Subject: FINANCIAL REPORTING

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  • 10 Marks

FR – Nov 2023 – L2 – Q7b – Presentation of Financial Statements (IAS 1)

Lists minimum line items for the statement of financial position and changes in equity as per IAS 1

IAS 1- Presentation of Financial Statements provides a list of line items that, as a minimum, must be shown on the face of the statement of financial position.

Required:

i. Give FIVE examples of minimum line items to be shown on the face of the statement of financial position. (5 Marks)
ii. State FIVE items that should be accounted for in the statement of changes in equity. (5 Marks)

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  • 5 Marks

FR – Nov 2023 – L2 – Q7a – Regulatory Framework for Financial Reporting

Discusses main sources of financial reporting regulations and reasons for regulatory practices.

Within the context of financial reporting and regulatory frameworks:

i. Discuss the main sources of regulations. (3 Marks)
ii. Discuss TWO reasons why financial reporting practice should be regulated. (2 Marks)

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  • 5 Marks

FR – Nov 2023 – L2 – Q6c – Conceptual Framework for Financial Reporting

Discusses areas of financial reporting enhanced by technology, such as data collection, recording, and report distribution.

Discuss TWO areas of financial reporting that could be enhanced by the use of technology. (4 Marks)

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  • 3 Marks

FR – Nov 2023 – L2 – Q6b – Ethical Issues in Financial Reporting

List three types of non-financial information useful to stakeholders for decision-making.

Businesses are increasingly accepting that they are not only accountable to investors and lenders, but also accountable to a much wider group of people or stakeholders to which non-financial information is useful in understanding and taking informed decisions on financial statements of the entities.

Required:
State THREE of such useful non-financial information. (3 Marks)

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  • 8 Marks

FR – Nov 2023 – L2 – Q6a – Ethical Issues in Financial Reporting

Identify and discuss techniques for manipulating financial statements under ethical compliance.

The management of an entity experiencing a decline in profits or poor cash flows may use various forms of creative accounting techniques to manipulate the views shown by the financial statements while complying with all applicable accounting standards and regulations.

Required:
Identify and discuss FOUR techniques of creative accounting. (8 Marks)

 

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  • 12 Marks

FR – Nov 2023 – L2 – Q5b – Accounting for Income Taxes (IAS 12)

Calculate Shakara Limited's income tax liability, deferred tax balance, and movement of deferred tax.

Shakara Limited was incorporated on January 1, 2022. During the year ended December 31, 2022, the company made a profit before taxation of N18,150,000.

The following capital expenditure were made during the year:

Expenditure N’000
Plant and machinery 7,200
Motor vehicles 1,800

The depreciation charged for the year amounted to N1,650,000, and capital allowance granted by the Federal Inland Revenue Services (FIRS) for the same period amounted to N2,250,000.

Company income tax rate is 30%, and deferred tax liability brought forward was N1,200,000.

Required:
i. Calculate the company income tax liability for the year ended December 31, 2022. (3 Marks)

ii. Calculate the deferred tax balance that should be disclosed in the statement of financial position of Shakara Limited as at December 31, 2022. (3 Marks)

iii. Prepare notes showing the movement of deferred tax charged to profit or loss for the year ended December 31, 2022. (3 Marks)

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  • 3 Marks

FR – Nov 2023 – L2 – Q5a – Accounting for Income Taxes (IAS 12)

Define deferred tax, permanent differences, and temporary differences per IAS 12.

Explain the following terms in accordance with IAS 12 – Income tax.
i. Deferred tax
ii. Permanent differences
iii. Temporary differences

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  • 20 Marks

FR – Nov 2023 – L2 – Q4a & b – Earnings Per Share (IAS 33)

Discuss diluted EPS and calculate EPS measures for Ebonyi Limited.

IAS 33 requires publicly-traded companies to calculate a diluted Earning Per Share (EPS) in addition to their basic EPS for the current year (with a comparative diluted EPS for the previous year), allowing for the effect of all dilutive potential ordinary shares.

Required: a. Explain the purpose of the dilutive measures and discuss THREE types of dilution. (8 Marks)

b. The statement of financial position (extracts) for Ebonyi Limited for the year ended December 31, 2022 is as follows:

Equity and Liabilities N’000
Ordinary shares (N1 each) 12,000
Retained earnings 36,000
Equity 48,000
Non-current liabilities:
5% convertible loan notes 4,000

Additional information: i. As at December 31, 2022, there has been no new issue of shares or loan notes for several years.
ii. The loan notes are convertible into ordinary shares in year 2023 or year 2024 at the following rates.
iii. At 30 shares for every N100 of loan notes if converted at December 31, 2023.
iv. At 25 shares for every N100 of loan notes if converted at December 31, 2024.
v. Company income tax rate is 30% on profit.

