Question Tag: Revenue Recognition

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  • 8 Marks

CR – May 2023 – L3 – Q5a – Emerging Trends in Corporate Reporting

Discuss four financial reporting issues companies should consider due to COVID-19.

Most regulatory authorities in Nigeria, such as the Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), and Federal Inland and State Internal Revenue Services, issued conditional relief for meeting reporting deadlines for filing annual and other returns required by law during the pandemic.

However, companies still need to monitor further reporting updates and evaluate the current and potential effects that COVID-19 could have on their financial reporting.

Required:

Discuss FOUR financial reporting issues that should be considered by companies as a consequence of COVID-19. (8 Marks)

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  • 10 Marks

CR – May 2023 – L3 – Q4a – Revenue Recognition (IFRS 15)

Discuss the criteria for a contract to fall under IFRS 15 for revenue recognition.

There has been significant divergence in practice over the recognition of revenue, mainly because International Financial Reporting Standards (IFRSs) contain limited guidance in certain areas. The International Accounting Standards Board (IASB), as a result of its joint project with the US Financial Accounting Standards Board (FASB), has issued IFRS 15 – Revenue from Contracts with Customers.

IFRS 15 sets out a five-step model, which applies to revenue earned from a contract with a customer with limited exceptions, regardless of the type of revenue transaction or the industry. Step one in the five-step model requires the identification of the contract with the customer and is critical for the purpose of applying the standard. The remaining four steps in the standard’s revenue recognition model are irrelevant if the contract does not fall within the scope of IFRS 15.

Required:

Discuss the criteria which must be met for a contract with a customer to fall within the scope of IFRS 15. (10 Marks)

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  • 15 Marks

CR – Nov 2021 – L3 – Q5 – Revenue Recognition (IFRS 15)

Analyze the impact of early revenue recognition, responsibilities of accountants, and risks of improper disclosure in financial reporting.

Accountants in business who are responsible for the preparation of financial information must ensure that the information they prepare is technically correct, completely disclosed without any omission, and also report the substance of the transaction. However, accountants are usually faced with the danger of influence from senior managers to present figures that inflate profit or assets or understate liabilities. This always puts accountants in a difficult position. This is the situation that the Chief Accountant of Fola PLC found himself.

Fola PLC has December 31 as its year-end, and the managing director (MD) feared that the forecast of 2020 profitability goals would not be reached. Therefore, when Fola PLC received a large order on December 30, the MD immediately directed that the Chief Accountant should record it as revenue for the period. This order represents about 13% of Fola PLC’s revenue. However, the inventory control department did not separate the goods for shipment until January 1, 2021. Separated goods are usually not included in the inventory because they have been sold. Physical inventory taking under the periodic inventory system was conducted on December 31, as it is customary for the company’s external auditors to be in attendance. The Chief Accountant was confused and not willing to be involved in any unethical act.

Required:

a. Appraise the effects and implications of treating the order as revenue on 2020 and 2021 profitability.
(5 Marks)

b. In such circumstances, what should be the responsibilities of the Chief Accountant?
(5 Marks)

c. Analyze the dangers of inappropriate disclosure of information in the financial statements.
(5 Marks)

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  • 20 Marks

AAA – Nov 2020 – L3 – Q4 – Audit of IT Systems and Data Analytics

Discuss IT controls and the five-step revenue recognition model in a retail environment adapting to online sales.

Holloway Interiors Limited operates a large shop at Garki, Abuja. The company’s year-end is April 30. It sells high-end furniture and provides interior decoration services. Typically, sales begin with a customer signing an invoice prepared by a sales clerk, who then records the sale in the system and prints a receipt in duplicate, one for the customer and one for filing. The customer either takes the product or arranges for delivery by the company.

Due to the COVID-19 lockdown in Abuja, Holloway Interiors closed its physical showroom, shifted all sales online, and allowed delivery after payment or on a cash-on-delivery basis. Delivery may take up to a week after the online sale is initiated.

You are the Audit Manager for Holloway Interiors Limited.

Required:
a. Discuss the general IT controls expected in Holloway Interiors. (10 Marks)
b. Explain the FIVE steps model for recognizing revenue under IFRS 15: Revenue from Contracts with Customers. (10 Marks)

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  • 15 Marks

CR – May 2024 – L3 – SC – Q6 – Revenue Recognition (IFRS 15)

Discuss IFRS 15 revenue recognition requirements and address consolidation impacts for two transactions.

