Question Tag: Currency Translation

Cabalar Nig. PLC, a company located in Ajao Industrial Estate, Lagos, specializes in the production of Adire T-Shirts. The company has a number of subsidiaries located in the South-South and South-West regions of the country and overseas.

On October 1, 2022, Cabalar PLC acquired 100% of the ordinary shares of Mansa-Konko Limited, an Adire T-Shirts distribution company based in the Gambia, West Africa. The official national currency of The Gambia is known as Gambia Dalasi (GMD).

The draft statement of financial position of Mansa-Konko Limited prepared under Gambia GAAP as at September 30, 2023, is as follows:

Additional Information:
The following are key transactions of Mansa-Konko Limited under Gambia GAAP. There is no deferred tax under Gambia GAAP:

1. Equipment:
   • On January 1, 2023, Mansa-Konko Limited acquired some specialist equipment from the United States of America (USA) for $150 million. Payment for the equipment was made on March 31, 2023.
   • In accordance with local Gambia GAAP, the cost of the equipment was recognized on January 1, 2023, at GMD 50 million, using the opening rate of exchange at October 1, 2022.
   • Full year’s depreciation of GMD 5 million was charged to cost of sales as Mansa-Konko Limited depreciates the equipment over a ten-year life, with no residual value. The equipment was included in the statement of financial position at GMD 45 million.
   • A sum of GMD 12.5 million has been debited to retained earnings, representing the difference between the amount paid to the supplier (GMD 62.5 million on March 31, 2023) and the cost recorded in non-current assets (GMD 50 million).
2. Impairments:
   • Mansa-Konko Limited bought a warehouse on October 1, 2016, for GMD 180 million, depreciated over 20 years with no residual value. On October 1, 2022, due to a rise in property prices, the warehouse was revalued to GMD 210 million, with a revaluation surplus of GMD 84 million recognized. No transfers were made between the revaluation surplus and retained earnings under Gambia GAAP in respect of depreciation.
   • Recently, there was a slump in the local property market, prompting an impairment review as of September 30, 2023. The warehouse was assessed as worth GMD 60 million, leading to a charge of GMD 90 million to profit or loss to reflect the difference between the carrying amount of GMD 150 million and the new value of GMD 60 million.
3. Financial Instruments:
   • On April 1, 2023, Mansa-Konko Limited bought five million shares in a local quoted company at GMD 7.7 per share. This represents a 3% shareholding. The company intends to hold the shares until December 31, 2023, for profit. The shares have been recognized at cost in the statement of financial position in accordance with Gambia GAAP. The market value at September 30, 2023, was GMD 12.5 per share.
   • Under Gambia tax rules, income tax is charged at 20% on accounting profit recognized on the sales of the investment.
4. Provisions:
   • On October 1, 2022, Mansa-Konko Limited signed an agreement with the Gambian government for exclusive rights for the next 20 years to supply Adire T-shirts for Gambia’s national traditional festival (GNTF).
   • The cost of acquiring these rights was GMD 42.5 million, recognized as intangible assets in Mansa-Konko Limited’s statement of financial position. Under the terms of the agreement, Mansa-Konko Limited must replace all damaged T-shirts at the end of the 20-year period.
   • There is a 40% probability that the replacement cost of damaged T-shirts would be GMD 75 million and a 60% probability of GMD 50 million.
   • For prudency, a provision of GMD 75 million was made in the financial statements and debited to operating costs.
   • Mansa-Konko Limited has a pre-tax discount rate of 8%. The replacement cost will be allowed for tax purposes when paid. The relevant income tax rate is expected to remain at 20%.
5. Exchange Rates:
   

   Date	USD to GMD	GMD to NGN
   October 1, 2022	$3.00	GMD 4.2 = N1
   January 1, 2023	$2.50
   March 31, 2023	$2.40
   September 30, 2023	$2.00	GMD 5.0 = N1

   Note: In Gambia, the tax treatments of property, plant, and equipment, as well as exchange differences, are similar to IFRS treatments.

Required:
(a) As the financial controller of Cabalar Nig. PLC, draft a report addressed to the finance director of your company explaining any adjustments needed to ensure that the subsidiary company’s (Mansa-Konko Limited’s) financial statements comply with IFRS requirements. (18 Marks)

(b) Prepare a revised statement of financial position for Mansa-Konko Limited that will be suitable for consolidation with the parent’s (Cabalar PLC’s) financial statements as of September 30, 2023, in accordance with IFRS. (12 Marks)

Note: Show all workings.
(Total: 30 Marks)