Series: MAY 2018

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  • 15 Marks

AT – May 2024 – L3 – SC – Q7 – Double Taxation Reliefs and Credits

Explain treaty shopping, strategies to mitigate it, ECOWAS common external tariff features, and trade defense measures.

Abakali Limited is a company engaged in the manufacturing of three variants of beverages. The products of the company are well received by consumers, as the company now controls about 55% of the domestic market. The “chocolate” brand is the top earner for the company. According to a recent newspaper review, “it has the same quality as those imported into the country from the western world.”

The Board of the company, at one of its meetings, decided to enter the West African market in 2024 and, by 2026, the European market, through:

  1. Establishment of depots in major cities of four neighboring countries (Republic of Benin, Togo, Ghana, and Niger) with goods transported by road.
  2. Incorporation of a branch in a European country, initially serving as a depot, but within two years, full production will commence.

As emphasized by one of the directors, the main challenge the company must address is the strategy to mitigate the negative impact of high tax rates (in Europe and West African countries) on profits to achieve better returns on investment.

A director, previously employed by an international company, suggested using “treaty shopping” as a tax planning strategy for locating the branch office in Europe. He also pointed out that the Economic Community of West African States (ECOWAS) common external tariff framework provides a solution to different tax regimes in the sub-region.

Most Board members are not familiar with “treaty shopping” or the ECOWAS common external tariff framework, and they have requested professional advice on these matters.

The Managing Director has approached your professional accounting firm for guidance on the key issues raised in the meeting.

Required:

As the officer designated to handle this task, write a report to your Principal Partner for review before sending it to the client. The report should address the following concerns of the client:

a. Explanation of the concept and practice of “treaty shopping” (6 Marks)

b. Discussion on the strategies employed by various countries in curbing treaty shopping in international transactions (2 Marks)

c. Discussion on the features of the ECOWAS common external tariff framework (4 Marks)

d. Comment on the trade defense measures put in place to guide the operations of the common external tariff framework (3 Marks)

(Total 15 Marks)

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  • 20 Marks

AT – May 2024 – L3 – SB – Q2 – Taxation of Specialized Businesses

Calculation of hydrocarbon tax payable by New Rain Petroleum and analysis of tax implications for deep offshore investment.

New Rain Petroleum Company Limited has been operating in the onshore and shallow water areas of the Niger Delta region for over fifteen years. The company was granted a petroleum mining lease license in January 2021. In its bid to improve profitability, the company’s management intends to apply for a license to operate in the deep-sea area starting from 2025. The decision of the management is expected to be presented to the company members at the 2023 annual general meeting, scheduled in the second half of 2024.

The following financial data were extracted from the book of accounts of New Rain Petroleum Company for the year ended December 31, 2023:

Income N’ million
Fiscal value of crude oil sold 191,100
Value of condensate from associated gas 84,474
Value of natural gas liquid from associated gas 55,328
Other incidental income 151
Realized exchange gain 38
Gross total income 331,091
Expenses/Deductions N’ million
Royalty incurred and paid 86,200
First exploration wells cost 6,800
First two appraisal wells costs 18,700
Joint cost – terminalling 12,000
Gas reinjection wells cost 3,420
Salaries and wages 9,300
Power cost 1,650
NDDC charge 125
Concessional rentals 60,430
Depreciation of assets 13,860
Allowance for doubtful debts 2,400
Host community trust fund contribution 4,800
Stamp duty 16
Staff welfare 350
Travelling 180
Donations and subscription 6
Decommissioning and abandonment 1,300
Environmental remediation fund contribution 1,250
General expenses 500
Finance costs 1,750
Total Expenses 225,037
Net Profit 106,054

Additional Information:

  1. Data on Crude Oil, Condensate, and Natural Gas Sales:
    Category Quantity (million barrels) Actual Price (USD) Fiscal Price (USD)
    Crude oil 5.25 70 72
    Condensate from associated gas 3.61 45 44
    Natural gas liquid from associated gas 2.80 38 40
  2. Omitted Record:
    • A balancing charge of N1,500,000 was made from the disposal of an old oil equipment platform, which was omitted from the records.
  3. Allowance for Doubtful Debts:
    Type of Provision N’ million
    Specific provisions 900
    General provisions 1,500
    Total 2,400
  4. Donations and Subscription:
    Recipient N’ million
    Recognized orphanage homes 3.0
    Host community’s cultural group 2.0
    Subscription to oil and gas association 1.0
    Total 6.0
  5. General Expenses:
    Expense N’ million
    Penalty for gas flare 250
    Printing of stationery items 140
    State government levy 110
    Total 500
  6. Agreed Capital Allowances:
    Category N’ million
    Brought forward 167
    For the year 2,105
    Total 2,272
  7. Production Allowance:
    Type of Operation N’ million
    Onshore operations 900
    Shallow water operation 1,700
    Total 2,600
  8. Exchange Rate: The exchange rate averaged N520 to 1 USD during the year.
  9. Assumption: Tax liabilities are to be paid in domestic (Naira) currency.

Required:
As the company’s Tax Manager, you are to advise the management, in accordance with the provisions of the Petroleum Industry Act 2021, on:

a. Hydrocarbon tax payable for the relevant assessment year (18 Marks)
b. Tax implications if the company decides to invest in deep offshore areas (2 Marks)

(Total 20 Marks)+

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  • 30 Marks

AT – May 2024 – L3 – SA – Q1 – Tax Administration and Dispute Resolution

Provide professional tax advice for the management of Soft Farm and Agro-Allied Ltd, focusing on deductible interest, adjusted profit, and tax liabilities.

Soft Farm and Agro-Allied Limited, a subsidiary of Emperor Agro Incorporated, Italy, was incorporated in Nigeria in January 2018. Soft Farm and Agro-Allied Limited produces palm kernel for domestic use and export to the European market. The Managing Director of the company has just received a letter from the head office (parent company) about an impending visit due to poor business performance (below the group’s return on investment benchmark of 25%) since the business commenced, despite financial and technical support from the parent company.

In January 2022, the parent company granted a loan of N100 million to Soft Farm and Agro-Allied Limited for business expansion.

The Board has scheduled a special meeting for next month to consider the financial report of Soft Farm and Agro-Allied Limited for the year ended December 31, 2022, and to review past financial reports and tax assessments. As the newly engaged Tax Consultant to the company, you have been invited to participate in the meeting to provide a professional opinion on tax-related issues.

The Financial Accountant has been directed by the Managing Director to provide you with financial statements for all periods under review, books of accounts, returns filed with tax authorities, and other supporting documents.

From your preliminary review of the financial report for the year ended December 31, 2022, you noted an item that requires further discussion with management. This issue relates to interest paid on a loan obtained from the parent company.

Extract from Financial Statements for the Year Ended December 31, 2022

Item N’000
Gross turnover:
– Domestic sales 147,500
– Export sales 200,100
– Other operating income 3,300
Total Gross Turnover 350,900
Deduct:
– Staff salary 122,600
– Ground rent paid to State government 3,200
– Motor running expenses 1,750
– Audit and accountancy fees 1,000
– Repairs and maintenance 5,800
– Depreciation of assets 38,240
– Rent paid 1,850
– Power and lighting 5,400
– Legal cost 5,000
– Rates (water) 2,100
– Allowance for doubtful debts 10,500
– Donations 4,000
– Interest and other finance costs paid 15,600
– Income tax provision 23,400
– General expenses 5,900
Total Deductions 246,340
Net Profit 104,560

Additional Information:

  1. Export Sales:
    20% of export sales were made to the parent company at the prevailing international market price.
  2. Other Operating Income:
    Description N’000
    Dividend received (net) 2,700
    Profit from disposal of non-current asset 600
    Total 3,300
  3. Repairs and Maintenance:
    Description N’000
    Repairs of plantation equipment 1,200
    Repairs to premises (non-industrial building) 900
    Expansion to warehouse (industrial building) 3,700
    Total 5,800
  4. Rent Paid:
    This amount is for accommodation for the newly employed General Manager, whose basic salary is N4,800,000.
  5. Legal Cost:
    Description N’000
    Cost of income tax appeal 850
    Cost of debt collection 1,300
    Cost of acquiring new lease 1,700
    Renewal of old lease 1,150
    Total 5,000
  6. Allowance for Doubtful Debts:
    Description N’000
    Specific provisions 5,230
    General provisions 7,870
    Bad debts recovered (2,600)
    Total 10,500
  7. Donations:
    Recipient N’000
    Palm Oil Research Institute 1,400
    National Library 600
    Cocoa Research Institute of Nigeria 1,000
    Women Society of the host community 1,000
    Total 4,000
  8. Interest and Other Finance Costs Paid:
    In January 2022, the company obtained a loan facility of N100 million from the parent company for business expansion at a competitive interest rate of 12% per annum. The loan duration is 10 years, with interest payable for the first three years, and principal and interest repayments due from the fourth year onward. The balance in the financial statements includes other finance costs and bank charges paid to domestic banks on various accounts.
  9. General Expenses:
    Description N’000
    Wedding gift to staff 350
    Fine imposed on company driver for traffic offense 150
    Haulage expenses 3,200
    Transport and travelling 2,200
    Total 5,900
  10. Schedule of Prior Years’ Turnover and Assessable Profits:
    Year Ended December 31 Turnover (N’000) Assessable Profit (N’000)
    2018 154,400 78,750
    2019 198,600 95,120
    2020 310,300 142,800
    2021 314,900 166,900
  11. Schedule of Qualifying Capital Expenditure Incurred:
    Date of Acquisition Asset Type Amount (N’000)
    August 31, 2017 Plantation equipment 4,600
    August 31, 2017 Industrial building 12,000
    August 31, 2017 Non-industrial building 9,000
    January 1, 2018 Motor vehicles (3) 8,400
    January 1, 2018 Furniture and fittings (10) 1,500
    February 14, 2021 Motor vehicles (2) 5,600
    June 12, 2022 Furniture and fittings (10) 2,000
    July 8, 2022 Research and development 7,000

Required:

As the Tax Consultant to the company, draft a report to the Managing Director of Soft Farm and Agro-Allied Limited, in line with the provisions of the Companies Income Tax Act Cap C21 LFN 2004 (as amended). The report should provide professional advice on the following:

  1. Treatment of Excess Amount of Deductible Interest Paid (6 Marks)
  2. Adjusted Profit of the Company for the Year Ended December 31, 2022 (7 Marks)
  3. Tax Liabilities for All Relevant Assessment Years (17 Marks)

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  • 7 Marks

AAA – May 2018 – L3 – SC – Q7b – Forensic Auditing

Outline anti-money laundering requirements for the auditor of Banana Follow Me Limited due to high cash-based transactions and overseas transfers.

Management of Banana Follow Me Limited plans to invest in factory equipment and fittings to attract more customers, using sufficient cash reserves for these capital expenditures. A significant risk associated with money laundering exists due to the high volume of cash transactions and regular overseas bank transfers.

Required:

i. Discuss THREE requirements of an anti-money laundering programme which the auditor of Banana Follow Me Limited should have in place for detecting and reporting suspicion of money-laundering.

(6 Marks)

ii. State ONE example of the criminal offenses connected with money laundering. (1 Mark)

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  • 8 Marks

AAA – May 2018 – L3 – SC – Q7a – Audit Reporting

Prepare a management representation letter for Banana Follow Me Limited and outline anti-money laundering requirements for the audit team.

You are the accountant to Banana Follow Me Limited and the audit of the financial statements for the year ended December 31, 2016 is currently ongoing. The company is a cocoa processing entity with various factories across the country. During the year end audit, the auditors, Akinfenwa & Company. (Chartered Accountants), observed that the company purchased
200,000 units of XYZ Plc. shares during the year and that the company had not recognised dividends on these shares as at year end. Upon enquiry, the Managing Director of the company explained that the
shares were purchased ex-dividend and had promised to provide suitable representations to confirm this. The auditors have verified this and are 106 satisfied with the explanation but expect representation letter which includes all other relevant representations from the company.

Required:

As the accountant to Banana Follow Me Limited, prepare the management representation letter to be issued to the company’s auditors, Akinfenwa & Company, confirming representations for the financial statements for the year ended December 31, 2016.

