Question Tag: Restructuring

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  • 20 Marks

AAA – Nov 2020 – L3 – Q2 – Audit Completion and Final Review

Requirements of ISA 450 for uncorrected misstatements, including discussions on litigation, restructuring, and depreciation adjustments.

You are the engagement partner on the audit of Uchenna & Associates. The audit senior sent you the schedule of uncorrected misstatements, shown below, including notes to explain each matter in the schedule. Profit or loss Statement of financial position is as follows:

The audited financial statements recognized revenue of N250 million and total assets of N1.24 billion. The materiality threshold was determined as N12.5 million.

You are holding a meeting with management tomorrow, at which the uncorrected misstatements will be discussed.

Notes:

  1. Litigation Provision: Uchenna & Associates was involved in a dispute over goods quality, resulting in a court judgment against them for N20 million. Uchenna & Associates has appealed the judgment, and its solicitors are confident of a favorable outcome. Management has not recognized the provision, believing they are likely to win. The audit conclusion is that a provision should be included in the financial statements.
  2. Restructuring Provision: Management recognized a provision for closing one of its factories. Although the board approved the closure in April 2019, no employee announcements were made. The audit conclusion is that the provision should not be recognized.
  3. Depreciation Correction: The audit team’s recomputation identified an understatement of N5,000,000 in depreciation expense.

Required:
a. Explain the requirements of ISA 450: Evaluation of Misstatements Identified during the Audit, with regard to uncorrected audit misstatements. (15 Marks)
b. Discuss the matters to be addressed with management for each uncorrected misstatement. (5 Marks)

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  • 10 Marks

CSME – May 2021 – L2 – Q1 – Strategic Implementation

Assessing Davidson Ltd's key resources, strategic choices, and restructuring to address international opportunities.

Davidson Ltd is an automobile company based in Aba, Nigeria. It has been in
existence for nearly eighty years. The company originally began by supplying
components for small vehicles and was producing equipment during the Second
World War. However, in the nineties, it underwent rapid transformation under
the founder‟s son, Tony. Tony has diversified the company into supplying tricycle
components and spare parts to the Nigerian market. The company now employs
some 500 staff around the country and is well known for the quality of its
workmanship. The company operates under three divisions. One division is
concerned with the manufacture of tricycle components, a second division with
spare parts and the third division undertakes specific one–off work in automobile
and automobile design. The tricycle component division is by far the biggest and
accounts for seventy per cent of the total turnover. The smaller specialist
automobile design division is by far the most profitable in terms of return on
capital employed and it relies a great deal on a senior engineer, Emmanuel, who
has been with the company for more than twenty years.
Recently, the company was invited to send sample components to a Japanese car
manufacturer who is keen to commence operations in Nigeria. These components
are needed within eight months. However, Mr. Tony is concerned that his
company may not be able to meet the strict standard imposed by the Japanese
manufacturer. The deal, if it is sealed, would establish Davidson Ltd as an
important auto component supplier in South East Asia, thus, opening up the
potential for exports. Tony realises that the export potential is great and that any
initiative towards exports would get full backing from the government. While,
this is happening, the spare parts division is also showing signs of growth.
Recent reforms in part of North Africa has made companies in that region to be
very keen to modernise and innovate their old manufacturing processes and
Davidson had received business enquiries from the region.
Tony faces a dilemma. He knows that the opportunities that have presented
themselves would give the company a global presence. At the same time, he
knows that the company is solely under his management as chief executive.
Tony holds eighty percent of the shares. The other two directors hold ten percent
each. Although the other divisions have managing directors, they rely on him for
decision making. The current managing directors are family members. One is a brother in-law and the other a cousin. Their knowledge of the industry and its
workings is generally poor. He made these appointments to please his father so
that he could be left to run the company as he deems fit. Tony knows that to
satisfy the Japanese auto manufacturer, he needs to reorganise the automobile
design division and consider issues of Total Quality Management (TQM). This will
take time and requires that he delegates responsibilities to other divisions.
However, he feels uncomfortable doing this.
The company is at crossroads. The three divisions are doing well, but could do
even better, if their old, bureaucratic and hierarchical systems are reviewed.
Indeed, some of the younger managers and engineers would prefer a more open,
flexible management structure. Some of them have studied both engineering and
management in Holland and the United States, and are keen to see key
innovations in place. While Tony knows that these opportunities highlighted
above should not be missed, he has to ensure that they are handled successfully
so that the future is secured for Davidson Ltd. This requires that he takes some
tough decisions in restructuring the company within a few months.

