MAY 2020 PROFESSIONAL EXAMINATION

CORPORATE REPORTING (PAPER 3.1)

CHIEF EXAMINER’S REPORT, QUESTIONS & MARKING SCHEME

EXAMINER’S GENERAL COMMENT

Compared to the November 2019 sitting, the questions for the May 2020 sitting is
relatively moderate in terms of the difficulty level. The May 2020 sitting which took
place in July 2020 as a result of the Covid-19 pandemic is the second examination
sitting after the introduction of the 2019 to 2024 syllabus. The marking scheme was
appropriate and provided a clear marking guide. Marking of scripts was generally
fair.
Candidates’ performance was relatively outstanding compared to the last couple of
exam diets. The weight of the high performance of the candidates resulted from
excellent responses to the questions on analysis of financial statements, capital
reduction and the question on ethics. Majority of the candidates could not adequately
answer the consolidation question as well as the question on accounting standards.

STANDARD OF THE PAPER

The standard of the questions was appropriate for the level being assessed. The
requirements of the questions were clear. The difficulty level of the paper is standard
and within expectation.
Questions were evenly weighted, the paper followed the pattern of the previous
sittings and is generally consistent in standard with the previous sitting’s paper.

The questions required critical thinking and a good mastery of the relevant areas of
the syllabus.

The mark allocations generally followed the weightings in the syllabus grid. Marks
were fairly allocated to questions and sub questions. The marks allocated to questions
were commensurate with the amount of time and effort required to answer the
questions.

PERFORMANCE OF CANDIDATES
There was much improvement in candidates’ performance compared with previous
sittings. The pass rate exceeded 59% as compared to the previous pass rate of 37%.
The outstanding performance was partly because the questions were clear and the
requirements not overloaded. Additionally, candidates were fairly prepared for the
paper. This notwithstanding, candidates who could not pass lacked the technique of
answering examination questions or were simply not adequately prepared for the
examinations.

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Candidates’ performance was consistent and was evenly spread across most centres.
A few centres however recorded very low pass rates. There were no signs of copying
at any centre. The worst attempted question was the question on the application of
IFRS and the question on preparing consolidated financial statements. Candidates
lacked the skills to apply the IFRS to the given scenarios and were unable to prepare
consolidated financial statements.

NOTABLE STRENGTHS AND WEAKNESSES OF CANDIDATES

 Most candidates performed better at the theory questions but performed poorly at
the questions that required application of concepts to given cases.
 Most candidates could not perform computations as required.
 Candidates’ weakest point was application of IFRS and preparation of financial
statements.
 On the theory questions, most candidates spent a lot of their time discussing issues
not immediately relevant to the question: giving backgrounds, providing lengthy
introductions, defining irrelevant terminology etc.
 The fundamental weaknesses observed is lack of appropriate knowledge, bad
strategy in use of time, wrong order in which questions were attempted, and
inability to apply concepts to practical scenarios.
 Most candidates could not effectively communicate their ideas on the answer
booklets.
 Candidates lacked effective time management skills.
 Some candidates numbered their questions wrongly.
 Some candidates had very poor handwriting which made it difficult to read the
answers properly.
 Some candidates answered the same question on several non-conservative pages
without cross referencing. This made tallying their marks very difficult.
 Some candidates displayed inadequate knowledge of the issues in the syllabus.
 Other candidates clearly were poorly prepared for the paper.

