Series: NOV 2016

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  • 15 Marks

FM – Nov 2016 – L3 – SC – Q7 – Mergers and Acquisitions

Advise on the benefits, drawbacks, alternatives, and target selection criteria for expansion through mergers or acquisitions.

One of the means by which companies expand is through mergers and acquisitions. However, there are other means of expansion aside from these methods.

Inkline Plc. is one of your client companies intending to expand its business by means of merger or acquisition. Your firm of management consultants has been asked to advise the management of the company on what steps to take while considering the merger and acquisition methods, and whether it should go ahead with the expansion programme or otherwise.

Required:

a. (i) FOUR benefits derivable from its proposed means of expansion. (4 Marks)
(ii) THREE probable demerits of employing its proposed method of expansion. (3 Marks)

b. TWO alternatives to merger and acquisition in your report. (2 Marks)

c. Where the company decides to go ahead with either of these methods, indicate THREE criteria the company may consider in choosing its target company. (6 Marks)

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  • 15 Marks

FM – Nov 2016 – L3 – SC – Q6 – Strategic Performance Measurement

Evaluate Osamco Limited’s financial performance compared to industry benchmarks and discuss reasons for considering stock exchange listing.

Osamco Limited, manufacturer of wire and cables, was bought from its conglomerate parent company in a management buyout deal in August 2010. Six years later, the managers are considering the possibility of listing the company’s shares on the Nigerian Stock Exchange.

The following information is made available:

OSAMCO LIMITED
INCOME STATEMENT FOR THE YEAR ENDED JUNE 30, 2016

N’million Amount
Turnover 91.25
Cost of sales (79.00)
Profit before interest and taxation 12.25
Interest (3.25)
Profit before taxation 9.00
Taxation (1.25)
Profit attributable to ordinary shareholders 7.75
Dividend (0.75)
Retained profit 7.00

STATEMENT OF FINANCIAL POSITION AS AT JUNE 30, 2016

N’million Amount
Non-current assets (at cost less accumulated depreciation)
Land and buildings 9.00
Plant and machinery 24.75
Total non-current assets 33.75
Current assets
Inventories 11.00
Accounts receivable 11.75
Cash at bank 2.50
Total current assets 25.25
Total assets 59.00
Equity
Ordinary shares of N1 each 6.75
Reserves 24.25
Total equity 31.00
Non-current liabilities
Accounts payable due after more than one year: 12% Debenture 2018 5.50
Current liabilities
Trade accounts payable 17.50
Bank overdraft 5.00
Total current liabilities 22.50
Total equity and liabilities 59.00

Industry sector ratios:

Metric Industry Average
Return before interest and tax on long-term capital employed 24%
Return after tax on equity 16%
Operating profit as percentage of sales 11%
Current ratio 1.6:1
Quick (acid test) ratio 1.0:1
Total debt: equity (gearing) 24%
Dividend cover 4.0
Interest cover 4.5

Required:
a. Evaluate the financial state and performance of Osamco Limited by comparing it with that of its industry sector. (10 Marks)

b. Discuss FOUR probable reasons why the management of Osamco Limited is considering Stock Exchange listing. (5 Marks)

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  • 15 Marks

FM – Nov 2016 – L3 – SC – Q5 – Portfolio Management

Assess CAPM's basic assumptions and determine overvalued securities among four companies using CAPM metrics.

a. Capital Asset Pricing Model (CAPM) is an equilibrium model of the trade-off between expected portfolio return and unavoidable risk.
What are the basic assumptions on which this model is based? (6 Marks)

b. Currently, the rate of return on the Federal Government Bond redeemable at par in the year 2018 is 5%. The securities of four companies, Akira Plc., Bombadia Plc., Courage Plc., and Divine Plc., have expected returns of 12%, 9.5%, 10.5%, and 13%, respectively. The average expected return on the market portfolio is 10%, subject to a 6% risk (standard deviation). Other relevant information relating to the four securities of the companies is as stated below:

Company Standard Deviation Correlation Coefficient
Akira Plc 0.080 0.975
Bombadia Plc 0.075 0.640
Courage Plc 0.090 0.740
Divine Plc 0.150 0.680

You are required to show which of the companies is/are overvalued. (9 Marks)

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  • 20 Marks

FM – Nov 2016 – L3 – SB – Q4 – Investment Appraisal Techniques

Evaluate Gugi Plc.'s proposed investment in a foreign factory, considering costs, revenues, tax, and exchange rate impacts.

