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  • 30 Marks

CR – May 2017 – L3 – Q1 – Foreign Currency Transactions and Translation (IAS 21)

Assess functional currency and prepare a consolidated statement of financial position under IFRS.

Rapuya Plc. is a Nigerian public limited company operating in the mining industry. The draft Statements of Financial Position of Rapuya Plc., and its two subsidiaries, Puta Limited and Soma Limited as at April 30, 2017, are as follows:

The following information is relevant to the preparation of the group financial statements:

(i) On May 1, 2016, Rapuya acquired 52% of the ordinary shares of Soma Limited, a foreign subsidiary. The retained earnings of Soma Limited on this date were 220 million defas. The fair value of the identifiable net assets of Soma Limited on May 1, 2016, was 990 million defas. The excess of the fair value over the net assets of Soma Limited is due to an increase in the value of non-depreciable land.

Rapuya Plc. wishes to use the ‘full goodwill’ method to consolidate the financial statements of Soma. The fair value of the non-controlling interest in Soma Limited at May 1, 2016, was 500 million defas.

Soma Limited is located in Tome, a small country in West Africa, and operates a mine. The income of Soma Limited is denominated and settled in defas. The output of the mine is routinely traded in defas, and its price is determined initially by local supply and demand. Soma Limited pays 30% of its costs and expenses in naira, with the remainder being incurred locally and settled in defas. Soma’s management has a considerable degree of authority and autonomy in carrying out the operations of Soma Limited and is not dependent upon group companies for financial support. The Finance Controller is not certain from the above whether the defas or naira should be taken as the functional currency of Soma Limited.

There have been no issues of ordinary shares and no impairment of goodwill since acquisition.

(ii) Also on May 1, 2016, Rapuya Plc. had acquired 70% of the equity interests of Puta Limited. The purchase consideration amounted to N226 million, which Rapuya Plc. paid through bank transfer in compliance with the cashless policy of the Federal Government of Nigeria. The fair value of the identifiable net assets recognized by Puta Limited was N240 million, excluding the patent below. The identifiable net assets of Puta Limited at May 1, 2016, included a brand with a fair value of N8 million. This had not been recognized in the financial statements of Puta Limited. The brand is estimated to have a useful life of four years. The retained earnings of Puta Limited were N98 million, and other components of equity were N6 million at the date of acquisition. The remaining excess of the fair value of the net assets is due to an increase in the value of non-depreciable land.

Rapuya Plc. wishes to use the ‘full goodwill’ method in consolidating the financial statements of this subsidiary. The fair value of the non-controlling interest in Puta Limited was N92 million on May 1, 2016. There have been no issues of ordinary shares since acquisition, and goodwill on acquisition is not impaired.

(iii) The following exchange rates are relevant for the preparation of the group financial statements:

Defas to Naira Exchange Rate
May 1, 2016 3:1
April 30, 2017 2.5:1
Average for year to April 30, 2017 2.9:1

Required:

(a) Advise the Finance Controller on what currency should be taken as the functional currency of Soma Limited, applying the principles set out in IAS 21 – The Effects of Changes in Foreign Exchange Rates. (5 Marks)

(b) Prepare a consolidated statement of financial position of the Rapuya Group as at April 30, 2017, in accordance with International Financial Reporting Standards (IFRS). (Show all workings) (25 Marks)

(Total: 30 Marks)

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  • 20 Marks

AT – May 2024 – L3 – SB – Q3 – Double Taxation Reliefs and Credits

Calculation of double taxation relief and tax liabilities for Lagode Nigeria, including implications of double taxation treaties.

Lagode Nigeria Limited, based in Lagos, Nigeria, commenced operations as a manufacturer of indigenous fabrics in 2013. Products are sold to wholesalers and retailers in Nigeria and to Africans in diaspora, particularly during annual holiday periods. A market survey in 2018 revealed a lack of local Nigerian fabric manufacturers in North America, prompting the company to establish Kuramo Incorp. in Ottawa, Canada, which began operations in January 2020.

The operating results for both locations for the year ended December 31, 2022, are as follows:

Description Lagos, Nigeria (N’000) Ottawa, Canada (N’000)
Gross turnover 180,200 330,800
Less: Expenses
– Cost of materials 72,100 162,320
– Wages and salaries 18,050 42,120
– Finance costs 1,400 3,150
– Miscellaneous 4,600 5,270
– Depreciation 5,760 8,750
– Share of head office expenses 25,600 16,040
– Foreign tax paid – 18,900
Total expenses 127,510 256,550
Net profit 52,690 74,250

Additional Information:

  1. Ottawa branch is a wholly owned Nigerian company.
  2. Miscellaneous expenses are allowable for tax purposes.
  3. Capital allowances agreed with Nigerian tax authorities:
    Location Capital Allowance (N’000)
    Lagos operations 6,800
    Ottawa operations 9,900
  4. The exchange rate for Canadian operations is fair.
  5. No double taxation agreement exists between Nigeria and Canada.

