Topic: Presentation of Financial Statements (IAS 1)

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CR – May 2016 – L3 – Q1 – Presentation of Financial Statements (IAS 1)

Explain earnings management, calculate goodwill, and prepare a consolidated statement of cash flows for Joy-land Group.

Question

Given that accrual accounting tends to mask actual cash flow performance, stock analyst and rating agencies are generally more interest in cash flow. The directors of Joy-land Plc have called for the cash flow statement of the group so as to have a view of earnings performance devoid of accruals. The following draft group financial statements relate to Joy-land Plc.
Joy-land Plc Group: Statement of financial position as of November 30

Joy-land Group: Statement of comprehensive income for the year ended November 30, 2015.

Joy-land Group: Statement of changes in equity for the year ended November 30, 2015

The following additional information relates to the financial statements of Joy-land
(i) On December 1 2013, Joy-land acquired 8% of the ordinary shares of Talk peace. Joy-land had treated this investment as available for sale in the financial statement to November 30, 2014. On December 1, 2014. Joyland acquired a further 52% of the ordinary shares of Talk-peace and gained control of the company, the consideration for the acquisitions was as follows:

At December 1, 2014 the fair value of the 8% holding in talk peace held by Joy-land at the time of the business combination was N20 million and the fair value of the noncontrolling interest in Talk-peace was N80million. no gain or loss on the 8% holding in Talk-peace had been reported in the financial statement at December 1, 2014, the
purchase consideration at December 1, 2014 comprised cash of N60 million and share of N60million.
The fair value of identifiable net assets of Talk-peace at the date of acquisition comprised the following:

(ii) Goodwill Impairment

Goodwill for all subsidiaries has undergone impairment testing for the financial year ending November 30, 2015.
Impairment losses identified were specific to subsidiaries 100% owned by Joy-land.

(iii) Purchase of Research Project (IAS 38)

On December 1, 2014, Joy-land purchased a research project from a third party for ₦32 million, which was recognized as an intangible asset under IAS 38.
Additional costs incurred during the year include:
- ₦8 million to complete the research phase.
- ₦16 million for product development (capitalizable).
- ₦4 million for initial marketing costs (not capitalizable; already accounted for correctly).
No other additions to intangible assets were recorded, except those from the acquisition of Talk-peace.

(iv) Rights Issue by Talk-peace

On November 30, 2015, Talk-peace issued new shares on a 1 for 4 basis.
The issue was fully subscribed and raised ₦20 million in cash.

(v) Investment Property (IAS 40)

Joy-land uses the fair value model to measure its investment properties.
During the year:
- Part of the air-conditioning system (carrying value: ₦2 million) was replaced with a new system costing ₦4 million.
- The replacement aligns with the treatment under IAS 40.

(vi) Sale of Surplus Land

Joy-land sold surplus land with a carrying value of ₦40 million for:
- ₦60 million in cash, and
- Plant valued at ₦16 million (part of the consideration).
The resulting gain on disposal has already been included in the income statement.
Depreciation for property, plant, and equipment (PPE) for the year totaled ₦108 million.

(vii) Defined Benefit Scheme

Joy-land operates a defined benefit pension scheme for select top executives and expatriates (in addition to its contributory pension scheme).
Current-year figures for the defined benefit scheme:

Description ₦’m

Opening Balance (Dec 1, 2014) 88

Current Year Charge to P&L 16

Contributions Paid (28)

Actuarial Loss to OCI 24

Closing Balance (Nov 30, 2015) 100

Description	₦’m
Opening Balance (Dec 1, 2014)	88
Current Year Charge to P&L	16
Contributions Paid	(28)
Actuarial Loss to OCI	24
Closing Balance (Nov 30, 2015)	100

(viii) The associate company did not pay any dividends in the year.
(ix) Deferred tax of N40illion arose on the gains on available for sale investments in the year

