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  • 20 Marks

CR – May 2023 – L3 – Q3 – Employee Benefits (IAS 19)

Discuss accounting treatments for investment properties and pension plans, including calculations and financial statement impacts.

You are the Financial Controller of Gongon Group. On January 2, 2021, you are busy preparing the financial statements for the year ended December 31, 2020. You are under a lot of pressure as you have been asked to present the draft financial statements to the Board of Directors in two days’ time.

The first draft of the financial statements for each of the three companies has been prepared and is now on your table. You have also compiled a list of outstanding issues that you need to consider before presenting the financial statements to the Board.

Outstanding Issues:

Here’s the rewritten version of the First Issue:

First Issue: Investment Properties and Changes in Use

Gongon Group holds three investment properties in its financial statements. These properties are measured at fair value in line with IAS 40 – Investment Properties, while owner-occupied properties are measured at cost less accumulated depreciation and impairment losses. Currently, the properties are presented at their 2019 year-end valuations, with no adjustments for 2020.

Details of the Properties

  1. Property A (Commercial Warehouse):
    • Location: Apapa
    • Use Change: Reassigned as office space for the company during 2020. Tenants vacated on May 1, 2020.
    • Valuations:
      • January 1, 2020: ₦8,000,000
      • May 1, 2020: ₦7,600,000
      • December 31, 2020: ₦7,400,000
    • Depreciation Policy: The company applies a 2% annual depreciation rate, calculated monthly for owner-occupied properties.
  2. Property B:
    • Acquisition Year: 2014
    • Valuations:
      • January 1, 2020: ₦9,000,000
      • December 31, 2020: ₦8,800,000
    • Planned Disposal:
      • Property was vacant from September 2020 and put on the market in October 2020 with an asking price of ₦8,800,000.
      • Estimated disposal costs: ₦600,000.
      • No firm offers had been made by year-end.
  3. Property C:
    • Valuation: Last valued at ₦18,500,000 in December 2018.

Draft Statements of financial position at December 31, 2020

Extract of draft statement of profit or loss and other comprehensive income for the year ended December 31, 2020

Second Issue: Pension Scheme Accounting Treatment

On January 1, 2020, Gongon PLC commenced a defined benefit plan for several head office employees. Under the scheme, Gongon PLC is obligated to provide post-employment benefits to these staff members. The company manages the actuarial and investment risks associated with the pension scheme.

Details of the Pension Scheme

Details ₦’000
Interest Income on Plan Assets 330
Employer’s Contribution to Plan 11,000
Current Service Cost 12,000
Interest on Plan Liability 360
Fair Value of Plan Assets (31/12/2020) 11,600
Present Value of Plan Obligation (31/12/2020) 12,400

Current Accounting Treatment

The Chief Accountant was uncertain about the appropriate accounting standard to apply for the pension scheme. The only adjustment made for 2020 was:

  • Expensing the Employer’s Contribution of ₦11 million in the statement of profit or loss and other comprehensive income.
  • Crediting the corresponding cash account.

The current treatment does not comply with the requirements of IAS 19 – Employee Benefits, which mandates more comprehensive reporting for defined benefit plans.

Required:
(a) Discuss and analyze the required accounting treatment of the first issue, showing relevant calculations and the impact on Gongon PLC’s financial statements as of December 31, 2020. (12 Marks)

(b) Review the accounting treatment of the second issue (pension plan) and make necessary disclosures in accordance with the relevant accounting standard. (8 Marks)

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  • 30 Marks

PSAF – Nov 2015 – L2 – Q1 – International Public Sector Accounting Standards (IPSAS)

Evaluate financial treatment for leased machinery, borrowing costs, and investment properties in a public sector agency's financial statements.

