Question Tag: Fair Value

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  • 10 Marks

CR – Nov 2016 – L3 – Q4c – Fair Value Measurement (IFRS 13)

Discuss IFRS 13’s principles in computing fair value for land with alternative uses in Abuja.

Megida Plc, a public limited liability company, has acquired hectares of land in Abuja designated for economic empowerment programs, intended for commercial use. The fair value of the land for commercial purposes is estimated at N100 million. Utilizing the land for commercial purposes would contribute to reducing unemployment and attract an annual tax credit, which is based on the lower of 15% of the fair market value or N10,000,000, at a 20% tax rate.

Megida Plc has also considered an alternative use of the land for residential purposes, a choice market participants may support. The fair value of the land for residential purposes is estimated to be N148 million, excluding certain associated costs such as:

  • Legal costs: N4,000,000
  • Project viability analysis: N6,000,000
  • Demolition of commercial structures: N2,000,000

Due to uncertainty in obtaining residential use permission from the Abuja Municipal Authority, market participants would discount the fair value by 20%.

Required: Discuss the way in which Megida Plc should compute the fair value of the Abuja land with reference to the principles of IFRS 13 Fair Value Measurement. (10 Marks)

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  • 8 Marks

CR – Nov 2016 – L3 – Q4b -Fair Value Measurement (IFRS 13)

Determine the principal market and fair value measurement for product sales in the Lagos and Accra markets.

One of the companies formally operating in Nigeria that had recently relocated its operations to Ghana, as a result of the challenging business environment in Nigeria, has access to both the Lagos and Accra markets for its product. The product sells at slightly different prices (in naira) in the two active markets. An entity enters into transactions in both markets and can access the price in those markets for the product at the measurement date as follows:

Lagos Market (N’000) Accra Market (N’000)
Sale Price 260 250
Transaction Cost (30) (10)
Transport Cost (20) (20)
Net Price Received 210 220

Required:

i. Briefly explain the principal market of an asset in accordance with IFRS 13 and determine what fair value would be used to measure the sale of the above product if the Lagos market were the principal market. (4 Marks)

ii. How is fair value determined in the absence of a principal market, and what fair value would be used to measure the sale of the above product if no principal market could be identified? (4 Marks)

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  • 2 Marks

CR – Nov 2016 – L3 – Q4a – Fair Value Measurement (IFRS 13)

Define fair value as per IFRS 13, addressing the standardized approach to valuation.

Prior to the advent of IFRS 13, many standards such as IAS 16, IAS 38, IAS 40, and IAS 39 required the use of fair value. These various requirements have been harmonized with the introduction of IFRS 13 Fair Value Measurement.

Required: Define fair value in accordance with IFRS 13. (2 Marks)

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  • 15 Marks

AAA – Nov 2018 – L3 – Q5 – Ethical Issues in Auditing

Examining professional skepticism, its necessity across audit stages, and its application in audits.

As a result of recent global financial crises, audit inspection reports in various jurisdictions have noted areas requiring professional judgment. Such areas include fair value, related party transactions, and going concern assessments, where regulators and oversight bodies believe that auditors should clearly demonstrate professional scepticism.

Required:

a. Explain the term “Professional Scepticism.” (3 Marks)

b. Identify the stages in the audit process where professional scepticism is necessary. (3 Marks)

c. Discuss three ways in which the application of professional scepticism can be demonstrated by the auditor. (9 Marks)

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  • 20 Marks

CR – Nov 2023 – L3 – SB – Q4 – Financial Instruments (IFRS 9)

Discuss IFRS 9 derecognition rules, trade receivables factoring, and FVTOCI investment strategy for Pelumi Limited.

a. Derecognition of financial instruments is the removal of a previously recognised financial asset or liability from an entity’s statement of financial position.

Required:
Discuss the rules of IFRS 9 – Financial Instruments relating to the derecognition of a financial asset. (10 Marks)

b. Royal Business Limited (RBL) held a portfolio of trade receivables with a carrying amount of N40 million as of May 31, 2022. At that date, the entity entered into a factoring agreement with Hexlinks Bank Limited (HBL), whereby it transfers the receivables in exchange for N36 million in cash. Royal Business Limited has agreed to reimburse the factor (HBL) for any shortfall between the amount collected and N36 million. Once the receivables have been collected, any amount above N36 million, less interest on this amount, will be repaid to Royal Business Limited. Royal Business Limited has derecognised the receivables and charged N4 million as a loss to profit or loss.