 

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  • 15 Marks

AAA – May 2018 – L3 – SC – Q6 – Risk Management in Audits

Identify and explain audit procedures to assess the going concern of Reliance Ventures Limited and steps if going concern assumption is invalid.

Reliance Ventures Limited has been trading in imported goods for many years. The company’s fortune has started to diminish as a result of the current economic environment. Your firm has been the auditor of the company in the last three years. You have noticed that the shareholders’ equity of the company has been eroded and is currently in deficit. This condition has raised significant doubt on the entity’s ability to continue as a going concern.

Required:

  1. Identify and explain FOUR audit procedures to be performed by the audit team to determine the going concern status of the company. (10 Marks)
  2. Discuss FOUR of the steps that the auditor should take if he considers that the going concern assumption is invalid whereas management considers it to be valid. (5 Marks)

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  • 15 Marks

AAA – May 2018 – L3 – SC – Q5 – Use of Experts in Audits

Evaluate objectivity factors and audit procedures to assess the reliability of a management-employed expert’s work in QQ Limited's financial statements.

The management of QQ Limited had engaged an expert valuer, Segun & Company, in the valuation of its investment property situated at Ojo Oniyun Street, Victoria Island for disclosure in the financial statements as at year-end.

Required:

  1. Discuss the factors to be considered when assessing the objectivity of the expert employed by management. (5 Marks)
  2. Explain the procedures to be performed by the auditor to assess whether the work of the management expert provides sufficient and appropriate evidence for the audit of the financial statements. (10 Marks)

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  • 20 Marks

AAA – May 2018 – L3 – SB – Q4 – Ethical Issues in Auditing

Educate staff on IFAC’s Code of Ethics principles, types of independence, and general sources of ethical threats in accounting.

You are the HR partner in Ekemode & Company (Chartered Accountants). As part of the continuous training program of your firm, you are to organize an in-house seminar to educate the staff of your firm on Rules of Professional Conduct. You have decided to emphasize the IFAC’s Code of Ethics for Professional Accountants published by the International Ethics Standard Board for Accountants (IESBA), which was recently adopted by ICAN into their localized code called “The Professional Code of Conduct and Guide for Members.”

Required:

a. Explain briefly the FIVE fundamental principles of the IFAC’s Code of Ethics for Professional Accountants. (7½ Marks)

b. Explain independence of mind and independence of appearance to the staff. (5 Marks)

c. Explain briefly THREE general sources of threat to the fundamental principles of the IFAC’s Code of Ethics for Professional Accountants. (7½ Marks)

(Total 20 Marks)

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  • 20 Marks

AAA – May 2018 – L3 – SB – Q3 – Auditor’s Legal Liability

Evaluate necessary IT general and application controls for a fully computerized hotel to ensure data integrity and security.

A new hotel opened for operations on February 1, 2016, in Abuja. The directors at their board meeting in September 2016 selected December as the hotel’s year-end. Also, from the conception of the hotel, it was decided to fully computerize the hotel and its operations. This will make the hotel stand out and attract clientele in the federal capital territory where there are many other hotels with strong competition.

The room doors are electronically operated and use electronic cards for opening. If a customer does not specify his/her duration and has the lock properly programmed, the door will lock at 12 noon, requiring the customer to go back to the reception for access. Furthermore, all accounting and other processes are computerized.

The IT company that handled the computerization agreed to leave a member of staff who will train the hotel’s staff for three months and ensure that the system operates efficiently. Management believes that the staff will familiarize themselves with the system within that period. The server handles all doors, accounting processes including billing, and the determination of room occupancy rate on a daily basis. Various units of the hotel have desktop units which key employees use in both ordering and communication between themselves. The server is located next to the operations manager’s office, who is responsible for overseeing it in addition to other duties.

The last quarterly report on the hotel activities was not consistent with expectations, and the occupancy rate did not match turnover. The management of the hotel approached your firm of chartered accountants to be engaged as auditors to the hotel. Your review and interactions as the leader of the audit team revealed the information disclosed above.

Required:

Evaluate and apply the relevant general and application controls necessary to be installed in the hotel’s information environment.
(Total 20 Marks)

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  • 20 Marks

AAA – May 2018 – L3 – SB – Q2 – Auditor’s Legal Liability

Discuss the expectation gap, strategies to address it, and the role of professional skepticism in auditing financial statements.

