Question Tag: Goodwill

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  • 20 Marks

CR – May 2017 – L3 – Q4 – Revenue Recognition (IFRS 15)

Advise on the correct accounting treatment for transactions involving contracts, licences, and purchase of components.

Dango Plc is a conglomerate company operating in Nigeria with diverse interests across Africa. It prepares its financial statements in accordance with International Financial Reporting Standards with a year-end of September 30. The following transactions relate to Dango Plc.

(a) In February 2016, Dango Plc won a significant new contract to supply large quantities of rice to the government of Guyama, a small West African country, for the next two years. Under the terms of the arrangement, payment is made in cash on delivery once goods have been cleared by customs. The rice will be delivered in batches four (4) times every year, on April 1, July 1, October 1, and January 1. The batches for April 1, 2016, and July 1, 2016, amounting to N250 million and N380 million respectively, were delivered and paid. Dango incurred significant costs on customs duties for the first batch of delivery. The October 1 batch, valued at N520 million, was shipped prior to the year-end but delivered and paid for on October 1, 2016.

(b) On October 1, 2010, a 12-year licence was awarded to Dango Plc by the Federal Government to be the sole manufacturer of a chemical used in the Nigerian pharmaceutical industry. The licence was recognised on that date at its fair value of N196 million. The award of the licence motivated Dango Plc in 2011 to purchase a division of another Nigerian competitor company making similar products. Goodwill of N240 million was recognised on the purchase of the division. Dango Plc merged the activities of the newly acquired division with its own to create a specialist chemical sub-division, which it now classifies as a separate cash-generating unit. By 2016, the revenue of this cash-generating unit now amounts to 5% of the Group’s revenue.

(c) Dango Plc buys raw materials from overseas suppliers. It has recently taken delivery of 1,000 units of component X, used in the production of chemicals. The quoted price of component X was N1,200 per unit, but Dango Plc has negotiated a trade discount of 5% due to the size of the order. The supplier offers an early settlement discount of 2% for payment within 30 days, and Dango Plc intends to achieve this. Import duties of N60 per unit must be paid before the goods are released through customs. Once the goods are released, Dango Plc must pay a delivery cost of N5,000 to have the components taken to its warehouse.

Required:
Write a report to the directors advising them on the correct accounting treatment of the above transactions in the financial statements for the year ended September 30, 2016, in accordance with the provisions of the relevant standards.

Note: You may consider the relevance of the following standards to the transactions: IAS 20, IAS 2, IAS 38, IFRS 3, and IFRS 15.

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  • 5 Marks

CR – May 2017 – L3 – Q3c – Impairment of Assets (IAS 36)

Allocate an impairment loss across assets in a cash-generating unit based on IAS 36.

A cash-generating unit holds the following assets:

Asset Value (N’Million)
Goodwill 160
Patent 320
Property, Plant and Equipment 480

An annual impairment review is required as the cash-generating unit contains goodwill. The most recent review assesses its recoverable amount to be N720 million. An impairment loss of N240 million has been incurred and has been recognised in profit or loss.

Required:
Show how the value of the assets held by the cash-generating unit will change after the impairment test based on the information provided above.

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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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  • 30 Marks

CR – Nov 2016 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a Consolidated Statement of Financial Position for Bata Plc and subsidiaries; explain IAS 21 principles for translating foreign subsidiaries.

a. Bata Plc, which operates in the manufacturing sector, has been surviving the challenges operating in the Nigerian economic environment. The draft Statements of Financial Position of Bata Plc and its subsidiaries as at October 31, 2016, are as follows:

Bata N’million Jewe N’million Gaba N’million
Non-current assets Property, plant, and equipment 4,320 360 420
Investments in subsidiaries 1,110 600 –
Financial assets 500 – –
Total Non-current assets 5,930 960 420
Current assets 1,050 570 540
Total assets 6,980 1,530 960
Equity Share capital – N1 ordinary shares 2,400 600 300
Retained earnings 3,410 540 390
Other components of equity 450 – –
Total equity 6,260 1,140 690
Current liabilities 720 390 270
Total liabilities and equity 6,980 1,530 960

Additional Information:

  1. Acquisition of Subsidiaries:
    • Bata Plc acquired 60% of the share capital of Jewe Plc on November 1, 2012, and 10% of Gaba Plc on November 1, 2013. The costs of the combinations were N852 million and N258 million, respectively.
    • Jewe Plc acquired 70% of the share capital of Gaba Plc on November 1, 2013.
  2. Retained Earnings Balances:
Date Jewe Plc (N’million) Gaba Plc (N’million)
November 1, 2012 270 –
November 1, 2013 360 240
  1. Fair Value Adjustments:
    • At acquisition dates, the fair value of the net assets was N930 million for Jewe Plc and N660 million for Gaba Plc. The difference in the fair value and book value relates to non-depreciable land.
    • The fair value of non-controlling interest (NCI) was N390 million for Jewe Plc and N330 million for Gaba Plc. Bata Plc adopts the full goodwill method under IFRS 3 to account for NCI.
  2. Impairment Testing:
    • Jewe Plc suffered an impairment loss of N60 million.
    • Gaba Plc did not suffer any impairment loss.
  3. Intra-group Inventory Sales:
    • During the year ended October 31, 2016, Bata Plc sold inventory to Jewe Plc and Gaba Plc.
    • The invoiced prices of the inventories were N480 million and N360 million, respectively.
    • Bata Plc invoices goods to achieve a markup of 25% on cost to all third parties, including group companies.
    • At the year-end, half of the inventory sold to Jewe Plc remained unsold, but the entire inventory sold to Gaba Plc had been sold to third parties.
  4. Financial Asset:
    • Bata Plc purchased a deep discount bond for N500 million on November 1, 2015.
    • The bonds will be redeemed in 3 years for N740.75 million and are carried at amortized cost in line with IAS 39.
    • The Accountant has not passed the correct entries to reflect amortized cost valuation at year-end, and the financial asset is shown at N500 million.