You are the chief accountant of Japa PLC, that prepares consolidated financial statements. The managing director who is not an accountant, has recently attended a workshop at which key corporate reporting issues were discussed.

The managing director remembers being taught the following at the workshop:

i. Financial statements of an entity should reflect the substance of its transactions.
ii. Revenue from contracts with customers should only be recognized when certain conditions have been satisfied. Transfer of legal title of the goods is not necessarily sufficient for an entity to recognize revenue from their sales.

The financial year-end of Japa PLC is August 31. In the year to August 31, 2021, the company entered into the following transactions:

Transaction 1

On March 1, 2021, Japa PLC sold a property to Kalokalo Bank LTD for N50 million. The market value of the property at the date of the sale was N100 million. However, Japa PLC continues to occupy the property rent-free. Japa PLC has the option to buy the property back from Kalokalo Bank LTD at the end of every month from March 31, 2021, until February 28, 2026. Japa PLC has not yet exercised this option.

The repurchase price will be N50 million plus N500,000 for every complete month that has elapsed from the date of sale to the date of repurchase. Kalokalo Bank LTD did not require Japa PLC to repurchase the property, and the facility will lapse after February 28, 2026.

The director of Japa PLC expects property prices to rise at around 5% each year for the foreseeable future.

Transaction 2

On September 1, 2020, Japa PLC sold one of its branches to Andrew Tourist Nig. LTD for N80 million. The net assets of the branch in the financial statements of Japa PLC immediately before the sale were N70 million. Andrew Tourist Nig. LTD is a subsidiary of Kalokalo Bank LTD and was specifically incorporated to carry out the purchase; it has no other business operations. Andrew Tourist Nig. LTD received the N80 million to finance this project from its parent (Kalokalo Bank LTD) in the form of a loan.

Japa PLC continues to control the operations of the branch and receives an annual operating fee from Andrew Tourist Nig. LTD. The annual fee is the operating profit of the branch for the 12 months to the previous August 31, less the interest payable on the loan taken out by Andrew Tourist Nig. LTD for the 12 months to the previous August 31. If this amount is negative, then Japa PLC must pay the negative amount to Andrew Tourist Nig. LTD.

Any payments to or by Japa PLC must be made by September 30 following the end of the relevant period.

In the year to August 31, 2021, the branch made an operating profit of N20 million, and interest payable by Andrew Tourist Nig. LTD on the loan for this period was N8 million.

Required:

(a) In accordance with IFRS 15 – Revenue from contracts with customers, discuss the conditions that need to be satisfied before revenue can be recognized. (5 Marks)

(b) Write a memo to the managing director of Japa PLC explaining how the transactions described above will be dealt with in the consolidated financial statements of Japa PLC for the year ended August 31, 2021, in accordance with IFRS 15. (10 Marks)

(Total 15 Marks)

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  • 15 Marks

CR – Nov 2018 – L3 – SC – Q7 – Segment Reporting (IFRS 8)

Guidance on segment reporting and revenue recognition for long-term contracts for Agbero Plc’s operating and contract revenue.

a. Agbero plc is a public company rendering services to the Lagos State Government, primarily in public transport. Listed on the Lagos Stock Exchange, Agbero plc identified three operating segments in its annual financial statements for the year ended March 31, 2018:

  • Segment 1: Local bus operations
  • Segment 2: Inter-city bus operations
  • Segment 3: Road constructions

The company disclosed two reportable segments. Segments 1 and 2 were aggregated into a single reportable operating segment, based on similar business characteristics, and the nature of their products and services. In the local bus operations market, the Lagos State Transport Authority awards the contract and pays Agbero for its services. Contracts for local bus operations are awarded via a competitive tender process, and ticket prices are set and paid to the Lagos State Transport Authority. In the inter-city bus operation market, Agbero sets the ticket prices, and passengers pay Agbero directly for the service.