Audit firms have been castigated over the years by the public whenever their clients have any financial or operational crises. The potential liability of auditors has also become an important topic in recent years due to the growing complexity of the business and legal environment and an increase in legal actions against auditors. One reason put forward to explain the high number of legal actions against auditors is the “expectation gap.”

Required:

a) Explain “expectation gap” and describe its THREE main elements. (5 Marks)

b) Discuss the strategies that could assist in closing the expectation gap. (10 Marks)

c) i. Explain briefly the concept of professional skepticism. (2 Marks)
ii. Evaluate the importance of professional skepticism in the audit of financial statements. (3 Marks)

(Total 20 Marks)

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  • 15 Marks

CR – May 2018 – L3 – SC – Q6 – Foreign Currency Transactions and Translation (IAS 21)

Discuss treatment of foreign currency transactions and accounting for investments in subsidiaries.

Omotola Nigeria Plc is a conglomerate which operates in different sectors of the economy. The company has many subsidiaries and associates across the six continents of the world, and its head office is located in Lagos, Nigeria. The shares of the company are listed on the Nigerian Stock Exchange.

The company is trying to finalize its financial statements for the year ended April 30, 2018, and the following accounting issues are being considered by the chief accountant based on the submission by the assistant accountant who is yet to complete her professional examinations with the Institute of Chartered Accountants of Nigeria. The functional and presentation currency of Omotola Nigeria Plc. is Naira. The following transactions relate to the company:

(i) On May 1, 2017, Omotola Nigeria Plc. bought an investment property in the United States for $1,000,000. The company uses the fair value model of IAS 40 to account for the investment property, and the fair value at April 30, 2018, is determined to be $1,200,000. The assistant accountant is unsure which exchange rate to use in translating the investment property at the year end and how to recognize any exchange difference that may arise.

(ii) On May 1, 2017, Omotola Nigeria Plc. acquired a wholly owned subsidiary in the United States of America. The goodwill that arose on the acquisition of this subsidiary is $400,000. In addition, the company invested in an equity instrument on the same date, which is measured at fair value through other comprehensive income (OCI) in accordance with the requirements of IFRS 9.

Required:

a. In accordance with the requirement of IAS 21 – Effect of Changes in Foreign Exchange Rates, discuss the treatment of foreign currency transactions and the gain or loss arising therefrom.
(7 Marks)

b. Discuss how the transaction in (i) will be accounted for in the financial statements of Omotola Nigeria Plc. for the year ended April 30, 2018, in accordance with IAS 21.
(4 Marks)

c. Discuss how the transaction in (ii) will be accounted for in the financial statements of Omotola Nigeria Plc. for the year ended April 30, 2018, in accordance with IAS 21.
(4 Marks)

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  • 15 Marks

CR – May 2018 – L3 – SC – Q5b – Consolidated Financial Statements (IFRS 10)

Compute deferred tax provision and charge for Tola Plc. as of December 31, 2017.

The following information relates to Tola Plc. as at December 31, 2017:

Description Carrying Amount (N) Tax Base (N)
Plant and equipment 250,000 218,750
Receivables:
Trade receivables 62,500 68,750
Interest receivable 1,250 0
Payables:
Fine 12,500 0
Interest payable 2,500 0

Further information:

  1. The trade receivables balance includes balances of N68,750 less a specific doubtful debt provision of N6,250.
  2. Deferred tax balance as of January 1, 2017, was N1,500.
  3. Interest is taxed on a cash basis.
  4. Doubtful debt allowances are not tax-deductible; receivables are only deductible upon a court order.
  5. Fines are non-deductible for tax purposes.
  6. The tax rate for 2017 is 30%, with an anticipated rise to 36% in 2018.

Required:

Compute the deferred tax provision required as of December 31, 2017, and the charge to profit or loss for the period in accordance with IAS 12 – Income Taxes.
(11 Marks)

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  • 4 Marks

CR – May 2018 – L3 – SC – Q5a – Regulatory Environment for Corporate Reporting

Distinguishes deferred tax perspectives in financial statements.