Required:
Explain how the rules of derecognition of the financial assets will affect the portfolio of trade receivables in Royal Business Limited’s financial statements. (3 Marks)

c. During the year 2021, Pelumi Limited invested in 800,000 shares in an NGX quoted company. The shares were purchased at N4.54 per share. The broker collected a commission of 1% on the transaction. Pelumi Limited elected to measure their shares at fair value through other comprehensive income (FVTOCI). The quoted share price as of December 31, 2021, was N4.22 to N4.26. Pelumi Limited decided to adopt a ‘sale and buy back’ strategy for the shares to realise a tax loss and therefore sold the shares at the market price on December 31, 2021, and bought the same quantity back the following day. The market price did not change on January 1, 2022. The broker collected a 1% commission on both transactions.

Required:
Explain the IFRS 9 accounting treatment of the above shares in the financial statement of Pelumi Limited for the year ended December 31, 2021.
Note: Show relevant calculations. (7 Marks)

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  • 20 Marks

CR – Nov 2022 – L3 – Q3 – Impairment of Assets (IAS 36)

Evaluate impairment of a CGU for Evo Plc, considering fair value, cost to sell, and cash flows.

Evo Plc acquired a cash-generating unit (CGU) several years ago. The directors of Evo Plc were concerned that the value of the CGU had declined because of a reduction in sales due to new competitors entering the market. At February 28, 2021, the carrying amounts of the assets in the CGU before any impairment testing were:

Asset Carrying Amount (N’m)
Goodwill 3
Property, Plant and Equipment 10
Other Assets 19
Total 32

The fair values of the property, plant, and equipment and the other assets at February 28, 2021, were N10 million and N17 million, respectively, and their costs to sell were N100,000 and N300,000, respectively. The CGU’s cash flow forecasts for the next five years are as follows:

Date (Year Ended) Pre-tax Cash Flow (N’m) Post-tax Cash Flow (N’m)
28 February 2022 8 5
28 February 2023 7 5
28 February 2024 5 3
28 February 2025 3 1.5
28 February 2026 13 10

The pre-tax discount rate for the CGU is 8%, and the post-tax discount rate is 6%. Evo Plc has no plan to expand the capacity of the CGU and believes that a reorganisation would bring cost savings, but as yet, no plan has been approved. The directors of Evo Plc need advice as to whether the CGU’s value is impaired.

The following extract from a table of present value factors has been provided:

Year Discount Rate 6% Discount Rate 8%
1 0.9434 0.9259
2 0.8900 0.8573
3 0.8396 0.7938
4 0.7921 0.7350
5 0.7473 0.6806

Required:
a. How is impairment loss determined and accounted for by a business entity? (6 Marks)
b. Advise the directors of Evo Plc on:
i. Whether the CGU’s value is impaired. (7 Marks)
ii. How the transactions above should be treated in its financial statements in accordance with the provisions of IAS 36 – Impairment of Assets. (7 Marks)
(Total 20 Marks)

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  • 9 Marks

FR – May 2016 – L2 – Q7b – Financial Instruments (IAS 32, IFRS 9)

Calculate amortised cost and fair value of a financial liability issued by Anifowose Plc.

Anifowose Plc issued a debt instrument at its fair value of N100 million on January 1, 2013. The debt instrument is to mature in 2017. It has a principal amount of N125 million and carries a fixed interest rate of 4.72%, which is paid annually. The effective interest rate is 10%, and on December 31, 2015, it had a fair value of 105 for every N10 nominal value. The company makes up its accounts to December 31 every year.

Required:

i. Show your computation schedule for the amortised cost of the financial liability up to December 31, 2015, on the assumption that the financial liability is valued at amortised cost.

ii. What is the value of the financial liability as of December 31, 2015, if the fair value option is adopted by Anifowose Plc?

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  • 6 Marks

FR – May 2016 – L2 – Q7a – Financial Instruments (IAS 32, IFRS 9)

Explain fair value and amortised cost measurement of financial assets under IAS 39 with examples of applicable asset classes.

After initial recognition in the Financial Statements, Financial Assets are measured either at fair value or amortised cost according to the provisions of IAS 39 – Financial Instruments: Recognition & Measurement.

Required:

Briefly explain how fair value and amortised costs of financial assets are determined and give one example each of the class of financial assets that can be measured using the methods.

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  • 5 Marks

FR – May 2016 – L2 – Q2a – Business Combinations (IFRS 3)

Calculate goodwill for a parent company's acquisition using both proportionate share and fair value methods.

A Parent Company acquired 60% equity interest in a subsidiary company for N440 million. The market value of the net assets of the subsidiary on the acquisition date was N400 million. The parent company estimates that the full 100% interest in the subsidiary company would have cost N640 million.

Required:

Calculate the goodwill at acquisition date where non-controlling interest is measured:

i. As a proportionate share of the net assets of the subsidiary company.
ii. At fair value (the full goodwill method).

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  • 4 Marks

FR – Nov 2022 – L2 – Q4c – IFRS 9 Financial Instrument Classes

Describe two classifications of financial instruments under IFRS 9, including criteria for measurement.

