19,000)	(32,800)
Gross profit	6,000	7,200
Distribution costs	(800)	(1,400)
Administrative expenses	(450)	(900)
Finance costs	(250)	(900)
Profit before tax	4,500	4,000
Income tax expense	(900)	(1,000)
Profit for the year	3,600	3,000

Statement of Financial Position (as at September 30, 2020):

	Betta Ltd (N’000)	Gamma Ltd (N’000)
Non-current assets
Property, plant and equipment
– Property	–	3,000
– Owned plant and equipment	4,800	2,000
– Leased plant and equipment	–	5,300
Total non-current assets	4,800	10,300
Current assets
Cash at bank and in hand	1,600	200
Trade receivables	1,600	5,100
Inventories	1,600	3,400
Total current assets	4,800	8,700
Total assets	9,600	19,000
Equity and liabilities
Ordinary shares (N1.00 each)	1,000	2,000
Revaluation surplus on property	–	900
Retained earnings	1,600	2,700
Total equity	2,600	5,600
Non-current liabilities
Finance lease obligation	–	4,200
5% loan notes (Dec 2026)	5,000	–
10% loan notes (Dec 2026)	–	5,000
Total non-current liabilities	5,000	9,200
Current liabilities
Trade payables	1,250	2,100
Finance lease obligation	–	1,000
Tax payable	750	1,100
Total current liabilities	2,000	4,200
Total equity and liabilities	9,600	19,000

Additional Ratios Calculated:
- Gross profit margin: Betta 24.0%, Gamma 18.0%
- Profit margin (before interest and tax): Betta 19.0%, Gamma 12.3%
- Return on capital employed (ROCE): Betta 62.5%, Gamma 31.0%
- Current ratio: Betta 2.4:1, Gamma 2.1:1
- Acid test ratio: Betta 1.6:1, Gamma 1.26:1
- Net assets turnover: Betta 3.3 times, Gamma 2.5 times
- Gearing: Betta 65.8%, Gamma 64.6%

Required:

a. Write a memo to the Director of Alpha PLC advising him on how to make the investment decision considering the performance and financial position of Betta Limited and Gamma Limited for the year ended September 30, 2020. (14 Marks)

b. What other qualitative factors should the management of Alpha PLC take into consideration assuming Gamma Limited is a foreign subsidiary? (6 Marks)

Answer

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Tags: Business Acquisition, Corporate Reporting, Financial Position, Investment Decision, Ratio Analysis
Level: Level 3

Topic: Consolidated Financial Statements (IFRS 10)
Series: MAY 2024

CR – May 2024 – L3 – SB – Q4b – Leases (IFRS 16)

Memo on IFRS 16 changes and right-of-use assets treatment for Ododoeye PLC

Question

Chief Okechukwu noticed a new component in the financial statements titled “right-of-use” relating to a leased warehouse. This component did not appear in previous years’ statements and has raised questions on its treatment under IFRS 16 compared to IAS 17.

Required:

Write an internal memo addressing Chief Okechukwu’s concerns and explaining:

The key changes under IFRS 16 related to right-of-use assets.
Accounting treatments for the right-of-use assets.
Financial statement impact of right-of-use assets.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Corporate Reporting, Financial Statements, IFRS 16, Leases, NGX-Quoted Company, Right-of-Use Assets
Level: Level 3

Topic: Leases (IFRS 16)
Series: MAY 2024

CR – May 2024 – L3 – SB – Q4a – Leases (IFRS 16)

Explanation of IFRS 16 recognition and measurement for lessee lease obligations

Question

Required:

i. Explain how IFRS 16 requires lessees to recognize and measure rights and obligations under lease arrangements. (4 Marks)

ii. Discuss how a lessee should measure the rights and obligation under short-term lease arrangements.