Required
(a) As the CFO of the group, briefly explain to the legal and engineer directors what is meant by earnings management giving TWO examples of how accruals could be employed in the earning management. (3 marks)
N’m
Balance at the beginning, December 1, 2014 88
Charge to profit or loss for the year 16
Pension contributions paid during the year (28)
Actuarial loss to other comprehensive income 24
Balance at the end, November 30 2015 100
(b) Determine the goodwill arising on the acquisition of the subsidiary on December 1, 2014 and total goodwill impairments of the group as at November 30, 2015 statement of cash flow on the assumption that it is the policy of Joyland Plc to value Non-controlling interest at full fair value. (3 marks)
(c) Prepare a consolidated statement of cash flows for the Joy-land Group for the year ended November 30, 2015 using the indirect method under IAS 7 ‘statement of Cash flow.
Note; Ignore deferred taxation other than where is mention in the question.

Answer

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Tags: Cash Flow Statement, consolidated financial statements, Earnings Management, Goodwill, Impairments, Non-Controlling Interest
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)

CR – May 2019 – L3 – Q6 – Presentation of Financial Statements (IAS 1)

Discuss reclassification adjustments and integrated reporting objectives and challenges.

Question

Dangogo Plc. has adopted IFRS in the preparation and presentation of its financial statements in line with Financial Reporting Council of Nigeria requirements. During deliberations on their financial statements for the year ended 31 March, 2019 the directors of Dangogo Plc. found the distinction between profit or loss and other comprehensive income confusing. This is the case with many other preparers or users of financial statements in Nigeria who seem to be unclear about the relationship between profit or loss and other comprehensive income (OCI). They blame the conceptual framework for Financial Reporting and IAS 1 regarding the confusing nature of re classification. The emergence of integrated reporting holds promises for better reporting, but preparers are equally uncertain about whether the International Integrated Reporting Councils (IIRC) or Integrated Reporting (IR) Framework constitutes suitable criteria for report preparation.

a. Discuss the nature of a re-classification adjustment and the arguments for and against allowing re-classification of items to profit or loss. (6 Marks)

bi. Discuss the objectives of integrated reporting and key components (content elements) of integrated reports. (6 Marks)

ii. Comment on any concerns which could limit the Framework’s suitability for assessing the performance and prospects of an entity. (3 Marks)

Answer

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Tags: Conceptual Framework, Financial Statements, Integrated Reporting, OCI, Profit or Loss, Reclassification
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)

CR – Nov 2014 – L3 – SB – Q3 – Presentation of Financial Statements (IAS 1)

Analyze Prochain Plc’s financial performance and calculate key ratios for loan covenants.

Question

Prochain Plc

The Directors of Prochain Plc have pursued an aggressive policy of expansion in the last two years. They have developed several new products and market share has increased.

The financial statements for the year ended 31 December 2013, which will be presented to the Board of Directors at its next meeting, are being finalised. The financial statements at the year-end are presented below:

Statement of profit or loss and other comprehensive income for the year ended 31 December

The results of the company as well as certain key ratios that will form part of the covenants in respect of the loan facilities will be discussed at the Board of Directors meeting.

Notes:

The movement on the revaluation reserve relates to property, plant, and equipment revalued in the year.
The movement on other reserves relates to the gains on the investments available for sale.
The bonds are repayable on 1 July 2015.

Required:

(a) Based on the results of Prochain Plc for the year ended 31 December 2013, calculate the key ratios for the loan.
(8 Marks)

(b) Prepare a report commenting on the financial performance for the year in relation to the key ratios for the loan.
(12 Marks)

(Total 20 Marks)

Answer

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Tags: Current Ratio, Financial Performance, Financial Ratios, Gearing Ratio, Interest Cover, Loan Covenants, Quick Ratio
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)
Series: NOV 2014

CR – May 2021 – L3 – Q3a – Presentation of Financial Statements (IAS 1)

Analyze Somolu Limited's financial performance and recommend whether Agege Plc should invest; discuss reporting quality improvements.

Question

The Chief Executive Officer (CEO) of Agege Plc. has forwarded the draft financial statements of Somolu Limited through an e-mail to you as the company’s financial consultants.