Required:

i. Advise Agbero plc on how the above accounting issues should be dealt with in its financial statements. (6 Marks)

ii. Although the company is satisfied with IFRS 8 – Operating Segment, it is unclear who to designate as the chief operating decision maker (CODM) under the standard. Define the chief operating decision maker in line with IFRS 8 – Operating Segment and identify who this should be in Agbero plc. (2 Marks)

b. Agbero Plc entered a contract with the Lagos State Government on April 1, 2016, to construct a new light railway line. The contract total revenue is N5 billion over a three-year period. The contract specifies that N1 billion will be paid at the start of the contract, but subsequent payments will be settled only upon completion of the project. Invoices have been sent as follows:

  • Year ended March 31, 2017: N2.8 billion
  • Year ended March 31, 2018: N1.2 billion
  • Remaining balance to be invoiced on March 31, 2019

To date, Agbero Plc has only recognized the initial payment in the financial statements up to March 31, 2017, as no subsequent payments are due until March 31, 2019. The invoiced amounts reflect the work completed in each period.

Required:

Agbero Plc. wishes to know how to account for the revenue on the contract in the financial statements to date. Advise Agbero Plc. Market interest rates are currently at 6%. (7 Marks)

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  • 4 Marks

PSAF – Nov 2023 – L2 – Q3b – Public Procurement and Contract Management

Prepare journal entries to record revenue, expenses, and payments for a healthcare construction project.

Based on the budget of Azare Federal Ministry of Health and Wellbeing (AFMHW), a contract to construct 5 units of Primary Healthcare Centres (PHC) in each of the six (6) geo-political zones to address malaria, infant deaths, and years of neglect in prioritizing primary healthcare and well-being of the citizens was signed with Alaafia Construction Company. This contract was at the cost of N12,250,200 per unit, with a 2-year contract duration and no variation clause.

A valuation certificate was submitted at the end of year one, which showed that over 60% of the contract has been executed, while N294,004,800 has been estimated to have been spent on the project since inception. There were also indications that the office of AFMHW has paid the contractor a total sum of N244,100,000.

Required:

Prepare journal entries to record the above transactions. (4 Marks)

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  • 30 Marks

PSF – Nov 2023 – L2 – Q1 – Public Sector Financial Statements

Assess expected profit, completion stage, and financial statement recognition for a government contract under IPSAS.

Housing-for-all Corporation is an entity established by Kazua State to engage in building construction. The corporation is partly financed with subvention from the State and also from the proceeds from its operations. It applied for a bid to construct twenty (20) classroom buildings in the riverine area of the state. After all the initial procurement processes on bid-opening were carried out, the corporation won the contract in June 2018. The contract price was N220m. The building construction contract was billed for completion in two years. The company uses stages of completion on the basis of value of work completed. The following financial data were available in respect of the contract as at December 31, 2019:

Description Amount (N’000)
Total contract price 220,000
Total expected costs 180,000
Costs incurred to date 120,000
Value of work certified as complete 140,000
Amount billed to client (Kazua State) 130,000
Progress payment received from client 100,000

The contract was duly completed in June 2020.

Required:

a. Determine the expected profit of the contract, stage of completion in percentage, as well as the amount to be recognized in Housing-for-all Corporation’s income statement at December 31, 2019. (11 Marks)

b. Calculate the amount to be recognized as gross amount due to or from the client, Kazua State, the amount of trade receivable, and prepare extracts of financial statements in respect of the construction contracts at December 31, 2019. (13 Marks)

c. Identify what constitutes the composition of contract costs as contained in IPSAS 11. (6 Marks)

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  • 20 Marks

CR – Nov 2017 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explain IFRS accounting treatment and ethical issues in Enugun Industries Ltd.’s draft financial statements for the year ended Dec 31, 2014.

Enugun Industries Limited
Atikun has recently been appointed as Financial Controller to Enugun Industries Limited. Until a month ago, Enugun Industries had a Finance Director, who resigned suddenly, due to ill health. Since Atikun joined the company, he has learned that his resignation was related to stress caused by a series of disagreements with the Managing Director about the performance of the business. The directors have not yet appointed a replacement.

It is now March 2015, and you have been asked to finalize the financial statements for the year ended December 31, 2014. The draft statement of profit or loss extract and statement of financial position are shown below:

Draft statement of profit or loss for the year ended December 31, 2014:

Profit before tax ₦’000
2,500

Draft statement of financial position as of December 31, 2014:

Item Amount (₦’000)
Property, plant, and equipment 12,000
Current assets 3,500
Total assets 15,500
Share capital 2,000
Retained earnings 6,000
Equity 8,000
Non-current liabilities 5,000
Current liabilities 2,500
Total equity and liabilities 15,500

During the year ended December 31, 2014, Enugun Industries entered into the following transactions:

  1. Just before the year-end, Enugun Industries signed a contract to deliver consultancy services for a period of 2 years at a fee of ₦500,000 per annum. The full amount of this fee has been paid in advance and is non-refundable.
  2. Enugun Industries has constructed a new factory. The construction has been financed from the pool of existing borrowings. Land at a cost of ₦1.8 million was acquired on February 1, 2014, and construction began on June 1, 2014. Construction was completed on September 30, 2014, at an additional cost of ₦2.7 million. Although the factory was usable from that date, full production did not commence until December 1, 2014. Throughout the year, the company’s average borrowings were as follows:
    Borrowing Type Amount (₦) Annual Interest Rate (%)
    Bank overdraft 1,000,000 9.75
    Bank loan 1,750,000 10
    Loan notes 2,500,000 8

    An amount of ₦450,000 has been included in property, plant, and equipment in respect of borrowing costs relating to the construction of the factory. The useful life of the factory has been estimated at 20 years. No depreciation has been charged for the year. The reason for this is that the factory has only been in use for one month and that the depreciation charge would be immaterial.

  3. A blast furnace with a carrying amount at January 1, 2014, of ₦3.5 million has been depreciated in the draft financial statements based on a remaining life of 20 years. In December 2014, the directors carried out a review of the useful lives of various significant items of plant and machinery, including the blast furnace. They concluded that the furnace’s useful life was 20 years as of December 31, 2014. The reasoning behind this judgment was that the lining of the furnace had been replaced in the last week of December 2014 at a cost of ₦1.4 million. Provided that the lining is replaced every five years, the life of the furnace can be extended accordingly. You have found a report commissioned by the previous Finance Director and prepared by a firm of asset valuation specialists, which assesses the remaining useful life of the main structure of the furnace as 15 years at January 1, 2014, and the lining of the furnace as 5 years. You have also found evidence that the Managing Director has seen this report.

Atikun has had a conversation with the Managing Director, who told him, “We need to make the figures look as good as possible, so I hope you’re not going to start being difficult. The consultancy fee is non-refundable, so there’s no reason why we can’t include it in full. I think we should look at our depreciation policies. We’re writing off our assets over far too short a period. As you know, we’re planning to go for a stock market listing in the near future, and being prudent and playing safe won’t help us do that. It won’t help your future with this company either.”

Required:

  1. Explain the required IFRS accounting treatment of these issues, preparing relevant calculations where appropriate.
    (16 Marks)
  2. Discuss the ethical issues arising from your review of the draft financial statements and the actions that you should consider.
    (4 Marks)

Total: 20 Marks

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  • 20 Marks

CR – Nov 2017 – L3 – Q3 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Evaluate Funda Plc's accounting policies for specific transactions, recommending adjustments as per IFRS where appropriate.

Funda Plc. is a listed utility service company in Nigeria providing water, electricity, and cable services. The directors prepared draft financial statements for the year ended June 30, 2017, following IFRS guidelines to support a loan application. Employees, owning 5% of ordinary shares, raised concerns about certain accounting policies applied by Funda Plc.

The draft income statement for the year ended June 30, 2017, is as follows:

N’m
Revenue 410.0
Cost of Sales (275.0)
Gross Profit 135.0
Other Operating Costs (65.0)
Profit Before Taxation 70.0

Employee Representatives’ Queries on Accounting Policies:

  1. Sale of Water Filters
    Funda Plc. sold 30 industrial water filters to a steelmaker, offering a 20% discount and granting the steelmaker a put option to repurchase the filters at 35% of the purchase price after six years, despite the filters’ expected ten-year life. Funda Plc. has recognized the entire revenue upfront.
  2. Connection Fees
    A refundable connection fee is charged for electricity connections, to be returned upon customer disconnection. No minimum notice is required, and costs can be deducted from refunds. The fee was fully recognized in the year as revenue.
  3. Activation Fees
    Non-refundable activation fees for digital cable services were fully recognized in revenue.
  4. Deposits for Domestic Electrical Goods
    Customers place a 25% deposit on orders, with the balance payable on delivery. Deposits are retained if orders are canceled but refunded if Funda Plc. fails to deliver. Revenue includes N10 million from deposits, with 90% of orders fulfilled.

Required:
Prepare a report explaining the suitability of Funda Plc.’s accounting policies for each transaction and recommend the appropriate IFRS treatment where necessary.