(4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Corporate Reporting, IFRS 16, Lease Obligations, Leases, Right-of-Use, Short-Term Leases
Level: Level 3

Topic: Leases (IFRS 16)
Series: MAY 2024

CR – May 2024 – L3 – SB – Q3 – Income Taxes (IAS 12)

Deferred tax impact analysis for asset purchase, fair value adjustments, and subsidiary profit

Question

Below is the statement of financial position (extract) of Bamboo PLC, a company with several subsidiaries across various regions, including one foreign subsidiary, Pako Limited, based in the USA:

Draft Statement of Financial Position
As at October 31, 2023

Assets	N’m
Deferred tax	77
Other non-current assets	2,329
Inventories and other current assets	1,150
Cash and cash equivalents	422
Total assets	3,978

Liabilities and Equity
Other non-current liabilities	1,671
Deferred tax liabilities	186
Payables and accruals	1,131
Total liabilities	2,988

Equity
Share capital	250
Share premium	120
Retained earnings	620
Total equity	990
Total liabilities and equity	3,978

During the preparation of the final draft of the financial statements, the following issues regarding deferred tax implications were raised:

Property, Plant, and Equipment
- On November 1, 2022, Bamboo PLC acquired an asset for N120 million, which qualified for a government capital grant of N20 million. The asset has a five-year useful life with straight-line depreciation. Capital allowances are restricted by the grant amount, and tax laws allow a 25% annual capital allowance rate.
Fair Value Adjustments
- Bamboo PLC acquired Iroko Limited for N100 million, with net assets fair valued at N80 million against a tax base of N70 million. The difference relates to property, plant, and equipment that Iroko Limited intends to hold long-term.
Profit from Foreign Subsidiary
- Bamboo PLC’s foreign subsidiary, Pako Limited, has $5,000 in undistributed post-acquisition profit, which would incur a N4 million tax if remitted to Nigeria. Bamboo PLC plans to retain these earnings for Pako Limited’s reinvestment.

Required:

a. Briefly explain and calculate, where applicable, the deferred tax implications for each transaction. (15 Marks)

b. Show the deferred tax effects on the draft statement of financial position for Bamboo PLC. (5 Marks)

Note: Use a 30% tax rate for calculations.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Corporate Reporting, Deferred Tax, Fair Value Adjustments, Foreign subsidiary, Income Tax, Property
Level: Level 3

Topic: Income Taxes (IAS 12)
Series: MAY 2024

CR – May 2024 – L3 – SB – Q2 -Consolidated Financial Statements (IFRS 10)

Memo advising on acquisition decision based on financial analysis of Betta and Gamma Ltd.

Question

Statement of Profit or Loss (for the year ended September 30, 2020):

	Betta Ltd (N’000)	Gamma Ltd (N’000)
Revenue	25,000	40,000
Cost of sales	(19,000)	(32,800)
Gross profit	6,000	7,200
Distribution costs	(800)	(1,400)
Administrative expenses	(450)	(900)
Finance costs	(250)	(900)
Profit before tax	4,500	4,000
Income tax expense	(900)	(1,000)
Profit for the year	3,600	3,000

Statement of Financial Position (as at September 30, 2020):

	Betta Ltd (N’000)	Gamma Ltd (N’000)
Non-current assets
Property, plant and equipment
– Property	–	3,000
– Owned plant and equipment	4,800	2,000
– Leased plant and equipment	–	5,300
Total non-current assets	4,800	10,300
Current assets
Cash at bank and in hand	1,600	200
Trade receivables	1,600	5,100
Inventories	1,600	3,400
Total current assets	4,800	8,700
Total assets	9,600	19,000
Equity and liabilities
Ordinary shares (N1.00 each)	1,000	2,000
Revaluation surplus on property	–	900
Retained earnings	1,600	2,700
Total equity	2,600	5,600
Non-current liabilities
Finance lease obligation	–	4,200
5% loan notes (Dec 2026)	5,000	–
10% loan notes (Dec 2026)	–	5,000
Total non-current liabilities	5,000	9,200
Current liabilities
Trade payables	1,250	2,100
Finance lease obligation	–	1,000
Tax payable	750	1,100
Total current liabilities	2,000	4,200
Total equity and liabilities	9,600	19,000