Compound sum of N1: (1 + r)^n

Year 12% 14%
1 1.1200 1.1400
2 1.2544 1.2996
3 1.4049 1.4815
4 1.5735 1.6890

Required:

  1. Prepare a Consolidated Statement of Financial Position for Bata Plc and its subsidiaries as at October 31, 2016.       (25 Marks)
  2. Explain to the directors of Bata Plc how the assets, liabilities, income, and expenses of a foreign subsidiary, including the resulting goodwill, are translated for consolidation purposes under IAS 21. (5 Marks)

(Total: 30 Marks)

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  • 30 Marks

CR – May 2019 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare the consolidated statement of financial position for a group with a foreign subsidiary and inter-company transactions as at September 30, 2017.

Oyin Plc. a Nigerian company acquired 960 million equity share capital of Kemy Plc., a foreign subsidiary based in Brazil, on 1 October, 2015 for 1.08 billion Brazilian real (BRL). The functional and presentation currency of Kemy Plc. is the BRL. Since acquisition, Kemy Plc., has operated autonomously of Oyin group.

The statements of financial position of Oyin Plc. and Kemy Plc. as at 30 September, 2017 are as follows:

Additional Information:

  1. It is the policy of Oyin Plc. group to recognize non-controlling interest at acquisition at the proportionate share of the net assets. The retained earnings of Kemy Plc., at the date of acquisition were 390 million BRL.
  2. Kemy Plc. sells goods to Oyin Plc. at cost plus a mark-up of 33 1/3%. At 30 September, 2017, Oyin Plc. held N15 million of the goods. The goods were purchased at an exchange rate of N1 to 5 BRL. On 28 September, 2017, Oyin Plc. sent Kemy Plc., a payment for N15 million to clear the intra-group payables. Kemy received and recorded the cash on 2 October, 2017.
  3. On 1 October, 2016, Kemy Plc. purchased a leasehold building for 375 million BRL, taking out a loan note payable after five years to finance the purchase. The estimated useful life of the building on 1 October, 2016 was 25 years with no estimated residual value. The building is to be depreciated on a straight-line basis. The building was professionally revalued at 450 million BRL on 30 September, 2017 and the directors have included the revalued amount in the statement of financial position.Both companies adopt a policy of revaluation for their properties. There was no difference between the carrying amount and fair value of the property of Oyin Plc. at 30 September, 2017.
  4. Exchange Rates:
Date BRL to N1
1 October, 2015 6.0
30 September, 2015 5.5
30 September, 2017 5.0
Average for the year to 30 September, 2016 5.2

Required:
Prepare the consolidated statement of financial position of Oyin group at 30 September, 2017.

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  • 12 Marks

CR – Nov 2014 – L3 – SB – Q4a – Income Taxes (IAS 12)

Compute the impact of deferred tax on retained earnings and advise Lagos Plc on IAS 12 compliance.

The following is the statement of financial position of Lagos Plc as at 31 December, 2013, with its immediate two comparative years.

The management of Lagos Plc is not sure of the impact of IAS 12 (Income Taxes) on its retained earnings as at 31 December, 2013, as well as what the new deferred tax balance will be on migrating to IFRS.

The following information was also available as at the year-end:

Details Value (N’000)
Tax written down value of PPE 40,300
Tax written down value of goodwill 4,300
Tax base of trade receivables 29,800
Tax base of trade payables 13,000

Assume that current tax has been correctly computed in line with the applicable tax laws at 30%.

Required:
Using relevant computations, advise the management of Lagos Plc on the impact of deferred tax calculated on retained earnings in accordance with IAS 12.

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  • 20 Marks

CR – May 2021 – L3 – Q4 – Business Combinations (IFRS 3)

Evaluate the impact of restructuring plans on individual and group accounts for Tanimo PLC and its subsidiaries.

Emili PLC and Wagbo PLC are both public limited companies wholly owned by Tanimo PLC, also a public limited company. Tanimo group PLC operates in the agro-allied industry; but the directors felt that the current structure does not serve their intended purpose and are therefore considering two different restructuring plans for the group.

The statements of financial position of Tanimo PLC and its subsidiaries Emili PLC and Wagbo PLC as at May 31, 2021, are as follows:

Statements of Financial Position as at May 31, 2021

Item Tanimo PLC (Nm) Emili PLC (Nm) Wagbo PLC (Nm)
Property, Plant, and Equipment 600 200 45
Cost of Investment in Emili PLC 60 – –
Cost of Investment in Wagbo PLC 70 – –
Net Current Assets 160 100 20
Total Assets 890 300 65
Equity & Liabilities:
Share Capital (Ordinary Shares of N1 each) 120 60 40
Retained Earnings 770 240 25
Total Equity & Liabilities 890 300 65

Tanimo PLC acquired the investment in Wagbo PLC on June 1, 2015, when the company’s retained earnings balance was N20 million. The fair value of the net assets of Wagbo PLC on June 1, 2015, was N60 million.

Emili PLC was incorporated by Tanimo PLC on June 1, 2015, and has always been a wholly owned subsidiary. The fair value of the net assets of Emili PLC as at May 31, 2021, was N310 million, and of Wagbo PLC, it was N80 million. The fair values of the net current assets of both Emili PLC and Wagbo PLC are approximately the same as their carrying amounts.

The directors are not certain what effects the following plans would have on the individual accounts of the companies and the group accounts. Local companies’ legislation requires that the amount at which share capital is recorded is dictated by the nominal value of the shares issued, and if the value of the consideration received exceeds that amount, the excess is recorded in the share premium account. Shares cannot be issued at a discount. In the case of a share-for-share exchange, the value of the consideration can be deemed to be the carrying amount of the investment exchanged.