Top-Hill State Investment Agency, a government business entity, provided the following transactions for the financial year ended December 31, 2014:

a. On January 1, 2014, the company acquired machinery on lease with a fair value of ₦500,000 and a residual value of NIL at the end of its economic life of five years. The lease payment of ₦139,778 was made first on January 1, 2014, with payments due on the first day of each financial year. The implicit interest rate was set at 8%.

b. Top-Hill State Investment Agency incurred borrowing costs of ₦5 million for the financial year ended December 31, 2014, with ₦1.2 million specifically related to constructing a qualifying asset. The Agency’s policy is to capitalize borrowing costs in line with IPSAS 5 on “Borrowing Costs.”

c. The Agency applies the cost model to its investment properties. At the end of the 2013 financial year, the investment properties carried a value of ₦4.5 million. The Agency depreciates these properties using a 25% reducing balance. The fair value as of December 31, 2014, was ₦4.2 million.

Required:

  1. Explain how the newly leased machinery should be treated in the Financial Statements (Extracts) of the Agency.
  2. State the amount to be taken to the Statement of Financial Performance (Extracts) and the Statement of Financial Position (Extracts) for the year ended December 31, 2014. (20 Marks)
  3. Explain how the ₦5 million borrowing costs should be treated in the financial statements (Extracts) and state the amount to be recorded in the Statement of Financial Performance (Extracts) and the Statement of Financial Position (Extracts) for the year ended December 31, 2014. (4 Marks)
  4. Identify and explain the accounting entries required as of December 31, 2014, to account for the Investment Properties. Show workings. (6 Marks)

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  • 12 Marks

FR – Nov 2019 – L2 – Q1a – Property, Plant, and Equipment (IAS 16)

Explain the classification and measurement differences between investment properties and property, plant, and equipment.

You are the Financial Controller of Uchena Nigeria plc. The company was established about 15 years ago. At the last annual general meeting of the company, a new Managing Director was appointed.

The new Managing Director is a non-finance executive with very little knowledge of accounting. He has requested for the past five years financial statements of the company for review.

He has prepared a list of issues based on his review as follows:

  1. When I look at the statement of financial position of one of the past financial statements, one of the categories of non-current asset is investment properties and another category is property, plant, and equipment, in which all other properties are included. It is certain that the company invested in properties, so why do you have two categories for them in the statement of financial position? How did you decide what goes where?
  2. A note to the financial statements states that investment properties are measured at their fair values and not depreciated. Don’t all non-current assets have to be depreciated over their estimated useful lives?
  3. Another note to the financial statements states that property included in the property, plant, and equipment is measured at cost less accumulated depreciation rather than at fair value. Shouldn’t all properties be measured in financial statements on a consistent basis?
  4. Finally, I can’t see from the financial statements where gains or losses relating to the measurement of investment properties are included; the profit statement includes two main components: profit or loss and other comprehensive income; where would the gains or losses go? Presumably, the treatment of gains or losses is the same for any non-current assets, which one is measured at fair value?

Required:

Provide answers to the issues raised by the Managing Director. You should justify your answers with reference to the relevant IFRS. (12 Marks)

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  • 10 Marks

CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

Medina Power Ltd has carried out certain transactions denominated in foreign currency during its financial year ended 31 October 2019 and has also conducted foreign operations through a foreign entity. Medina Power Ltd.’s functional and presentation currency is the cedi.

On 31 July 2019, Medina Power Ltd purchased goods from a foreign supplier for 16 million dinars. At 31 October 2019, the supplier had not yet been paid and the goods were still held in inventory by Medina Power Ltd.

On 31 July, Medina Power Ltd sold goods to a foreign customer for 8 million dinars, and it received payment for the goods in dinars on 31 October 2019.

Medina Power Ltd had also purchased an investment property on 1 November 2018 for 56 million dinars. At 31 October 2019, the investment property had a fair value of 48 million dinars. The company uses the fair value model in accounting for investment properties.

Medina Power Ltd wants advice on how to treat these transactions in the financial statements for the year ended 31 October 2019.

question table

Required:
Discuss the accounting treatment of the above transactions in accordance with the advice required by the directors. (You should show detailed workings as well as a discussion of the accounting treatment used.)