Gugi Plc. is a highly successful manufacturing company operating in Nigeria. In addition to sales within Nigeria, the company also exports to a foreign country (with currency F$) along the ECOWAS sub-region. The export sales generate annual net cash inflow of ₦50,000,000. Gugi Plc. is now considering whether to establish a factory in the foreign country and stop exporting from Nigeria to the country. The project is expected to cost F$1 billion, including F$200million for working capital.

A suitable existing factory has been located, and production could commence immediately. A payment of F$950million would be required immediately, with the remainder payable at the end of year one. The following additional information is available:

  • Annual production and sales in units: 110,000
  • Unit selling price: F$5,000
  • Unit variable cost: F$2,000
  • Unit royalty payable to Gugi Plc: ₦300
  • Incremental annual cash fixed costs: F$50million

Assume that the above cash items will remain constant throughout the expected life of the project of 4 years. At the end of year 4, it is estimated that the net realisable value of the non-current assets will be F$1.40billion.

It is the policy of the company to remit the maximum funds possible to the parent (i.e., Gugi Plc.) at the end of each year. Assume that there are no legal complications to prevent this.

If the new factory is set up and export to the foreign country is stopped, it is expected that new export markets of a similar worth in North Africa could replace the existing exports.

Production in Nigeria is at full capacity, and there are no plans for further capacity expansion.

Tax on the company’s profits is at a rate of 40% in both countries, payable one year in arrears. A double taxation agreement exists between Nigeria and the foreign country, and no double taxation is expected to arise. No withholding tax is levied on royalties payable from the foreign country to Nigeria.

Tax allowable “depreciation” is at a rate of 25% on a straight-line basis on all non-current assets.

The Directors of Gugi Plc. believe that the appropriate risk-adjusted cost of capital for the project is 13%.

Annual inflation rates in Nigeria and the foreign country are currently 5.6% and 10%, respectively. These rates are expected to remain constant in the foreseeable future. The current spot exchange rate is F$1.60 = N1. You may assume that the exchange rate reflects the purchasing power parity theorem.

Required:
a. Evaluate the proposed investment from the viewpoint of Gugi Plc.
Notes:
i. Show all workings and calculations to the nearest million.
ii. State all reasonable assumptions. (18 Marks)

b. State TWO further information and analysis that might be useful in the evaluation of this project?

(2 Marks)

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  • 20 Marks

FM – Nov 2016 – L3 -SB – Q3 – Capital Gains Tax

Calculate EVA for Jack Limited and determine its market value added (MVA) based on provided assumptions.

Jack Limited is a family-owned business that has grown strongly in the last 50 years. The key objective of the company is to maximise the family’s wealth through their shareholdings. Recently, the directors introduced value-based management, using Economic Value Added (EVA) as the index for measuring performance.

You are provided with the following financial information:

Statement of Profit or Loss and Other Comprehensive Income for the year ended December 31, 2015:

₦’million 2015
Operating profit 340.0
Finance charges (115.0)
Profit before tax 225.0
Tax at 25% (56.3)
Profit after tax 168.7

Notes

Notes 2015 (₦’m) 2014 (₦’m)
(i) Capital employed – from the Statement of Financial Position 6,285 6,185
(ii) Operating costs:
Depreciation 295 285
Provision for doubtful debts 10 2.5
Research and development 60 –
Other non-cash expenses 35 30
Marketing expenses 50 45
(iii) Economic depreciation is assessed to be ₦415 in 2015. Economic depreciation includes any appropriate amortisation adjustments. In previous years, it can be assumed that economic and accounting depreciation were the same.
(iv) Tax is the cash paid in the current year (₦45million) and an adjustment of ₦2.5million for deferred tax provisions. There was no deferred tax balance prior to 2015.
(v) The provision for doubtful debts was ₦22.5million on the 2015 Statement of Financial Position.
(vi) Research and development cost is not capitalised in the accounts. It relates to a new project that will be developed over five years and is expected to be of long-term benefit to the company. The first year of this project is 2015.
(vii) The company has been spending heavily on marketing each year to build its brand long term.
(viii) Estimated cost of capital of the company:
Equity 16%
Debt (pre-tax) 5%
(ix) Gearing (Debt/Equity) Ratio 1.5: 1