Additional Ratios Calculated:
- Gross profit margin: Betta 24.0%, Gamma 18.0%
- Profit margin (before interest and tax): Betta 19.0%, Gamma 12.3%
- Return on capital employed (ROCE): Betta 62.5%, Gamma 31.0%
- Current ratio: Betta 2.4:1, Gamma 2.1:1
- Acid test ratio: Betta 1.6:1, Gamma 1.26:1
- Net assets turnover: Betta 3.3 times, Gamma 2.5 times
- Gearing: Betta 65.8%, Gamma 64.6%

Required:

b. What other qualitative factors should the management of Alpha PLC take into consideration assuming Gamma Limited is a foreign subsidiary? (6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Business Acquisition, Corporate Reporting, Financial Position, Investment Decision, Ratio Analysis
Level: Level 3

Topic: Consolidated Financial Statements (IFRS 10)
Series: MAY 2024

Question Tag: Corporate Reporting

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CR – May 2024 – L3 – SB – Q4b – Leases (IFRS 16)

Memo on IFRS 16 changes and right-of-use assets treatment for Ododoeye PLC

CR – May 2024 – L3 – SB – Q4a – Leases (IFRS 16)

Explanation of IFRS 16 recognition and measurement for lessee lease obligations

CR – May 2024 – L3 – SB – Q3 – Income Taxes (IAS 12)

Deferred tax impact analysis for asset purchase, fair value adjustments, and subsidiary profit

CR – May 2024 – L3 – SB – Q2 -Consolidated Financial Statements (IFRS 10)

Memo advising on acquisition decision based on financial analysis of Betta and Gamma Ltd.

CR – May 2024 – L3 – SB – Q4b – Leases (IFRS 16)

Memo on IFRS 16 changes and right-of-use assets treatment for Ododoeye PLC

CR – May 2024 – L3 – SB – Q4a – Leases (IFRS 16)

Explanation of IFRS 16 recognition and measurement for lessee lease obligations

CR – May 2024 – L3 – SB – Q3 – Income Taxes (IAS 12)

Deferred tax impact analysis for asset purchase, fair value adjustments, and subsidiary profit

CR – May 2024 – L3 – SB – Q2 -Consolidated Financial Statements (IFRS 10)

Memo advising on acquisition decision based on financial analysis of Betta and Gamma Ltd.

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CR – May 2024 – L3 – SB – Q4b – Leases (IFRS 16)

Memo on IFRS 16 changes and right-of-use assets treatment for Ododoeye PLC

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CR – May 2024 – L3 – SB – Q4a – Leases (IFRS 16)

Explanation of IFRS 16 recognition and measurement for lessee lease obligations

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CR – May 2024 – L3 – SB – Q3 – Income Taxes (IAS 12)

Deferred tax impact analysis for asset purchase, fair value adjustments, and subsidiary profit

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CR – May 2024 – L3 – SB – Q2 -Consolidated Financial Statements (IFRS 10)

Memo advising on acquisition decision based on financial analysis of Betta and Gamma Ltd.

You're reporting an error for "CR – May 2024 – L3 – SB – Q2 -Consolidated Financial Statements (IFRS 10)"

CR – May 2024 – L3 – SB – Q4b – Leases (IFRS 16)

Memo on IFRS 16 changes and right-of-use assets treatment for Ododoeye PLC

You're reporting an error for "CR – May 2024 – L3 – SB – Q4b – Leases (IFRS 16)"

CR – May 2024 – L3 – SB – Q4a – Leases (IFRS 16)

Explanation of IFRS 16 recognition and measurement for lessee lease obligations

You're reporting an error for "CR – May 2024 – L3 – SB – Q4a – Leases (IFRS 16)"

CR – May 2024 – L3 – SB – Q3 – Income Taxes (IAS 12)

Deferred tax impact analysis for asset purchase, fair value adjustments, and subsidiary profit

You're reporting an error for "CR – May 2024 – L3 – SB – Q3 – Income Taxes (IAS 12)"

CR – May 2024 – L3 – SB – Q2 -Consolidated Financial Statements (IFRS 10)

Memo advising on acquisition decision based on financial analysis of Betta and Gamma Ltd.

You're reporting an error for "CR – May 2024 – L3 – SB – Q2 -Consolidated Financial Statements (IFRS 10)"

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