Series: NOV 2017

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  • 15 Marks

AAA – Nov 2017 – L3 – Q7 – Audit of IT Systems and Data Analytics

Assess key controls for an online trading business, evaluate associated risks with electronic data interchange, and suggest effective risk mitigation controls.

Young Entrepreneur Trading (YET) is an online trading business established by Yemisi Tumfere. YET sources household goods from various local and international manufacturers, placing orders online with suppliers. Customers also place online orders, and invoices are processed and sent to stores for dispatch through a network of delivery centers across the country.

YET, dissatisfied with its previous auditors, has approached your firm for the audit engagement, with professional clearance obtained. As the audit manager, you are responsible for the engagement, with several new trainees under your supervision who are unfamiliar with controls for online businesses.

Requirements:
a. Discuss FIVE controls an auditor should focus on to assess the effectiveness of controls in an online system like YET. (5 Marks)
b. Evaluate FOUR risks associated with YET’s use of electronic data interchange in an online business and recommend FOUR effective controls to minimize these risks. (10 Marks)

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  • 15 Marks

AAA – Nov 2017 – L3 – Q6 – Audit Reporting

Discuss audit report modifications, draft modified report on grant treatment, and analyze auditor’s responsibilities regarding asset valuation.

During the audit of fixed assets for Next Engineering Plc as of December 31, 2016, two issues were encountered:

  1. The cost calculations for direct labor on assets under construction were destroyed, with the direct labor cost totaling ₦20,000,000.
  2. A government grant of ₦50,000,000, received for plant and equipment purchased during the year, was fully credited to the income statement as an exceptional item, though the plant and equipment have a 10-year useful life.

Requirements:
a. Discuss the general forms of modifications available to auditors in drafting their report and specify circumstances for each form.

(6 Marks)
b. Assuming a modified audit report is necessary regarding the government grant treatment, draft the relevant section (entire report not required).

(5 Marks)
c. Analyze the auditor’s general responsibility concerning the directors’ report on land and building valuation.

(4 Marks)

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  • 30 Marks

AAA – Nov 2017 – L3 – Q5 – Audit Evidence

Evaluate XYZ Bank’s provision for litigation, discuss audit procedures per ISA 501, and prepare litigation disclosure for financial statements.

You are the audit manager for XYZ Bank Limited for the year ended December 31, 2016. The Bank’s Board noted a litigation issue involving a lawsuit from BBB Limited, where the Bank was found liable for a cheque conversion worth ₦2.1 billion. The high court imposed a penalty on the Bank for this amount, which BBB Limited is now claiming.

The Bank has objected to the judgment, appealing to the Court of Appeal, with legal counsel advising that a favorable outcome is expected. The Bank’s litigation-related financial information is as follows:

  • Provision for litigation (recognized in financial statements): ₦96 million
  • Litigation cases as defendant: 50
  • Litigation cases as plaintiff: 10
  • Claims in favor of the Bank: ₦2.7 billion
  • Claims against the Bank (including the ₦2.1 billion case): ₦3.2 billion

Requirements:
a. Discuss FOUR specific considerations under ISA 501 for obtaining audit evidence on litigation provisions.

(5 Marks)
b. Evaluate the adequacy of the litigation provision recognized in the financial statements as at December 31, 2016.

(5 Marks)
c. Prepare a summary disclosure of the litigation status for inclusion in the financial statement notes as at December 31, 2016.

(5 Marks)

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  • 20 Marks

AAA – Nov 2017 – L3 – Q4 – Risk Management in Audits

Assess audit risks in taking on Pony Bank Plc, recommend management and audit firm actions to address financial statement risks, and draft a management letter.

The management of Pony Bank Plc and its wholly owned subsidiary, Ponte Micro Finance Bank Limited, engaged in fraudulent activities involving the arrangement of bogus loans amounting to ₦5.5 billion in worthless assets, which were undetected by the previous auditors. The former auditors attributed the oversight to a well-organized group within Pony Bank that actively deceived and obstructed the audit process to conceal their actions.

Your firm, Vic Viv & Co, has recently taken on the audit of Pony Bank Plc.

Requirements:
a. Advise the engagement partner on the risks involved in taking up the audit.

(4 Marks)
b. Recommend appropriate actions for management and your firm to address financial statement risks.