Explain TWO classes of financial instruments in accordance with IFRS 9. (4 Marks)

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  • 10 Marks

CR – Nov 2016 – L3 – Q4c – Fair Value Measurement (IFRS 13)

Discuss IFRS 13’s principles in computing fair value for land with alternative uses in Abuja.

Megida Plc, a public limited liability company, has acquired hectares of land in Abuja designated for economic empowerment programs, intended for commercial use. The fair value of the land for commercial purposes is estimated at N100 million. Utilizing the land for commercial purposes would contribute to reducing unemployment and attract an annual tax credit, which is based on the lower of 15% of the fair market value or N10,000,000, at a 20% tax rate.

Megida Plc has also considered an alternative use of the land for residential purposes, a choice market participants may support. The fair value of the land for residential purposes is estimated to be N148 million, excluding certain associated costs such as:

  • Legal costs: N4,000,000
  • Project viability analysis: N6,000,000
  • Demolition of commercial structures: N2,000,000

Due to uncertainty in obtaining residential use permission from the Abuja Municipal Authority, market participants would discount the fair value by 20%.

Required: Discuss the way in which Megida Plc should compute the fair value of the Abuja land with reference to the principles of IFRS 13 Fair Value Measurement. (10 Marks)

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  • 8 Marks

CR – Nov 2016 – L3 – Q4b -Fair Value Measurement (IFRS 13)

Determine the principal market and fair value measurement for product sales in the Lagos and Accra markets.

One of the companies formally operating in Nigeria that had recently relocated its operations to Ghana, as a result of the challenging business environment in Nigeria, has access to both the Lagos and Accra markets for its product. The product sells at slightly different prices (in naira) in the two active markets. An entity enters into transactions in both markets and can access the price in those markets for the product at the measurement date as follows:

Lagos Market (N’000) Accra Market (N’000)
Sale Price 260 250
Transaction Cost (30) (10)
Transport Cost (20) (20)
Net Price Received 210 220

Required:

i. Briefly explain the principal market of an asset in accordance with IFRS 13 and determine what fair value would be used to measure the sale of the above product if the Lagos market were the principal market. (4 Marks)

ii. How is fair value determined in the absence of a principal market, and what fair value would be used to measure the sale of the above product if no principal market could be identified? (4 Marks)

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  • 2 Marks

CR – Nov 2016 – L3 – Q4a – Fair Value Measurement (IFRS 13)

Define fair value as per IFRS 13, addressing the standardized approach to valuation.

Prior to the advent of IFRS 13, many standards such as IAS 16, IAS 38, IAS 40, and IAS 39 required the use of fair value. These various requirements have been harmonized with the introduction of IFRS 13 Fair Value Measurement.

Required: Define fair value in accordance with IFRS 13. (2 Marks)

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  • 15 Marks

AAA – Nov 2018 – L3 – Q5 – Ethical Issues in Auditing

Examining professional skepticism, its necessity across audit stages, and its application in audits.

As a result of recent global financial crises, audit inspection reports in various jurisdictions have noted areas requiring professional judgment. Such areas include fair value, related party transactions, and going concern assessments, where regulators and oversight bodies believe that auditors should clearly demonstrate professional scepticism.

Required:

a. Explain the term “Professional Scepticism.” (3 Marks)

b. Identify the stages in the audit process where professional scepticism is necessary. (3 Marks)

c. Discuss three ways in which the application of professional scepticism can be demonstrated by the auditor. (9 Marks)

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  • 20 Marks

CR – Nov 2023 – L3 – SB – Q4 – Financial Instruments (IFRS 9)

Discuss IFRS 9 derecognition rules, trade receivables factoring, and FVTOCI investment strategy for Pelumi Limited.

a. Derecognition of financial instruments is the removal of a previously recognised financial asset or liability from an entity’s statement of financial position.

Required:
Discuss the rules of IFRS 9 – Financial Instruments relating to the derecognition of a financial asset. (10 Marks)

b. Royal Business Limited (RBL) held a portfolio of trade receivables with a carrying amount of N40 million as of May 31, 2022. At that date, the entity entered into a factoring agreement with Hexlinks Bank Limited (HBL), whereby it transfers the receivables in exchange for N36 million in cash. Royal Business Limited has agreed to reimburse the factor (HBL) for any shortfall between the amount collected and N36 million. Once the receivables have been collected, any amount above N36 million, less interest on this amount, will be repaid to Royal Business Limited. Royal Business Limited has derecognised the receivables and charged N4 million as a loss to profit or loss.