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QUESTION ONE

Phato Ltd, is a Public Limited Liability Company which operates in the service
sector in Ghana. Phato Ltd has business relationship with two other Ghanaian
companies, Sakara Ltd and Saadi Ltd, which are public limited liability companies
too. The draft statements of financial position of these three companies are below
as at 30 September 2019.
Phato Ltd Sakara Ltd Saadi Ltd
GH¢million GH¢million GH¢million
Assets:
Non-current assets
Property, plant and equipment 460.0 150.0 155.0
Investment in subsidiaries
Sakara Ltd 365.0
Saadi Ltd 160.0
Investment in Azuri Ltd 24.0
Intangible assets 99.0 15.0 17.5
948.0 325.0 172.5
Current assets 447.5 240.0 125.0
Total assets 1,395.5 565.0 297.5
Equity and liabilities
Share capital 460.0 200.0 100.0
Other components of equity 36.5 18.5 12.5
Retained earnings 447.5 221.0 69.5
Total equity 944.0 439.5 182.0
Non-current liabilities 247.5 61.5 46.5
Current liabilities 204.0 64.0 69.0
Total liabilities 451.5 125.5 115.5
Total equity and liabilities 1,395.5 565.0 297.5

Additional relevant information:

i) Phato Ltd, on 1 October 2017, acquired 60% of the equity interests of Sakara Ltd.
The cost of investment comprised cash of GH¢360 million. At acquisition, the fair
value of the non-controlling interest in Sakara Ltd was estimated at GH¢146
million. On acquisition date, the fair value of the identifiable net assets acquired
totalled GH¢417.5 million and the retained earnings of Sakara Ltd were estimated
to be GH¢159.5 million whilst other components of equity were GH¢13.5 million.
The excess in fair value is resulting from a non-depreciable land.

ii) Sakara Ltd on 1 October 2018, acquired 70% of the equity interests of Saadi Ltd for
a cash consideration of GH¢160 million. The fair value of a 30% holding of the non-
controlling interests was estimated at GH¢36 million, and a 58% holding was
GH¢80.5 million. At the date of acquisition, the identifiable net assets of Saadi Ltd
had a fair value of GH¢181 million, retained earnings were GH¢53 million and
other components of equity were GH¢10 million. The excess in fair value is due to
non-depreciable land. It is the group’s policy to measure the non-controlling
interest at fair value at the date of acquisition.
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iii) On 1 October 2017, Phato Ltd acquired a 14% interest in Azuri Ltd, for a cash
consideration of GH¢9 million. The investment was accounted for under IFRS 9:
Financial Instruments and was designated as at fair value through other
comprehensive income. On 1 April 2019, Phato Ltd acquired an additional 16%
interest in Azuri Ltd for a cash consideration of GH¢13.5 million and achieved
significant influence. The value of the original 14% investment on 1 April 2019 was
GH¢10.5 million. Azuri Ltd made profits after tax of GH¢10 million and GH¢15
million for the years to 30 September 2018 and 30 September 2019 respectively. On
30 September 2019, Phato Ltd received a dividend from Azuri Ltd amounting to
GH¢1 million, which has been credited to other components of equity.

iv) Phato Ltd purchased patents amounting to GH¢5 million to use in a project to
develop new products on 1 October 2018. Phato Ltd has completed the
investigative phase of the project, incurring an additional cost of GH¢3.5 million
and has now determined that the product can be developed profitably. An
effective and working prototype was created at a cost of GH¢2 million and in order
to put the product into a condition for sale, a further GH¢ 1.5 million was spent.
Finally, marketing costs of GH¢1 million were incurred. All of the above costs are
included in the intangible assets of Phato Ltd.

v) Impairment tests were conducted for both Sakara Ltd and Saadi Ltd on 30
September 2019. The recoverable amounts of both cash generating units as stated
in the individual financial statements as at 30 September 2019 were Sakara Ltd,
GH¢712.5 million, and Saadi Ltd, GH¢302 million, respectively. The directors of
Phato Ltd felt that any impairment of assets was due to the poor performance of
the intangible assets and it was deemed that other assets were already held at
recoverable amount. The recoverable amounts have been determined without
consideration of liabilities which all relate to the financing of operations.

Required:
Prepare the consolidated statement of financial position for the Phato Ltd Group
as at 30 September 2019.
(20 marks)

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QUESTION TWO

a) On 1 January 2018, Asankragua Ltd (Asankragua) applied to a government agency

for a grant to assist with the construction of a factory in Enchi. The proposed
construction cost of the factory was GH¢52 million and the company projected that
350 people would be employed after completion. The land was already owned by
Asankragua.