Required:
In accordance with the provisions of the Companies Income Tax Act Cap. C21 LFN 2004 (as amended), you are to: a. Compute the double taxation relief (if any) available to the Nigerian company

(9 Marks)
b. Advise on the tax liabilities of the Nigerian company for the relevant assessment year (9 Marks)
c. Comment on the implications of double taxation agreements on withholding tax deductions by a company resident in a country:
(i) With no double taxation agreement with Nigeria

(1 Mark)
(ii) With double taxation treaty with Nigeria (1 Mark)
Total: 20 Marks

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  • 30 Marks

FM – Nov 2022 – L3 – Q1 – Mergers and Acquisitions

Evaluating the acquisition of Company K3 in Togo for business expansion purposes.

The following case relates to a business expansion decision for Abayomi Plc (AP):

Abayomi Plc (AP) is a major electrical company in Nigeria. The directors have recently identified Togo as a priority location for business expansion. Togo uses currency T$. Assume today is 30 August 2021.

Company K3, located in Togo, has been identified as a potential acquisition target. AP already manages two business units in Togo, named K1 and K2, and these have shown strong performance under AP’s ownership.

K3 is particularly attractive to AP because it has its own warehouse, distribution, and logistics network, all of which could be used by K1 and K2, if the acquisition goes ahead. Currently, K1 and K2 send goods to customers from AP warehouses located in Ghana. This involves considerable cost and delay in delivery.

K3 is a private company, and 100% of its shares are owned by the family that founded it. Many shareholders are keen to realize their investment by selling the company to AP.

Both companies are working towards an effective date for the sale of K3 to AP on 1 January 2022.

Financial Data for K3 for 2020:

The statement of financial position of K3 as at 31 December 2020 showed the following balances:

T$ Million
Long term borrowings 375
Share capital (T$1 ordinary shares) 90
Total liabilities 465
Net assets 180

Additional Data:

AP aims to maintain the same capital structure as AP. That is, gearing (debt/debt+equity) would be 25% based on market values. AP would guarantee K3’s new debt, which can be assumed to have the same risk profile as AP’s debt.

A proxy company has been identified which is also located in Togo and has a similar business model to K3.

Proxy company data:

  • P/E ratio of 12.
  • Equity beta of 1.7 and debt beta of 0.4.
  • Gearing (debt/debt+equity) based on market values of 35%.

Togo has a risk-free rate of 5% and a market risk premium of 4%.

Financial Data for AP:

Latest data available for AP shows:

  • P/E ratio of 14.
  • Equity beta of 1.5 and debt beta of 0.3.
  • Gearing (debt/debt+equity) based on market values of 25%.
  • AP pays 6.2% interest on its long-term borrowings.
  • Tax rate in Nigeria is 30%.

The spot rate for T$ against Naira today is T$7/₦ (i.e., ₦1 = T$7.00) and is not expected to change in the foreseeable future.

Assume that Nigeria has the same risk-free rate and market risk premium as Togo.

Required:
Assume you are the Finance Director of AP.

a. Advise on:
i. The types of synergistic benefit that might arise from the acquisition of K3. (8 Marks)
ii. Possible reasons why both one-off and ongoing synergistic benefits might not be achieved to the extent expected. (4 Marks)

b. Calculate:
i. A Weighted Average Cost of Capital (WACC) for use in valuing K3 based on the proxy company’s business and country risk and AP’s capital structure. (6 Marks)
ii. A range of values for the equity of K3 in T$ as at 1 January 2022 using the following methods:

  • Asset basis. (2 Marks)
  • P/E (including bootstrapping). (5 Marks)
  • DCF (with and without synergistic benefits). (5 Marks)

(Total 30 Marks)

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  • 7 Marks

CR – Mar 2024 – L3 – Q3a – Foreign currency

This question involves determining the functional currency of Mongu Plc and discussing the factors influencing this decision.

Mongu Plc (Mongu) is a diversified entity listed on the Ghana Stock Exchange. Its financial year ends on 30 September. Mongu Plc operates through its local and foreign subsidiaries. Most of Mongu’s revenues come from its foreign operations, but Mongu incurs a significant portion of its costs locally in Ghana. The local currency is the Ghana Cedi (GH¢), but Mongu’s subsidiaries operate in regions that use other currencies.

Required:
In accordance with IAS 21: The Effects of Changes in Foreign Exchange Rates, identify the functional currency of Mongu Plc, considering the relevant factors, and explain how exchange differences should be accounted for.