Required: Calculate the basic EPS and diluted EPS for year 2022. (8 Marks)

c. IAS 33 allows an entity to disclose an alternative measure of EPS in addition to the EPS calculated.

Required: Identify and explain TWO conditions that are required in accordance with IAS 33 to be complied with where an alternative measure of EPS is shown in the financial statements of an entity. (4 Marks)

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  • 12 Marks

FR – Nov 2023 – L2 – Q3b – Property, Plant, and Equipment (IAS 16)

Discuss financial implications of reclassifying investment property under cost and fair value models.

Young Shall Grow Limited with year-end December 31 purchased an office building, with a useful life of 50 years, for N55 million on January 1, 2013. The amount attributable to land was negligible. The company used the building as its head office until December 31, 2017, when the entity moved to a larger premises.

The building was reclassified as an investment property and leased out under a five-year lease. However, owing to a change in circumstances, Young Shall Grow Limited took possession of the building five years later, on December 31, 2022, to use it as its head office once more. At that date, the remaining useful life of the building was confirmed as 40 years.

The fair value of the building was as follows:

  • At December 31, 2017: N60 million
  • At December 31, 2022: N75 million

Required:

Discuss how the changes of use should be reflected in the financial statements of Young Shall Grow Limited:

  1. If the company uses the cost model for its investment properties.
  2. If the company uses the fair value model for its investment properties.

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  • 8 Marks

FR – Nov 2023 – L2 – Q3a – Property, Plant, and Equipment (IAS 16)

Explain reclassification criteria for transferring investment property to PPE.

a. If a property is transferred into or out of the category of property, plant and equipment (PPE), it might be reclassified as investment property or as no longer an investment property.

A transfer of investment property can only be made where there is a change of use of such property.

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  • 20 Marks

FR – Nov 2023 – L2 – Q2 – Business Combinations (IFRS 3)

Analyze Oyowood Limited's financials and adjust ratios based on acquisition considerations.

Chisom Plc experienced rapid growth in recent years through the acquisition and integration of other companies. Chisom Plc is interested in acquiring Oyowood Limited, a retailing company, which is one of several companies owned and managed by the same family.

The summarized financial statements of Oyowood Limited for the year ended December 31, 2022, are as follows:

From the above financial statements, Chisom Plc has calculated for Oyowood Limited the ratios below for the year ended December 31, 2022. It has also obtained the equivalent ratios for the retail sector average, which can be taken to represent Oyowood‟s sector.

Additional Information:

  1. Oyowood Limited buys all inventories from family companies at a 10% discount below market prices.
  2. Post-acquisition, Chisom Plc would replace the board of directors with a new board at a remuneration cost of ₦2.5 million per annum.
  3. Directors’ loan accounts will be refinanced through a 10% interest-bearing commercial loan of the same amount.
  4. The purchase price for Oyowood Limited is expected to be ₦30 million.

Required:

a. As the financial analyst for Chisom Plc, recalculate the ratios for Oyowood Limited after adjustments based on points (i) to (iv) above. (10 Marks)

b. Draft a memo to the managing director of Chisom Plc commenting on the adjusted performance of Oyowood Limited. (10 Marks)

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  • 30 Marks

FR – Nov 2023 – L2 – Q1 – Presentation of Financial Statements (IAS 1)

Prepare financial statements for Akamata Nigeria Limited, analyze revaluation adjustments, and assess ethical challenges posed by management.

Akamata Nigeria Limited is a manufacturing company. Its finished products are stored in a nearby warehouse until ordered by the customers. Akamata Nigeria Limited has performed very well in the past, but has been in financial difficulties in recent months due to the removal of petroleum subsidies and floating of exchange rate by the Federal Government of Nigeria. The company has been reorganizing its business to improve performance.