On 1 March 2018, the government agency offered to grant a sum amounting to 25%
of the factory’s construction cost to a maximum of GH¢13 million. The grant aid
was to be advanced on completion, and would be repayable on demand if total
employment at the factory fell below 300 people within 5 years of completion.

At the financial year end, 31 March 2018, Asankragua had accepted the offer of
grant aid, and had signed contracts for the construction of the factory at a total cost
of GH¢52 million. Construction work was due to commence on 1 April 2018.

By 31 March 2019, the factory had been completed on budget, 400 people were
employed ready to commence manufacturing activities, and the government
agency agreed that the conditions necessary for the drawdown of the grant had
been met.

On 1 April 2019, the factory was brought into use. It was estimated that it would
have a ten-year useful economic life. On 1 June 2019, the government agency paid
over the agreed GH¢13 million. In addition, the company sought and was paid an
employment grant of GH¢1.2 million as employment exceeded original
projections. This is expected to be payable annually for 5 years in total, at a rate of
GH¢12,000 per additional person employed over 300 in each year. There are no
repayment provisions attached to the employment grant.

The directors of Asankragua expect employment levels to exceed 350 people for at
least 4 further years from 31 March 2020.

Required:
Demonstrate, showing calculations and relevant entries, how Asankragua Ltd
should record the above transactions and events in its financial statements for
years ended 31 March 2018, 2019 and 2020.
(9 marks)

b) Dompoase Ltd incurred the following borrowing costs during the financial year
2018:
GH¢'000
Overdraft interest 12
Foreign currency loan interest (correctly translated into GH¢) 84
Foreign currency loan exchange differences on capital 140

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 In addition a three-year fixed rate GH¢2 million loan was taken out on 1 January
2018 at 6.5%. A loan set-up fee was charged at GH¢20,000. This increased the
effective interest rate on the loan to 6.88%.

Required:
Determine the maximum amount that could potentially be capitalised as
borrowing costs during the period (assuming an asset was being financed using
all available finance). (5 marks)

c) Nzema prepares its financial statements in accordance with International Financial

Reporting Standards (IFRS) with financial year end 31 December 2018. On 1
January 2018, Nzema commenced a defined benefit pension plan for a number of
head office employees. Under the pension scheme, Nzema has an obligation to
provide these staff with agreed post-employment benefits. Nzema carries the
actuarial and investment risk associated with the pension scheme.

The following information has been compiled from workings by Nzema’s

accounting staff and actuarial reports for the 2018 financial year:
GH¢
Interest Income on plan assets 16,500
Employer contributions to plan 550,000
Current service cost 600,000
Interest on plan liability 18,000
Fair value of plan assets at 31/12/2018 580,000
Present value of plan obligation at 31/12/2018 620,000

The Accountant was not sure which accounting standard to apply when
accounting for the pension scheme. The only adjustment made to account for the
scheme was to expense the company’s contributions of GH¢550,000 for the 2018
financial year in the Statement of Profit or Loss and Other Comprehensive Income
and to credit the ‘Cash’ account.

Required:
Recommend, with appropriate calculations the necessary accounting treatment for
this accounting issue. (6 marks)

(Total: 20 marks)

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QUESTION THREE

a) Medina Power Ltd has carried out certain transactions denominated in foreign
currency during its financial year ended 31 October 2019 and has also conducted
foreign operations through a foreign entity. Medina Power Ltd.’s functional and
presentation currency is the cedi.

On 31 July 2019 Medina Power Ltd purchased goods from a foreign supplier for
16 million dinars. At 31 October 2019, the supplier had not yet been paid and the
goods were still held in inventory by Medina Power Ltd.

On 31 July Medina Power Ltd sold goods to a foreign customer for 8 million dinars
and it received payment for the goods in dinars on 31 October 2019.
Medina Power Ltd had also purchased an investment property on 1 November
2018 for 56 million dinars. At 31 October 2019, the investment property had a fair
value of 48 million dinars. The company uses the fair value model in accounting
for investment properties.