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  • 30 Marks

CR – May 2017 – L3 – Q1 – Foreign Currency Transactions and Translation (IAS 21)

Assess functional currency and prepare a consolidated statement of financial position under IFRS.

Rapuya Plc. is a Nigerian public limited company operating in the mining industry. The draft Statements of Financial Position of Rapuya Plc., and its two subsidiaries, Puta Limited and Soma Limited as at April 30, 2017, are as follows:

The following information is relevant to the preparation of the group financial statements:

(i) On May 1, 2016, Rapuya acquired 52% of the ordinary shares of Soma Limited, a foreign subsidiary. The retained earnings of Soma Limited on this date were 220 million defas. The fair value of the identifiable net assets of Soma Limited on May 1, 2016, was 990 million defas. The excess of the fair value over the net assets of Soma Limited is due to an increase in the value of non-depreciable land.

Rapuya Plc. wishes to use the ‘full goodwill’ method to consolidate the financial statements of Soma. The fair value of the non-controlling interest in Soma Limited at May 1, 2016, was 500 million defas.

Soma Limited is located in Tome, a small country in West Africa, and operates a mine. The income of Soma Limited is denominated and settled in defas. The output of the mine is routinely traded in defas, and its price is determined initially by local supply and demand. Soma Limited pays 30% of its costs and expenses in naira, with the remainder being incurred locally and settled in defas. Soma’s management has a considerable degree of authority and autonomy in carrying out the operations of Soma Limited and is not dependent upon group companies for financial support. The Finance Controller is not certain from the above whether the defas or naira should be taken as the functional currency of Soma Limited.

There have been no issues of ordinary shares and no impairment of goodwill since acquisition.

(ii) Also on May 1, 2016, Rapuya Plc. had acquired 70% of the equity interests of Puta Limited. The purchase consideration amounted to N226 million, which Rapuya Plc. paid through bank transfer in compliance with the cashless policy of the Federal Government of Nigeria. The fair value of the identifiable net assets recognized by Puta Limited was N240 million, excluding the patent below. The identifiable net assets of Puta Limited at May 1, 2016, included a brand with a fair value of N8 million. This had not been recognized in the financial statements of Puta Limited. The brand is estimated to have a useful life of four years. The retained earnings of Puta Limited were N98 million, and other components of equity were N6 million at the date of acquisition. The remaining excess of the fair value of the net assets is due to an increase in the value of non-depreciable land.

Rapuya Plc. wishes to use the ‘full goodwill’ method in consolidating the financial statements of this subsidiary. The fair value of the non-controlling interest in Puta Limited was N92 million on May 1, 2016. There have been no issues of ordinary shares since acquisition, and goodwill on acquisition is not impaired.

(iii) The following exchange rates are relevant for the preparation of the group financial statements:

Defas to Naira Exchange Rate
May 1, 2016 3:1
April 30, 2017 2.5:1
Average for year to April 30, 2017 2.9:1

Required:

(a) Advise the Finance Controller on what currency should be taken as the functional currency of Soma Limited, applying the principles set out in IAS 21 – The Effects of Changes in Foreign Exchange Rates. (5 Marks)

(b) Prepare a consolidated statement of financial position of the Rapuya Group as at April 30, 2017, in accordance with International Financial Reporting Standards (IFRS). (Show all workings) (25 Marks)

(Total: 30 Marks)

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  • 20 Marks

AT – May 2024 – L3 – SB – Q3 – Double Taxation Reliefs and Credits

Calculation of double taxation relief and tax liabilities for Lagode Nigeria, including implications of double taxation treaties.

Lagode Nigeria Limited, based in Lagos, Nigeria, commenced operations as a manufacturer of indigenous fabrics in 2013. Products are sold to wholesalers and retailers in Nigeria and to Africans in diaspora, particularly during annual holiday periods. A market survey in 2018 revealed a lack of local Nigerian fabric manufacturers in North America, prompting the company to establish Kuramo Incorp. in Ottawa, Canada, which began operations in January 2020.

The operating results for both locations for the year ended December 31, 2022, are as follows:

Description Lagos, Nigeria (N’000) Ottawa, Canada (N’000)
Gross turnover 180,200 330,800
Less: Expenses
– Cost of materials 72,100 162,320
– Wages and salaries 18,050 42,120
– Finance costs 1,400 3,150
– Miscellaneous 4,600 5,270
– Depreciation 5,760 8,750
– Share of head office expenses 25,600 16,040
– Foreign tax paid – 18,900
Total expenses 127,510 256,550
Net profit 52,690 74,250

Additional Information:

  1. Ottawa branch is a wholly owned Nigerian company.
  2. Miscellaneous expenses are allowable for tax purposes.
  3. Capital allowances agreed with Nigerian tax authorities:
    Location Capital Allowance (N’000)
    Lagos operations 6,800
    Ottawa operations 9,900
  4. The exchange rate for Canadian operations is fair.
  5. No double taxation agreement exists between Nigeria and Canada.