In the e-mail, the CEO informed you that Agege Plc. is planning to acquire Somolu Limited. Somolu Limited is a private limited company that has recently applied for additional funds which was rejected from its current bankers on the basis that the company has insufficient assets to offer as security.

The draft financial statements of Somolu Limited as at December 31, 2019, are as follows:

Somolu Limited
Statement of profit or loss and other comprehensive income for the year ended December 31, 2019

Somolu Limited
Statement of financial position as at December 31, 2019

Required:

a. Carry out a critical analysis of the financial performance and position of Somolu
Limited together with recommendations as to whether Agege Limited should
consider the investment in Somolu Limited. (14 Marks)

Answer

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Tags: Financial Analysis, IFRS, Ratios, Reporting Standards
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)

CR – Dec 2020 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Assess the performance of two companies using financial ratios and draft a report for investment decisions.

Question

Heritage Limited and Legacy Limited are two competitors in the merchandising and retailing sector of the economy. At a time when the sector is faced with escalating fuel prices and economic recession, both companies have shown resilience and adaptability. The financial statements of the companies for the year ended December 31, 2020, are as follows:

Statements of Profit or Loss for the Year Ended December 31, 2020:

Item	Heritage Limited (N’000)	Legacy Limited (N’000)
Revenue	150,000	700,000
Cost of Sales	(60,000)	(210,000)
Gross Profit	90,000	490,000
Interest	500	12,000
Distribution Costs	13,000	72,000
Administrative Expenses	15,000	35,000
Total Expenses	28,500	119,000
Profit Before Tax	61,500	371,000
Income Tax Expense	(16,605)	(100,170)
Profit for the Year	44,895	270,830

Statements of Financial Position as at December 31, 2020:

Item	Heritage Limited (N’000)	Legacy Limited (N’000)
Assets:
Non-Current Assets:
Property	–	500,000
Plant and Equipment	190,000	280,000
Total Non-Current Assets	190,000	780,000
Current Assets:
Inventories	12,000	26,250
Trade Receivables	37,500	105,000
Bank	500	22,000
Total Current Assets	50,000	153,250
Total Assets	240,000	933,250
Equity & Liabilities:
Equity:
Share Capital	156,000	174,750
Retained Earnings	51,395	390,830
Total Equity	207,395	565,580
Non-Current Liabilities:
Long-Term Debt	10,000	250,000
Current Liabilities:
Trade Payables	22,605	117,670
Total Liabilities	32,605	367,670
Total Equity & Liabilities	240,000	933,250

The Board of Directors of Patrimony Investments PLC is considering a proposal to buy into one of the companies to enhance the reported profit and stability of the company after the investment.

Required:

a. Assess the relative performance of the two companies for the year ended December 31, 2020, with three suitable ratios each for:

Profitability and efficiency
Liquidity and solvency
(8 Marks)

b. Draft a report on the computed ratios for the consideration of the Board of Directors of Patrimony Investments PLC to appropriately guide the Board in deciding on the proposal to buy into any one of the companies.
(12 Marks)

Answer

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Tags: Efficiency Analysis, Investment decision-making, Liquidity Ratios, Profitability Ratios, Solvency Ratios
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)

CR – May 2023 – L3 – Q5b – Presentation of Financial Statements (IAS 1)

Discuss the importance of optimal disclosure and barriers to reducing excessive disclosures in annual reports.

Question

There have been various arguments globally about the extent of disclosures in the annual reports of companies. Some argue that annual reports should include more extensive disclosures, while others believe that efforts should focus on reducing the quantity of information to avoid overwhelming users of financial statements.

The latter perspective suggests that excessive disclosure is burdensome and may obscure key information. Conversely, some argue that there is no such thing as providing too much useful information to users of financial statements.

Required:

Discuss why it is important to ensure that an optimal level of disclosure is made in annual reports. Also, identify and explain the barriers that may exist when trying to reduce excessive disclosure of information in an annual report. (7 Marks)

Answer

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Tags: Annual Reports, Barriers to Disclosure Reduction, Disclosures, Financial Reporting, IAS 1
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)

CR – May 2024 – L3 – SC – Q7 – Presentation of Financial Statements (IAS 1)

Discuss allocation impacts of purchase price for land and warehouse on earnings and identify ethical issues in CFO’s approach.

