Question Tag: Restructuring costs

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  • 30 Marks

FR – Nov 2023 – L2 – Q1 – Presentation of Financial Statements (IAS 1)

Prepare financial statements for Akamata Nigeria Limited, analyze revaluation adjustments, and assess ethical challenges posed by management.

Akamata Nigeria Limited is a manufacturing company. Its finished products are stored in a nearby warehouse until ordered by the customers. Akamata Nigeria Limited has performed very well in the past, but has been in financial difficulties in recent months due to the removal of petroleum subsidies and floating of exchange rate by the Federal Government of Nigeria. The company has been reorganizing its business to improve performance.

The trial balance of Akamata Nigeria Limited as at March 31, 2023, was as follows:

Description Debit (N’000) Credit (N’000)
Revenue 624,500
Cost of goods manufactured (excluding depreciation) 470,000
Distribution costs 45,300
Administrative expenses 80,100
Restructuring costs 605
Interest received 6,000
Loan notes interest paid 3,195
Land and building (including land N100,000,000) 251,500
Plant and equipment 18,600
Accumulated depreciation at March 31, 2022:
– Buildings 30,300
– Plant and equipment 8,350
Investment properties (at market value) 120,000
Inventories at March 31, 2022 24,260
Trade receivables 46,650
Cash and bank 5,950
Ordinary share capital of N1 each (fully paid) 100,000
Share premium 2,150
Revaluation surplus 15,625
Retained earnings at March 31, 2022 140,385
Ordinary dividend paid 5,000
7% loan notes (2027) 91,250
Trade payables 40,600
Proceeds of shares issued 12,000

Total Debit = 1,071,160
Total Credit = 1,071,160

Additional Information:

  1. Property, plant, and equipment depreciation policies:
    • Building: 5% p.a. on straight-line basis (administrative cost).
    • Plant and equipment: 25% p.a. on reducing balance basis (cost of sales).
  2. Land revaluation on March 31, 2023: N120,000,000.
  3. Estimated income tax for the year ended March 31, 2023: N4,880,000.
  4. Closing inventories as at March 31, 2023, amount to N25,900,000. Inspection shows that a production machine had incorrect setup resulting in mispackaged products costing N250,000 to produce. Additional repackaging cost of N100,000 would enable a sale at N275,000. The mispackaged goods are currently included in inventory at N250,000.
  5. Loan notes are due for repayment by March 31, 2027, with interest accrued for six months to March 31, 2023.
  6. Restructuring costs represent major efforts to improve competitiveness and profitability.
  7. Investment properties required no fair value adjustments during the period.
  8. Issued 10 million new ordinary shares at N1.20 each during the year, recorded under “proceeds of share issue.”

Required:

a. Prepare the statement of profit or loss and other comprehensive income, and the statement of changes in equity for the year ended March 31, 2023. (15 Marks)

b. Prepare the statement of financial position as at March 31, 2023. (10 Marks)

c. As the chief accountant of Akamata Nigeria Limited, you have been instructed by the new managing director (MD) to revise the last financial statement and prepare an attractive six-month forecast for listing on the Nigerian Exchange Limited (NGX), potentially bypassing relevant accounting standards and NGX regulations.

Required:
Identify the motivations of the managing director and outline actions you should consider under this ethical pressure. (5 Marks)

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  • 20 Marks

CR – Nov 2018 – L3 – Q1 – Consolidated financial statements

Prepare the consolidated statement of financial position for Accra Ltd, considering acquisitions, goodwill, impairments, revaluation, and pension obligations.

Accra Ltd, a public limited liability company in Ghana, operates in the manufacturing sector.

Accra Ltd has investments in two other Ghanaian companies.