Required:
In accordance with the provisions of the Companies Income Tax Act Cap. C21 LFN 2004 (as amended), you are to: a. Compute the double taxation relief (if any) available to the Nigerian company

(9 Marks)
b. Advise on the tax liabilities of the Nigerian company for the relevant assessment year (9 Marks)
c. Comment on the implications of double taxation agreements on withholding tax deductions by a company resident in a country:
(i) With no double taxation agreement with Nigeria

(1 Mark)
(ii) With double taxation treaty with Nigeria (1 Mark)
Total: 20 Marks

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  • 30 Marks

FM – Nov 2022 – L3 – Q1 – Mergers and Acquisitions

Evaluating the acquisition of Company K3 in Togo for business expansion purposes.

The following case relates to a business expansion decision for Abayomi Plc (AP):

Abayomi Plc (AP) is a major electrical company in Nigeria. The directors have recently identified Togo as a priority location for business expansion. Togo uses currency T$. Assume today is 30 August 2021.

Company K3, located in Togo, has been identified as a potential acquisition target. AP already manages two business units in Togo, named K1 and K2, and these have shown strong performance under AP’s ownership.

K3 is particularly attractive to AP because it has its own warehouse, distribution, and logistics network, all of which could be used by K1 and K2, if the acquisition goes ahead. Currently, K1 and K2 send goods to customers from AP warehouses located in Ghana. This involves considerable cost and delay in delivery.

K3 is a private company, and 100% of its shares are owned by the family that founded it. Many shareholders are keen to realize their investment by selling the company to AP.

Both companies are working towards an effective date for the sale of K3 to AP on 1 January 2022.

Financial Data for K3 for 2020:

The statement of financial position of K3 as at 31 December 2020 showed the following balances:

T$ Million
Long term borrowings 375
Share capital (T$1 ordinary shares) 90
Total liabilities 465
Net assets 180

Additional Data:

AP aims to maintain the same capital structure as AP. That is, gearing (debt/debt+equity) would be 25% based on market values. AP would guarantee K3’s new debt, which can be assumed to have the same risk profile as AP’s debt.

A proxy company has been identified which is also located in Togo and has a similar business model to K3.

Proxy company data:

  • P/E ratio of 12.
  • Equity beta of 1.7 and debt beta of 0.4.
  • Gearing (debt/debt+equity) based on market values of 35%.

Togo has a risk-free rate of 5% and a market risk premium of 4%.

Financial Data for AP:

Latest data available for AP shows:

  • P/E ratio of 14.
  • Equity beta of 1.5 and debt beta of 0.3.
  • Gearing (debt/debt+equity) based on market values of 25%.
  • AP pays 6.2% interest on its long-term borrowings.
  • Tax rate in Nigeria is 30%.

The spot rate for T$ against Naira today is T$7/₦ (i.e., ₦1 = T$7.00) and is not expected to change in the foreseeable future.

Assume that Nigeria has the same risk-free rate and market risk premium as Togo.

Required:
Assume you are the Finance Director of AP.

a. Advise on:
i. The types of synergistic benefit that might arise from the acquisition of K3. (8 Marks)
ii. Possible reasons why both one-off and ongoing synergistic benefits might not be achieved to the extent expected. (4 Marks)

b. Calculate:
i. A Weighted Average Cost of Capital (WACC) for use in valuing K3 based on the proxy company’s business and country risk and AP’s capital structure. (6 Marks)
ii. A range of values for the equity of K3 in T$ as at 1 January 2022 using the following methods:

  • Asset basis. (2 Marks)
  • P/E (including bootstrapping). (5 Marks)
  • DCF (with and without synergistic benefits). (5 Marks)

(Total 30 Marks)

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  • 7 Marks

CR – Mar 2024 – L3 – Q3a – Foreign currency

This question involves determining the functional currency of Mongu Plc and discussing the factors influencing this decision.

Mongu Plc (Mongu) is a diversified entity listed on the Ghana Stock Exchange. Its financial year ends on 30 September. Mongu Plc operates through its local and foreign subsidiaries. Most of Mongu’s revenues come from its foreign operations, but Mongu incurs a significant portion of its costs locally in Ghana. The local currency is the Ghana Cedi (GH¢), but Mongu’s subsidiaries operate in regions that use other currencies.

Required:
In accordance with IAS 21: The Effects of Changes in Foreign Exchange Rates, identify the functional currency of Mongu Plc, considering the relevant factors, and explain how exchange differences should be accounted for.

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