Series: DEC 2022

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  • 20 Marks

FR – Dec 2022 – L2 – Q3 – IAS 7 Statement of Cash Flows

Prepare Dompa Ltd.'s statement of cash flows for the year ended 31 December 2021, using the indirect method based on the IAS 7 framework.

Dompa Ltd prepares its financial statements in accordance with IFRSs. Below are the statement of profit or loss for the year ended 31 December 2021 and the statement of financial position as at that date, and the comparative statement of financial position as at 31 December 2020.

Statement of Profit or Loss for the year ended 31 December 2021

Description GH¢’000
Revenue 1,656,000
Cost of sales (745,200)
Gross profit 910,800
Other income 15,000
Admin expenses (409,860)
Distribution costs (136,620)
Profit before interest & tax 379,320
Finance cost (3,232)
Profit before tax 376,088
Tax expense (9,462)
Profit for the year 366,626

Statement of Financial Position as at 31 December

Description 2021 (GH¢’000) 2020 (GH¢’000)
Non-current assets:
Property, Plant & Equipment 33,210 23,260
Investment Property 28,500 28,000
Intangible Assets 124 155
Total Non-Current Assets 61,834 51,415
Current assets:
Inventory 15,700 5,680
Trade Receivables 82,800 10,765
Cash 16,712 152
Bank 304,437 5,950
Total Current Assets 419,649 22,547
Total Assets 481,483 73,962
Equity & Liabilities:
Equity:
Share capital 30,000 25,000
Retained earnings 373,526 11,300
Revaluation surplus 862 1,262
Total Equity 404,388 37,562
Non-current liabilities:
15% bond redeemable in 2024 20,432 20,200
Deferred tax 3,762 2,300
Current liabilities:
Trade & other payables 46,401 7,600
Current tax 6,500 6,300
Total Equity & Liabilities 481,483 73,962

Additional Information:

i) Depreciation expense on tangible non-current assets recognised for the year is GH¢8,804,000.
ii) An impairment review has been undertaken on one of the machines of the company that has a carrying value of GH¢1,500,000, but an estimated recoverable amount at the impairment review date was GH¢745,000.
iii) One of the company’s vehicles was involved in an accident in the year and was written off with a carrying value of GH¢562,000.
iv) The company sold a machine for GH¢850,000 with a carrying value of GH¢689,000.
v) The company also issued a 15% bond in January 2020 at a par value of GH¢20,000 with a tenure of 5 years.
vi) The company realized GH¢400,000 in revaluation surplus through excess depreciation charges.

Required:
Using IAS 7: Statement of Cash Flows, prepare the statement of cash flow for Dompa Ltd for the year ended 31 December 2021.

 

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  • 20 Marks

FR – Dec 2022 – L2 – Q4 – Financial Analysis & Ratios

Analyze and compare Madina Ltd.’s performance using key financial ratios for the years 2020 and 2021, including comparisons with industry standards.

Madina Ltd is engaged in the processing of palm fruits to produce palm oil and palm kernel oil. The financial statements of the company for the years ended 31st December 2020 and 2021 are as follows:

Statement of Profit or Loss for the year ended

Description 2021 (GH¢’000) 2020 (GH¢’000)
Revenue 123,817 95,620
Cost of sales (84,940) (76,240)
Net gains from changes in fair value of biological assets 84 754
Gross profit 38,961 20,134
Administrative expenses (11,727) (8,494)
Other income 1,267 927
Operating profit 28,501 12,567
Finance income 888 508
Profit before income tax 29,389 13,075
Income tax expense (4,692) (3,422)
Profit for the year 24,697 9,653

Statement of Financial Position as at:

Description 2021 (GH¢’000) 2020 (GH¢’000)
Non-current assets
Property, Plant & Equipment 57,909 49,471
Financial assets 5,221 5,137
Current assets
Inventories 8,490 9,370
Trade Receivables 24,663 18,304
Cash and cash equivalents 22,832 10,618
Total Assets 119,115 92,900

The following ratios have been gathered from the food and processing industry for the year ended 31 December 2021:

  • Return on Equity (%) 23.52
  • Gross Profit Margin (%) 29.57
  • Net Profit Margin (%) 22.16
  • Current Ratio (times) 2.5
  • Acid Test Ratio (times) 1.8
  • Inventory Turnover (days) 20
  • Trade Receivables Collection (days) 68
  • Trade Payables Settlement (days) 32

Required:
Write a report to the Board of Directors of Madina Ltd, assessing the company’s performance for the year ended 31 December 2021 in relation to the industry and the comparative year.