Deferred tax can be determined by adopting two perspectives that may result in different numbers in the financial statements and tax computations. These are statement of comprehensive income and statement of financial position perspectives.

Required:

Distinguish between the TWO perspectives of identifying deferred tax balances in the financial statements.
(4 Marks)

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  • 14 Marks

CR – May 2018 – L3 – SB – Q4b – Presentation of Financial Statements (IAS 1)

Discuss accounting issues and treatments for factoring and sale-leaseback transactions, applying the substance over form principle.

Waasimi entered into the following transactions during the year ended March 31, 2018:

In March 2018, Waasimi factored some of its trade receivables to Asejere, a finance house. Based on selected account balances, Asejere paid Waasimi 80% of its book value. The agreement was that Asejere would administer the collection of the receivables and remit a residual amount to Waasimi depending upon how quickly individual customers paid. Any balance not collected by Asejere after six months will be refunded to Asejere by Waasimi.

On April 1, 2017, Waasimi’s freehold building had a carrying amount of N15 million and an estimated remaining useful life of 20 years. On this date, Waasimi sold the building to Gbajumose for a price of N24 million and entered into an agreement with Gbajumose to lease back the building for an annual rental of N2.6 million for a period of five years.

The auditors of Waasimi have commented that in their opinion the building had a market value of N20 million at the date of its sale and to rent an equivalent building under similar terms to the agreement between Waasimi and Gbajumose would cost N1,600,000 per annum. Assume finance cost of 10% per annum.

Required:

i. Briefly explain the major accounting issues involved in the above transactions using the principles of substance over form. (5 Marks)

ii. State the appropriate accounting treatments of the various elements identified. (6 Marks)

iii. State the classes of charges to be incurred and their appropriate accounting treatments. (3 Marks)

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  • 6 Marks

CR – May 2018 – L3 – SB – Q4a – Presentation of Financial Statements (IAS 1)

Explain how off-statement financing can mislead financial statement users, with examples for three user groups.

a. Recording the substance of transactions, rather than their legal form, is an important principle in financial reporting. The use of off-statement of financial position financing arrangement enables companies to obtain financing without showing debts in their books.

Required:

Describe how the use of off-statement of financial position financing can mislead users of financial statements, making specific reference to THREE user groups and giving examples where recording the legal form of transactions may mislead them. (6 Marks)

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  • 13 Marks

CR – May 2018 – L3 – SB – Q3b – Impairment of Assets (IAS 36)

valuate discontinuation conditions and prepare profit or loss statement for Bamgbose Plc with comparative figures.

Bamgbose Plc. is a long-established travel agent, operating through a network of retail outlets and online store. In recent years, the business has seen its revenue from the online store grow strongly, and that of retail outlets decline significantly. On July 1, 2017, the board decided to close the retail network at the financial year end of December 31, 2017, and put the buildings up for sale on that date. The directors are seeking advice regarding the treatment of the buildings in the statement of financial position as well as the treatment of the trading results of the retail division for the year. The following figures are available at December 31, 2017:

  • Carrying amount of buildings: ₦30.0 million
  • Fair value less costs to sell of buildings: ₦25.8 million
  • Other expected costs of closure: ₦5.85 million

Required:

(i) Outline the conditions which must be met in order to present the results of an operation as “discontinued” and the accounting treatment that applies when such a classification is deemed appropriate. (5 Marks)

(ii) Draft the statement of profit or loss for Bamgbose Plc. for year ended December 31, 2017, together with the comparative figures for 2016, taking the above information into account. (8 Marks)

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  • 7 Marks

CR – May 2018 – L3 – SB – Q3a – Impairment of Assets (IAS 36)

Outline conditions for classifying assets as held for sale and their accounting treatment under IFRS 5.

(a) “IFRS 5 Non-current Asset held for Sale and Discontinued Operations” sets out the principles governing the measurement and presentation of non-current assets that are expected to be realized through sale rather than through continuing use. The standard also deals with reporting the results of operations that qualify as discontinued.