(8 Marks)
c. Prepare a management letter with two matters suitable for submission to the directors.

(8 Marks)

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  • 20 Marks

AAA – Nov 2017 – L3 – Q3 – Audit Reporting

Assess material and pervasive effects on financial statements, audit procedures, and draft audit report opinion paragraphs for Tophem Bank’s foreign associate investment.

Tophem Bank Nigeria Plc has been operational for 20 years, with your firm auditing the company for the past five years. During the year, Tophem acquired an investment in Accra Insurance Limited, a foreign associate, which is accounted for using the equity method and listed at ₦575 million on the Statement of Financial Position as of December 31, 2016. Tophem’s income for the year includes its share of Accra’s net income. However, the audit team was denied access to Accra’s management, auditors, and financial data.

Following a review of the audit file for the year ended December 31, 2016, your partner has recommended a modified opinion for the audit report, providing a draft outline and requesting your input to complete it.

Requirements:
a. Evaluate the circumstances under which a matter could be both material and pervasive in its effect on the financial statements.

(4 Marks)
b. Explain EIGHT appropriate procedures to follow in the audit assignment before finalizing the audit opinion.

(8 Marks)
c. Draft an appropriate basis of opinion paragraph suitable for inclusion in the auditor’s report.

(4 Marks)
d. Draft an appropriate opinion paragraph suitable for inclusion in the auditor’s report.

(4 Marks)

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  • 20 Marks

AAA – Nov 2017 – L3 – Q2 – Group Audits

Assess business risks for Chuks Zaka Limited post-acquisition, evaluate financial statement risks, and outline audit considerations.

Chuks Roberts Plc (CRP) operates as an auto-parts manufacturing company in Nigeria with headquarters in Lagos. CRP plans to manufacture drones for parcel distribution across Africa and has acquired Zaka Roberts Limited (ZRL), a South African company based in Johannesburg, to bring this plan to fruition.

Zaka previously specialized in manufacturing computer-controlled equipment for laboratories and other industries in Africa and the Middle East. The company was owned by five directors/shareholders who accepted CRP’s offer on February 1, 2016, to purchase Zaka’s manufacturing equipment, technology (patent-protected), Cape Town factory, and Johannesburg head office for US$450 million, representing 75% of Zaka’s value.

Effective March 31, 2016, Zaka ceased manufacturing, making most employees redundant except for a select few in marketing, accounts, and administration, with one month’s notice. The restructured entity, now named Chuks Zaka Limited (CZL), will operate as a marketing arm selling CRP’s drones in the South African region, with CRP holding a 55% stake.

Your firm has been CRP’s external auditor and is now engaged to audit CZL.

Required:
a. Analyse and evaluate the business risks that would be assessed by the management of CZL. (6 Marks)
b. Analyse and evaluate the business risks that would be assessed by the directors of CRP.

(6 Marks)
c. Assess and advise on the financial statements’ risks to be considered in planning the audit of CZL for the year ended December 31, 2016.

(8 Marks)

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  • 30 Marks

AAA – Nov 2017 – L3 – Q1 – Quality Control in Audit Firms

Evaluate audit quality issues and procedures in response to a regulatory review of NigerKap Plc.

Bode, Ugo, Musa and Company is a firm of Chartered Accountants that has existed for over 20 years and achieved a strong reputation for quality audit work. The firm has expanded significantly over the past ten years – doubling its client base across different sectors of the Nigerian economy. The firm currently audits two banks, five listed entities, and over seventy other companies. It has also increased its audit staff base and grown the number of its partners from two to seven over the same period.

However, in the last two years, the firm has had a series of regulatory reviews due to several instances of errors noted in some financial statements audited by the firm. One of the clients, the shareholders of NigerKap Plc, petitioned the regulator over a misstatement in the value of their investment property. This resulted in an overstatement of profit and overpayment of taxes by the company based on the financial statements for the year ended December 31, 2015. The shareholders also threatened to take legal action against the firm.

The Managing Partner (MP) of the firm is very concerned about this situation and has commenced internal procedures to evaluate the quality of audits performed by the firm, especially for the NigerKap audit of 2015. A committee has been set up…

Required:
Discuss the internal procedures that Bode, Ugo, Musa and Company should implement to improve audit quality and prevent further regulatory issues.