It is the group’s policy to value non-controlling interests at its proportionate share of the fair value of the subsidiary’s identifiable net assets.

The two different plans to restructure the group are as follows:

  1. Plan 1
    • Emili PLC is to purchase the whole of Tanimo’s PLC investment in Wagbo PLC.
    • The directors are undecided as to whether the purchase consideration should be 50 million N1 ordinary shares of Emili PLC or a cash amount of N75 million.
  2. Plan 2
    • The assets and trade of Wagbo PLC are to be transferred to Emili PLC at their carrying amount.
    • Wagbo PLC would initially become a non-trading company.
    • The consideration for the transfer will be N60 million, which will be left outstanding on the intercompany account between Emili PLC and Wagbo PLC.

Required:

Discuss the key considerations and the accounting implications of the above plans for the Tanimo PLC group. Your answer should show the potential impact on the individual accounts of Tanimo PLC, Emili PLC, and Wagbo PLC and the group accounts after each plan has been implemented.

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  • 26 Marks

FM – May 2023 – L3 – Q1a – Business Valuation Techniques

Evaluate ZL's valuation using multiple methods and recommend whether KK should acquire ZL. Discuss takeover regulation factors.

KK, a company quoted on the Stock Exchange, has cash balance of ₦230 million which are currently invested in short-term money market deposits. The cash is intended to be used primarily for strategic acquisitions, and the company has formed an acquisition committee with a remit to identify possible acquisition targets. The committee has suggested the purchase of ZL, a company in a different industry that is quoted on the AIM (Alternative Investment Market). Although ZL is quoted, approximately 50% of its shares are still owned by three directors. These directors have stated that they might be prepared to recommend the sale of ZL, but they consider that its shares are worth ₦220 million in total.

Summarised financial data:

Economic data:

  • Risk-free rate of return: 6% p.a.
  • Market return: 14% p.a.
  • Inflation rate: 2.4% p.a., expected to remain stable.

Expected effects of the acquisition:

  1. 50 employees of ZL would immediately be made redundant at an after-tax cost of ₦12 million. Pre-tax annual wage savings are expected to be ₦7.50 million (at current prices) for the foreseeable future.
  2. Some land and buildings of ZL would be sold for ₦8 million (after tax).
  3. Pre-tax advertising and distribution savings of ₦1.50 million per year (at current prices) would be possible.
  4. The three existing directors of ZL would each be paid ₦1 million per year for three years for consultancy services. This amount would not increase with inflation.

Required:

a. Calculate the value of ZL based upon:
i. The use of comparative P/E ratios (3 Marks)
ii. The dividend valuation model (4 Marks)
iii. The present value of relevant operating cash flows over a 10-year period (10 Marks)
iv. Provide an evaluation of each of the three valuation methods in (i) to (iii) above. (7 Marks)
v. Recommend whether KK should go ahead with the offer for ZL. (2 Marks)

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  • 22 Marks

CR – May 2023 – L3 – Q1a – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Omi PLC and subsidiaries.

The draft statement of financial position of Omi PLC, Ruwa Limited, and Mmili Limited as of November 30, 2020, are as follows:

Additional Information for Consolidated Financial Statements Preparation:

  1. Acquisition of Ruwa Limited:
    • Omi PLC acquired 80% of Ruwa Limited’s ordinary share capital on December 1, 2017.
    • Retained earnings of Ruwa Limited at acquisition: N400 million.
    • Fair value of Ruwa Limited’s net assets: N2,840 million.
    • Any fair value adjustment pertains to net current assets, which had been realized by November 30, 2020.
    • No new issue of shares occurred in the group since the establishment of the current structure.
  2. Acquisition of Mmili Limited:
    • On December 1, 2018, Omi PLC acquired 40% and Ruwa Limited acquired 25% of Mmili Limited’s ordinary share capital.
    • Retained earnings of Mmili Limited at acquisition: N200 million.
    • Retained earnings of Ruwa Limited at acquisition: N600 million.
    • No revaluation surplus existed in Mmili Limited’s books at acquisition, and the fair value of Mmili Limited’s net assets was consistent with their carrying amount.
  3. Development Costs:
    • Significant expenditure incurred on developing internet products. These were initially written off but later reinstated as development inventories upon commercial use.
    • Costs do not meet the recognition criteria of IAS 38 – Intangible Assets.
    • Ruwa Limited included N80 million of these costs in its inventory, of which N20 million relates to expenses from periods before December 1, 2017.
    • The group wishes to ensure compliance with IFRS for this treatment.
  4. Internet Equipment:
    • Ruwa Limited purchased new internet equipment for N200 million, excluding a trade discount of N24 million.
    • The discount was recorded in the income statement.
    • Depreciation is calculated using the straight-line method over six years.
  5. Property, Plant, and Equipment Policy:
    • The group transitioned from the revaluation model to the cost model under IAS 16 – Property, Plant, and Equipment in 2020.
    • Mmili Limited’s assets were revalued on December 1, 2019, creating a revaluation surplus of N280 million.
    • Mmili Limited’s property was originally purchased in December 2018 for N1,200 million, with depreciation over six years.
    • The group does not transfer excess depreciation from revaluation reserves to retained earnings.
  6. Valuation of Non-controlling Interests:
    • The group values non-controlling interests at acquisition using their proportionate share of the subsidiary’s identifiable net assets.
  7. Defined Benefit Pension Scheme:
    • Omi PLC established a defined benefit pension scheme, contributing N400 million to it.
    • Details as of November 30, 2020:
      • Present value of obligation: N520 million.
      • Fair value of plan assets: N500 million.
      • Current service cost: N440 million.
      • Interest cost (scheme liabilities): N80 million.
      • Expected return on pension assets: N40 million.
      • Actuarial gain: N60 million.
    • The only recorded entry was the cash contribution, included in Omi PLC’s trade receivables.
    • Directors propose recognizing actuarial gain immediately in the statement of profit or loss.