Required:

Write a report to the Chief Executive of Davidson Ltd addressing the following issues:

a.
i. The key resources and implementation issues facing Davidson Ltd in the scenario above. (15 Marks)
ii. How the key resources will affect strategic choices. (7 Marks)
iii. How implementation issues will affect strategic choices. (8 Marks)

b. How should Tony restructure the company? (10 Marks)

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  • 4 Marks

FR – Nov 2016 – L2 – Q2d – Financial Statement Analysis

Discuss the effects of two events on the financial statements in accordance with IAS 10 Events after the Reporting Period.

Suame Ltd is a listed telecommunication company which prepares its financial statements for the year ended 31 October 2015 in accordance with IFRS. The financial statements are due to be authorised for issue on 15 January 2016.

  • i) Suame Ltd holds an investment in the shares of a listed company, Asafo Ltd. During November 2015 there was a material fall in the value of Asafo Ltd’s shares. Analysts attribute the fall in value principally to a fraud dating back to December 2014 that was discovered by Asafo Ltd’s management and announced publicly in November 2015.
  • ii) In December 2015, the directors of Suame Ltd publicly announced a plan to reduce the workforce by 10% as a result of worsening economic conditions.

Required:
Discuss the effects of each of the above items on the financial statements of Suame Ltd for the year ended 31 October 2015 in accordance with IAS 10 Events after the Reporting Period.

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  • 15 Marks

CR – May 2018 – L3 – Q3 – Corporate Reconstruction and Reorganisation

Evaluate two schemes for restructuring a microfinance company and discuss the advantages of each scheme.

Bank of Ghana (BoG) recently announced an increase in the minimum capital requirement for Micro Finance Institutions in the country from GH¢500,000 to GH¢2 million by June 2018. Capital Link, a Micro Finance Company, has been affected by the increase in players in the Micro Finance Industry, which has seen a reduction of its loan portfolio and an increase in loan default rate. A statement of financial position recently prepared by Capital Link is provided:

Statement of Financial Position as at 30th April 2017

Additional information: Depositors are uncertain about the ability of Capital Link to raise the required capital. Management of Capital Link has proposed two options for the company’s future:

  • Scheme 1 – Close Down Mission:
    Unity Capital Ltd has offered GH¢600,000 for the leasehold property. The loan portfolio is conservatively valued at GH¢592,500 in a forced sale. Investments in Treasury bills are valued at GH¢465,000. Liquidation expenses are estimated at GH¢30,000, and interest to depositors is GH¢330,000.
  • Scheme 2 – Rescue Mission:
    Management has proposed to implement a rescue scheme that includes a GH¢600,000 loan from a distress fund set up by an NGO. The loan terms include paying GH¢375,000 to the NGO immediately, with the balance exchanged for a 20% debenture repayable over four years.

Assume:

  • Current borrowing rate is 14%.
  • The present value of GH¢1 receivable at the end of each year is:
Year 14% 20%
1 0.88 0.83
2 0.77 0.69
3 0.67 0.58
4 0.59 0.48

Required:
a) By means of numerical analysis of the two schemes, evaluate how much the bank would recover from each scheme. (12 marks)
b) Discuss TWO advantages of each scheme. (3 marks)

 

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  • 20 Marks

BCL – May 2019 – L1 – Q2 – Employment Law

Discuss the rights of an employer in a restructuring situation.