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  • 8 Marks

CR – May 2023 – L3 – Q5a – Emerging Trends in Corporate Reporting

Discuss four financial reporting issues companies should consider due to COVID-19.

Most regulatory authorities in Nigeria, such as the Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), and Federal Inland and State Internal Revenue Services, issued conditional relief for meeting reporting deadlines for filing annual and other returns required by law during the pandemic.

However, companies still need to monitor further reporting updates and evaluate the current and potential effects that COVID-19 could have on their financial reporting.

Required:

Discuss FOUR financial reporting issues that should be considered by companies as a consequence of COVID-19. (8 Marks)

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  • 10 Marks

CR – May 2023 – L3 – Q4a – Revenue Recognition (IFRS 15)

Discuss the criteria for a contract to fall under IFRS 15 for revenue recognition.

There has been significant divergence in practice over the recognition of revenue, mainly because International Financial Reporting Standards (IFRSs) contain limited guidance in certain areas. The International Accounting Standards Board (IASB), as a result of its joint project with the US Financial Accounting Standards Board (FASB), has issued IFRS 15 – Revenue from Contracts with Customers.

IFRS 15 sets out a five-step model, which applies to revenue earned from a contract with a customer with limited exceptions, regardless of the type of revenue transaction or the industry. Step one in the five-step model requires the identification of the contract with the customer and is critical for the purpose of applying the standard. The remaining four steps in the standard’s revenue recognition model are irrelevant if the contract does not fall within the scope of IFRS 15.

Required:

Discuss the criteria which must be met for a contract with a customer to fall within the scope of IFRS 15. (10 Marks)

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  • 15 Marks

CR – Nov 2021 – L3 – Q5 – Revenue Recognition (IFRS 15)

Analyze the impact of early revenue recognition, responsibilities of accountants, and risks of improper disclosure in financial reporting.

Accountants in business who are responsible for the preparation of financial information must ensure that the information they prepare is technically correct, completely disclosed without any omission, and also report the substance of the transaction. However, accountants are usually faced with the danger of influence from senior managers to present figures that inflate profit or assets or understate liabilities. This always puts accountants in a difficult position. This is the situation that the Chief Accountant of Fola PLC found himself.

Fola PLC has December 31 as its year-end, and the managing director (MD) feared that the forecast of 2020 profitability goals would not be reached. Therefore, when Fola PLC received a large order on December 30, the MD immediately directed that the Chief Accountant should record it as revenue for the period. This order represents about 13% of Fola PLC’s revenue. However, the inventory control department did not separate the goods for shipment until January 1, 2021. Separated goods are usually not included in the inventory because they have been sold. Physical inventory taking under the periodic inventory system was conducted on December 31, as it is customary for the company’s external auditors to be in attendance. The Chief Accountant was confused and not willing to be involved in any unethical act.

Required:

a. Appraise the effects and implications of treating the order as revenue on 2020 and 2021 profitability.
(5 Marks)

b. In such circumstances, what should be the responsibilities of the Chief Accountant?
(5 Marks)

c. Analyze the dangers of inappropriate disclosure of information in the financial statements.
(5 Marks)

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  • 20 Marks

AAA – Nov 2020 – L3 – Q4 – Audit of IT Systems and Data Analytics

Discuss IT controls and the five-step revenue recognition model in a retail environment adapting to online sales.

Holloway Interiors Limited operates a large shop at Garki, Abuja. The company’s year-end is April 30. It sells high-end furniture and provides interior decoration services. Typically, sales begin with a customer signing an invoice prepared by a sales clerk, who then records the sale in the system and prints a receipt in duplicate, one for the customer and one for filing. The customer either takes the product or arranges for delivery by the company.

Due to the COVID-19 lockdown in Abuja, Holloway Interiors closed its physical showroom, shifted all sales online, and allowed delivery after payment or on a cash-on-delivery basis. Delivery may take up to a week after the online sale is initiated.

You are the Audit Manager for Holloway Interiors Limited.

Required:
a. Discuss the general IT controls expected in Holloway Interiors. (10 Marks)
b. Explain the FIVE steps model for recognizing revenue under IFRS 15: Revenue from Contracts with Customers. (10 Marks)

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  • 15 Marks

CR – May 2024 – L3 – SC – Q6 – Revenue Recognition (IFRS 15)

Discuss IFRS 15 revenue recognition requirements and address consolidation impacts for two transactions.