Required:
a. Calculate, showing all relevant workings, the Economic Value Added (EVA) for the year ended December 31, 2015. Make use of the adjusted opening capital employed. Comment on your result and make appropriate recommendations. (15 Marks)

b. Irrespective of your answer in (a) above, assume the company’s current EVA is ₦120million and that this will decline annually by 2% for the next ten years and then increase by 4% per annum in perpetuity. Assume the following for this part only:

  • Cost of equity 14%
  • WACC 10%

Calculate the market value added (MVA) by the company. Show all workings. (5 Marks)

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  • 20 Marks

FM – Nov 2016 – L3 – SB – Q2 – Investment Appraisal Techniques

Calculate the value of the convertible loan stock, expected growth rate in equity price, and provide recommendations on whether to hold or sell the security.

Honey Comb Plc has issued 10% convertible loan stock, which is due for redemption in 10 years’ time (i.e., December 31, 2025). The option to convert is open only for another two years. If conversion does not take place by December 31, 2017, the option will lapse. The issue was sold to the public at a price of N920 for N1000 of convertible loan stock. The conversion rate at January 1, 2016 was 250 equity shares for N1000 of stock. Non-convertible loan stock in a similar risk class is presently yielding 12%. The market price of Honey Comb Plc equity shares has been increasing steadily over time, reflecting the performance of the company. The shares currently pay a dividend of N0.30 per share. The current price of the convertible security is N960, and each share is currently valued at N3.00. A holder of the convertible loan stock is considering whether to sell his holdings or continue to hold the stock. Ignore taxation while answering the questions.

Required:
a. What is the value of the security as simple unconvertible loan stock? (5 Marks)

b. What is the expected minimum annual rate of growth in the equity share price that is required to justify the holder of convertible loan stock holding on to the security before the option expires? (12 Marks)

c. What recommendation would you make to the holder of the security and why? (3 Marks)

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  • 30 Marks

FM – Nov 2016 – L3 – SA – Q1 – Cost of Capital

Analyze a potential investment project, including the valuation of the firm’s equity and bonds, calculation of the risk-adjusted cost of capital, and project valuation with and without a buyout offer.

Tinko Plc (TP) repairs and maintains heavy-duty trucks with workshops across Nigeria and parts of Africa. Below are extracts from its financial position:

Item ₦’million
Share capital (50k/share) 200
Reserves 320
Non-current liabilities 760
Current liabilities 60

The company’s Free Cash Flow to Equity (FCFE) is estimated at ₦153 million, with a perpetual growth rate of 2.5% annually. The equity shareholders require an 11% return.

The non-current liabilities consist of ₦1,000 nominal value bonds redeemable in 4 years at par with a 5.4% coupon. The credit spread is 80 basis points above the risk-free rate.

A project related to the “Graduates Back To Land (GBTL)” program is under consideration. The initial investment is ₦84 million, with estimated cash flows for four years. Details about the project include alternative scenarios for the program’s growth and a potential buyout offer of ₦100 million at the end of year one.

Required:
a. Calculate the current total market value of TP’s:
i. Equity (3 Marks)
ii. Bonds (4 Marks)

b. Calculate the risk-adjusted cost of capital required for the new project. (10 Marks)

c. Estimate the value of the project with and without the offer from FL (10 Marks)

d. State the assumptions made in your calculations. (3 Marks)

 

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  • 15 Marks

AT – Nov 2016 – L3 – SC – Q7 – Tax Planning and Management

Explain tax planning and anti-avoidance legislation, summarize tax evasion and double taxation provisions, and highlight non-tax investment factors.

You were invited as the Chairman of a Tax Summit at Ikeja, Lagos State. The topics for discussion were as follows:

i. Tax Planning, an Effective Method of Tax Avoidance
ii. Tax Evasion in a Growing Economy
iii. Double Taxation – The Provisions and the Impact
iv. Jurisdiction for Investment – Non-Tax Factors

As the Chairman, you had the opportunity to summarize the papers presented by the four paper presenters in just ten minutes.

You are required to:

a. Explain briefly, Tax Planning and Anti-Avoidance Legislations put in place by the Government (3 Marks).

b. Summarize situations that may involve Tax Evasion (4 Marks).

c. Explain Double Taxation Agreement – Provisions and the Main Objectives (4 Marks).

d. Summarize Non-tax factors that attract investors in choosing a business jurisdiction (4 Marks).