Medina Power Ltd wants advice on how to treat these transactions in the financial
statements for the year ended 31 October 2019.

Average rate for year

Exchange rate (direct quotes) GH¢/1 to:
1 November 2017 GH¢0.9091/1 dinar
31 October 2018 GH¢0.7143/1 dinar 1 GH¢0.8333/1 dinar
1 November 2018 GH¢0.7143/1 dinar
31 July 2019 GH¢0.6250/1 dinar
31 October 2019 GH¢0.7692/1 dinar GH¢0.6667/1 dinar

Required
Discuss the accounting treatment of the above transaction in accordance with the
advice required by the directors.
(You should show detailed workings as well as a discussion of the accounting
treatment used.)
(10 marks)

b) You have just obtained your full membership with the Institute of Chartered
Accountants (Ghana). Following this successful achievement, you have been
appointed as the Head of Finance at Asasiyemedeh Company Limited, a Ghanaian
company, which provides catering services. Your former employer Akwaba
Limited is a large public sector organization operating in Accra, where, as the
Financial Accountant, you had the opportunity to work on areas relating to
financial accounting, procurement, contracts and bids. One of Asasiyemedeh
Company Limited’s major contracts is with Akwaba Limited, your former
employer. The contract is now due for renewal, and Asasiyemedeh Company
Limited is preparing a competitive bid for this contract.

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 You have been tasked to lead the team responsible for bidding for this contract,
but you are concerned as a professional that you might breach confidentiality if
you accept this role. You also suspect that your knowledge and experience of
Akwaba Limited were seen as good reasons for appointing you to the position of
Head of Finance at Asasiyemedeh Company Limited. You do not in any way want
to let your new employer down as you are aware that the loss of such a major
contract would have a significant effect on the financial performance of
Asasiyemedeh Company Limited, and its performance-related bonus scheme for
management members.

Required:
i) Discuss the ethical issues raised in the above scenario. (5 marks)

ii) Recommend the possible courses of action that you will take in order to be
ethically responsible as expected from a Professional Accountant. (5 marks)

(Total: 20 marks)

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QUESTION FOUR

Sasasila Ltd has been operating profitably for a number of years now. However, in
recent times, the company has been making losses. Find below the statement of
financial position as at 30 June 2019.
Assets GH¢000
Non-Current Assets
Patents and copyrights 75,000
Land and buildings (net) 200,000
Plant and machinery (net) 150,000
425,000
Current Assets
Inventories 125,000
Trade receivables 125,000
Bank 37,500
Investments (cost) 100,000
387,500
Total Assets 812,500

Equity and liabilities:

Equity:
Ordinary share capital (issued at GH¢10 each) 375,000
20% cumulative preference shares (issued at GH¢10 each) 175,000
Retained earnings (75,000)
475,000

Non-current Liabilities
15% Debentures 125,000

Current Liabilities
Interest on debentures 18,750
Trade payables 93,750
Provision for business restructuring 50,000
Provision for legal damage & claims 12,500
Provision for warranties 37,500
212,500
Equity and liabilities 812,500

Additional relevant information:

The following scheme of reconstruction was approved by all parties as well as the
High Court with the exception of only one ordinary shareholder:
i) The ordinary shares were to be reduced to GH¢5 per share.
ii) The preference shares were to be reduced to GH¢7.5 per share and arrears in
dividend thereof for three years were to be cancelled from the company’s books.