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  • 5 Marks

FR – Dec 2022 – L2 – Q5a – Intangible Assets Treatment for Employee Training

Analyze the treatment of employee training costs as an intangible asset under IAS 38.

Damba Ltd spent GH¢400,000 on training courses for its employees, which has resulted in increased efficiency and cost savings. The Assistant Accountant has recognized the training costs as an intangible asset and charged six months’ amortization based on the average time within which the training courses were completed.

Required:
Comment on the Assistant Accountant’s treatment of the aforementioned transaction in Damba Ltd’s financial statements for the year ended March 31, 2022, and advise on how it should be handled under International Financial Reporting Standards.

 

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  • 5 Marks

FR – Dec 2022 – L2 – Q5d – Distinction Between Joint Venture and Joint Operation

This question asks candidates to explain the distinction between joint ventures and joint operations under IFRS 11.

An investor entity can enter into a contractual arrangement with another entity in which unanimous consent of both parties is required in order to take decisions relating to operating and financial policies of the investee. Such an arrangement could either be a joint venture or a joint operation.

Required:
Explain the distinction between joint venture and joint operation under IFRS 11: Joint Arrangements.

 

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  • 5 Marks

FR – Dec 2022 – L2 – Q5b – Definition of Liability and Provisions

This question asks candidates to define liabilities and describe circumstances under which provisions should be recognized.

The definition of a liability forms an important element of the International Accounting
Standards Board’s Framework for the Preparation and Presentation of Financial Statements
which, in turn, forms the basis for IAS 37: Provisions, Contingent Liabilities and Contingent
Assets.

Required

Define liability and describe the circumstances under which provisions should be recognized.

 

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  • 5 Marks

FR – Dec 2022 – L2 – Q5c – Calculation of EPS for the Year Ended December 31, 2021

This question requires the calculation of EPS for the year 2021, and restating the EPS for the year 2020 using a rights issue adjustment.

On January 1, 2021, Bayor Ltd had 10 million ordinary shares in issue. On 31 March 2021, the company issued at full market price, 2 million ordinary shares. On 31 August 2021, the company made a rights issue of 1 for 5 at GH¢3. The fair value of the shares on the last day before the rights issue was GH¢3.80. Profit for the current period is GH¢3.5 million. The reported Earnings Per Share (EPS) for the year ended December 31, 2020 was 0.33p.

Required: Calculate the EPS for the year ended December 31, 2021, and the restated EPS for the year ended December 31, 2020.

 

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  • 5 Marks

SCS – Dec 2022 – L3 – Q8b – Controlling risk

Explanation of ways to embed risk awareness within an organisation.

The risks that TCWL automated systems could be exposed to can be controlled and managed through embedding risk awareness in the culture of the organisation. Creating a culture of risk awareness is the responsibility of the board of directors and senior management of TCWL.

Required:
Explain FOUR (4) ways by which the Board can create and embed risk awareness in the culture of TCWL to ensure that systems risks are controlled effectively. (5 marks)

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  • 5 Marks

SCS – Dec 2022 – L3 – Q8a – Controlling risk

Explanation of risks faced by automated systems and ways to embed risk awareness within an organisation.

TCWL production processes and operations are highly automated, and this may expose the company to major risks with high potential of negative consequences for the business.

Required:
Explain FOUR (4) major risks that TCWL automated systems could suffer. (5 marks)

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  • 10 Marks

SCS – Dec 2022 – L3 – Q7 – Strategy, stakeholders, and mission

Explanation of required corporate disclosures and measures to maximise shareholder engagement in a listed company.