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  • 15 Marks

AT – Nov 2016 – L3 – SC – Q6 – Petroleum Profits Tax (PPT)

Explain associated gas and downstream activities and compute petroleum profits tax for Bivenette Petroleum Company Ltd.

a. The administration of the Petroleum Profits Tax Act is under the charge and management of the Federal Inland Revenue Service with respect to Petroleum Profits Tax Act Cap P13 LFN 2004.

You are required to explain:
i. Associated Gas (2 Marks)
ii. Downstream Activities (2 Marks)

b. Bivenette Petroleum Company Limited has been in the oil prospecting business for some years. Extracts from the financial statements for the year ended December 31, 2013, show the following information:

Details Amount (₦’000)
Value of oil exported 1,030,000
Domestic sales 842,000
Chargeable gas sales 603,000
Other income 425,000
Operating costs 1,385,000
Intangible costs 142,800
Royalty on export sales 125,000
Royalty on local sales 96,500
Non-productive rent 102,000
Exploration incentives 313,500
Rental 101,200
Interest paid 98,000
Administrative expenses 265,000

Additional Information:
(i) The Petroleum Profits Tax rate is 85%.
(ii) Interest paid included ₦12,000,000 paid to an affiliated company.
(iii) Capital allowances were agreed at ₦253,750,000.
(iv) Included in the operating cost is ₦302,000,000 paid to a company for information on oil prospect in Adamawa State.
(v) The company is entitled to Investment Allowance of ₦173,000,000.

Required:
Determine the Assessable Profit, Chargeable Profit, Assessable Tax, and Chargeable Tax of the company for the relevant Year of Assessment. (11 Marks)

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  • 15 Marks

AT – Nov 2016 – L3 – SC – Q5 – Tax Incentives and Reliefs

Identify industries qualifying as Pioneer Industries and compute tax liabilities and withholding tax for Ajanaku Nigeria Limited.

a. **One of the incentives available to industries in Nigeria is contained in the Industrial Development (Income Tax Relief) Act 1971, which grants tax holidays to companies in the industries that meet the conditions for being designated “Pioneer Industries.”

Under the Industrial Development (Income Tax Relief) Act 1971, state any FOUR industries that qualify to be regarded as Pioneer Industries.** (4 Marks)

b. Ajanaku Nigeria Limited was incorporated as a pioneer company on March 15, 2011, with a focus on the manufacture of aluminum roofing sheets. It was granted a Pioneer Certificate with Production Day given as July 1, 2011. Extracts of Audited Financial Statements are as shown below:

Period 6 Months to 31/12/11 Year to 31/12/12 Year to 31/12/13 Six Months to 30/6/14
(Loss) / Profit (3,750) (4,800) 2,250 4,500
After Charging: Depreciation 2,800 2,500 1,700 1,000
Withholding Tax on Rent Included 500 250 – –
Donations to:
Epe Traditional Dance Troupe 10 – – –
Nigerian Red Cross – 100 – –
Borno State General Hospital – – 120 –

Additional Information:

  • Ajanaku Nigeria Limited declared gross dividends of ₦600,000 and ₦1,500,000 for 2013 and 2014, respectively.
  • Withholding tax rates on dividends for the relevant years are 10%.
  • Ignore minimum tax provisions.
  • The company’s initial tax relief period was not extended.

Required:
Compute the tax liabilities for the relevant years of assessment relating to Pioneer Status only, and state the amount of Withholding Tax due from the shareholders. (11 Marks)

a. Four Industries Qualifying as Pioneer Industries:

  1. Agricultural production, including food processing and packaging.
  2. Manufacturing, such as aluminum products and roofing sheets.
  3. Mining and processing of minerals, including petroleum refining.
  4. Telecommunication and information technology.

b. Computation of Tax Liabilities and Withholding Tax for Ajanaku Nigeria Limited:

Step 1: Pioneer Period

  • Pioneer period runs from July 1, 2011, to June 30, 2014.

Step 2: Loss/Profit Exemption During Pioneer Period

  • Losses incurred during the pioneer period are disregarded for tax purposes.
  • Profits during the pioneer period are exempt from tax.

Step 3: Dividend Withholding Tax (WHT):

Year Gross Dividend (₦’000) Withholding Tax Rate (%) WHT Amount (₦’000)
2013 600 10 60
2014 1,500 10 150

Total Withholding Tax Due = ₦60,000 + ₦150,000 = ₦210,000.

Final Tax Liabilities:

  • Since Ajanaku Nigeria Limited’s profits during the pioneer period are exempt from tax, Tax Liability = ₦0.