You are the chief accountant of Japa PLC, that prepares consolidated financial statements. The managing director who is not an accountant, has recently attended a workshop at which key corporate reporting issues were discussed.

The managing director remembers being taught the following at the workshop:

i. Financial statements of an entity should reflect the substance of its transactions.
ii. Revenue from contracts with customers should only be recognized when certain conditions have been satisfied. Transfer of legal title of the goods is not necessarily sufficient for an entity to recognize revenue from their sales.

The financial year-end of Japa PLC is August 31. In the year to August 31, 2021, the company entered into the following transactions:

Transaction 1

On March 1, 2021, Japa PLC sold a property to Kalokalo Bank LTD for N50 million. The market value of the property at the date of the sale was N100 million. However, Japa PLC continues to occupy the property rent-free. Japa PLC has the option to buy the property back from Kalokalo Bank LTD at the end of every month from March 31, 2021, until February 28, 2026. Japa PLC has not yet exercised this option.

The repurchase price will be N50 million plus N500,000 for every complete month that has elapsed from the date of sale to the date of repurchase. Kalokalo Bank LTD did not require Japa PLC to repurchase the property, and the facility will lapse after February 28, 2026.

The director of Japa PLC expects property prices to rise at around 5% each year for the foreseeable future.

Transaction 2

On September 1, 2020, Japa PLC sold one of its branches to Andrew Tourist Nig. LTD for N80 million. The net assets of the branch in the financial statements of Japa PLC immediately before the sale were N70 million. Andrew Tourist Nig. LTD is a subsidiary of Kalokalo Bank LTD and was specifically incorporated to carry out the purchase; it has no other business operations. Andrew Tourist Nig. LTD received the N80 million to finance this project from its parent (Kalokalo Bank LTD) in the form of a loan.

Japa PLC continues to control the operations of the branch and receives an annual operating fee from Andrew Tourist Nig. LTD. The annual fee is the operating profit of the branch for the 12 months to the previous August 31, less the interest payable on the loan taken out by Andrew Tourist Nig. LTD for the 12 months to the previous August 31. If this amount is negative, then Japa PLC must pay the negative amount to Andrew Tourist Nig. LTD.

Any payments to or by Japa PLC must be made by September 30 following the end of the relevant period.

In the year to August 31, 2021, the branch made an operating profit of N20 million, and interest payable by Andrew Tourist Nig. LTD on the loan for this period was N8 million.

Required:

(a) In accordance with IFRS 15 – Revenue from contracts with customers, discuss the conditions that need to be satisfied before revenue can be recognized. (5 Marks)

(b) Write a memo to the managing director of Japa PLC explaining how the transactions described above will be dealt with in the consolidated financial statements of Japa PLC for the year ended August 31, 2021, in accordance with IFRS 15. (10 Marks)

(Total 15 Marks)

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  • 15 Marks

CR – Nov 2018 – L3 – SC – Q7 – Segment Reporting (IFRS 8)

Guidance on segment reporting and revenue recognition for long-term contracts for Agbero Plc’s operating and contract revenue.

a. Agbero plc is a public company rendering services to the Lagos State Government, primarily in public transport. Listed on the Lagos Stock Exchange, Agbero plc identified three operating segments in its annual financial statements for the year ended March 31, 2018:

  • Segment 1: Local bus operations
  • Segment 2: Inter-city bus operations
  • Segment 3: Road constructions

The company disclosed two reportable segments. Segments 1 and 2 were aggregated into a single reportable operating segment, based on similar business characteristics, and the nature of their products and services. In the local bus operations market, the Lagos State Transport Authority awards the contract and pays Agbero for its services. Contracts for local bus operations are awarded via a competitive tender process, and ticket prices are set and paid to the Lagos State Transport Authority. In the inter-city bus operation market, Agbero sets the ticket prices, and passengers pay Agbero directly for the service.