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  • 15 Marks

FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

a. In the context of the selection and holding of investments, discuss each of the following scenarios:

i. An investor holding only one security needs to be concerned with the unsystematic risk of that security. (3 Marks)

ii. However, an investor who holds a number of securities should take account of total risk. (3 Marks)

iii. An investor should never add to a portfolio an investment that yields a return less than the market rate of return. (3 Marks)

b. The equity beta of KT Plc. is 1.2 and the equity alpha is 1.4. Explain the meaning and significance of these values to the company. (6 Marks)

(Total 15 Marks)

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  • 15 Marks

FM – Nov 2017 – L3 – Q6 – Ethical Issues in Financial Management

Explore ethical considerations in capital investment and apply the Black-Scholes model in company valuation.

You have recently taken up employment with Large Plc., a Nigerian company with manufacturing subsidiaries in many countries across Africa. As the Financial Analyst, you report directly to the Managing Director who currently requires briefings on the following areas:

(i) Ethical issues and capital investment decisions,
(ii) Options and company valuation

Required:

a. Explain, with examples, ethical issues that might affect capital investment decisions and discuss the importance of such issues for Strategic Financial Management. (8 Marks)

b. Explain the circumstances in which the Black-Scholes Option Pricing (BSOP) model could be used to assess the value of a company, including the data required for the variables used in the model. (7 Marks)

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  • 15 Marks

FM – Nov 2017 – L3 – Q5 – Corporate Governance and Financial Strategy

Identify stakeholder financial objectives and discuss methods to incentivize directors to maximize shareholder wealth.

Private sector companies have multiple stakeholders who are likely to have divergent interests.

Required:

(a) Identify FIVE stakeholder groups and discuss briefly their financial objectives.
(10 Marks)

(b) Explain ways in which companies’ directors can be encouraged to achieve the objective of maximisation of shareholders’ wealth.
(5 Marks)

(Total 15 Marks)

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  • 20 Marks

FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management

Evaluate foreign exchange exposure, determine forward rates, assess hedging strategies, and discuss economic exposure significance for Kudi Limited.

You are the Financial Director of Kudi Limited, a Nigerian company that imports raw materials mainly from Tiko (currency: T$) and exports finished products to Katuga (currency: K$). Kudi is partly financed by a loan raised in the domestic market and usually hedges its foreign currency exposure using forward or money markets. Most customers are allowed a 3-month credit. The company recently sold products to a customer in Katuga for K$20 million.

Available Information:

Exchange Rate K$ per N T$ per N
Spot Rate 1.9600 1.4600
1 Month Forward 1.9580 1.4579
Central Bank Base Rate Per Annum Nigeria Katuga Tiko
Rate (%) 5.5% 4.25% 3.75%

Required:

(a) Comment on the Interest Rate Parity (IRP) and Purchasing Power Parity (PPP) methods for estimating exchange rates. (6 Marks)

In answering the following questions, include relevant calculations:

  1. Given that interest rates are higher in Nigeria than in Tiko, should T$ be depreciating against the naira and thus trading at a discount? (3 Marks)
  2. Determine the 3-month K$ forward rate of exchange implied by the given information and calculate the naira receipts expected in 3 months from the customer in Katuga. (3 Marks)
  3. Assess whether buying T$ on the spot market now and placing it on deposit would be a sensible policy for Kudi. (3 Marks)

(b) Discuss the concept and significance of foreign exchange economic exposure for a multinational company. (5 Marks)

(Total 20 Marks)

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  • 20 Marks

FM – Nov 2017 – L3 – Q3 – Financing Decisions and Capital Markets

Calculate theoretical ex-rights price, evaluate shareholder options, discuss EMH implications, and analyze market timing for Peter Plc’s equity financing.

Peter Plc. is a large, listed manufacturing company that is currently considering how best to raise new equity finance. One option is to undertake a public issue of new shares, a course of action recently approved by the shareholders. Alternatively, the company is considering a 1 for 4 rights issue at a 10% discount to the current market price of N5.00 per share.