Withholding Tax Due from Shareholders:

  • Total Withholding Tax on dividends for 2013 and 2014 is ₦210,000.

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  • 5 Marks

CR – Nov 2016 – L3 – Q5b – Regulatory framework and ethics

Discuss the ethical and professional conflicts faced by the chief accountant of Nyamekye Plc when pressured to alter financial statements to secure a loan.

The board of directors of Nyamekye Plc, a company listed on the Ghana Stock Exchange, needs a significant capital injection to finance a capital-intensive project to consolidate the company’s market share, failure of which will result in a loss of 25% of its market share. The management of the company has approached National Commercial Bank (NCB) for a loan facility to undertake the project.

However, the bank’s current lending policies require borrowers to demonstrate good projected cash flow, as well as a level of profitability which would indicate that repayments would be made. Unfortunately, the current projected statement of cash flow does not satisfy NCB’s criteria for lending. The directors have told the bank that the company is in an excellent financial position and that the financial results and statement of cash flow projections will meet the criteria, and that the chief accountant will forward a report to this effect shortly. The chief accountant has just recently joined Nyamekye Plc and has openly indicated that she cannot afford to lose her job because of her financial commitments and family concerns.

Required:
Discuss the professional and potential ethical conflicts which may arise in the above scenario and the ethical principles which would guide how a professional accountant should act in this situation.

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  • 5 Marks

CR – Nov 2016 – L3 – Q5a – Regulatory framework and ethics

Discuss the ethical and professional issues faced by the financial accountant when considering the treatment of a finance lease in financial reporting.

Mordern Technology Ghana Limited plans to upgrade its production process, and the directors believe that technology-led production is the only feasible way to remain competitive in recent times. However, the company operates from a leased property, and the leasing arrangement was established to maximize taxation benefits. Surprisingly, the financial statements have not shown a lease asset or liability to date.

A new financial accountant joined Modern Technology Ghana Limited just after the financial year-end of 31 July 2016 and is currently reviewing the financial statements to prepare for the upcoming audit and to begin making a loan application to finance the new technology.

The financial accountant believes that the lease relating to both the land and buildings should be treated as a finance lease, but the finance director completely disagrees. The finance director does not wish to recognize the lease in the statement of financial position and, as a result, wishes to continue treating it as an operating lease. The finance director believes that the lease does not meet the criteria for a finance lease and was made clear by the finance director that showing the lease as a finance lease could adversely affect the loan application.

Required:
Discuss the ethical and professional issues which face the financial accountant in the above transaction.

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  • 10 Marks

CR – Nov 2016 – L3 – Q4b – Analysis and interpretation of financial statements

Write a report comparing Decimal Ltd’s financial performance with industry averages in terms of profitability, liquidity, efficiency, and shareholders’ investment.

Below are the financial ratios for the year 2015 for Decimal Ltd, a company engaged in the buying and shipment of agricultural products. The ratios for the industry have also been provided.

Ratios Decimal Ltd Industry Average
Quick ratio 0.52:1 0.84:1
Current ratio 1.20:1 1.80:1
Debtors collection period 46 days 41 days
Creditors payment period 70 days 50 days
Inventory holding period 58 days 48 days
Dividend yield 3.6% 9.0%
Debt to equity 85% 45%
Dividend cover 1.4 times 3.4 times
Gross profit margin 18% 28%
Net profit margin 8% 12.8%
Return on capital employed 28% 14%
Net assets turnover 4.2 times 1.9 times

Required:
Write a report to the Shareholders of Decimal Ltd assessing its performance in comparison with the industry in respect of profitability, liquidity, efficiency, and shareholders’ investment.
(10 marks)

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  • 5 Marks

CR – Nov 2016 – L3 – Q4a – Analysis and interpretation of financial statements

Describe two uses of accounting ratios and explain three limitations of their use in appraising financial performance.

It has been suggested that ratio analysis is not necessarily the best way of assessing a company’s performance.

Required:
i) Describe two uses of accounting ratios other than performance assessment. (2 marks)
ii) Explain three limitations of the use of accounting ratios in the appraisal of financial performance. (3 marks)

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  • 15 Marks

CR – Nov 2016 – L3 – Q3 – Corporate reconstruction and reorganization

Prepare the capital reduction, stated capital, and bank accounts along with a statement of financial position after reorganization.