Required:
Prepare the consolidated statement of financial position of Omi Group for the year ended November 30, 2020, in accordance with relevant IFRS.

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  • 30 Marks

CR – Nov 2021 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare consolidated financial position of Makoko Group for the year ended Dec 31, 2021, and discuss accounting implications of significant influence.

Makoko Intercontinental Holdings Limited is a global merchant of cash crops. A policy of strategic acquisitions over the years has placed the company in a position to source for export products competitively. The lockdown arising from the recent pandemic posed a significant challenge for the export of their products throughout the year 2020. At a board meeting to review the performance of the company for that year and discuss the impact of the pandemic, the Managing Director noted the significant drop in the general performance indices. In order to get a greater market presence and higher demand locally, the board decided to acquire the following investments on January 1, 2021:

  • 60% of the equity share of Ojodu Limited;
  • 50% of 10% loan notes of Ojodu Ltd at par;
  • 40% stake in the ordinary shares of Egbeda Confectioneries Limited.

In the opinion of the board, both Ojodu Limited and Egbeda Confectioneries Limited are the biggest local customers of Makoko Intercontinental Holdings Limited and a control through shareholding would give the investing company greater stake in the operational decisions of the investee companies. Importantly, it would also boost revenue by allowing unrestricted access to local markets. It is believed that this will forestall any adverse impact of further lockdowns that may hinder export sales in the future.

The draft financial statements of the companies for the year are as follows:

Statements of financial position as at December 31, 2021

Additional Information:

  1. Makoko Limited paid N90 million for the acquisition of Ojodu Limited when the retained earnings of Ojodu Limited were N13 million.
  2. The fair value of Ojodu’s freehold property was N6.5 million higher than the carrying amount as at the date of acquisition. This valuation has not been reflected in the books of Ojodu Limited.
  3. Makoko Limited paid N41 million for the shareholding in Egbeda Limited when the retained earnings of Egbeda Limited were N12 million.
  4. An impairment test as at December 31, 2021 showed that goodwill was impaired by N3.5 million and the investment in Egbeda Limited was impaired by N0.8 million.
  5. During the year, Makoko Limited sold products to Egbeda Limited at a price of N8 million. These goods had cost Makoko Limited N5 million. Half of the goods were still in the inventory of Egbeda Limited as at December 31, 2021.
  6. The companies issued share capital has not changed since the date of acquisition.
  7. No dividends were paid during the year.
  8. Non-controlling interests in subsidiaries are to be measured at the appropriate proportion of the subsidiary’s identifiable net assets.

Required: a. Prepare the consolidated statement of financial position for the Makoko Group for the year ended December 31, 2021. (20 Marks)

b. The Directors of Makoko Intercontinental Holdings Limited are concerned about getting significant influence, if not absolute control, of all entities they intend to buy into. The five-year strategic plan of the company (2020 – 2024) focuses on having control of the cash crops segment of the agribusiness sector of the economy. This is in order to make them ready to roll out the next developmental phase of the business, which is to migrate from exporting raw products to finished products for industrial and household use.

Towards this goal, the board requires the Group Accountant to make a presentation on the accounting implications of gaining significant influence in another entity.

Required: Discuss the issues involved in the requirements of the Board as specified above. (5 Marks)

c. A friend to the Chief Accountant of Makoko Intercontinental Holdings Limited, who is a consultant to Ojodu Limited and Egbeda Confectionaries Limited, is requesting for information on the new acquisitions from his friend, the Chief Accountant.

Required: Identify the ethical issues involved in the above scenarios and their implications. (5 Marks)

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  • 30 Marks

AAA – May 2018 – L3 – SA – Q1 – Audit of Complex Entities

Evaluate materiality reassessment, audit findings, and joint audit implications for Honey Group’s financial statements.

You are a manager in Puposola & Company (Chartered Accountants) responsible for the audit of the Honey Group (the Group), a quoted company. The Group’s main activity is steel manufacturing and it comprises of a parent company and three subsidiaries. Your firm currently audits all components of the Group. You are working on the audit of the Group’s financial statements for the year ended June 30, 2017. This morning, the audit engagement partner left a note for you.

“Hello

I have gone through the draft consolidated financial statements and accompanying notes which summarise the key audit findings and some background information.

Although, at the planning stage, materiality was initially determined to be N900,000, and was calculated based on the assumption that Honey Group is a high-risk client due to its listing status. However, due to a number of issues that arose during the audit, there is a need to revise the materiality level for the financial statements as a whole. The revised level of materiality should now be N700,000.

Thank you.”

The Group’s draft consolidated financial statements, with notes referenced to key audit findings, are shown below:

Draft Consolidated Statement of Comprehensive Income

Note June 30, 2017 Draft (N’000) June 30, 2016 Actual (N’000)
Revenue 98,795 103,100
Cost of sales (75,250) (74,560)
Gross profit 23,545 28,540
Operating expenses (14,900) (17,500)
Operating profit 8,645 11,040
Share of profit of associate 1,010 900
Finance costs (380) (340)
Profit before tax 9,275 11,600
Taxation (3,200) (3,500)
Profit for the year 6,075 8,100
Other comprehensive income for the year, net of tax:
Gain on property revaluation 800 —–
Actuarial losses on defined benefit plan (1,100) (200)
Other comprehensive loss (300) (200)
Total comprehensive income for the year 5,775 7,900

Notes: Key Audit Findings on Statement of Comprehensive Income

  1. Revenue has been stable for all components of the Group with the exception of one subsidiary, Copesink Company, which witnessed a 25% decrease in revenue.
  2. Operating expenses for the year to June 2017 is shown net of profit on a property disposal of N2 million. Our evidence includes agreeing the cash receipts to the bank statement and sale documentation, and we have confirmed that the property has been removed from the non-current asset register. The audit junior noted when reviewing the sale document that there is an option to repurchase the property in five years’ time, but did not discuss the matter with management.
  3. The property revaluation relates to the Group’s head office. The audit team has not obtained evidence on the revaluation, as the gain was immaterial based on the initial calculation of materiality.
  4. The actuarial loss is attributed to an unexpected stock market crash. The Group’s pension plan is managed by Axial Company, a firm of independent fund managers who maintain the necessary accounting records relating to the plan. Axial Company has supplied written representation as to the value of the defined benefit plan’s assets and liabilities at June 30, 2017. No other audit work has been performed other than to agree the amount reported in the financial statements to supporting documentation supplied by Axial Company.