Eric Afful was employed as the Chief Operations Officer of Deews Construction Company, in 2003. In 2015, the company undertook a major restructuring resulting in re-assignment of Eric to the role of Building Inspector. In this new role, his signing authorities were withdrawn and all subordinate staff transferred out of his department. His salary was reduced drastically and he was informed by the MD that the company’s budget would not be able to meet his salary. When he complained, he was advised to keep quiet or have his appointment terminated.

Required:

a) Comment on the right of the employer in the case. (5 marks)

b) On what THREE (3) grounds can Eric’s appointment be terminated? (9 marks)

c) What TWO (2) remedies will be available to Eric in the event of unfair termination? (6 marks)

 

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  • 10 Marks

AAA – Nov 2019 – L3 – Q5b – Current Issues, Audit-related Services

Discuss the financial reporting implications of a restructuring and recommend auditor actions if financial statements are not amended.

You are the manager responsible for the audit of Obeyeyie Co. Ltd (OCL), a manufacturing company with a year ended 31 December 2018. The audit work has been completed and reviewed and you are due to issue the audit report in three days. The draft audit opinion is unmodified. The financial statements show revenue for the year ended 31 December 2018 of GH¢ 15 million, net profit of GH¢ 3 million, and total assets at the year-end are GH¢ 80 million.

The finance director of OCL e-mailed you this morning in addition to a WhatsApp message to tell you about the announcement yesterday of a significant restructuring of OCL, which will take place over the next six months. The restructuring will involve the closure of a factory and its relocation to another part of the country. There will be some redundancies and the estimated cost of closure is GH¢ 250,000. The financial statements have not been amended in respect of this matter.

Required:

i) Comment on the financial reporting implications, and advise the further audit procedures to be performed. (6 marks)

ii) Recommend the actions to be taken by the auditor if the financial statements are not amended. (4 marks)

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  • 20 Marks

AAA – Nov 2020 – L3 – Q2 – Audit Completion and Final Review

Requirements of ISA 450 for uncorrected misstatements, including discussions on litigation, restructuring, and depreciation adjustments.

You are the engagement partner on the audit of Uchenna & Associates. The audit senior sent you the schedule of uncorrected misstatements, shown below, including notes to explain each matter in the schedule. Profit or loss Statement of financial position is as follows:

The audited financial statements recognized revenue of N250 million and total assets of N1.24 billion. The materiality threshold was determined as N12.5 million.

You are holding a meeting with management tomorrow, at which the uncorrected misstatements will be discussed.

Notes:

  1. Litigation Provision: Uchenna & Associates was involved in a dispute over goods quality, resulting in a court judgment against them for N20 million. Uchenna & Associates has appealed the judgment, and its solicitors are confident of a favorable outcome. Management has not recognized the provision, believing they are likely to win. The audit conclusion is that a provision should be included in the financial statements.
  2. Restructuring Provision: Management recognized a provision for closing one of its factories. Although the board approved the closure in April 2019, no employee announcements were made. The audit conclusion is that the provision should not be recognized.
  3. Depreciation Correction: The audit team’s recomputation identified an understatement of N5,000,000 in depreciation expense.

Required:
a. Explain the requirements of ISA 450: Evaluation of Misstatements Identified during the Audit, with regard to uncorrected audit misstatements. (15 Marks)
b. Discuss the matters to be addressed with management for each uncorrected misstatement. (5 Marks)

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  • 10 Marks

CSME – May 2021 – L2 – Q1 – Strategic Implementation

Assessing Davidson Ltd's key resources, strategic choices, and restructuring to address international opportunities.