MM Ltd, producers of telecommunication equipment, has been making losses in recent times. The directors have proposed a scheme of reorganization to take effect on 1 October 2013. The statement of financial position of the company at 30 September 2013 is as follows:

Statement of Financial Position as at 30 September 2013

Additional information:

  1. The ordinary shares are to be written down to GH¢0.25 per share and then converted into new ordinary shares of GH¢1.00, fully paid.
  2. The preference shareholders are to receive 40,000 ordinary shares of GH¢1.00 per share, fully paid in exchange for their preference shares.
  3. Dividends on the 7% preference shares are two years in arrears. In consideration of waiving their rights to arrears of preference dividends, the preference shareholders have agreed to accept 10,000 new ordinary shares of GH¢1.00 per share, fully paid, in final settlement.
  4. The creditors have agreed to take 100,000 new ordinary shares of GH¢1.00 per share, fully paid in part settlement of the amounts due to them.
  5. The balance on the retained earnings account is to be written off.
  6. Some assets of the company have been revalued and are to be incorporated into the accounts as follows:
    • Freehold premises: GH¢100,000
    • Plant and equipment: GH¢125,000
    • Vehicles: GH¢25,000
    • Inventory: GH¢36,000
  7. An allowance of GH¢3,500 is to be made for doubtful debts.
  8. The ordinary shareholders have agreed to inject an additional GH¢90,000 cash by acquiring 120,000 ordinary shares at GH¢0.75 per share, fully paid.
  9. Reorganization costs amounted to GH¢7,500.

Required:
a) Prepare the capital reduction account, stated capital account, and bank account. (9 marks)
b) Prepare the statement of financial position of MM Ltd as at 1 October 2016, after the reorganization. (6 marks)

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  • 4 Marks

CR – Nov 2016 – L3 – Q2e – Other information in the annual report

Determine the classification and disclosure of related party transactions for Mane Ltd in accordance with IAS 24

Mane Ltd is an entity specializing in importing a wide range of non-food items and selling them to retailers. Aqeel is Mane’s CEO and founder and owns 40% of Mane’s equity shares:

i) Mane’s largest customer, Zico, accounts for 35% of Mane’s revenue. Zico has just completed negotiations with Mane for a special 5% discount on all sales.
ii) During the accounting period, Aqeel purchased a property from Mane for GH¢500,000. Mane had previously declared the property surplus to its requirements and had valued it at GH¢750,000.
iii) Aqeel’s son, Sherif, is a director in a financial institution, Cheap Capital. During the accounting period, Cheap Capital advanced GH¢2 million to Mane as an unsecured loan at a favorable rate of interest.

Required:
Explain, with reasons, the extent to which each of the above transactions should be classified and disclosed in accordance with IAS 24 Related Party Disclosures in Mane’s financial statements for the period.
(4 marks)

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  • 6 Marks

CR – Nov 2016 – L3 – Q2d – IAS 36 – Impairment of Assets

Account for the impairment loss of a taxi business under IAS 36.

Afoko Ltd acquired a car taxi business on 1 January 2015 for GH¢230,000. The value of the assets of the business at that date based on net selling price were as follows:

Assets GH¢’000
Vehicles 120
Intangible assets 30
Trade receivables 10
Cash 50
Trade payables (20)
Net assets 190

On 1 February 2015, the taxi business had three (3) of its vehicles stolen. The net selling values of these vehicles was GH¢30,000, and because of non-disclosure of certain risks to the insurance company, the business was uninsured. As a result of this event, Afoko Ltd wishes to recognize an impairment loss of GH¢45,000, inclusive of the loss of the stolen vehicles due to the decline in value of the stolen income-generating unit, that is the taxi business. On 1 March 2015, a rival taxi company commenced business in the same area. It is anticipated that the business revenue of Afoko Ltd would be reduced by 25%, leading to a decline in the present value in use of the business, which is calculated at GH¢150,000. The net selling value of the taxi license has fallen to GH¢25,000 as a result of the rival taxi operator. The net selling values of the other assets have remained the same as at 1 January 2015.

Required:
Recommend how Afoko Ltd should account for the above transaction in its financial statements in accordance with IAS 36 Impairment of Assets.
(6 marks)

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  • 5 Marks

CR – Nov 2016 – L3 – Q2b – IAS 19 – Employee Benefits

Account for a pension scheme under the defined benefit plan for Patience Pass All Ltd.