Draft Consolidated Statement of Financial Position

Note June 30, 2017 Draft (N’000) June 30, 2016 Actual (N’000)
ASSETS
Non-current assets
Property, plant and equipment 81,800 76,300
Goodwill 5,350 5,350
Investment in associate 4,230 4,230
Non-current assets held for sale 7,800 –
Total non-current assets 99,180 85,880
Current assets
Inventory 8,600 8,000
Receivables 8,540 7,800
Cash and cash equivalents 2,100 2,420
Total current assets 19,240 18,220
Total assets 118,420 104,100
EQUITY AND LIABILITIES
Equity
Share capital 12,500 12,500
Revaluation reserve 3,300 2,500
Retained earnings 33,600 29,400
Non-controlling interest 4,350 4,000
Total equity 53,750 48,400
Non-current liabilities
Defined benefit pension plan 10,820 9,250
Long-term borrowings 43,000 35,000
Deferred tax 1,950 1,350
Total non-current liabilities 55,770 45,600
Current liabilities
Trade and other payables 6,200 7,300
Provisions 2,700 2,800
Total current liabilities 8,900 10,100
Total liabilities 64,670 55,700
Total equity and liabilities 118,420 104,100

Notes: Key Audit Findings on Statement of Financial Position

  1. The goodwill relates to each of the subsidiaries in the Group. Management has confirmed in writing that goodwill is stated correctly, and our other audit procedure was to arithmetically check the impairment review conducted by management.
  2. The associate is a 30% holding in Jamil Company, purchased to provide investment income. The audit team has not obtained evidence regarding the associate as there is no movement in the amount recognised in the statement of financial position.
  3. The non-current assets held for sale relate to a trading division of one of the subsidiaries, which represents one third of that subsidiary’s net assets. The sale of the division was announced in May 2017, and is expected to be complete by December 31, 2017. Audit evidence obtained includes a review of the sales agreement and confirmation from the buyer obtained in July 2017, that the sale will take place.
  4. Two of the Group’s subsidiaries are partly owned by shareholders external to the Group.
  5. A loan of N8 million was obtained in October 2016 at an interest rate of 2%, payable annually in arrears. The terms of the loan have been confirmed from the loan agreement provided by the bank. There was no repayment of the loan in the books as at prior year end.

Required:

a. Explain why auditors may need to reassess materiality as the audit progresses. (4 Marks)

b. Assess the implications of the key audit findings for the completion of the audit.

Note: Your assessment must consider whether the key audit findings indicate a risk of material misstatement. Where the key audit findings refer to audit evidence, you must also consider the adequacy of the audit evidence obtained, but you do not need to recommend further specific procedures. (18 Marks)

c. Discuss TWO advantages and TWO disadvantages of a joint audit being performed on the financial statements. (8 Marks)

(Total 30 Marks)

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  • 15 Marks

CR – May 2018 – L3 – SC – Q6 – Foreign Currency Transactions and Translation (IAS 21)

Discuss treatment of foreign currency transactions and accounting for investments in subsidiaries.

Omotola Nigeria Plc is a conglomerate which operates in different sectors of the economy. The company has many subsidiaries and associates across the six continents of the world, and its head office is located in Lagos, Nigeria. The shares of the company are listed on the Nigerian Stock Exchange.

The company is trying to finalize its financial statements for the year ended April 30, 2018, and the following accounting issues are being considered by the chief accountant based on the submission by the assistant accountant who is yet to complete her professional examinations with the Institute of Chartered Accountants of Nigeria. The functional and presentation currency of Omotola Nigeria Plc. is Naira. The following transactions relate to the company:

(i) On May 1, 2017, Omotola Nigeria Plc. bought an investment property in the United States for $1,000,000. The company uses the fair value model of IAS 40 to account for the investment property, and the fair value at April 30, 2018, is determined to be $1,200,000. The assistant accountant is unsure which exchange rate to use in translating the investment property at the year end and how to recognize any exchange difference that may arise.

(ii) On May 1, 2017, Omotola Nigeria Plc. acquired a wholly owned subsidiary in the United States of America. The goodwill that arose on the acquisition of this subsidiary is $400,000. In addition, the company invested in an equity instrument on the same date, which is measured at fair value through other comprehensive income (OCI) in accordance with the requirements of IFRS 9.

Required:

a. In accordance with the requirement of IAS 21 – Effect of Changes in Foreign Exchange Rates, discuss the treatment of foreign currency transactions and the gain or loss arising therefrom.
(7 Marks)

b. Discuss how the transaction in (i) will be accounted for in the financial statements of Omotola Nigeria Plc. for the year ended April 30, 2018, in accordance with IAS 21.
(4 Marks)

c. Discuss how the transaction in (ii) will be accounted for in the financial statements of Omotola Nigeria Plc. for the year ended April 30, 2018, in accordance with IAS 21.
(4 Marks)

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  • 30 Marks

CR – May 2018 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

repare consolidated financial statements for Komolafe Group including profit or loss and statement of financial position for year-end 2016.