The trial balance of Akamata Nigeria Limited as at March 31, 2023, was as follows:

Description Debit (N’000) Credit (N’000)
Revenue 624,500
Cost of goods manufactured (excluding depreciation) 470,000
Distribution costs 45,300
Administrative expenses 80,100
Restructuring costs 605
Interest received 6,000
Loan notes interest paid 3,195
Land and building (including land N100,000,000) 251,500
Plant and equipment 18,600
Accumulated depreciation at March 31, 2022:
– Buildings 30,300
– Plant and equipment 8,350
Investment properties (at market value) 120,000
Inventories at March 31, 2022 24,260
Trade receivables 46,650
Cash and bank 5,950
Ordinary share capital of N1 each (fully paid) 100,000
Share premium 2,150
Revaluation surplus 15,625
Retained earnings at March 31, 2022 140,385
Ordinary dividend paid 5,000
7% loan notes (2027) 91,250
Trade payables 40,600
Proceeds of shares issued 12,000

Total Debit = 1,071,160
Total Credit = 1,071,160

Additional Information:

  1. Property, plant, and equipment depreciation policies:
    • Building: 5% p.a. on straight-line basis (administrative cost).
    • Plant and equipment: 25% p.a. on reducing balance basis (cost of sales).
  2. Land revaluation on March 31, 2023: N120,000,000.
  3. Estimated income tax for the year ended March 31, 2023: N4,880,000.
  4. Closing inventories as at March 31, 2023, amount to N25,900,000. Inspection shows that a production machine had incorrect setup resulting in mispackaged products costing N250,000 to produce. Additional repackaging cost of N100,000 would enable a sale at N275,000. The mispackaged goods are currently included in inventory at N250,000.
  5. Loan notes are due for repayment by March 31, 2027, with interest accrued for six months to March 31, 2023.
  6. Restructuring costs represent major efforts to improve competitiveness and profitability.
  7. Investment properties required no fair value adjustments during the period.
  8. Issued 10 million new ordinary shares at N1.20 each during the year, recorded under “proceeds of share issue.”

Required:

a. Prepare the statement of profit or loss and other comprehensive income, and the statement of changes in equity for the year ended March 31, 2023. (15 Marks)

b. Prepare the statement of financial position as at March 31, 2023. (10 Marks)

c. As the chief accountant of Akamata Nigeria Limited, you have been instructed by the new managing director (MD) to revise the last financial statement and prepare an attractive six-month forecast for listing on the Nigerian Exchange Limited (NGX), potentially bypassing relevant accounting standards and NGX regulations.

Required:
Identify the motivations of the managing director and outline actions you should consider under this ethical pressure. (5 Marks)

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  • 9 Marks

FR – May 2016 – L2 – Q7b – Financial Instruments (IAS 32, IFRS 9)

Calculate amortised cost and fair value of a financial liability issued by Anifowose Plc.

Anifowose Plc issued a debt instrument at its fair value of N100 million on January 1, 2013. The debt instrument is to mature in 2017. It has a principal amount of N125 million and carries a fixed interest rate of 4.72%, which is paid annually. The effective interest rate is 10%, and on December 31, 2015, it had a fair value of 105 for every N10 nominal value. The company makes up its accounts to December 31 every year.

Required:

i. Show your computation schedule for the amortised cost of the financial liability up to December 31, 2015, on the assumption that the financial liability is valued at amortised cost.

ii. What is the value of the financial liability as of December 31, 2015, if the fair value option is adopted by Anifowose Plc?

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  • 6 Marks

FR – May 2016 – L2 – Q7a – Financial Instruments (IAS 32, IFRS 9)

Explain fair value and amortised cost measurement of financial assets under IAS 39 with examples of applicable asset classes.

After initial recognition in the Financial Statements, Financial Assets are measured either at fair value or amortised cost according to the provisions of IAS 39 – Financial Instruments: Recognition & Measurement.

Required:

Briefly explain how fair value and amortised costs of financial assets are determined and give one example each of the class of financial assets that can be measured using the methods.

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  • 15 Marks

FR – May 2016 – L2 – Q6 – Inventory Accounting (IAS 2)

Calculate the working capital cycle and assess liquidity using specific ratios for Apapta Limited.

The statement of financial position extract of Apapta Limited is given as follows:

2015 (N’000) 2016 (N’000)
Inventories 3,950 3,250
Receivables 2,151 2,675
Investments (Marketable Securities) 430 375
Cash 565 –
7,460 6,300
Payables amounts due within one year (3,865) (3,755)
3,595 2,545

Payables are analysed as follows:

2015 (N’000) 2016 (N’000)
Trade payables 2,600 2,215
Company Income Tax 695 820
Dividend payable 570 540
Bank overdraft – 180
3,865 3,755

Its profit or loss account extract is as follows:

Item 2015 (N’000) 2016 (N’000)
Sales 17,795 16,715
Cost of sales (12,100) (11,200)
Gross profit 5,695 5,515

Cost of sales is analysed as follows:

2015 (N’000) 2016 (N’000)
Opening inventory 3,250 3,150
Add: Purchase 12,800 11,300
Less: Closing inventory (3,950) (3,250)
Cost of sales 12,100 11,200

In 2014 and 2015, credit sales were 83% of total sales.