The draft statement of financial position as at 31 March 2018 are as follows:

Additional information:

i) On 1 April 2016, Accra Ltd acquired 14% of the equity interest of Takoradi Ltd for a cash consideration of GH¢130 million, and Bawku Ltd acquired 70% of the equity interest of Takoradi Ltd for a cash consideration of GH¢635 million. At 1 April 2016, the identifiable net assets of Takoradi Ltd had a fair value of GH¢495 million, retained earnings were GH¢95 million, and other components of equity were GH¢26 million. At 1 April 2017, the identifiable net assets of Takoradi Ltd had a fair value of GH¢575 million, retained earnings were GH¢120 million, and other components of equity were GH¢35 million. The excess in fair value is due to non-depreciable land. The fair value of the 14% holding of Accra Ltd in Takoradi Ltd, which was classified as fair value through profit or loss, was GH¢140 million at 31 March 2017 and GH¢155 million at 31 March 2018. However, the fair value of Bawku Ltd’s interest in Takoradi Ltd had not changed since acquisition.

ii) On 1 April 2017, Accra Ltd acquired 60% of the equity interests of Bawku Ltd, a public limited liability company in Ghana. The cost of investment comprised cash of GH¢625 million. On 1 April 2017, the fair value of the identifiable net assets acquired was GH¢975 million, retained earnings of Bawku Ltd were GH¢325 million, and other components of equity were GH¢27.5 million. The excess in fair value is due to non-depreciable land. It is the group’s policy to measure the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary’s net assets.

iii) Goodwill of Bawku Ltd and Takoradi Ltd were tested for impairment at 31 March 2018 and found that there was no impairment relating to Takoradi Ltd. However, the goodwill of Bawku Ltd was fully impaired by the reporting date.

iv) On 1 April 2016, Accra Ltd acquired office accommodation at a cost of GH¢45 million with a 30-year estimated useful life. During the year, the property market in the area slumped, and the fair value of accommodation fell to GH¢37.5 million at 31 March 2017, which was reflected in the financial statements. However, the market unexpectedly recovered quickly due to the announcement of major government investment in the area’s transport infrastructure. On 31 March 2018, the valuer advised Accra Ltd that the offices should now be valued at GH¢52.5 million. Accra Ltd has charged depreciation for the year but has not taken account of the upward valuation of the offices. Accra Ltd uses the revaluation model and records any valuation change when advised to do so.

v) Accra Ltd has announced two major restructuring plans during the year. The first plan is to reduce its capacity by the closure of some of its smaller factories, which have already been identified. This will lead to the redundancy of 500 employees, who have all individually been selected and communicated to. The costs of this plan are GH¢4.5 million in redundancy costs, GH¢2.5 million in retraining costs, and GH¢2.5 million in lease termination costs. The second plan is to re-organize the finance and information technology department over a one-year period but it does not commence until two years’ time. The plan will result in 20% of finance staff losing their jobs during the restructuring. The costs of this plan are GH¢5 million in redundancy costs, GH¢3 million in retraining costs, and GH¢3.5 million in equipment lease termination costs. There are no entries made in the financial statements for the above plans.

vi) The following information relates to the group pension plan of Accra Ltd:

1 April 2017 GH¢ million 31 March 2018 GH¢ million
Fair value of plan assets 14 14.5
Actuarial value of defined benefit obligation 15 17.5

The contributions for the period received by the fund were GH¢1 million, and the employee benefits paid in the year amounted to GH¢1.5 million. The discount rate to be used in any calculation is 5%. The current service cost for the period based on actuarial calculations is GH¢0.5 million. The above figures have not been taken into account for the year ended 31 March 2018 except for the contributions paid, which have been entered in cash and the defined benefit obligation.

Required:
Prepare the group consolidated statement of financial position of Accra Ltd as at 31 March 2018.
(Total: 20 marks)

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  • 7 Marks

CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits

Recommend accounting treatment for pension obligations and restructuring costs in financial statements in accordance with relevant IFRS.

Kaase Ltd, a public limited company, operates in the technology sector in Ghana. The company has decided to restructure one of its business segments, affecting employees in two locations. In the first location (A), half of the factory units were closed by 31 March 2021, and the affected employees’ pension benefits were frozen. After restructuring, the present value of the defined benefit obligation in this location was GH¢8 million. Before restructuring, the value was GH¢10 million, and the fair value of plan assets was GH¢7 million, resulting in a net pension liability of GH¢3 million.

In the second location (B), all activities were discontinued, and employees will receive GH¢4 million in exchange for a pension liability of GH¢2.4 million. Kaase Ltd estimates that restructuring costs excluding pension costs will be GH¢6 million. No formal announcement has been made due to a planned rights issue. The pension liability is currently included in non-current liabilities.

Required:
Recommend the accounting treatment of the above transaction in the financial statement of Kaase Ltd, including financial statement extracts for the year ended 31 March 2021, in accordance with relevant International Financial Reporting Standards (IFRS).