The following information relates to the pension scheme of Patience Pass All Limited for the year ended 30 April 2016:

The pension costs have not been accounted for in the total comprehensive income as the Accountant of the company is not qualified yet and lacks sufficient knowledge on the provisions of IAS 19 Employee Benefits.

Required:
Demonstrate how the above transaction would be accounted for under the provisions of IAS 19 Employee Benefits, including relevant extracts to the financial statements for the year ended 30 April 2016.

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  • 5 Marks

CR – Nov 2016 – L3 – Q2a – IFRS 16: Leases

Account for a sale and leaseback transaction in accordance with IAS 17.

Hard-Work Ltd is a public limited company in Ghana and owned a building on which it raised finance to support its operations. On 1 June 2015, Hard-Work Ltd disposed of the building for GH¢5 million to a finance company when the carrying amount of the building was GH¢3.5 million. However, the same building was immediately leased back from the finance company for a period of 20 years, which was considered to be equivalent to the majority of the asset’s useful economic life. The lease rentals for the period amounted to GH¢441,000 payable annually in arrears. The interest rate implicit in the lease is 7%. The present value of the guaranteed minimum lease payments is the same as the sale proceeds.

Required:
Demonstrate how Hard-Work Ltd will account for the above transaction for the year ended 31 May 2016 in accordance with IAS 17 Leases. Show relevant extracts to the statement of profit or loss and the statement of financial position as at 31 May 2016.

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  • 20 Marks

CR – Nov 2016 – L3 – Q1 – Consolidated financial statements

Prepare the consolidated statement of profit or loss and other comprehensive income for Broad Ltd. Group for the year ended June 30, 2016.

Below are the separate financial statements of Broad Ltd and two investee companies which also operate in the same industry as the investor entity.

Statements of profit or loss and other comprehensive income for the year ended 30 June 2016


The following information is relevant:

  1. On 1 March 2016, Broad Ltd acquired 80% of the equity share capital of Narrow Ltd. The consideration consisted of two elements: a share exchange of three shares in Broad Ltd for every five acquired shares in Narrow Ltd and the issue of a GH¢100 6% loan note for every 500 shares acquired in Narrow Ltd. The share issue has not yet been recorded by Broad Ltd, but the issue of the loan notes has been recorded. At the date of acquisition, shares in Broad Ltd had a market value of GH¢5 each, and the shares of Narrow Ltd had a stock market price of GH¢3.50 each.Broad Ltd had earlier acquired 2.4 million shares in Shadow Ltd on the stock market at a price of GH¢1.50 per share on 1 January 2016.
  2. At the date of acquisition, the fair values of Narrow Ltd.’s assets were equal to their carrying amounts with the exception of its property, which had a fair value of GH¢1.2 million below its carrying amount. This would lead to a reduction of the depreciation charge (in cost of sales) of GH¢50,000 in the post-acquisition period. Narrow Ltd has not incorporated this value change into its separate financial statements.
  3. Broad’s group policy is to revalue all properties to current value at each year-end. On 30 June 2016, the value of Narrow’s property was unchanged from its value at acquisition, but the land element of Broad Ltd.’s property had increased in value by GH¢500,000 as shown in other comprehensive income.
  4. Sales from Narrow Ltd to Broad Ltd throughout the year ended 30 June 2016 were GH¢12 million. Narrow made a mark-up on cost of 25% on these sales. Broad Ltd had GH¢2 million (at cost to Broad Ltd) of inventory that had been supplied in the post-acquisition period by Narrow Ltd as at 30 June 2016.
  5. In June 2016, Broad Ltd sold goods to Shadow Ltd for GH¢2,000,000, thus achieving a profit mark-up of 25%. The entire consignment remained unsold and was included in the inventory of Shadow Ltd as at 30 June 2016.
  6. Broad’s investments include some available-for-sale investments that have increased in value by GH¢300,000 during the year. The other equity reserve relates to these investments and is based on their value as at 30 June 2015. There were no acquisitions or disposals of any of these investments during the year ended 30 June 2016.
  7. Broad’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, Narrow’s share price at that date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.
  8. It was determined at the year-end that 10% of the goodwill relating to the acquisition of Narrow was impaired.

Required:

a) Prepare the consolidated statement of profit or loss and other comprehensive income for Broad Ltd. Group for the year ended 30 June 2016. (10 marks)

b) Prepare the consolidated statement of financial position for Broad Ltd. Group as at 30 June 2016. (10 marks)

 

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