The company has approached several investment banks regarding the potential new rights issue and public issue. During these discussions, one investment bank stated that the precise timing of a rights issue would be of no consequence. The bank is of the opinion that a public issue of new shares should not be undertaken at the present time. It recommended that if the company wishes to pursue a public issue, it should be deferred for a minimum of six months. The bank explained that, at present, the stock market is significantly undervaluing Peter Plc.’s shares. Consequently, the company would have to issue far more shares to raise the required amount of finance than it would in six months.

The Finance Director of Peter Plc. is uncertain about this and, at a recent board meeting where the matter was discussed, made the following statement:

“According to the Efficient Market Hypothesis, all share prices are correct at all times, with prices moving randomly when new information is publicly announced. The analysts at investment banks are unable to predict future share prices.”

Required:

  1. (a) Calculate the theoretical ex-rights price per share and the value of the rights per existing share, assuming the company chooses this option. (2 Marks)
  2. (b) Discuss the alternative courses of action open to the owner of 500 shares in Peter Plc. as regards the rights issue, in each case, determining the effect on the wealth of the investor. (4 Marks)
  3. (c) Discuss the factors that will influence the actual ex-rights price per share. (4 Marks)
  4. (d) Discuss the meaning and significance of the three forms of the Efficient Market Hypothesis and, with specific reference to these, discuss both the recommendation that the company waits for six months before undertaking a public issue and the Finance Director’s statement. (10 Marks)

(Total 20 Marks)

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  • 20 Marks

FM – Nov 2017 – L3 – Q2 – Mergers and Acquisitions

Calculate Raymond Plc.'s valuation, analyze Harold Limited's acquisition value, and assess the offer price from shareholders' perspectives.

Raymond Plc. is a successful IT services company incorporated 10 years ago. It was listed on the Stock Exchange 3 years ago. The company has a broad customer base mainly consisting of small and medium-sized companies. Raymond Plc. has achieved rapid growth in recent years by obtaining regular business from satisfied customers and also by acquiring other IT services companies.

The Directors of Raymond Plc. have identified Harold Limited, an unlisted company, as a possible acquisition target. Harold Limited has a number of large multinational clients, and, in general, its clients tend to be larger than those of Raymond Plc. If successful, the acquisition would go ahead on January 1, 2018.

Forecast financial data for Raymond Plc. and Harold Limited as of December 31, 2017, are summarized below:

Financial Item Raymond Plc. Harold Limited
Share capital (Ordinary ₦1 shares) ₦150m ₦40m
Market share price ₦4.90 N/A

N/A: Not applicable (not listed).

Additional information:

  1. If Harold Limited were to remain an independent company, its Directors estimate that reported Profit After Tax would be ₦15 million for 2018 and then grow by 2% yearly in perpetuity;
  2. If the acquisition were to go ahead, Raymond Plc.’s Directors estimate that Harold Limited’s profit after tax would be 5% higher for 2018 than if the company remains an independent company, and that profit after tax would then grow by 3% yearly in perpetuity;
  3. The average ungeared Cost of Equity for the industry is 8%;
  4. Both Raymond Plc. and Harold Limited are wholly equity financed; and
  5. Profit after tax can be assumed to be a good approximation of free cash flow attributable to investors.

The Directors of Raymond Plc. are considering offering to purchase Harold Limited at a price of ₦7.00 per share. It is estimated that transaction costs of ₦8 million would be payable on the acquisition and that ₦2 million would be required in the first year to cover the costs of integrating the two companies.

Required:

  • (a) Calculate:
    • i. The value of Raymond Plc. as at December 31, 2017.
    • ii. The value of Harold Limited as at December 31, 2017 before taking the possible acquisition of the company by Raymond Plc. into account.
    • iii. The overall increase in value created by the acquisition of Harold Limited by Raymond Plc. (8 Marks)
  • (b)
    • i. Explain how value might be created by the proposed acquisition. (2 Marks)
    • ii. Comment on the difficulties which Raymond Plc. is likely to face in realizing the potential added-value, after the acquisition. (2 Marks)
  • (c) Evaluate the proposed offer price of ₦7.00 per share for Harold Limited from the point of view of:
    • i. Harold Limited’s shareholders.
    • ii. Raymond Plc.’s shareholders. (8 Marks)

(Total 20 Marks)

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  • 30 Marks

FM – Nov 2017 – L3 – Q1 – Financial Planning and Forecasting

Prepare forecast financials for Lekki Plc and suggest divestment options for a poorly performing subsidiary.