Required:

Discuss the conditions which must be met for a non-current asset to be classified as being “held for sale” and explain the accounting treatment that applies when such a classification is deemed appropriate. (7 Marks)

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  • 20 Marks

CR – May 2018 – L3 – SB – Q2 – Associates and Joint Ventures (IAS 28

Calculate and interpret key financial ratios for Wole-Adura Group and evaluate liquidity.

Set out below are the draft accounts of Wole-Adura Plc and subsidiaries and of Maseru Associates. Wole-Adura acquired 40% of the equity capital of Maseru Associates three years ago when the latter’s retained earnings stood at N140m.

Abridged statement of financial position

Wole-Adura Plc & Subsidiaries Maseru Associates
Property, plant, and equipment 990 Nm
Investment in Maseru Associates at cost 290 Nm
Loan to Maseru Associates 70 Nm
Current assets 450 Nm
Loan from Wole-Adura Plc. –
Total Assets 1800 Nm

FINANCED BY:

| Ordinary shares of 50k each | 1,125 Nm | 350 Nm | | Retained earnings | 675 Nm | 350 Nm | | Total Equity | 1800 Nm | 700 Nm |

Abridged statements of profit or loss

Wole-Adura Plc & Subsidiaries Maseru Associates
Profit before tax 427.50 Nm
Tax expense (157.50 Nm)
Profit after tax 270.00 Nm

Additional information:

(i) Wole-Adura proposed a dividend of N225m.
(ii) Total market capitalisation is N5,625m.

Required:

(a) Calculate each of these ratios for Wole-Adura Plc. and subsidiaries:

  1. Earnings per share
  2. Dividend cover
  3. Earnings yield
  4. Dividend yield

(4 Marks)

(b)

  1. Using the equity method, compute the earnings of the group incorporating the associates. (4 Marks)
  2. Compute the ratios in (a) above for the group. (4 Marks)

(c) Comment on the ratios calculated in (a) and (b) above by pairwise comparison. (3 Marks)

(d) Extracts from the financial statements of Ikoku Plc. recently published are as follows:

Statement of profit or loss for the year ended December 31, 2017

2017 2016
Revenue 360 Nm
Cost of sales (150 Nm)
Gross profit 210 Nm
Operating expenses (50 Nm)
Operating profit 160 Nm
Interest expense (10 Nm)
Tax expense (60 Nm)
Profit for the year 90 Nm

Statement of financial position as at December 31, 2017

2017 2016
Non-current assets
Property, plant & equipment 80 Nm
Current assets
Inventory 200 Nm
Trade receivables 70 Nm
Bank (50 Nm)
Total assets 300 Nm

Equity & liabilities

| Ordinary shares of N1 each | 60 Nm | 40 Nm | | Current liabilities | | | Trade payables | 190 Nm | 60 Nm | | Current tax | 50 Nm | 15 Nm | | Total liabilities and equity | 300 Nm | 115 Nm |

Required:

Discuss the liquidity challenges of Ikoku Plc. during the year ended December 31, 2017, from the extracts of the published financial statements. (5 Marks)

(Total 20 Marks)

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  • 30 Marks

CR – May 2018 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

repare consolidated financial statements for Komolafe Group including profit or loss and statement of financial position for year-end 2016.

Komolafe Group carries on business as a distributor of warehouse equipment and importer of fruit into the country. Komolafe was incorporated in 2008 to distribute warehouse equipment. It diversified its activities during the year 2010 to include the import and distribution of fruit, and expanded its operations by the acquisition of shares in Kelvins in 2012 and Kelly in 2014.

Accounts for all companies are made up to December 31.

The draft statements of profit or loss and other comprehensive income for Komolafe, Kelvins, and Kelly for the year ended December 31, 2016 are as follows:

Komolafe Kelvins Kelly
Revenue 91,200 49,400 45,600
Cost of sales (36,100) (10,926) (10,640)
Gross profit 55,100 38,474 34,960
Distribution costs (6,650) (4,274) (3,800)
Administrative expenses (6,950) (1,900) (3,800)
Finance costs (650) – –
Profit before tax 40,850 32,300 27,360
Income tax expense (16,600) (10,780) (8,482)
Profit for the year 24,250 21,520 18,878
Other comprehensive income for the year:
Items that will not be reclassified to profit or loss in subsequent period
Revaluation of property 400 200 –
Total Comprehensive Income 24,650 21,720 18,878