The Ghana Code of Best Practices for Corporate Governance specifies a number of disclosures that should be included in an annual report of a listed company, in addition to those required by law or other regulations. The new CEO has presented a paper to the Board recommending that the company should go public to raise some equity capital to partially finance its expansion plans. The listing of the company would result in an increased number of shareholders.

Required:

a) Explain to the Board SIX (6) statements that must be disclosed in the annual report of TCWL after listing on the Ghana Stock Exchange. (6 marks)
b) The Code of Best Practices recommends measures that aim at maximising attendance and involvement by shareholders in the company. Briefly discuss FOUR (4) of those measures. (4 marks)

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  • 10 Marks

SCS – Dec 2022 – L3 – Q6b – Ethics and social responsibility

Analysis of child labour using deontological and teleological ethical theories.

The Board chairman and the CEO have disagreed on whether the use of child labour by the distributors and continuous supply of the company’s products to the affected distributors is ethically wrong. The two have approached you as an expert in ethics to determine which of the positions is correct.

Required:

Using the two main theories of ethics, deontological theory and teleological theory, determine whether child labour is ethically wrong. (10 marks)

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  • 5 Marks

AA – Dec 2022 – L2 – Q1c – Professional and Ethical Considerations

Explains the need for a quality control system in accounting firms, with reference to the audit of God First Microfinance.

You are the manager in charge of the audit of God First Microfinance Co. Ltd for the year ended 31 December, 2021. Due to the highly regulated environment in which such companies have to operate, your partner has requested that, right from the planning stage of the audit, you strictly apply the requirement of ISA 220: Quality Control for an audit of financial statements.

Required:
State FIVE (5) reasons for the need for a quality control system in accounting firms.

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  • 10 Marks

AA – Dec 2022 – L2 – Q1b – Audit and Assurance Risk Environment

Defines fraud under ISA 240 and provides examples of two types of fraud: fraudulent financial reporting and misappropriation of assets

According to ISA 240: The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements, the term “Fraud” refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties involving the use of deception to obtain an unjust or illegal advantage.

Required:
i) State the TWO (2) types of fraud as identified by ISA 240.
ii) For each type of fraud, list THREE (3) examples.

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  • 5 Marks

AA – Dec 2022 – L2 – Q1a – Introduction to Audit and Assurance Engagements

Explains the concept of self-regulation and outlines the roles of ICAG in regulating the accountancy profession in Ghana.

Institute of Chartered Accountants, Ghana (ICAG) is established by the Institute of Chartered Accountants, Ghana, Act 2020 (Act 1058). Its mission is to train professional accountants of the highest quality, ready to provide cutting-edge services to their clients at all times, upholding the ethical values of the accountancy profession. In addition, all companies must have their financial statements audited by accountants regulated by ICAG as it is the sole regulator of the accountancy practice in Ghana.

Required:

i) Define the concept of self-regulation.
ii) Outline THREE (3) roles of a regulatory body such as ICAG in regulating the accountancy profession in Ghana.

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  • 20 Marks

CR – Dec 2022 – L3 – Q5 – Analysis and Interpretation of Financial Statements

Evaluate Partey Ltd's performance using key financial ratios for profitability, liquidity, efficiency, and gearing.

Partey Ltd is a company engaged in continuous casting and cold rolling of aluminum products in Ghana. The company has been in operation for several decades, and its operations did not change in the year ended 31 December 2021.

Below are financial statements for the years 2021 and 2020:

Statement of Profit or Loss and Other Comprehensive Income

2021 (GH¢000) 2020 (GH¢000)
Revenue 389,507 445,963
Cost of sales (240,731) (237,345)
Gross profit 148,776 208,618
Other income 19,315 10,983
Distribution costs (76,366) (108,137)
Administrative expenses (74,520) (46,216)
Operating profit 17,205 65,248
Finance cost (21,287) (21,537)
Profit before tax (4,082) 43,711
Tax expense – (16,521)
Profit for the year (4,082) 27,190