Question

Signal PLC purchased land and warehouse for N90,000,000. The warehouse is expected to last for 20 years and to have a salvage value equal to 10% of its cost. The Chief Finance Officer (CFO) and the Chief Accountant (CA) discussed the allocation of the purchase price between the land and the warehouse. The CFO believes that the largest amount possible should be assigned to the land because that will improve reported net income in the future. Depreciation expense will be lower because land is not depreciated. He suggested allocation of one third of the cost to the land. The CA argues that the smallest amount possible, about one-fifth of the purchase price, should be allocated to the land, thereby saving income taxes, since the depreciation will be greater if lesser amount is allocated to land.

Required:

(a) Evaluate how the different allocations of one-third and one-fifth to land will affect reported earnings and determine how the purchase cost should be allocated. (8 Marks)

(b) Identify and discuss inherent ethical issues in the CFO’s submission in the above scenario. (7 Marks)

Total Marks: 15

Answer

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Tags: Asset Allocation, CFO Decisions, Depreciation, Earnings Impact, Ethical Issues, Financial Reporting, Land Valuation, Tax Savings
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)
Series: MAY 2024

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

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

Question

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

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

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

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

Required:

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

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

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

Answer

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Tags: Accounting Treatment, Factoring, Financial Reporting, Non-current Liabilities, Off-Balance Sheet Financing, Operating Lease, Sale-Leaseback, Substance Over Form
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)
Series: MAY 2018

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

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

Question

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

Required:

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

Answer

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Tags: Financial Misrepresentation, Financial Reporting, Gearing, Liquidity, Off-Balance Sheet Financing, Profitability, Substance Over Form, User Groups
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)
Series: MAY 2018

CR – Nov 2022 – L3 – Q2 – Presentation of Financial Statements (IAS 1)

Calculate key financial ratios and evaluate the company's performance for shareholder and lender insight.

Question

A-Z is considering raising external finance through offering its shares for sale or obtaining a term loan from the bank. The company’s financial statements for the year ended November 30, 2021, have been subjected to financial analysis as follows:

Statement of Comprehensive Income for Year Ended November 30:

	2021 (N’000)	2020 (N’000)
Profit before interest and tax	6,600	4,710
Interest expense	(510)	(450)
Profit before tax	6,090	4,260
Income tax expense	(2,190)	(1,560)
Profit after tax	3,900	2,700
Dividends paid	(750)	(750)
Retained profit	3,150	1,950

Statement of Financial Position as at November 30:

	2021 (N’000)	2020 (N’000)
Non-current assets	19,050	16,800
Current assets:
Trade receivables	6,300	6,210
Inventories	5,130	4,620
Total current assets	11,430	10,830
Total assets	30,480	27,630
Equity and liabilities
Equity:
Share capital (ordinary shares of N1 fully paid up)	9,000	9,000
Retained earnings	11,100	7,950
Total Equity	20,100	16,950
Non-current liabilities:
10% Loan notes 2022/2023	4,500	4,500
Current liabilities:
Trade payables	3,120	3,390
Taxation	1,650	1,350
Bank overdraft	1,110	1,440
Total Equity and Liabilities	30,480	27,630

Required:
a. Compute the following ratios for the years 2020 and 2021:

Return on equity
Dividend cover
Dividend pay-out ratio
Interest cover
(8 Marks)

b. Based on the ratios computed above, prepare a report on the performance and state of the company, assuming potential shareholders and lenders are the recipients of your report.
(12 Marks)
(Total 20 Marks)

Answer

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Tags: Company Performance, Dividend Cover, Dividend Pay-Out Ratio, Financial Ratios, Interest Cover, Return on Equity
Level: Level 3

Topic: Presentation of Financial Statements (IAS 1)
Series: NOV 2022

CR – May 2016 – L3 – Q1 – Presentation of Financial Statements (IAS 1)