Required:

i. Advise Agbero plc on how the above accounting issues should be dealt with in its financial statements. (6 Marks)

ii. Although the company is satisfied with IFRS 8 – Operating Segment, it is unclear who to designate as the chief operating decision maker (CODM) under the standard. Define the chief operating decision maker in line with IFRS 8 – Operating Segment and identify who this should be in Agbero plc. (2 Marks)

b. Agbero Plc entered a contract with the Lagos State Government on April 1, 2016, to construct a new light railway line. The contract total revenue is N5 billion over a three-year period. The contract specifies that N1 billion will be paid at the start of the contract, but subsequent payments will be settled only upon completion of the project. Invoices have been sent as follows:

  • Year ended March 31, 2017: N2.8 billion
  • Year ended March 31, 2018: N1.2 billion
  • Remaining balance to be invoiced on March 31, 2019

To date, Agbero Plc has only recognized the initial payment in the financial statements up to March 31, 2017, as no subsequent payments are due until March 31, 2019. The invoiced amounts reflect the work completed in each period.

Required:

Agbero Plc. wishes to know how to account for the revenue on the contract in the financial statements to date. Advise Agbero Plc. Market interest rates are currently at 6%. (7 Marks)

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  • 4 Marks

PSAF – Nov 2023 – L2 – Q3b – Public Procurement and Contract Management

Prepare journal entries to record revenue, expenses, and payments for a healthcare construction project.

Based on the budget of Azare Federal Ministry of Health and Wellbeing (AFMHW), a contract to construct 5 units of Primary Healthcare Centres (PHC) in each of the six (6) geo-political zones to address malaria, infant deaths, and years of neglect in prioritizing primary healthcare and well-being of the citizens was signed with Alaafia Construction Company. This contract was at the cost of N12,250,200 per unit, with a 2-year contract duration and no variation clause.

A valuation certificate was submitted at the end of year one, which showed that over 60% of the contract has been executed, while N294,004,800 has been estimated to have been spent on the project since inception. There were also indications that the office of AFMHW has paid the contractor a total sum of N244,100,000.

Required:

Prepare journal entries to record the above transactions. (4 Marks)

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  • 30 Marks

PSF – Nov 2023 – L2 – Q1 – Public Sector Financial Statements

Assess expected profit, completion stage, and financial statement recognition for a government contract under IPSAS.

Housing-for-all Corporation is an entity established by Kazua State to engage in building construction. The corporation is partly financed with subvention from the State and also from the proceeds from its operations. It applied for a bid to construct twenty (20) classroom buildings in the riverine area of the state. After all the initial procurement processes on bid-opening were carried out, the corporation won the contract in June 2018. The contract price was N220m. The building construction contract was billed for completion in two years. The company uses stages of completion on the basis of value of work completed. The following financial data were available in respect of the contract as at December 31, 2019:

Description Amount (N’000)
Total contract price 220,000
Total expected costs 180,000
Costs incurred to date 120,000
Value of work certified as complete 140,000
Amount billed to client (Kazua State) 130,000
Progress payment received from client 100,000

The contract was duly completed in June 2020.

Required:

a. Determine the expected profit of the contract, stage of completion in percentage, as well as the amount to be recognized in Housing-for-all Corporation’s income statement at December 31, 2019. (11 Marks)

b. Calculate the amount to be recognized as gross amount due to or from the client, Kazua State, the amount of trade receivable, and prepare extracts of financial statements in respect of the construction contracts at December 31, 2019. (13 Marks)

c. Identify what constitutes the composition of contract costs as contained in IPSAS 11. (6 Marks)

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  • 20 Marks

CR – Nov 2017 – L3 – Q4 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explain IFRS accounting treatment and ethical issues in Enugun Industries Ltd.’s draft financial statements for the year ended Dec 31, 2014.

Enugun Industries Limited
Atikun has recently been appointed as Financial Controller to Enugun Industries Limited. Until a month ago, Enugun Industries had a Finance Director, who resigned suddenly, due to ill health. Since Atikun joined the company, he has learned that his resignation was related to stress caused by a series of disagreements with the Managing Director about the performance of the business. The directors have not yet appointed a replacement.

It is now March 2015, and you have been asked to finalize the financial statements for the year ended December 31, 2014. The draft statement of profit or loss extract and statement of financial position are shown below:

Draft statement of profit or loss for the year ended December 31, 2014:

Profit before tax ₦’000
2,500

Draft statement of financial position as of December 31, 2014:

Item Amount (₦’000)
Property, plant, and equipment 12,000
Current assets 3,500
Total assets 15,500
Share capital 2,000
Retained earnings 6,000
Equity 8,000
Non-current liabilities 5,000
Current liabilities 2,500
Total equity and liabilities 15,500

During the year ended December 31, 2014, Enugun Industries entered into the following transactions:

  1. Just before the year-end, Enugun Industries signed a contract to deliver consultancy services for a period of 2 years at a fee of ₦500,000 per annum. The full amount of this fee has been paid in advance and is non-refundable.
  2. Enugun Industries has constructed a new factory. The construction has been financed from the pool of existing borrowings. Land at a cost of ₦1.8 million was acquired on February 1, 2014, and construction began on June 1, 2014. Construction was completed on September 30, 2014, at an additional cost of ₦2.7 million. Although the factory was usable from that date, full production did not commence until December 1, 2014. Throughout the year, the company’s average borrowings were as follows:
    Borrowing Type Amount (₦) Annual Interest Rate (%)
    Bank overdraft 1,000,000 9.75
    Bank loan 1,750,000 10
    Loan notes 2,500,000 8

    An amount of ₦450,000 has been included in property, plant, and equipment in respect of borrowing costs relating to the construction of the factory. The useful life of the factory has been estimated at 20 years. No depreciation has been charged for the year. The reason for this is that the factory has only been in use for one month and that the depreciation charge would be immaterial.

  3. A blast furnace with a carrying amount at January 1, 2014, of ₦3.5 million has been depreciated in the draft financial statements based on a remaining life of 20 years. In December 2014, the directors carried out a review of the useful lives of various significant items of plant and machinery, including the blast furnace. They concluded that the furnace’s useful life was 20 years as of December 31, 2014. The reasoning behind this judgment was that the lining of the furnace had been replaced in the last week of December 2014 at a cost of ₦1.4 million. Provided that the lining is replaced every five years, the life of the furnace can be extended accordingly. You have found a report commissioned by the previous Finance Director and prepared by a firm of asset valuation specialists, which assesses the remaining useful life of the main structure of the furnace as 15 years at January 1, 2014, and the lining of the furnace as 5 years. You have also found evidence that the Managing Director has seen this report.

Atikun has had a conversation with the Managing Director, who told him, “We need to make the figures look as good as possible, so I hope you’re not going to start being difficult. The consultancy fee is non-refundable, so there’s no reason why we can’t include it in full. I think we should look at our depreciation policies. We’re writing off our assets over far too short a period. As you know, we’re planning to go for a stock market listing in the near future, and being prudent and playing safe won’t help us do that. It won’t help your future with this company either.”

Required:

  1. Explain the required IFRS accounting treatment of these issues, preparing relevant calculations where appropriate.
    (16 Marks)
  2. Discuss the ethical issues arising from your review of the draft financial statements and the actions that you should consider.
    (4 Marks)

Total: 20 Marks

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  • 20 Marks

CR – Nov 2017 – L3 – Q3 – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Evaluate Funda Plc's accounting policies for specific transactions, recommending adjustments as per IFRS where appropriate.

Funda Plc. is a listed utility service company in Nigeria providing water, electricity, and cable services. The directors prepared draft financial statements for the year ended June 30, 2017, following IFRS guidelines to support a loan application. Employees, owning 5% of ordinary shares, raised concerns about certain accounting policies applied by Funda Plc.

The draft income statement for the year ended June 30, 2017, is as follows:

N’m
Revenue 410.0
Cost of Sales (275.0)
Gross Profit 135.0
Other Operating Costs (65.0)
Profit Before Taxation 70.0

Employee Representatives’ Queries on Accounting Policies:

  1. Sale of Water Filters
    Funda Plc. sold 30 industrial water filters to a steelmaker, offering a 20% discount and granting the steelmaker a put option to repurchase the filters at 35% of the purchase price after six years, despite the filters’ expected ten-year life. Funda Plc. has recognized the entire revenue upfront.
  2. Connection Fees
    A refundable connection fee is charged for electricity connections, to be returned upon customer disconnection. No minimum notice is required, and costs can be deducted from refunds. The fee was fully recognized in the year as revenue.
  3. Activation Fees
    Non-refundable activation fees for digital cable services were fully recognized in revenue.
  4. Deposits for Domestic Electrical Goods
    Customers place a 25% deposit on orders, with the balance payable on delivery. Deposits are retained if orders are canceled but refunded if Funda Plc. fails to deliver. Revenue includes N10 million from deposits, with 90% of orders fulfilled.

Required:
Prepare a report explaining the suitability of Funda Plc.’s accounting policies for each transaction and recommend the appropriate IFRS treatment where necessary.

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