Davidson Ltd is an automobile company based in Aba, Nigeria. It has been in
existence for nearly eighty years. The company originally began by supplying
components for small vehicles and was producing equipment during the Second
World War. However, in the nineties, it underwent rapid transformation under
the founder‟s son, Tony. Tony has diversified the company into supplying tricycle
components and spare parts to the Nigerian market. The company now employs
some 500 staff around the country and is well known for the quality of its
workmanship. The company operates under three divisions. One division is
concerned with the manufacture of tricycle components, a second division with
spare parts and the third division undertakes specific one–off work in automobile
and automobile design. The tricycle component division is by far the biggest and
accounts for seventy per cent of the total turnover. The smaller specialist
automobile design division is by far the most profitable in terms of return on
capital employed and it relies a great deal on a senior engineer, Emmanuel, who
has been with the company for more than twenty years.
Recently, the company was invited to send sample components to a Japanese car
manufacturer who is keen to commence operations in Nigeria. These components
are needed within eight months. However, Mr. Tony is concerned that his
company may not be able to meet the strict standard imposed by the Japanese
manufacturer. The deal, if it is sealed, would establish Davidson Ltd as an
important auto component supplier in South East Asia, thus, opening up the
potential for exports. Tony realises that the export potential is great and that any
initiative towards exports would get full backing from the government. While,
this is happening, the spare parts division is also showing signs of growth.
Recent reforms in part of North Africa has made companies in that region to be
very keen to modernise and innovate their old manufacturing processes and
Davidson had received business enquiries from the region.
Tony faces a dilemma. He knows that the opportunities that have presented
themselves would give the company a global presence. At the same time, he
knows that the company is solely under his management as chief executive.
Tony holds eighty percent of the shares. The other two directors hold ten percent
each. Although the other divisions have managing directors, they rely on him for
decision making. The current managing directors are family members. One is a brother in-law and the other a cousin. Their knowledge of the industry and its
workings is generally poor. He made these appointments to please his father so
that he could be left to run the company as he deems fit. Tony knows that to
satisfy the Japanese auto manufacturer, he needs to reorganise the automobile
design division and consider issues of Total Quality Management (TQM). This will
take time and requires that he delegates responsibilities to other divisions.
However, he feels uncomfortable doing this.
The company is at crossroads. The three divisions are doing well, but could do
even better, if their old, bureaucratic and hierarchical systems are reviewed.
Indeed, some of the younger managers and engineers would prefer a more open,
flexible management structure. Some of them have studied both engineering and
management in Holland and the United States, and are keen to see key
innovations in place. While Tony knows that these opportunities highlighted
above should not be missed, he has to ensure that they are handled successfully
so that the future is secured for Davidson Ltd. This requires that he takes some
tough decisions in restructuring the company within a few months.

Required:

Write a report to the Chief Executive of Davidson Ltd addressing the following issues:

a.
i. The key resources and implementation issues facing Davidson Ltd in the scenario above. (15 Marks)
ii. How the key resources will affect strategic choices. (7 Marks)
iii. How implementation issues will affect strategic choices. (8 Marks)

b. How should Tony restructure the company? (10 Marks)

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  • 4 Marks

FR – Nov 2016 – L2 – Q2d – Financial Statement Analysis

Discuss the effects of two events on the financial statements in accordance with IAS 10 Events after the Reporting Period.

Suame Ltd is a listed telecommunication company which prepares its financial statements for the year ended 31 October 2015 in accordance with IFRS. The financial statements are due to be authorised for issue on 15 January 2016.

  • i) Suame Ltd holds an investment in the shares of a listed company, Asafo Ltd. During November 2015 there was a material fall in the value of Asafo Ltd’s shares. Analysts attribute the fall in value principally to a fraud dating back to December 2014 that was discovered by Asafo Ltd’s management and announced publicly in November 2015.
  • ii) In December 2015, the directors of Suame Ltd publicly announced a plan to reduce the workforce by 10% as a result of worsening economic conditions.

Required:
Discuss the effects of each of the above items on the financial statements of Suame Ltd for the year ended 31 October 2015 in accordance with IAS 10 Events after the Reporting Period.