Komolafe Group carries on business as a distributor of warehouse equipment and importer of fruit into the country. Komolafe was incorporated in 2008 to distribute warehouse equipment. It diversified its activities during the year 2010 to include the import and distribution of fruit, and expanded its operations by the acquisition of shares in Kelvins in 2012 and Kelly in 2014.

Accounts for all companies are made up to December 31.

The draft statements of profit or loss and other comprehensive income for Komolafe, Kelvins, and Kelly for the year ended December 31, 2016 are as follows:

Komolafe Kelvins Kelly
Revenue 91,200 49,400 45,600
Cost of sales (36,100) (10,926) (10,640)
Gross profit 55,100 38,474 34,960
Distribution costs (6,650) (4,274) (3,800)
Administrative expenses (6,950) (1,900) (3,800)
Finance costs (650) – –
Profit before tax 40,850 32,300 27,360
Income tax expense (16,600) (10,780) (8,482)
Profit for the year 24,250 21,520 18,878
Other comprehensive income for the year:
Items that will not be reclassified to profit or loss in subsequent period
Revaluation of property 400 200 –
Total Comprehensive Income 24,650 21,720 18,878

The draft statement of financial position as at December 31, 2016, is as follows:

Komolafe Kelvins Kelly
Non-current assets
Property, plant, and equipment (carrying amount) 70,966 48,546 26,126
Investments
Shares in Kelvins 13,300 – –
Shares in Kelly – 7,600 –
Total Non-current assets 84,266 56,146 26,126
Current assets 3,136 18,050 17,766
Total assets 87,402 74,196 43,892
Equity
Ordinary shares 16,000 6,000 4,000
Retained earnings 45,276 48,150 39,796
Current liabilities 26,126 20,046 96
Total equity and liabilities 87,402 74,196 43,892

The following information is available relating to Komolafe, Kelvins, and Kelly:

  1. On January 1, 2012, Komolafe acquired 5,400,000 N1 ordinary shares in Kelvins for N13,300,000, at which date there was a credit balance on the retained earnings of Kelvins of N2,850,000. No shares have been issued by Kelvin since Komolafe acquired its interest.
  2. At the date of acquisition, the fair value of the identifiable net assets of Kelvins was N10 million. The excess of the fair value of net assets is due to an increase in the value of non-depreciable land.
  3. On January 1, 2014, Kelvins acquired 3,200,000 N1 ordinary shares in Kelly for N7,600,000, at which date there was a credit balance on the retained earnings of Kelly of N1,900,000. No shares have been issued by Kelly since Kelvins acquired its interest. The fair value of the identifiable net assets of Kelly at the date of acquisition approximates their book values.
  4. During 2016, Kelly made intra-group sales to Kelvins of N960,000, making a profit of 25% on cost. N150,000 of these goods were in inventories at December 31, 2016.
  5. During 2016, Kelvins made intra-group sales to Komolafe of N520,000, making a profit of 25% on sales. N120,000 of these goods were in inventories at December 31, 2016.
  6. An impairment test conducted at the year-end did not reveal any impairment losses.
  7. It is the group’s policy to value the non-controlling interest at fair value at the date of acquisition. The fair value of the non-controlling interests in Kelvins on January 1, 2012, was N1,000,000. The fair value of the 28% non-controlling interest (direct and indirect) in Kelly on January 1, 2014, was N1,800,000.

Required:
Prepare for Komolafe Group:

a. A consolidated statement of profit or loss and other comprehensive income for the year ended December 31, 2016. (13 Marks)

b. A consolidated statement of financial position as at December 31, 2016. (12 Marks)

c. In business combination, the consideration given by the acquirer to gain control of the acquiree can be in different forms, including deferred and contingent considerations. While deferred and contingent considerations represent amounts of consideration to be transferred in the future, the two differ in nature and form.

Required:
Briefly distinguish between deferred and contingent consideration. (5 Marks)

Total: 30 Marks

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  • 30 Marks

CR – Nov 2023 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Sports PLC Group, considering goodwill, non-controlling interests, impairments, and disposals.

Sports PLC is a company which operates in the service sector. Sports PLC has a business relationship with Football PLC and Volleyball PLC. The financial positions of these companies as at September 30, 2020, are stated below:

Item Sports PLC Football PLC Volleyball PLC
Non-current assets: N’m N’m N’m
Property, plants, and equipment 1,840 600 620
Investment in subsidiaries:
– Football PLC 1,460 – –
– Volleyball PLC 640 – –
Investment in Handball PLC 96 – –
Intangible assets 396 60 70
Total Non-current assets 3,792 1,300 690
Current assets 1,790 960 500
Total assets 5,582 2,260 1,190

Equity and liabilities

Item Sports PLC Football PLC Volleyball PLC
Ordinary share capital 1,840 800 400
Other components of equity 146 74 50
Retained earnings 1,790 884 278
Total equity 3,776 1,758 728
Non-current liabilities 990 246 186
Current liabilities 816 256 276
Total liabilities 1,806 502 462
Total equity and liabilities 5,582 2,260 1,190