Statement of Financial Position

2021 (GH¢000) 2020 (GH¢000)
Non-current assets:
Property, plant and equipment 196,784 183,190
Investment securities 137 348
Total non-current assets 196,921 183,538
Current assets:
Inventories 50,400 66,351
Trade receivables 23,769 27,688
Other receivables 9,343 1,833
Cash and cash equivalents 45,969 20,699
Total current assets 129,481 116,571
Total assets 326,402 300,109
Equity and Liabilities:
Stated capital 10,000 10,000
Retained earnings 124,575 111,676
Total equity 134,575 121,676
Non-current liabilities:
15% Loan notes 8,580 10,247
20% Loan notes (NGIC Pension Fund) 100,000 100,000
Total non-current liabilities 108,580 110,247
Current liabilities:
Trade payables 80,182 65,082
Current tax – 3,104
Accrued expenses 3,065 –
Total current liabilities 83,247 68,186
Total equity and liabilities 326,402 300,109

Required:

a) As the Finance Manager of Partey Ltd, you have been tasked by the Board of Directors to produce a report. Assess the performance of the company over time based on profitability, liquidity, efficiency, and gearing.
(Note: Your report should include TWO (2) ratios each of profitability, liquidity, efficiency, and gearing).
(16 marks)

b) Management of the company wants to achieve improvement in technology and production processes to stimulate growth. However, this will require further injection of funds and less strain on operating cash flows. To achieve this, the Board of Directors of the company has resolved to convince the company’s largest debtholder, NGIC Pension Fund, to exercise the conversion right attached to the debt. The total value of the debt included in the financial statements for both financial years is GH¢100 million. The debt was issued at a coupon rate of 20% per annum. The annual coupon payments are also included in the financial statements above for both financial years. NGIC Pension Fund is also the second-largest shareholder of the company.

The estimated tax expense on the company’s profit for the year ended 31 December 2021, if the debt owed to NGIC Pension Fund is converted, is GH¢3.172 million. Current tax liability at 31 December 2021 is expected to increase by the same amount.

Required:
Assess the performance of the company for the year ended 31 December 2021 upon conversion of the debt owed to NGIC Pension Fund on 1 January 2021 at its carrying amount.
(4 marks)

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  • 5 Marks

CR – Dec 2022 – L3 – Q4b – Business combinations and consolidation

Explain how an investor can lose control over a subsidiary and the related accounting treatment in consolidated financial statements.

The loss of control of a subsidiary that is a business, other than in a nonreciprocal transfer to owners, results in the recognition of a gain or loss on the sale of the interest sold and on the revaluation of any retained non-controlling investment. A loss of control is an economic event, similar to that of gaining control, and therefore is a re-measurement event.

Required:

Explain in what ways an investor may lose control over an investee, indicating how such an accounting event should be dealt with in the consolidated financial statements.
(Total: 5 marks)

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  • 15 Marks

CR – Dec 2022 – L3 – Q4a – Business Valuation

Valuation of Kudus Ltd using Net Asset, Price/Earnings, and Dividend Yield methods for acquisition purposes.

Kudus Ltd (Kudus) is an unlisted agro-processing company which operates locally within the Middle Belt. Amartey Mutual Funds Ltd has identified Kudus as a target firm and would like to estimate its worth for the purpose of acquisition.

The following financial summaries relate to Kudus as at 31 March 2022:

Description GH¢ million
Non-current assets 150
Current assets 145
Ordinary shares (@ GH¢1.5) 30
20% Preference shares 10
Non-current liabilities 50
Current liabilities 110
Profit after tax (Draft) 38

Number of authorised ordinary shares: 30 million

Additional information:

  1. Kudus has the following ordinary dividends:
Description GH¢ million
Announced on 15 March 2021 but declared on 10 April 2021 2.5
Declared on 30 June 2021 but paid on 31 July 2021 1.5
Announced on 25 March 2022 but declared on 5 April 2022 2

Kudus has correctly accounted for ordinary dividends in the financial statements.