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iii) The fair values of the assets were agreed at the following values:
GH¢000
Patents and copyrights Nil
Land and buildings 225,000
Plant and machinery 75,000
Investments 75,000
Inventories 105,000
Trade receivables 70,000

iv) The balance on the retained earnings is to be eliminated in full

v) The liability for legal damages and claims was to be settled for GH¢10 million and
the provision for warranty reduced to GH¢27.5 million.
vi) The accrued debenture interest was to be paid in cash.
vii) Investment with a carrying amount of GH¢52.5 million were to be sold for cash at
that value in desperation to strengthen the working capital position of the
business.
The amount set aside for business restructuring was to be eliminated also.
viii)The High Court directed a payment of GH¢0.2 million to a member who opposed
the scheme for 50 ordinary shares held by him. Mr. Salia a director of the company,
has offered to take over the shares.
ix) The following additional information is relevant:
Sasasila Limited continued trading from 1 July 2019 to 31 December 2019 which
resulted in the following changes in assets and liabilities:
Increased by Decreased by
GH¢000 GH¢000
Bank and cash 10,000 -
Inventories 12,500 -
Trade and other receivables 20,000 -
Trade payables - 5,000

Plant and machinery is depreciated at 10% per annum and no depreciation is

provided on land and buildings. The half year debenture interest has not been
paid.

Required:
a) Prepare the Capital Reduction Account as at 30 June 2019. (6 marks)

b) Prepare the statement of financial position as at 31 December 2019. (14 marks)

(Total: 20 marks)

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QUESTION FIVE

Gamashie Ltd is considering purchasing an interest in its competitor Bossman Ltd.

The Managing Director of Gamashie Ltd has obtained the three most recent
statements of profit or loss and statements of financial position of Bossman Ltd as
shown below.
Bossman Ltd
Statements of Profit or Loss for years ended 31 December
2016 2017 2018
GH¢'000 GH¢'000 GH¢'000
Revenue 18,000 18,900 19,845
Cost of sales (10,440) (10,340) (11,890)
Gross profit 7,560 8,560 7,955
Distribution costs (1,565) (1,670) (1,405)
Administrative expenses (1,409) (1,503) (1,591)
Profit before interest & tax 4,586 5,387 4,959
Finance cost (704) (815) (1,050)
Profit before tax 3,882 4,572 3,909
Income tax (1,380) (2,000) (1,838)
Profit after tax 2,502 2,572 2,071

Bossman Ltd
Statements of Financial Position as at 31 December
2016 2017 2018
Assets GH¢'000 GH¢'000 GH¢'000
Non-current assets
Land and buildings 11,460 12,121 11,081
Plant and machinery 8,896 9,020 9,130
20,356 21,141 20,211
Current assets
Inventory 1,775 2,663 3,995
Trade receivables 1,440 2,260 3,164
Cash 50 53 55
3,265 4,976 7,214
23,621 26,117 27,425
Equity and liabilities
Equity and reserves
Share capital 8,000 8,000 8,000
Retained earnings 6,434 7,313 7,584
14,434 15,313 15,584
Non-current liabilities
12% loan stock 5,000 5,000 5,000
Current liabilities
Trade payables 390 388 446
Bank 1,300 2,300 3,400

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Taxation 897 1,420 1,195
Dividend payable 1,600 1,696 1,800
4,187 5,804 6,841
23,621 26,117 27,425
Required:
Prepare a report for the Managing Director of Gamashie Ltd commenting on the
financial performance and position of Bossman Ltd and highlighting any areas that
require further investigation.
(20 marks)

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SOLUTION TO QUESTIONS

QUESTION ONE

Phato Ltd Group

Consolidated statement of financial position as at 30 September, 2019
Assets: GH¢million
Non-current assets
Property, plant and equipment (460 + 150 + 155 +44.5 + 18) 827.5
Goodwill (W3) 93.5
Intangible assets (99 + 15 + 17.5 – 4.5 -13.5) 113.5
Investment in Azuri (W7) 25.25
Current assets (447.5 + 240 + 125) 812.5
Total assets 1,872.25
Equity and liabilities
Equity attributable to owners of parent
Share capital 460
Retained earnings (W5) 489.41
Other components of equity (W5) 38.05
987.46
Non-controlling interest (W4) 192.29
1,179.75
Total non-current liabilities (247.5 + 61.5 + 46.5) 355.5
Current liabilities (204 + 64 + 69) 337.0
Total liabilities 692.5
Total equity and liabilities 1,872.25