Additional Information

  1. Acquisition of Football PLC:
    • On October 1, 2018, Sports PLC acquired 70% of the equity interest in Football PLC. The purchase consideration was cash of N1,460 million. At the acquisition date, the fair value of the non-controlling interests (NCI) in Football PLC was N590 million. The fair value of the identifiable net assets acquired was N1,670 million. Retained earnings of Football PLC were N638 million, and other components of equity were N54 million. The excess in fair value is due to non-depreciable land.
  2. Acquisition of Volleyball PLC:
    • On October 1, 2019, Football PLC acquired 80% of the equity interest in Volleyball PLC for a cash consideration of N640 million. The fair value of the non-controlling interests for 20%, 30%, and 44% holdings was N144 million, N216 million, and N322 million, respectively. At the date of acquisition, the fair value of the identifiable net assets of Volleyball PLC was N724 million. Retained earnings were N212 million, and other components of equity were N40 million. The excess in fair value is due to non-depreciable land. The group’s policy is to measure the non-controlling interests at fair value at the acquisition date.
  3. Impairment Testing:
    • As of September 30, 2020, both Football PLC and Volleyball PLC were tested for impairment. The recoverable amounts for Football PLC and Volleyball PLC were N2,850 million and N1,208 million, respectively. Directors determined that impairment was due to poor performance of intangible assets.
  4. Investment in Handball PLC:
    • On October 1, 2018, Sports PLC acquired a 14% interest in Handball PLC for N36 million, classified as fair value through other comprehensive income (FVTOCI). On April 1, 2020, Sports PLC acquired an additional 16% interest for N54 million, achieving significant influence. The value of the original 14% investment on April 1, 2020, was N42 million. Handball PLC reported after-tax profits of N40 million for the year ending September 30, 2019, and N60 million for the year ending September 30, 2020. In September 2020, Sports PLC received a dividend of N4 million from Handball PLC, credited to other components of equity.
  5. Project Development Costs:
    • Sports PLC purchased patents costing N20 million on October 1, 2019, to develop new products. An additional investigative cost of N14 million was incurred, and a working prototype was created at a cost of N8 million. Another N6 million was spent to prepare the product for sale, and marketing costs amounted to N4 million. All costs were included in intangible assets.
  6. Disposal Plan:
    • Sports PLC intends to dispose of a major patent line. At the date the criteria for “held for sale” were met, the carrying amounts were:
      • Property, Plant, and Equipment: N36 million
      • Inventories: N98 million
      • Current Liabilities (Trade Payables): N6 million
    • Expected proceeds are N60 million. No adjustments have been made to the financial statements for this decision.

Required: Prepare the consolidated statement of financial position for Sports PLC Group as of September 30, 2020. (30 Marks)

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  • 30 Marks

CR – Nov 2022 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare consolidated statement of financial position for RAM, DAM, and TAM as at April 30, 2021, including adjustments for goodwill, revaluation, and retained earnings.

The following draft statements of financial position of RAM, DAM, and TAM, all of which are public limited companies as at April 30, 2021, are provided:

RAM Plc (N’m) DAM Plc (N’m) TAM Plc (N’m)
Non-current assets:
Property, plant, and equipment 2,030 705 356
Investment in DAM 690 – –
Investment in TAM 180 110 –
Total non-current assets 2,900 815 356
Current assets:
Inventories 450 185 75
Trade receivables 270 115 60
Cash and cash equivalents 105 65 85
Total current assets 825 365 220
Total assets 3,725 1,180 576
Equity and liabilities
Equity:
Ordinary share capital 2,400 620 220
Share premium 300 105 56
Revaluation reserves 60 – –
Retained earnings 685 280 76
Total equity 3,385 1,005 412
Non-current liabilities 200 65 64
Current liabilities 140 110 100
Total equity and liabilities 3,725 1,180 576

Additional Information:

  1. Three years ago, on May 1, 2018, RAM Plc acquired 80% of the ordinary share capital of DAM Plc when DAM’s retained earnings were N110m. There were no new share issues since the group structure was created. The fair value of non-controlling interests at acquisition was N160m, and the fair value of DAM Plc’s net assets was N850m at that date. Any fair value adjustments related to inventory were realized by the current year-end.
  2. Two years ago, to veil the identity of the true owner of TAM Plc, RAM Plc acquired 40%, while DAM Plc acquired 25% of TAM’s ordinary share capital on the same date, when the retained earnings of TAM Plc were N65m and those of DAM Plc were N160m. The fair value of non-controlling interest in TAM Plc was N155m as at acquisition, with no revaluation reserve in TAM’s books at that time. The fair values of TAM Plc’s net assets as at acquisition were not materially different from their carrying amount.
  3. The group operates in the oil industry and incurs expenditure on research and development. These costs, previously written off to the statement of profit or loss and other comprehensive income as incurred, are reinstated when the related products are commercialized. The reinstated costs are shown as ‘Development Inventory.’ The costs do not meet IAS 38 criteria for classification as intangibles, and net cash inflows are unlikely to exceed development costs. DAM Plc included N22m of these costs in inventory this year.
  4. DAM Plc purchased significant new production equipment this year. Its cost before a trade discount was N60m, with a discount of N12m taken to the income statement. Depreciation is on a straight-line basis over six years.
  5. The group policy now states tangible non-current assets at depreciated historical cost. This year, the group changed from the revaluation model to the cost model under IAS 16, except for TAM Plc’s tangible non-current assets, which were revalued by TAM Plc’s directors on the first day of the current year, creating an N80m revaluation reserve. TAM Plc’s assets were initially purchased on May 1, two years prior, at N320m, depreciated over six years. The group does not transfer revaluation reserves to retained earnings annually for excess depreciation. There were no additions or disposals in TAM’s assets over the last two years.
  6. Goodwill from DAM Plc’s acquisition was impairment tested each year; the current year-end revealed a recoverable value of N900m for DAM Plc. TAM Plc’s goodwill has not been impaired since acquisition.
  7. The group policy is to value non-controlling interests at fair value.

Required:
Prepare a consolidated statement of financial position for the RAM Group as at April 30, 2021.
(Total: 30 Marks)

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  • 15 Marks

FR – May 2016 – L2 – Q2b – Consolidated Financial Statements (IFRS 10)

Preparation of consolidated financial position statement, considering goodwill and NCI.

The statement of financial position of PAPA Pie and MAMA Pie as at December 31, 2015, were as follows:

PAPA PLC N’000 MAMA PLC N’000
Property Plant & Equipment 9,000 Property Plant & Equipment 5,000
Investment in MAMA Pie 5,000 Other Assets 1,500
Other Assets 2,000
Total Assets 16,000 Total Assets 6,500
Share Capital 500 Share Capital 500
Retained Earnings 14,500 Retained Earnings 5,000
Other Liabilities 1,000 Other Liabilities 1,000
Total Equity & Liabilities 16,000 Total Equity & Liabilities 6,500

PAPA Plc acquired 80% equity interest in MAMA Plc two years ago.