 

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  • 20 Marks

CR – May 2023 – L3 – Q3 – Employee Benefits (IAS 19)

Discuss accounting treatments for investment properties and pension plans, including calculations and financial statement impacts.

You are the Financial Controller of Gongon Group. On January 2, 2021, you are busy preparing the financial statements for the year ended December 31, 2020. You are under a lot of pressure as you have been asked to present the draft financial statements to the Board of Directors in two days’ time.

The first draft of the financial statements for each of the three companies has been prepared and is now on your table. You have also compiled a list of outstanding issues that you need to consider before presenting the financial statements to the Board.

Outstanding Issues:

Here’s the rewritten version of the First Issue:

First Issue: Investment Properties and Changes in Use

Gongon Group holds three investment properties in its financial statements. These properties are measured at fair value in line with IAS 40 – Investment Properties, while owner-occupied properties are measured at cost less accumulated depreciation and impairment losses. Currently, the properties are presented at their 2019 year-end valuations, with no adjustments for 2020.

Details of the Properties

  1. Property A (Commercial Warehouse):
    • Location: Apapa
    • Use Change: Reassigned as office space for the company during 2020. Tenants vacated on May 1, 2020.
    • Valuations:
      • January 1, 2020: ₦8,000,000
      • May 1, 2020: ₦7,600,000
      • December 31, 2020: ₦7,400,000
    • Depreciation Policy: The company applies a 2% annual depreciation rate, calculated monthly for owner-occupied properties.
  2. Property B:
    • Acquisition Year: 2014
    • Valuations:
      • January 1, 2020: ₦9,000,000
      • December 31, 2020: ₦8,800,000
    • Planned Disposal:
      • Property was vacant from September 2020 and put on the market in October 2020 with an asking price of ₦8,800,000.
      • Estimated disposal costs: ₦600,000.
      • No firm offers had been made by year-end.
  3. Property C:
    • Valuation: Last valued at ₦18,500,000 in December 2018.

Draft Statements of financial position at December 31, 2020

Extract of draft statement of profit or loss and other comprehensive income for the year ended December 31, 2020

Second Issue: Pension Scheme Accounting Treatment

On January 1, 2020, Gongon PLC commenced a defined benefit plan for several head office employees. Under the scheme, Gongon PLC is obligated to provide post-employment benefits to these staff members. The company manages the actuarial and investment risks associated with the pension scheme.

Details of the Pension Scheme

Details ₦’000
Interest Income on Plan Assets 330
Employer’s Contribution to Plan 11,000
Current Service Cost 12,000
Interest on Plan Liability 360
Fair Value of Plan Assets (31/12/2020) 11,600
Present Value of Plan Obligation (31/12/2020) 12,400

Current Accounting Treatment

The Chief Accountant was uncertain about the appropriate accounting standard to apply for the pension scheme. The only adjustment made for 2020 was:

  • Expensing the Employer’s Contribution of ₦11 million in the statement of profit or loss and other comprehensive income.
  • Crediting the corresponding cash account.

The current treatment does not comply with the requirements of IAS 19 – Employee Benefits, which mandates more comprehensive reporting for defined benefit plans.

Required:
(a) Discuss and analyze the required accounting treatment of the first issue, showing relevant calculations and the impact on Gongon PLC’s financial statements as of December 31, 2020. (12 Marks)

(b) Review the accounting treatment of the second issue (pension plan) and make necessary disclosures in accordance with the relevant accounting standard. (8 Marks)

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  • 30 Marks

PSAF – Nov 2015 – L2 – Q1 – International Public Sector Accounting Standards (IPSAS)

Evaluate financial treatment for leased machinery, borrowing costs, and investment properties in a public sector agency's financial statements.