Workings
(W1) Group Structure
Phato Azuri Ltd (14% until April 1 2019

60% 30% from April 1, 2019

Sakara Ltd

70%

Saadi Ltd
The group effective interest in Saadi Ltd is 42% (60% x 70%).
The NCI holding is therefore 58% (100% - 42%).
Sakara Ltd Saadi Ltd
Phato Ltd (Group) interests: Direct 60% -
Indirect - 60% x 70% = 42%

Non-controlling interest: Direct 40% (100% - 70%) = 30%

Indirect - 40% x 70% = 28%
100% 100%

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(W2) Net Assets – Sakara Ltd
Acquisition Reporting Change
date date
GH¢ million GH¢ million GH¢ million
Share capital 200 200 -
Other components 13.5 18.5 5.0
Retained earnings 159.5 221 61.5
Fair value adjustment – land 44.5 44.5 -
417.5 484 66.5

Net Assets - Saadi Ltd

Acquisition Reporting Change
date date
GH¢ million GH¢ million GH¢ million
Share capital 100 100 -
Other components 10 12.5 2.5
Retained earnings 53 69.5 16.5
Fair value adjustment- land 18 18 -
181 200 19

(W3) Goodwill

Sakara Ltd
GH¢ million
Fair value of consideration 365
Fair value of non-controlling interest 146
Fair value of identifiable net assets acquired (W2) (417.5)
Goodwill at acquisition 93.5

Saadi Ltd
GH¢ million
Fair value of consideration 160
Indirect holding adjustment (40% x GH¢160) (64)
FV of NCI at acquisition ( a 58% holdings) 80.5
Less fair value of identifiable net assets (W2): (181)
Negative Goodwill at acquisition (4.5)
Goodwill to Profit or Loss account 4.5
Goodwill at reporting date -

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(W4) Non–controlling interest
GH¢ million
NCI in Sakara Ltd at acquisition 146
NCI % of post-acquisition profit (40% x (GH¢484 - GH¢417.5) 26.6
(W2))
Indirect holding adjustment (40% x GH¢160) (64)
NCI in Saadi Ltd at acquisition 80.5
NCI% of post-acquisition profit (58% x (GH¢200 - GH¢181) (W2)) 11.02
Impairment (58% x GH¢13.5 (W6)) (7.83)
192.29

(W5) Reserves
Retained earnings GH¢ million
Phato Ltd 447.5
Sakara Ltd: 60% x (GH¢221 - GH¢159.5 (W2)) 36.9
Saadi Ltd: 42% (GH¢69.5 - GH¢53) (W2)) 6.93
Impairment (42% x GH¢13.5 (W6)) (5.67)
Azuri Ltd gain from OCE (W7) 1.5
Azuri Ltd dividend (W7) 1
Share of Azuri’s post-acquisition retained earnings (W7) 1.25
Capital surplus (Negative goodwill of Saadi Ltd) 4.5
Intangible assets (W8) (4.5)
489.41
Other components of equity
GH¢ million
Phato Ltd 36.5
Sakara: 60% x (GH¢18.5 - GH¢13.5) (W2) 3
Saadi Ltd: 42% (GH¢12.5 - GH¢10) (W7)) 1.05
Azuri Ltd gain to retained earnings (W7) (1.5)
Azuri Ltd dividend (W7) (1)
38.05

(W6) Impairment
In note 6 of the question, we are told that the recoverable amount of each subsidiary
has been determined ‘without consideration of liabilities’. In other words, you are
given the recoverable amounts of the assets only. Make sure that you compare this the
recoverable amounts of the assets only. Make sure that you compare this to the
carrying value of each subsidiary’s assets (rather than the net assets)

Sakara Ltd Saadi Ltd

GH¢ million GH¢ million
Goodwill (W3) 93.5 -
Assets (per SFP) 565 297.5
Fair value adjustment (W2) 44.5 18
Total assets value 704.5 315.5

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 Recoverable amount (712.5) (302)
Impairment n/a 13.5

There is no impairment in the case of Sakara Ltd but Saadi’s Ltd assets are impaired.
Group reserves will be debited with GH¢5.67 million and NCI with GH¢7.83 million,
being the loss in value of the assets split according to the effective interests.

