Question Tag: Financial Liabilities

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  • 15 Marks

FR – May 2024 – L2 – SA – Q5 – Financial Instruments

Explains financial assets and liabilities, and categorizes financial assets under IFRS 9.

a. IFRS 9 – Financial Instruments defines a financial instrument as a contract that gives rise to both a financial asset in one entity and a financial liability or equity instrument in another entity.

Required:
i. Explain the terms “financial asset” and “financial liability.” (3 Marks)
ii. Describe with examples THREE categories of financial assets in accordance with IFRS 9. (7 Marks)

b. Olisa Nigeria PLC issued a stepped bond on January 1, 2018 with an issue value of N10million. The bond pays a coupon rate of 5% interest for the first two years and 7% interest for the next two years. The interest on the bond is paid annually on the anniversary of the bond issue. The bond has an effective interest rate of 5.94234% and is expected to be redeemed at par after four years.

Required:
Calculate the amortised cost of the bond at the end of each year over its life.
(5 Marks)

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  • 7 Marks

FR – Nov 2021 – L2 – Q2a – Financial Reporting Standards and Their Applications

This question deals with the application of IFRS 9 in financial instruments and the recognition of revenue under IFRS 15.

Manu Ltd (Manu) is a private company that prepares financial statements in compliance with International Financial Reporting Standards (IFRSs). Financial statements for the year ended 31 December 2020 are being prepared, and the following transactions occurred.

i) On 1 September 2020, Manu purchased 100,000 ordinary shares on the stock exchange for speculative reasons (making a profit) at a price of GH¢1.20 per share and paid a transaction cost of GH¢1,250. On 31 December 2020, the shares were now trading at GH¢1.32 per share on the stock exchange, and Manu received a dividend of GH¢15,000 on the shares.
(3 marks)

ii) Manu issued GH¢360,000 of redeemable 2% Preference shares at a discount of 14% on 1 January 2020. Issue costs were GH¢5,265. The shares will be redeemed on 31 December 2022 at par. Interest is paid annually in arrears, and the effective interest rate is 8%.
(4 marks)

Required:
In accordance with IFRS 9: Financial Instruments, explain how to account for the above transactions in the statement of profit or loss and statement of financial position for the year ended 31 December 2020.

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  • 3 Marks

FR – May 2019 – L2 – Q2e – Financial Reporting Standards and Their Applications

Identification of key principles behind the accounting treatment for leases under IFRS 16.

IFRS 16: Leases was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. However, early adoption is permitted, provided IFRS 15: Revenue from Contracts with Customers is implemented also. This standard applies to all leases, except those shorter than 12 months and small assets. It also brings additional disclosure requirements for both lessees and lessors. The IFRS brings significant changes to those leases formerly classified as operating leases under IAS 17: Leases, the previous standard.

Required:

Identify THREE (3) key principles behind the accounting treatment for leases as required by IFRS 16.

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  • 10 Marks

CR – April 2022 – L3 – Q3a – Financial instruments: Recognition and measurement

Account for finance lease and financial liability transactions according to relevant IFRS.

a) Zeus Ltd manufactures equipment for lease or sale. The following transactions relate to Zeus Ltd for the year ended 31 December 2020:

i) On 31 December 2020, Zeus Ltd leased out equipment under a 10-year finance lease. The selling price of the leased item was GH¢50 million, and the net present value of the minimum lease payments was GH¢47 million. The carrying value of the leased asset was GH¢40 million, and the present value of the residual value of the product when it reverts to Zeus Ltd at the end of the lease term is GH¢2.8 million. Zeus Ltd has shown sales of GH¢50 million and cost of sales of GH¢40 million in its financial statements.
(5 marks)

ii) On 1 January 2020, Zeus Ltd raised finance by issuing a two-year deeply discounted 2% bond with a nominal value of GH¢20,000 that was issued at a discount of 5% and is redeemable at a premium of GH¢2,150. There were no issue costs. The bond has an effective interest rate of 10%.
(5 marks)

Required:
Recommend to the directors of Zeus Ltd how the above transactions should be accounted for in the financial statements for the year ended 31 December 2020 in accordance with relevant International Financial Reporting Standards.

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  • 5 Marks

CR – Aug 2022 – L3 – Q3b – IFRS 15: Revenue from contracts with customers

This question focuses on the recognition of revenue from advance payments in line with IFRS 15 and explains the treatment for advance payment financing.

Tieku Technologies (Tieku) imports customized equipment from Europe and China for onward delivery in Ghana. It is the policy of Tieku that customers make payment for their supplies one year before delivery. Tieku does not offer discounts for advance payments. The advance payment allows Tieku to manage its import levels and to communicate delivery of supply to its customers. On 1 April 2021, Tieku received GH¢5 million from a customer to supply a customized equipment, and on 31 March 2022, Tieku delivered the equipment. Tieku’s incremental borrowing rate on 1 April 2021 was 10%.