  1. The preference shares are irredeemable.
  2. Due diligence was carried out on Kudus as at 12 April 2022 and the following were identified which may necessitate the revision of the draft profit:
    • Non-current assets include Kudus’s office building with a carrying value of GH¢95 million. The building is estimated to have a fair value of GH¢160 million if used for rental purposes, and GH¢180 million if used for industrial purposes. The rental value is before considering substantial rework required to be carried out on the property. The location of the property currently makes it legally impermissible to use it for industrial activities. The market value of the building in its current use is estimated at GH¢120 million. A plant with a carrying value of GH¢10 million is not in usable condition but could be scrapped for GH¢2 million. The value of the remaining plant and equipment has not changed.
    • Non-current assets of Kudus include a four-year secured debenture carried at its year-end amortised cost. No allowance was made for credit losses against this investment as the directors believed that the investment was exposed to only minimal risk of default. At year-end, allowance based on lifetime expected credit loss was estimated at GH¢1.8 million while allowance for next-12 months’ expected credit loss was assessed at GH¢1 million.
    • The current assets include an amount due from a customer totalling GH¢20 million which has been outstanding for the last two years due to a dispute with the customer. No provision was made in relation to this. The auditors have qualified the audit report to this effect. With several follow-up activities, the customer as at 31 March 2022 has agreed to pay GH¢8 million at 31 March 2023 and GH¢4 million at 31 March 2024. However, Kudus has decided to file a case against the customer to recover the entire amount due by 31 March 2025.
    • Non-current liability represents three-year 5% GH¢50 million loan notes issued on 1 April 2021 at nominal value when their effective interest rate was 7% because of a large premium at redemption. Kudus has taken the “fair value option” for these notes. At 31 March 2022, fair value of the notes based on a widely used valuation model is GH¢47 million and based on inputs drawn from a vibrant market is GH¢49 million. No fair value change is attributable to Kudus’s own credit risk. Coupon has been paid and charged to income statement.
  3. The following details relate to Bukari Plc, a listed firm which operates in the same sector as Kudus:
Indicators Ratio
Dividend cover 4
Yield on earnings 12.5%
Annual sales growth (over last 5 years) 18%
Annual earnings growth (over last 5 years) 17%
  1. Assume discount rate of 10% and unlisted firm risk factor of 20%.

Required:

Determine a range of values for each ordinary share of Kudus using:

i) Net Assets basis.
(6 marks)

ii) Price/Earnings basis.
(5 marks)

iii) Dividend Yield basis.
(4 marks)

(Note: Ignore tax implications)

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  • 10 Marks

CR – Dec 2022 – L3 – Q3c – Regulatory Framework and Ethics

Address ethical issues surrounding special treatment of a cashier at Salisu Medical Centre and propose remedies.

Salisu Medical Centre runs 24-hour services every day. To ensure smooth cash collection from walk-in clients, the company also operates a 24-hour cash office. The cashiers work on a shift basis to cover the morning, afternoon, evening, and night services. There are five (5) cashiers employed by the firm, who are all supposed to work at least once in each of the shift periods before the year ends. Jennifer, one of the cashiers, has never worked on night duties since she was employed. The Finance Director of the company prepares the duty roster (time-schedule) for the cashiers’ shifts together with the Chief Cashier.

Jennifer’s special treatment has been continuously justified by the Finance Director due to her place of abode being far from the workplace. However, there are other cashiers who come on night-shift staying in her vicinity.

Jennifer is also known in the company for her frequent “excuse” duty from Doctors at the medical centre, allowing her to stay away from work, as well as her spontaneous use of annual leave days, sometimes obtaining additional casual leave. This behavior of Jennifer continuously affects workflow at the Cash Office, leading to another cashier being called to stand in for her, resulting in overtime payments for that cashier.

The conduct of Jennifer and the manner in which the Finance Director handles her case has caused concern among the other cashiers.

Required:

i) Describe the ethical issues involved and their implications on work output at Salisu Medical Centre.
(4 marks)

ii) Recommend possible measures that could be instituted to prevent such ethical challenges in the future.
(6 marks)

(Total: 10 marks)

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  • 5 Marks

CR – Dec 2022 – L3 – Q3b – IAS 19: Employee benefits

Determine the accounting treatment for the curtailment and settlement in Mensah Ltd's pension scheme under IAS 19.