Required:
Explain how the rules of derecognition of the financial assets will affect the portfolio of trade receivables in Royal Business Limited’s financial statements. (3 Marks)

c. During the year 2021, Pelumi Limited invested in 800,000 shares in an NGX quoted company. The shares were purchased at N4.54 per share. The broker collected a commission of 1% on the transaction. Pelumi Limited elected to measure their shares at fair value through other comprehensive income (FVTOCI). The quoted share price as of December 31, 2021, was N4.22 to N4.26. Pelumi Limited decided to adopt a ‘sale and buy back’ strategy for the shares to realise a tax loss and therefore sold the shares at the market price on December 31, 2021, and bought the same quantity back the following day. The market price did not change on January 1, 2022. The broker collected a 1% commission on both transactions.

Required:
Explain the IFRS 9 accounting treatment of the above shares in the financial statement of Pelumi Limited for the year ended December 31, 2021.
Note: Show relevant calculations. (7 Marks)

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  • 20 Marks

CR – Nov 2022 – L3 – Q3 – Impairment of Assets (IAS 36)

Evaluate impairment of a CGU for Evo Plc, considering fair value, cost to sell, and cash flows.

Evo Plc acquired a cash-generating unit (CGU) several years ago. The directors of Evo Plc were concerned that the value of the CGU had declined because of a reduction in sales due to new competitors entering the market. At February 28, 2021, the carrying amounts of the assets in the CGU before any impairment testing were:

Asset Carrying Amount (N’m)
Goodwill 3
Property, Plant and Equipment 10
Other Assets 19
Total 32

The fair values of the property, plant, and equipment and the other assets at February 28, 2021, were N10 million and N17 million, respectively, and their costs to sell were N100,000 and N300,000, respectively. The CGU’s cash flow forecasts for the next five years are as follows:

Date (Year Ended) Pre-tax Cash Flow (N’m) Post-tax Cash Flow (N’m)
28 February 2022 8 5
28 February 2023 7 5
28 February 2024 5 3
28 February 2025 3 1.5
28 February 2026 13 10

The pre-tax discount rate for the CGU is 8%, and the post-tax discount rate is 6%. Evo Plc has no plan to expand the capacity of the CGU and believes that a reorganisation would bring cost savings, but as yet, no plan has been approved. The directors of Evo Plc need advice as to whether the CGU’s value is impaired.

The following extract from a table of present value factors has been provided:

Year Discount Rate 6% Discount Rate 8%
1 0.9434 0.9259
2 0.8900 0.8573
3 0.8396 0.7938
4 0.7921 0.7350
5 0.7473 0.6806

Required:
a. How is impairment loss determined and accounted for by a business entity? (6 Marks)
b. Advise the directors of Evo Plc on:
i. Whether the CGU’s value is impaired. (7 Marks)
ii. How the transactions above should be treated in its financial statements in accordance with the provisions of IAS 36 – Impairment of Assets. (7 Marks)
(Total 20 Marks)

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  • 9 Marks

FR – May 2016 – L2 – Q7b – Financial Instruments (IAS 32, IFRS 9)

Calculate amortised cost and fair value of a financial liability issued by Anifowose Plc.

Anifowose Plc issued a debt instrument at its fair value of N100 million on January 1, 2013. The debt instrument is to mature in 2017. It has a principal amount of N125 million and carries a fixed interest rate of 4.72%, which is paid annually. The effective interest rate is 10%, and on December 31, 2015, it had a fair value of 105 for every N10 nominal value. The company makes up its accounts to December 31 every year.

Required:

i. Show your computation schedule for the amortised cost of the financial liability up to December 31, 2015, on the assumption that the financial liability is valued at amortised cost.

ii. What is the value of the financial liability as of December 31, 2015, if the fair value option is adopted by Anifowose Plc?

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  • 6 Marks

FR – May 2016 – L2 – Q7a – Financial Instruments (IAS 32, IFRS 9)

Explain fair value and amortised cost measurement of financial assets under IAS 39 with examples of applicable asset classes.

After initial recognition in the Financial Statements, Financial Assets are measured either at fair value or amortised cost according to the provisions of IAS 39 – Financial Instruments: Recognition & Measurement.

Required:

Briefly explain how fair value and amortised costs of financial assets are determined and give one example each of the class of financial assets that can be measured using the methods.

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  • 5 Marks

FR – May 2016 – L2 – Q2a – Business Combinations (IFRS 3)

Calculate goodwill for a parent company's acquisition using both proportionate share and fair value methods.

A Parent Company acquired 60% equity interest in a subsidiary company for N440 million. The market value of the net assets of the subsidiary on the acquisition date was N400 million. The parent company estimates that the full 100% interest in the subsidiary company would have cost N640 million.

Required:

Calculate the goodwill at acquisition date where non-controlling interest is measured:

i. As a proportionate share of the net assets of the subsidiary company.
ii. At fair value (the full goodwill method).

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  • 4 Marks

FR – Nov 2022 – L2 – Q4c – IFRS 9 Financial Instrument Classes

Describe two classifications of financial instruments under IFRS 9, including criteria for measurement.

Explain TWO classes of financial instruments in accordance with IFRS 9. (4 Marks)

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