Required:

a. Calculate the working capital cycle for 2015 and 2014. (9 Marks)

b. Compute the ratios listed below and comment on the company’s liquidity over the two years.

i. Cash ratio
ii. Current ratio
iii. Quick ratio (6 Marks)

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  • 9 Marks

FR – May 2016 – L2 – Q5b – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Assess the validity of the assistant accountant's suggestion on extending plant life for depreciation and illustrate its impact on the financial statements.

The directors of Oluwaseun Plc are disappointed by the draft profit for the year ended September 30, 2015. One of your staff, who is an assistant accountant, has suggested one area where he believes the reported profit may be improved, if it is acceptable to the company’s management.

Included in the financial statement of Oluwaseun Plc is an item of plant which had cost N80 million to purchase and install three years ago on October 1, 2012. It is the policy of Oluwaseun Plc to depreciate this plant on a straight-line basis over a five-year period, assuming nil residual value.

The depreciation of the plant has progressed as envisaged, but at the start of the current year (October 1, 2014), the production manager estimated that the plant was likely to last eight years in total from the date of its purchase as against the original five-year period upon which current depreciation is based.

The assistant accountant has calculated that, based on an eight-year life (with no residual value), the accumulated depreciation of the plant at September 30, 2015, would be N30 million (N80 million/8 years × 3). In the financial statements for the year ended September 30, 2014, the accumulated depreciation was N32 million (N80 million/5 years × 2). Therefore, by adopting an eight-year life, Oluwaseun can avoid making a depreciation charge in the current year and instead credit N2 million (N32 million – N30 million) from the accumulated depreciation account to the income statement in the current year to improve the reported profit.

Required:

i. Comment on the acceptability of the assistant accountant’s suggestions. (6 Marks)
ii. Illustrate how the suggestions will affect the financial statements of Oluwaseun Plc based on the correct application of the relevant IFRS. (9 Marks)

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  • 6 Marks

FR – May 2016 – L2 – Q5a – Accounting Policies, Changes in Accounting Estimates, and Errors (IAS 8)

Explain the basis of selecting accounting policies and distinguish between changes in accounting policies and estimates with examples.

As one of the accountants of Oluwaseun Plc, a company that has migrated to IFRS, you are aware that IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” contains guidance on the use of accounting policies and accounting estimates.

Required:

Explain the basis on which the management of an entity, such as Oluwaseun Plc, must select its accounting policies, and distinguish, with an example, between changes in accounting policies and changes in accounting estimates.

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  • 20 Marks

FR – May 2016 – L2 – Q3 – Business Combinations

Calculate goodwill and prepare the consolidated income statement for Panda Group, including post-acquisition adjustments.

On October 1, 2015, Panda purchased 75% of the equity shares in Sanda through a share exchange of two shares in Panda for every three shares in Sanda. The stock market price of Panda’s shares on October 1, 2015, was N6 per share.

The summarized statements of comprehensive income for the two companies for the year ending March 31, 2016, are as follows:

Item Panda (N’000) Sanda (N’000)
Revenue 675,000 360,000
Cost of Sales (390,000) (165,000)
Gross Profit 285,000 195,000
Distribution Costs (35,400) (18,000)
Administrative Expenses (40,500) (34,500)
Finance Costs (2,250) (1,800)
Profit Before Tax 206,850 140,700
Income Tax Expense (72,000) (41,700)
Profit for the Year 134,850 99,900
Other Comprehensive Income
Gain on Revaluation of Land 3,750 1,500
Loss on Fair Value of Equity Financial Asset (1,050) (600)
Total Comprehensive Income 137,550 99,900

Additional Information:

  1. Equity at October 1, 2015:
    • Panda: Equity Shares (N1 each) N375,000, Share Premium N150,000, Revaluation Reserve (Land) N12,600, Retained Earnings N135,000
    • Sanda: Equity Shares (N1 each) N240,000, Retained Earnings N220,500
  2. Immediately after acquisition, Panda transferred a plant item to Sanda valued at N7.5 million (carrying amount: N4 million). The plant had a remaining life of two and a half years, and depreciation is charged to cost of sales.
  3. After the acquisition, Sanda sold goods to Panda for N60 million, which cost Sanda N45 million. N18 million of these goods remained in Panda’s closing inventory.
  4. Non-controlling interest in Sanda is valued at fair value, set at N150 million by Panda’s directors.
  5. The goodwill of Sanda has not suffered impairment.
  6. All items in the comprehensive income statements accrue evenly over the year.