Mensah Ltd is a telecommunication company with a year-end of 30 September 2022 that operates a defined benefit pension scheme. On 31 March 2022, the company announced that it was to close down a business division and agreed to pay each of its 300 staff a cash payment of GH¢100,000 to compensate them for the loss of pension arising from wage inflation. It is estimated that the closure will reduce the present value of the pension obligation by GH¢11.6 million. Mensah Ltd is unsure of how to deal with the settlement and curtailment and has not yet recorded the transaction in its financial statements.

Required:
In accordance with IAS 19: Employee Benefits, show the accounting treatment for the above transaction in Mensah Ltd’s financial statement for the year ended 30 September 2022.
(Total: 5 marks)

———————————————————————

Answer:

  1. Settlement and Curtailment Loss
    The estimated settlement on the pension liability is calculated as follows:

    • 300 employees x GH¢100,000 = GH¢30 million
    • This amount of GH¢30 million should be included within current liabilities in the statement of financial position.
  2. Curtailment Gain
    The curtailment gain is estimated at GH¢11.6 million. As this is GH¢18.4 million (i.e., GH¢30 million – GH¢11.6 million) more than the estimated curtailment gains, a loss of GH¢18.4 million should be recognised within retained earnings.
  3. Reduction in Non-Current Liabilities
    The non-current liabilities are reduced by the GH¢11.6 million due to the reduction in pension obligations.

(Appropriate distribution of 5 marks)

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  • 5 Marks

CR – Dec 2022 – L3 – Q3a – IAS 36: Impairment of Assets ,IAS 37: Provisions, contingent liabilities and contingent assets

Determine the appropriate accounting treatment for Samed Ltd's production facility impairment.

Samed Ltd is a Ghanaian company located in the Northern Region that manufactures goods such as washing machines, tumble dryers, and dishwashers. The manufacturing industry in Ghana is highly competitive with many products on the market. Samed Ltd’s current accounting year-end is 31 December 2022.

Samed Ltd has a production facility that started showing serious cracks and signs of possible leakage since July 2022. It is probable that Samed Ltd will have to undertake major repairs sometime during 2023 to rectify the problem. Samed Ltd does not have an insurance policy covering the production facility. The Chief Operating Officer has refused to disclose the issue in the financial statements for the year ended 31 December 2022, and no repair costs have yet been undertaken, although he is aware that this is contrary to International Financial Reporting Standards (IFRSs). According to the Chief Operating Officer, he does not believe that the need for major repairs on the production facility is an indicator of impairment. Furthermore, the Chief Operating Officer argues that no provision for the repair to the production facility should be made as there is no legal or constructive obligation to repair the facility.

Samed Ltd has a revaluation policy for property, plant, and equipment, and there is a balance on the revaluation surplus of GH¢20 million in the financial statements for the year ended 31 December 2022. However, this balance does not relate to the production facility, but the Chief Operating Officer is of the opinion that this surplus can be used for any future loss arising from the collapse of the production facility.

Required:
In accordance with relevant IFRSs, discuss the accounting treatment which Samed Ltd should adopt to account for the above transaction in its financial statements for the year ended 31 December 2022.
(5 marks)

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  • 5 Marks

CR – Dec 2022 – L3 – Q2c -IFRS 5: Non-current assets held for sale and discontinued operations

Provide accounting treatment for Ayew Plc's plant reclassification under IFRS 5.

Ayew Plc (Ayew) decided to dispose of one of its major production plants, which had become surplus to requirement. At 31 January 2021, all criteria were met for the plant to be classified as held for sale. On 31 July 2022, there was material evidence that the original sale plan would change and hence, it was considered not appropriate to retain the plant as held-for-sale. The plant is carried under the cost model.

Details of the plant are as follows:

GH¢’million
Cost (acquired on 1 August 2019) 20
Depreciation rate (straight line to nil residual value) 10%
At 31 January 2022:
Fair value 14
Costs to sell 0.4
At 31 July 2022:
Recoverable amount 15.2

Required:
In line with IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations, recommend how the above would be accounted for within the financial statements of Ayew for the year ended 31 July 2022.
(Total: 5 marks)

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