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  • 30 Marks

FR – Nov 2023 – L2 – Q1 – Presentation of Financial Statements (IAS 1)

Prepare financial statements for Akamata Nigeria Limited, analyze revaluation adjustments, and assess ethical challenges posed by management.

Akamata Nigeria Limited is a manufacturing company. Its finished products are stored in a nearby warehouse until ordered by the customers. Akamata Nigeria Limited has performed very well in the past, but has been in financial difficulties in recent months due to the removal of petroleum subsidies and floating of exchange rate by the Federal Government of Nigeria. The company has been reorganizing its business to improve performance.

The trial balance of Akamata Nigeria Limited as at March 31, 2023, was as follows:

Description Debit (N’000) Credit (N’000)
Revenue 624,500
Cost of goods manufactured (excluding depreciation) 470,000
Distribution costs 45,300
Administrative expenses 80,100
Restructuring costs 605
Interest received 6,000
Loan notes interest paid 3,195
Land and building (including land N100,000,000) 251,500
Plant and equipment 18,600
Accumulated depreciation at March 31, 2022:
– Buildings 30,300
– Plant and equipment 8,350
Investment properties (at market value) 120,000
Inventories at March 31, 2022 24,260
Trade receivables 46,650
Cash and bank 5,950
Ordinary share capital of N1 each (fully paid) 100,000
Share premium 2,150
Revaluation surplus 15,625
Retained earnings at March 31, 2022 140,385
Ordinary dividend paid 5,000
7% loan notes (2027) 91,250
Trade payables 40,600
Proceeds of shares issued 12,000

Total Debit = 1,071,160
Total Credit = 1,071,160

Additional Information:

  1. Property, plant, and equipment depreciation policies:
    • Building: 5% p.a. on straight-line basis (administrative cost).
    • Plant and equipment: 25% p.a. on reducing balance basis (cost of sales).
  2. Land revaluation on March 31, 2023: N120,000,000.
  3. Estimated income tax for the year ended March 31, 2023: N4,880,000.
  4. Closing inventories as at March 31, 2023, amount to N25,900,000. Inspection shows that a production machine had incorrect setup resulting in mispackaged products costing N250,000 to produce. Additional repackaging cost of N100,000 would enable a sale at N275,000. The mispackaged goods are currently included in inventory at N250,000.
  5. Loan notes are due for repayment by March 31, 2027, with interest accrued for six months to March 31, 2023.
  6. Restructuring costs represent major efforts to improve competitiveness and profitability.
  7. Investment properties required no fair value adjustments during the period.
  8. Issued 10 million new ordinary shares at N1.20 each during the year, recorded under “proceeds of share issue.”

Required:

a. Prepare the statement of profit or loss and other comprehensive income, and the statement of changes in equity for the year ended March 31, 2023. (15 Marks)

b. Prepare the statement of financial position as at March 31, 2023. (10 Marks)

c. As the chief accountant of Akamata Nigeria Limited, you have been instructed by the new managing director (MD) to revise the last financial statement and prepare an attractive six-month forecast for listing on the Nigerian Exchange Limited (NGX), potentially bypassing relevant accounting standards and NGX regulations.

Required:
Identify the motivations of the managing director and outline actions you should consider under this ethical pressure. (5 Marks)

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  • 20 Marks

CR – Nov 2018 – L3 – Q1 – Consolidated financial statements

Prepare the consolidated statement of financial position for Accra Ltd, considering acquisitions, goodwill, impairments, revaluation, and pension obligations.

Accra Ltd, a public limited liability company in Ghana, operates in the manufacturing sector.

Accra Ltd has investments in two other Ghanaian companies.

The draft statement of financial position as at 31 March 2018 are as follows:

Additional information:

i) On 1 April 2016, Accra Ltd acquired 14% of the equity interest of Takoradi Ltd for a cash consideration of GH¢130 million, and Bawku Ltd acquired 70% of the equity interest of Takoradi Ltd for a cash consideration of GH¢635 million. At 1 April 2016, the identifiable net assets of Takoradi Ltd had a fair value of GH¢495 million, retained earnings were GH¢95 million, and other components of equity were GH¢26 million. At 1 April 2017, the identifiable net assets of Takoradi Ltd had a fair value of GH¢575 million, retained earnings were GH¢120 million, and other components of equity were GH¢35 million. The excess in fair value is due to non-depreciable land. The fair value of the 14% holding of Accra Ltd in Takoradi Ltd, which was classified as fair value through profit or loss, was GH¢140 million at 31 March 2017 and GH¢155 million at 31 March 2018. However, the fair value of Bawku Ltd’s interest in Takoradi Ltd had not changed since acquisition.