Despite the global recession, demand for the company’s products has recently increased and is expected to grow over the next two years.

As part of a recent strategic review, the directors made the following projections for the years ending March 31, 2018, and March 31, 2019:

  1. An anticipated annual revenue increase of 8% for each year.
  2. Operating costs (excluding depreciation) expected to rise by 4% per year.
  3. Tax rate to remain at 21%, payable in the year liability arises.
  4. The trade receivables/revenue and trade payables/operating costs ratios will stay the same.
  5. Inventory levels to increase by 10% in the year ending March 31, 2018, and then remain stable.
  6. Non-current assets, including Lekki Plc.’s headquarters and factory, are not depreciated, and capital allowances are negligible.
  7. Dividend growth rate to remain at 6% annually, with dividends declared at the year-end and paid the following year.
  8. Purchase of new machinery at N8 million, financed through existing overdraft facilities. Machinery to be depreciated straight-line over 8 years with a N1 million residual value; capital allowances will apply at 18% reducing balance.
  9. Finance costs are projected to increase by 50% in the year ending March 31, 2018, and remain stable thereafter.

Financial Statement Extracts (March 31, 2017):

  • Income Statement:
    • Revenue: N60,240,000
    • Operating Costs: N49,500,000
    • Operating Profit: N10,740,000
    • Finance Costs: N800,000
    • Profit before Tax: N9,940,000
    • Tax: N2,286,000
    • Profit after Tax: N7,654,000
  • Statement of Financial Position:
    • Assets:
      • Non-current Assets: N28,850,000
      • Current Assets:
        • Inventories: N9,020,000
        • Trade Receivables: N9,036,000
        • Cash and Equivalents: N396,000
    • Equity and Liabilities:
      • Ordinary Share Capital: N16,700,000
      • Retained Earnings: N12,482,000
      • Non-current Liabilities: N8,000,000 (6% Debentures)
      • Current Liabilities: N10,120,000 (Trade Payables, Dividends)

Assume today is April 1, 2017.

a. Prepare a Forecast Financial Statement (Income Statement, Statement of Financial Position, and Cash Flow Statement) for each of the years ending March 31, 2018, and March 31, 2019.
(24 Marks)

Note: All calculations should be rounded up to the nearest N’000.

b. Beyond March 31, 2019, the directors are considering the disposal of a smaller subsidiary due to poor performance. The Finance Director suggests avoiding liquidation to minimize industrial relations issues.

Required: Discuss three non-liquidation methods to divest the subsidiary.
(6 Marks)

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  • 15 Marks

AT – Nov 2017 – L3 – Q7 – Tax Implications of Mergers and Acquisitions

Advise on tax implications for Aba Foods merger/acquisition options with Ifedi Foods.

The prevailing economic condition has led to the business cessation of many SMEs. Aba Foods Limited, a well-known food and beverage company in Abia State, faced difficulties in securing long-term loans, preventing the replacement of its outdated equipment and leading to losses. To ensure continuity, the company considered mergers or acquisitions and entered discussions with Chief Egodi of Ifedi Group. Chief Egodi, concerned about the tax implications of potential arrangements, sought advice from your firm, Aliyara & Co., Chartered Accountants.

Required:
Provide a presentation in the form of advice:

(a) Explain the tax implications of Aba Foods Limited merging with Ifedi Foods and Beverage Limited, with Ifedi inheriting all assets and liabilities. (5 Marks)
(b) Explain the tax implications if Ifedi Foods and Beverage Limited is reconstituted to take over Aba Foods’ assets and liabilities. (5 Marks)
(c) Explain the tax implications if Ifedi Foods and Aba Foods enter a Joint Venture or Partnership Agreement. (5 Marks)

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  • 15 Marks

AT – Nov 2017 – L3 – Q6 – Tax Administration and Dispute Resolution

Company on the total tax liabilities

Pategi and Abu are brothers based in Hackettstown, New Jersey, USA. In 2009, they, along with ten other African-Americans, incorporated a telecommunications company named Pategi Telecommunications Limited. The company, headquartered in the USA, has a representative office in Share, Kwara State, Nigeria. In the year ended December 31, 2014, the following transactions were extracted from the company’s records:

  1. Number of Minutes of Telecommunication Transactions:
    • U.S. to other parts of the World: 1,705,000 minutes
    • U.S. to Nigeria: 374,000 minutes
    • Nigeria to U.S.: 426,250 minutes
    • Nigeria to Canada: 550,000 minutes
    • U.S. to Canada through Nigeria: 794,750 minutes
      Total Minutes: 3,850,000 minutes
  2. Worldwide Expenses Incurred (Naira):
    • Refurbishment: N7,150,000
    • Rent: N1,100,000
    • Depreciation: N25,991,563
    • Salaries and Wages: N4,065,188
    • Other Disallowable Expenses: N9,658,000
    • Administrative Expenses: N4,820,750
      Total Expenses: N52,785,501
  3. Telecommunication Charges:
    • Average charge rate per minute: $0.50
    • Applicable exchange rate: N198 to $1.00

Required:
Advise the company on the total tax liabilities for the relevant year of assessment. (Total 15 Marks)

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  • 15 Marks

AT – Nov 2017 – L3 – Q5 – Tax Administration and Dispute Resolution

Outline objection and appeal procedures for FIRS additional assessment.

Papa Ejima Limited, a manufacturing company, filed tax returns for the 2014 Assessment Year. The Federal Inland Revenue Service (FIRS) issued additional assessments totaling N360,000 for Value Added Tax (VAT) and N3,050,000 for Withholding Tax (WHT). The Managing Director disputes this assessment, asserting the accuracy of the company’s tax filings.

The records of the company for the Accounting Year ended December 31, 2013 showed:

Description Amount (N)
Revenue 187,500,000
Cost of sales (102,500,000)
Gross Profit 85,000,000
Other income 31,250,000
Operating expenses (57,250,000)
Interest and similar charges (3,200,000)
Profit before tax 55,800,000
Taxation (6,250,000)
Profit after tax 49,550,000
Dividend (38,500,000)
Retained profit for the year 11,050,000

Other relevant information includes:

  1. Revenue:
    • Export sales: N58,500,000
    • Local sales: N129,000,000
  2. Cost of sales:
    • Opening inventory (VAT inclusive): N22,800,000
    • Closing stock (VAT inclusive): N37,150,000
    • Purchase of raw material: N90,600,000
    • Freight charges: N18,700,000
    • Other direct materials: N27,550,000
  3. Other income:
    • Foreign exchange gain: N4,800,000
    • Profit on sale of Non-current assets (sales proceeds is N21.5m): N8,850,000
    • Management fees from subsidiary companies: N17,600,000
  4. Operating expenses:
    • Office rent: N18,000,000
    • Audit fees: N4,000,000
    • Consultancy fees to ZXY Ltd: N11,000,000
    • Directors’ fees: N7,500,000
    • Other expenses: N16,750,000
  5. Additional details:
    • The company purchased Non-Current Assets (VAT inclusive): N84,000,000
    • VAT remitted to FIRS during the year: N1,976,235
    • WHT remitted to FIRS during the year: N6,650,000

Required:
As the tax consultant for the company, prepare a memo to advise the Managing Director on the appropriate objection and appeal procedures available to the company under the tax regulations.

(Total 15 Marks)

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  • 20 Marks

AT – Nov 2017 – L3 – Q4 – Capital Gains Tax (CGT)

Compute capital gains tax for equipment sale; define key CGT concepts.

Mr. Afolabi, owner of Afolabi Mining Limited in Itakpe, bought a pulverizing equipment on hire purchase on January 1, 2013, making a deposit of ₦49,875,000 against a cash price of ₦78,750,000. The balance was payable in 20 monthly installments of ₦1,750,000 starting February 1, 2013.

As the Tax Consultant, you are required to:
a. Compute the Capital Gains Tax (CGT) payable for the relevant Years of Assessment, assuming the equipment was sold for:
i. ₦ 84,700,000 after installment payments on November 3, 2013.
ii. ₦ 86,800,000 after installment payments on August 5, 2014.

b. Outline the allowable and disallowable deductions in computing Capital Gains Tax.
c. Explain ‘Year of Assessment’ in the context of the Capital Gains Tax Act CAP C1 LFN 2004.
d. Explain the term ‘Connected Persons’.