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  • 15 Marks

CR – May 2018 – L3 – Q3 – Corporate Reconstruction and Reorganisation

Evaluate two schemes for restructuring a microfinance company and discuss the advantages of each scheme.

Bank of Ghana (BoG) recently announced an increase in the minimum capital requirement for Micro Finance Institutions in the country from GH¢500,000 to GH¢2 million by June 2018. Capital Link, a Micro Finance Company, has been affected by the increase in players in the Micro Finance Industry, which has seen a reduction of its loan portfolio and an increase in loan default rate. A statement of financial position recently prepared by Capital Link is provided:

Statement of Financial Position as at 30th April 2017

Additional information: Depositors are uncertain about the ability of Capital Link to raise the required capital. Management of Capital Link has proposed two options for the company’s future:

  • Scheme 1 – Close Down Mission:
    Unity Capital Ltd has offered GH¢600,000 for the leasehold property. The loan portfolio is conservatively valued at GH¢592,500 in a forced sale. Investments in Treasury bills are valued at GH¢465,000. Liquidation expenses are estimated at GH¢30,000, and interest to depositors is GH¢330,000.
  • Scheme 2 – Rescue Mission:
    Management has proposed to implement a rescue scheme that includes a GH¢600,000 loan from a distress fund set up by an NGO. The loan terms include paying GH¢375,000 to the NGO immediately, with the balance exchanged for a 20% debenture repayable over four years.

Assume:

  • Current borrowing rate is 14%.
  • The present value of GH¢1 receivable at the end of each year is:
Year 14% 20%
1 0.88 0.83
2 0.77 0.69
3 0.67 0.58
4 0.59 0.48

Required:
a) By means of numerical analysis of the two schemes, evaluate how much the bank would recover from each scheme. (12 marks)
b) Discuss TWO advantages of each scheme. (3 marks)

 

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  • 20 Marks

BCL – May 2019 – L1 – Q2 – Employment Law

Discuss the rights of an employer in a restructuring situation.

Eric Afful was employed as the Chief Operations Officer of Deews Construction Company, in 2003. In 2015, the company undertook a major restructuring resulting in re-assignment of Eric to the role of Building Inspector. In this new role, his signing authorities were withdrawn and all subordinate staff transferred out of his department. His salary was reduced drastically and he was informed by the MD that the company’s budget would not be able to meet his salary. When he complained, he was advised to keep quiet or have his appointment terminated.

Required:

a) Comment on the right of the employer in the case. (5 marks)

b) On what THREE (3) grounds can Eric’s appointment be terminated? (9 marks)

c) What TWO (2) remedies will be available to Eric in the event of unfair termination? (6 marks)

 

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  • 10 Marks

AAA – Nov 2019 – L3 – Q5b – Current Issues, Audit-related Services

Discuss the financial reporting implications of a restructuring and recommend auditor actions if financial statements are not amended.

You are the manager responsible for the audit of Obeyeyie Co. Ltd (OCL), a manufacturing company with a year ended 31 December 2018. The audit work has been completed and reviewed and you are due to issue the audit report in three days. The draft audit opinion is unmodified. The financial statements show revenue for the year ended 31 December 2018 of GH¢ 15 million, net profit of GH¢ 3 million, and total assets at the year-end are GH¢ 80 million.

The finance director of OCL e-mailed you this morning in addition to a WhatsApp message to tell you about the announcement yesterday of a significant restructuring of OCL, which will take place over the next six months. The restructuring will involve the closure of a factory and its relocation to another part of the country. There will be some redundancies and the estimated cost of closure is GH¢ 250,000. The financial statements have not been amended in respect of this matter.

Required:

i) Comment on the financial reporting implications, and advise the further audit procedures to be performed. (6 marks)

ii) Recommend the actions to be taken by the auditor if the financial statements are not amended. (4 marks)

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