ii) On 1 April 2017, Accra Ltd acquired 60% of the equity interests of Bawku Ltd, a public limited liability company in Ghana. The cost of investment comprised cash of GH¢625 million. On 1 April 2017, the fair value of the identifiable net assets acquired was GH¢975 million, retained earnings of Bawku Ltd were GH¢325 million, and other components of equity were GH¢27.5 million. The excess in fair value is due to non-depreciable land. It is the group’s policy to measure the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary’s net assets.

iii) Goodwill of Bawku Ltd and Takoradi Ltd were tested for impairment at 31 March 2018 and found that there was no impairment relating to Takoradi Ltd. However, the goodwill of Bawku Ltd was fully impaired by the reporting date.

iv) On 1 April 2016, Accra Ltd acquired office accommodation at a cost of GH¢45 million with a 30-year estimated useful life. During the year, the property market in the area slumped, and the fair value of accommodation fell to GH¢37.5 million at 31 March 2017, which was reflected in the financial statements. However, the market unexpectedly recovered quickly due to the announcement of major government investment in the area’s transport infrastructure. On 31 March 2018, the valuer advised Accra Ltd that the offices should now be valued at GH¢52.5 million. Accra Ltd has charged depreciation for the year but has not taken account of the upward valuation of the offices. Accra Ltd uses the revaluation model and records any valuation change when advised to do so.

v) Accra Ltd has announced two major restructuring plans during the year. The first plan is to reduce its capacity by the closure of some of its smaller factories, which have already been identified. This will lead to the redundancy of 500 employees, who have all individually been selected and communicated to. The costs of this plan are GH¢4.5 million in redundancy costs, GH¢2.5 million in retraining costs, and GH¢2.5 million in lease termination costs. The second plan is to re-organize the finance and information technology department over a one-year period but it does not commence until two years’ time. The plan will result in 20% of finance staff losing their jobs during the restructuring. The costs of this plan are GH¢5 million in redundancy costs, GH¢3 million in retraining costs, and GH¢3.5 million in equipment lease termination costs. There are no entries made in the financial statements for the above plans.

vi) The following information relates to the group pension plan of Accra Ltd:

1 April 2017 GH¢ million 31 March 2018 GH¢ million
Fair value of plan assets 14 14.5
Actuarial value of defined benefit obligation 15 17.5

The contributions for the period received by the fund were GH¢1 million, and the employee benefits paid in the year amounted to GH¢1.5 million. The discount rate to be used in any calculation is 5%. The current service cost for the period based on actuarial calculations is GH¢0.5 million. The above figures have not been taken into account for the year ended 31 March 2018 except for the contributions paid, which have been entered in cash and the defined benefit obligation.

Required:
Prepare the group consolidated statement of financial position of Accra Ltd as at 31 March 2018.
(Total: 20 marks)

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  • 7 Marks

CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits

Recommend accounting treatment for pension obligations and restructuring costs in financial statements in accordance with relevant IFRS.

Kaase Ltd, a public limited company, operates in the technology sector in Ghana. The company has decided to restructure one of its business segments, affecting employees in two locations. In the first location (A), half of the factory units were closed by 31 March 2021, and the affected employees’ pension benefits were frozen. After restructuring, the present value of the defined benefit obligation in this location was GH¢8 million. Before restructuring, the value was GH¢10 million, and the fair value of plan assets was GH¢7 million, resulting in a net pension liability of GH¢3 million.

In the second location (B), all activities were discontinued, and employees will receive GH¢4 million in exchange for a pension liability of GH¢2.4 million. Kaase Ltd estimates that restructuring costs excluding pension costs will be GH¢6 million. No formal announcement has been made due to a planned rights issue. The pension liability is currently included in non-current liabilities.

Required:
Recommend the accounting treatment of the above transaction in the financial statement of Kaase Ltd, including financial statement extracts for the year ended 31 March 2021, in accordance with relevant International Financial Reporting Standards (IFRS).

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