Top-Hill State Investment Agency, a government business entity, provided the following transactions for the financial year ended December 31, 2014:

a. On January 1, 2014, the company acquired machinery on lease with a fair value of ₦500,000 and a residual value of NIL at the end of its economic life of five years. The lease payment of ₦139,778 was made first on January 1, 2014, with payments due on the first day of each financial year. The implicit interest rate was set at 8%.

b. Top-Hill State Investment Agency incurred borrowing costs of ₦5 million for the financial year ended December 31, 2014, with ₦1.2 million specifically related to constructing a qualifying asset. The Agency’s policy is to capitalize borrowing costs in line with IPSAS 5 on “Borrowing Costs.”

c. The Agency applies the cost model to its investment properties. At the end of the 2013 financial year, the investment properties carried a value of ₦4.5 million. The Agency depreciates these properties using a 25% reducing balance. The fair value as of December 31, 2014, was ₦4.2 million.

Required:

  1. Explain how the newly leased machinery should be treated in the Financial Statements (Extracts) of the Agency.
  2. State the amount to be taken to the Statement of Financial Performance (Extracts) and the Statement of Financial Position (Extracts) for the year ended December 31, 2014. (20 Marks)
  3. Explain how the ₦5 million borrowing costs should be treated in the financial statements (Extracts) and state the amount to be recorded in the Statement of Financial Performance (Extracts) and the Statement of Financial Position (Extracts) for the year ended December 31, 2014. (4 Marks)
  4. Identify and explain the accounting entries required as of December 31, 2014, to account for the Investment Properties. Show workings. (6 Marks)

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  • 12 Marks

FR – Nov 2019 – L2 – Q1a – Property, Plant, and Equipment (IAS 16)

Explain the classification and measurement differences between investment properties and property, plant, and equipment.

You are the Financial Controller of Uchena Nigeria plc. The company was established about 15 years ago. At the last annual general meeting of the company, a new Managing Director was appointed.

The new Managing Director is a non-finance executive with very little knowledge of accounting. He has requested for the past five years financial statements of the company for review.

He has prepared a list of issues based on his review as follows:

  1. When I look at the statement of financial position of one of the past financial statements, one of the categories of non-current asset is investment properties and another category is property, plant, and equipment, in which all other properties are included. It is certain that the company invested in properties, so why do you have two categories for them in the statement of financial position? How did you decide what goes where?
  2. A note to the financial statements states that investment properties are measured at their fair values and not depreciated. Don’t all non-current assets have to be depreciated over their estimated useful lives?
  3. Another note to the financial statements states that property included in the property, plant, and equipment is measured at cost less accumulated depreciation rather than at fair value. Shouldn’t all properties be measured in financial statements on a consistent basis?
  4. Finally, I can’t see from the financial statements where gains or losses relating to the measurement of investment properties are included; the profit statement includes two main components: profit or loss and other comprehensive income; where would the gains or losses go? Presumably, the treatment of gains or losses is the same for any non-current assets, which one is measured at fair value?

Required:

Provide answers to the issues raised by the Managing Director. You should justify your answers with reference to the relevant IFRS. (12 Marks)

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  • 10 Marks

CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

Medina Power Ltd has carried out certain transactions denominated in foreign currency during its financial year ended 31 October 2019 and has also conducted foreign operations through a foreign entity. Medina Power Ltd.’s functional and presentation currency is the cedi.

On 31 July 2019, Medina Power Ltd purchased goods from a foreign supplier for 16 million dinars. At 31 October 2019, the supplier had not yet been paid and the goods were still held in inventory by Medina Power Ltd.

On 31 July, Medina Power Ltd sold goods to a foreign customer for 8 million dinars, and it received payment for the goods in dinars on 31 October 2019.

Medina Power Ltd had also purchased an investment property on 1 November 2018 for 56 million dinars. At 31 October 2019, the investment property had a fair value of 48 million dinars. The company uses the fair value model in accounting for investment properties.

Medina Power Ltd wants advice on how to treat these transactions in the financial statements for the year ended 31 October 2019.

question table

Required:
Discuss the accounting treatment of the above transactions in accordance with the advice required by the directors. (You should show detailed workings as well as a discussion of the accounting treatment used.)

 

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