Required:

a) Calculate the amount paid by Panda and the goodwill arising on the acquisition of Sanda. (6 Marks)

b) Prepare the consolidated statement of comprehensive income for Panda Group for the year ending March 31, 2016. (14 Marks)

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  • 20 Marks

FR – May 2016 – L2 – Q4 – Business Combinations (IFRS 3)

Calculate and assess Quintet Plc's performance against industry averages using ratio analysis.

Quintet Plc sells provisions through its stores located in various retail shopping centers in the major cities in Nigeria. It has recently been experiencing declining profitability, and the board is concerned whether this issue is specific to the company or related to the sector as a whole. Additionally, concerns regarding the company’s solvency have been raised. To address these, the company has engaged a consulting firm specializing in corporate report analysis to provide average ratios across the business sector to rate performance.

Below are the ratios provided by the consulting firm for Quintet Plc’s business sector based on the year ending June 30, 2015:

  • Debt to equity: 38%
  • Gross profit margin: 35%
  • Operating profit margin: 12%
  • Return on year-end capital employed (ROCE): 16.8%
  • Net asset turnover: 1.4 times
  • Current ratio: 1.25:1
  • Average inventory turnover: 3 times
  • Trade payables’ payment period: 64 days

The financial statements of Quintet Plc for the year ending September 30, 2015, are as follows:

Income Statement

Item Amount (N’000)
Revenue 224,000
Opening Inventory 33,200
Purchases 175,600
Closing Inventory (40,800)
Gross Profit 56,000
Operating Costs (39,200)
Finance Costs (3,200)
Profit Before Tax 13,600
Income Tax Expense (4,000)
Profit for the Year 9,000

Statement of Financial Position

Item Amount (N’000)
Assets
Non-current assets
Property and shop fittings 102,400
Deferred development expenditure 20,000
Total Non-current assets 122,400
Current Assets
Inventory 40,800
Bank 4,000
Total Current Assets 44,800
Total Assets 167,200
Equity and Liabilities
Equity
Equity shares of N1 each 60,000
Property revaluation reserve 12,000
Retained earnings 34,400
Total Equity 106,400
Non-current Liabilities
10% loan notes 32,000
Current Liabilities
Trade payables 21,600
Current tax payable 7,200
Total Current Liabilities 28,800
Total Equity and Liabilities 167,200

Note:

  1. Net asset is defined by the consulting firm as total assets less current liabilities.
  2. The deferred development expenditure relates to a one-off payment for a franchise as a sole distributor of a particular product under negotiation but not concluded as of September 30, 2015, although payment has been made.

Required:

a) Compute the equivalent ratios for Quintet Plc provided by the consulting firm for the business sector.
(9 Marks)

b) Write a report to the board assessing the profitability and solvency performance of Quintet Plc compared to its business sector averages. For clarity, solvency measures both liquidity and gearing.
(11 Marks)

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  • 15 Marks

FR – May 2015 – L2 – SB – Q7 – Consolidated Financial Statements (IFRS 10)

Identify and explain events after the reporting period, discuss treatment of liquidation and dividends under IAS 10.

(a) There is usually a lead time between the end of an entity’s accounting year and when the financial statements are approved and signed off by the directors. In between this period, there are two types of events according to IAS 10-Events After The Reporting Period, which may require consideration when preparing financial statements.

Required:
Identify and explain these events and state how they are treated in the financial statements. (4 Marks)

(b) Company A is indebted to company B to the tune of N50,000,000. The financial year-end of company B is 30 June 2014. On 30 July 2014, company B received a letter from a liquidator advising it that company A has gone into insolvency. The letter revealed that company A ceased operations a month ago and that company B is only likely to receive a liquidation dividend of 20k for every naira owed by company A. It is the normal practice of company B’s board to approve the audited financial statements three months after the financial year end.

Required:

  1. Explain how the above transactions should be treated in the financial statements of company B in accordance with IAS 10-Events After The Reporting Period. (2 Marks)
  2. Prepare journal entries that are required to adjust company B’s financial statements to account for the above event. (2 Marks)
  3. State what would have been the treatment in the financial statements assuming it was fire that destroyed company B’s factory building on 30 July 2014. (3 Marks)

(c) The directors of XYZ Plc declared that a dividend of N1 per ordinary share be paid to shareholders on the company’s register as at 15 April 2014. The financial statements were approved by the company’s board on 30 May 2014. The shareholders, at the company’s annual general meeting held on 15 June 2014, approved the payment of the dividend to eligible shareholders on 1 July 2014.

Required:
Explain how the dividend proposed by the Directors should be treated in the financial statements of XYZ Plc in accordance with IAS 10. (4 Marks)

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