Required:

In line with IFRS 15: Revenue from Contracts with Customers, provide an explanation (with calculations and entries, if necessary) as to how the above scenario would be treated by Tieku during the year ended 31 March 2022. (5 marks)

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  • 15 Marks

FR – May 2024 – L2 – SA – Q5 – Financial Instruments

Explains financial assets and liabilities, and categorizes financial assets under IFRS 9.

a. IFRS 9 – Financial Instruments defines a financial instrument as a contract that gives rise to both a financial asset in one entity and a financial liability or equity instrument in another entity.

Required:
i. Explain the terms “financial asset” and “financial liability.” (3 Marks)
ii. Describe with examples THREE categories of financial assets in accordance with IFRS 9. (7 Marks)

b. Olisa Nigeria PLC issued a stepped bond on January 1, 2018 with an issue value of N10million. The bond pays a coupon rate of 5% interest for the first two years and 7% interest for the next two years. The interest on the bond is paid annually on the anniversary of the bond issue. The bond has an effective interest rate of 5.94234% and is expected to be redeemed at par after four years.

Required:
Calculate the amortised cost of the bond at the end of each year over its life.
(5 Marks)

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  • 7 Marks

FR – Nov 2021 – L2 – Q2a – Financial Reporting Standards and Their Applications

This question deals with the application of IFRS 9 in financial instruments and the recognition of revenue under IFRS 15.

Manu Ltd (Manu) is a private company that prepares financial statements in compliance with International Financial Reporting Standards (IFRSs). Financial statements for the year ended 31 December 2020 are being prepared, and the following transactions occurred.

i) On 1 September 2020, Manu purchased 100,000 ordinary shares on the stock exchange for speculative reasons (making a profit) at a price of GH¢1.20 per share and paid a transaction cost of GH¢1,250. On 31 December 2020, the shares were now trading at GH¢1.32 per share on the stock exchange, and Manu received a dividend of GH¢15,000 on the shares.
(3 marks)

ii) Manu issued GH¢360,000 of redeemable 2% Preference shares at a discount of 14% on 1 January 2020. Issue costs were GH¢5,265. The shares will be redeemed on 31 December 2022 at par. Interest is paid annually in arrears, and the effective interest rate is 8%.
(4 marks)

Required:
In accordance with IFRS 9: Financial Instruments, explain how to account for the above transactions in the statement of profit or loss and statement of financial position for the year ended 31 December 2020.

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  • 3 Marks

FR – May 2019 – L2 – Q2e – Financial Reporting Standards and Their Applications

Identification of key principles behind the accounting treatment for leases under IFRS 16.

IFRS 16: Leases was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. However, early adoption is permitted, provided IFRS 15: Revenue from Contracts with Customers is implemented also. This standard applies to all leases, except those shorter than 12 months and small assets. It also brings additional disclosure requirements for both lessees and lessors. The IFRS brings significant changes to those leases formerly classified as operating leases under IAS 17: Leases, the previous standard.

Required:

Identify THREE (3) key principles behind the accounting treatment for leases as required by IFRS 16.

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  • 10 Marks

CR – April 2022 – L3 – Q3a – Financial instruments: Recognition and measurement

Account for finance lease and financial liability transactions according to relevant IFRS.

a) Zeus Ltd manufactures equipment for lease or sale. The following transactions relate to Zeus Ltd for the year ended 31 December 2020:

i) On 31 December 2020, Zeus Ltd leased out equipment under a 10-year finance lease. The selling price of the leased item was GH¢50 million, and the net present value of the minimum lease payments was GH¢47 million. The carrying value of the leased asset was GH¢40 million, and the present value of the residual value of the product when it reverts to Zeus Ltd at the end of the lease term is GH¢2.8 million. Zeus Ltd has shown sales of GH¢50 million and cost of sales of GH¢40 million in its financial statements.
(5 marks)

ii) On 1 January 2020, Zeus Ltd raised finance by issuing a two-year deeply discounted 2% bond with a nominal value of GH¢20,000 that was issued at a discount of 5% and is redeemable at a premium of GH¢2,150. There were no issue costs. The bond has an effective interest rate of 10%.
(5 marks)

Required:
Recommend to the directors of Zeus Ltd how the above transactions should be accounted for in the financial statements for the year ended 31 December 2020 in accordance with relevant International Financial Reporting Standards.

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  • 5 Marks

CR – Aug 2022 – L3 – Q3b – IFRS 15: Revenue from contracts with customers

This question focuses on the recognition of revenue from advance payments in line with IFRS 15 and explains the treatment for advance payment financing.

Tieku Technologies (Tieku) imports customized equipment from Europe and China for onward delivery in Ghana. It is the policy of Tieku that customers make payment for their supplies one year before delivery. Tieku does not offer discounts for advance payments. The advance payment allows Tieku to manage its import levels and to communicate delivery of supply to its customers. On 1 April 2021, Tieku received GH¢5 million from a customer to supply a customized equipment, and on 31 March 2022, Tieku delivered the equipment. Tieku’s incremental borrowing rate on 1 April 2021 was 10%.

Required:

In line with IFRS 15: Revenue from Contracts with Customers, provide an explanation (with calculations and entries, if necessary) as to how the above scenario would be treated by Tieku during the year ended 31 March 2022. (5 marks)

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