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  • 20 Marks

AT – Nov 2017 – L3 – Q3 – Double Taxation Reliefs and Credits

Outline objectives of the MOU with oil companies and compute double tax credit for Salim Consultants.

a. Outline FIVE objectives of the Memorandum of Understanding which the Federal Government of Nigeria entered into with the Oil Producing Companies on January 1, 1986.

b. SALIM CONSULTANTS LIMITED, incorporated in 2012, is a corporate advisory firm in Nigeria. In 2015, it expanded to Burundi to explore business opportunities there. The directors are interested in the Double Taxation Agreement but have not benefited from it before.

Below is a summary of the Income Statements for the year ended December 31, 2016:

Description Nigeria (N) Burundi (N) Total (N)
Gross Advisory fees 57,000,000 21,750,000 78,750,000
Other Income 960,000 1,800,000 2,760,000
Total 57,960,000 23,550,000 81,510,000
Deduct Expenses:
Deal Execution Expenses (30,225,000) (9,750,000) (39,975,000)
Office Rent (1,800,000) (675,000) (2,475,000)
Depreciation (5,100,000) (2,700,000) (7,800,000)
Loss on sale of Non-Current Assets – (525,000) (525,000)
Foreign Exchange Loss Provision (960,000) – (960,000)
Other Operating Expenses (3,240,000) (1,380,000) (4,620,000)
Net Operating Profit 16,635,000 8,520,000 25,155,000

Additional information:
(i) N2,130,000 was paid to the Burundi Tax Authority after claiming N4,800,000 Capital Allowance. Capital Allowance claimable in Nigeria was N7,800,000.
(ii) Other income of N960,000 is profit from the sale of Non-Current Assets, while N1,800,000 is gains from the disposal of securities.

Required:
a. Explain briefly what is meant by Double Taxation Relief.
b. Compute the Double Tax Credit claimable by the Company assuming there is a Double Taxation Agreement with Burundi.

 

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  • 20 Marks

AT – Nov 2017 – L3 – Q2 – Taxation of Companies

Compute assessable profit, chargeable profit, and tax for Skkye Petroleum Plc.

Skkye Petroleum Plc. began operations over ten years ago and uses December 31 as its accounting date. The following details were extracted from the accounting records for the year ended December 31, 2016:

  1. Crude oil exported – 3,500,000 barrels
  2. Crude oil used locally – 1,200,000 barrels at N100 per barrel
  3. Incidental income from petroleum operations – ₦26,750,000
  4. Exploration and drilling costs – ₦30,000,000
  5. Management and administration expenses – ₦240,500,000
  6. Non-productive rents – ₦8,300,000
  7. Provision for bad debts:
    • General – ₦7,500,000
    • Specific – ₦11,200,000
  8. Depreciation – ₦7,250,000
  9. Losses brought forward – ₦13,200,000

Qualifying capital expenditures:

  • Pipeline and storage tanks (March 2016, Continental Shelf, 190 meters depth) – ₦48,000,000
  • Plant and machinery (June 2014, Territorial Waters, 90 meters depth) – ₦63,800,000
  • Furniture and fittings (May 2013, Territorial Waters, 95 meters depth) – ₦21,000,000
  • Buildings (April 2015, onshore) – ₦71,000,000

Breakdown of Management and Administration expenses:

  • Donations to XYZ Political Party – ₦8,500,000
  • Expenditure on information regarding petroleum deposits – ₦4,700,000
  • Companies income tax of an associated company – ₦5,000,000
  • Interest on inter-company loans (market terms) – ₦2,600,000
  • Staff salaries – ₦175,000,000
  • Royalties on export sales – ₦6,200,000
  • Repairs and renewals on PPE for petroleum operations – ₦2,900,000
  • Rent for land/buildings under an Oil Prospecting License – ₦3,600,000
  • Other administrative expenses – ₦32,000,000

The international market price of crude oil in 2016 was USD $75 per barrel, with an exchange rate of USD $1 = ₦280.

Required:
a. Compute the assessable profit.
b. Compute the chargeable profit.
c. Compute the assessable tax.
d. Compute the chargeable tax.
e. Compute the Tertiary Education Tax.

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