At the date of acquisition, MAMA’s retained earnings stood at N3 million, and the fair value of its net assets was N5 million. This was N1.5 million above the carrying amount of the net assets at this date. The fair value adjustment related to an asset that had a remaining useful economic life of 10 years as at the date of acquisition.

The goodwill arising on consolidation has not suffered any impairment.

Required:

Prepare the consolidated statement of financial position of PAPA Pie Group as at December 31, 2015, on the assumption that non-controlling interest is valued at fair value (the full goodwill method). (15 Marks)

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  • 15 Marks

FR – May 2015 – L2 – SC – Q5 – Impairment of Assets (IAS 36)

Discuss intangible assets, characteristics and recognition of goodwill, development cost conditions, and calculate goodwill on consolidation.

IAS 38 – Intangible Assets, specifies the criteria that must be met before an intangible asset can be recognised by an entity in its Financial Statements. Intangible assets are identifiable non-monetary assets without physical substance and include goodwill, brands, copyright and research and development expenditure. They could be
purchased and/or internally generated.
Required:

(a) Identify any TWO characteristics of goodwill which distinguish it from other intangible assets. (2 Marks)

(b) Explain THREE differences between purchased goodwill and non-purchased goodwill. (3 Marks)

(c) Identify any THREE conditions that must be met under IAS 38 for development expenditure to be recognised as an intangible asset. (3 Marks)

(d) State any FOUR factors to be considered when determining the useful life of an intangible asset. (4 Marks)

(e) Calculate the goodwill on consolidation from the information below:
Parent has 80% interests in subsidiary.

Item Amount (N’000)
Parent’s cost of investment in subsidiary 299,700
Fair value of non-controlling interest at acquisition date 169,500
Net asset at acquisition date (subsidiary) 345,800
Impairment of goodwill 62,200

Required: Compute the goodwill on consolidation. (3 Marks)

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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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  • 20 Marks

FR – May 2015 – L2 – SB – Q2 – Property Plant and Equipment

Determine disclosure requirements for separate financial statements and calculate equity, non-controlling interests, goodwill, and property valuation adjustments.

(a) When a parent company elects not to prepare consolidated financial statements and instead prepares separate financial statements, what are the disclosure requirements stipulated in IAS 27 on Separate Financial Statements? (6 Marks)

(b) Kerewanta Plc acquired 60% of the equity shares of Orijinmi Plc through a share exchange (three shares in Kerewanta Plc for four shares in Orijinmi Plc). The share value of Kerewanta Plc at the acquisition date (April 1, 2013) was N10 per share. Additionally, Kerewanta Plc would make a deferred cash payment of 70k per acquired share on April 1, 2014. Kerewanta Plc’s cost of capital is 12% per annum, with the following information extracted as of March 31, 2014:

Additional Information:

  1. An equipment in Orijinmi Plc had a fair value of N360,000,000 above its carrying amount with a four-year remaining life. The group uses straight-line depreciation.
  2. Orijinmi Plc had an unrecorded deferred tax liability of N10,000,000 as of March 31, 2014, with no goodwill impairment.
  3. Non-controlling interests are valued at fair value at acquisition. Fair value of Orijinmi Plc’s non-controlling interests at acquisition was N6 per share.

Required: Calculate the following as at March 31, 2014:

  1. Equity
  2. Non-controlling Interests
  3. Consolidated Goodwill
  4. Property, Plant, and Equipment (14 Marks)

 

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  • 20 Marks

FR – May 2017 – L2 – SB – Q2 – Consolidated Financial Statements

Calculate non-controlling interest, goodwill, and consolidated reserves for Abuja Limited’s acquisition of Abaji Limited.

Abuja Limited acquired 80% of Abaji Limited’s ordinary shares on January 1, 2015. The company paid an immediate N5.00 per share and a further payment of N19,440,000 in cash. The company only recorded the cash consideration of N5 per share. The two statements of financial position as of December 31, 2015, are as follows:

Additional Information:

  1. Non-Controlling Interests (NCI): Abuja Limited values NCI using the fair value at the acquisition date, set at N14,940,000. Due to impairment, the NCI value reduced to N14,220,000 by December 31, 2015.
  2. Revaluation: Abaji Limited revalued its land and buildings at the acquisition date, increasing the value by N3,600,000, with an additional increase of N720,000 on December 31, 2015.
  3. Brand Valuation: Abaji Limited’s product line brand was valued at N7,200,000, with a 10-year useful life as of January 1, 2015. This brand is not included in Abaji’s statement of financial position.
  4. Intercompany Loan: Abuja Limited provided a loan of N10,800,000 to Abaji Limited at acquisition. Interest, payable annually, was not recorded by Abuja Limited by the end of the year.
  5. Development Costs: Abaji Limited completed a development project on June 30, 2015, costing N9,000,000, of which N1,800,000 was amortized by year-end. Only N3,240,000 of development costs were capitalized by the acquisition date, but Abuja Limited’s directors deem these costs unrecognized assets under IAS 38.
  6. Inventory Profits: Abaji Limited sold goods to Abuja Limited, with one-third remaining in Abuja’s inventory at December 31, 2015. The sale profit was N1,080,000.

Required:

Provide the figures to be included in the consolidated statement of financial position as of December 31, 2015, for:

  • a. Non-Controlling Interest (7 Marks)
  • b. Goodwill (7 Marks)
  • c. Consolidated Reserves:
    i. Share premium
    ii. Retained earnings
    iii. Revaluation reserve
    (Show workings for all calculations)

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