The draft statement of financial position as at December 31, 2016, is as follows:

Komolafe Kelvins Kelly
Non-current assets
Property, plant, and equipment (carrying amount) 70,966 48,546 26,126
Investments
Shares in Kelvins 13,300 – –
Shares in Kelly – 7,600 –
Total Non-current assets 84,266 56,146 26,126
Current assets 3,136 18,050 17,766
Total assets 87,402 74,196 43,892
Equity
Ordinary shares 16,000 6,000 4,000
Retained earnings 45,276 48,150 39,796
Current liabilities 26,126 20,046 96
Total equity and liabilities 87,402 74,196 43,892

The following information is available relating to Komolafe, Kelvins, and Kelly:

  1. On January 1, 2012, Komolafe acquired 5,400,000 N1 ordinary shares in Kelvins for N13,300,000, at which date there was a credit balance on the retained earnings of Kelvins of N2,850,000. No shares have been issued by Kelvin since Komolafe acquired its interest.
  2. At the date of acquisition, the fair value of the identifiable net assets of Kelvins was N10 million. The excess of the fair value of net assets is due to an increase in the value of non-depreciable land.
  3. On January 1, 2014, Kelvins acquired 3,200,000 N1 ordinary shares in Kelly for N7,600,000, at which date there was a credit balance on the retained earnings of Kelly of N1,900,000. No shares have been issued by Kelly since Kelvins acquired its interest. The fair value of the identifiable net assets of Kelly at the date of acquisition approximates their book values.
  4. During 2016, Kelly made intra-group sales to Kelvins of N960,000, making a profit of 25% on cost. N150,000 of these goods were in inventories at December 31, 2016.
  5. During 2016, Kelvins made intra-group sales to Komolafe of N520,000, making a profit of 25% on sales. N120,000 of these goods were in inventories at December 31, 2016.
  6. An impairment test conducted at the year-end did not reveal any impairment losses.
  7. It is the group’s policy to value the non-controlling interest at fair value at the date of acquisition. The fair value of the non-controlling interests in Kelvins on January 1, 2012, was N1,000,000. The fair value of the 28% non-controlling interest (direct and indirect) in Kelly on January 1, 2014, was N1,800,000.

Required:
Prepare for Komolafe Group:

a. A consolidated statement of profit or loss and other comprehensive income for the year ended December 31, 2016. (13 Marks)

b. A consolidated statement of financial position as at December 31, 2016. (12 Marks)

c. In business combination, the consideration given by the acquirer to gain control of the acquiree can be in different forms, including deferred and contingent considerations. While deferred and contingent considerations represent amounts of consideration to be transferred in the future, the two differ in nature and form.

Required:
Briefly distinguish between deferred and contingent consideration. (5 Marks)

Total: 30 Marks

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  • 15 Marks

AA – May 2016 – L2 – Q5 – The Role and Responsibilities of Auditors

Steps for auditor replacement when incumbent auditors do not wish to resign, and brief overview of audit documentation.

Alhaji Abubakar Yusuf is the managing director of Nasara Tech Limited, a private company. Nasara Tech is currently audited by Mike and Co. Alhaji Abubakar has informed you that the directors of Nasara Tech wish to appoint your firm, Adewuyi Adeyemi and Co., as auditors in place of Mike and Co., but they consider that Mike and Co. will not be willing to resign.

Required:

a. Assuming that Mike and Co. are not willing to resign, set out the statutory and other procedures which will have to be followed by Nasara Tech Limited, your firm, and which may be adopted by Mike and Co. in connection with this proposed appointment. You should assume that Adewuyi Adeyemi and Co. have adequate resources to take on the audit of Nasara Tech Limited and that there are no issues surrounding independence or client integrity. (6 Marks)

b. Assuming that Mike and Co. are willing to resign part way through their term of office, set out the procedures to be followed by Mike and Co. and Nasara Tech Limited in order to effect the resignations. (4 Marks)

Your office has recently taken on a new trainee, John. You have been asked to explain to John what information is recorded in the audit process and where.

c. Set out a brief explanation for John. (5 Marks)

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