(W7) Azuri Ltd

Phato Ltd has significant influence over Azuri. Azuri ltd is therefore an associate and
must be accounted for using the equity method. The gain of GH¢1.5 million (GH¢10.5
million - GH¢9 million) recorded with OCE up to April 1, 2019 would not be
transferred to profit or loss for the year but can be transferred within equity and hence
to retained earnings under IFRS 9 Financial instruments.

Dr OCE GH¢1.5 million

Cr retained earnings GH¢1.5 million
The dividend should have been credited to Phato’s Ltd profit or loss and not OCI.

Dr OCE GH¢1 million

Cr retained earnings GH¢1 million

The amount included in the consolidated statement of financial position would be:
GH¢
million
Cost (GH¢10.5 million + GH¢13.5 million) 24
Share of post-acquisition profits (GH¢15 million x 6/12 x 30%) 2.25
Less dividend received (1.0)
25.25

There is no impairment as the carrying amount of the investment in the separate

financial statements does not exceed the carrying amount in the consolidated financial
statements nor does the dividend exceed the total comprehensive income of the
associate in the period in which the dividend is declared
The group’s share the post-acquisition retained earnings movement is GH¢1.25 m
(GH¢2.25 m - GH¢1.0 m). This will be held within group earnings (W5).

(W8) Development
There are strict criteria in IAS 38 governing the items that can be included in the cost
of an intangible assets. Phato Ltd should recognize the GH¢5 million as an intangible
asset plus the cost of the prototype of GH¢2 million and the GH¢1.5 million to get it
into condition for sale. The remainder of the costs should be expensed including the
marketing costs. This totals GH¢4.5 million, which should be taken out of intangibles
and expensed.
Dr retained earnings GH¢ 4.5 million
Cr intangible assets GH¢4.5 million

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(Suggested marking scheme: 100 ticks at 0.20 marks each up to maximum of 20
marks. These include relevant workings.)

EXAMINER’S COMMENT
This was on Consolidated Statement of Financial Position of a complex group and
attracted 20 marks.
This question was fairly moderate. It involved a parent, subsidiary, sub-subsidiary
and an associate. A greater number of the candidates were not able to solve this rather
simple question on complex groups. This development is disturbing given the
relatively high percentage pass mark in this exams diet. The obvious observation is
that the nature and structure of the corporate reporting paper affords candidates the
opportunity to easily pass without answering or attempting to answer the
consolidation question. In the future, this weight should be increased to 30 marks.

All candidates attempted this question. The performance was average. Some
candidates scored below 5 marks.

QUESTION TWO

a) Year ended 31 March 2018:

No accounting entry is made in this financial year, as no transaction has yet been
entered into. A capital commitment exists, and should be disclosed in the notes.
The grant approval should be disclosed also.

Year ended 31 March 2019:

At this date, the factory should be recorded at its cost of GH¢52 million. As all
conditions for the payment of the grant have been met, recognition should be made
of this amount receivable also. As the factory has not yet been brought into use, no
depreciation will be charged for the year. Similarly, no amortisation of the grant
will take place in the period.

Recognition of factory:
Dr Property, plant & equipment GH¢52 million
Cr Cash GH¢52 million
(New factory constructed as a cost of GH¢52 million)

Recognition of grant:
Option 1
Dr Government grant receivable (current asset) GH¢13 million
Cr Property, plant & equipment GH¢13 million
(Government grant approved, not received yet)

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Option 2
Dr Government grant receivable (current asset) GH¢13 million
Cr Deferred income – current liability GH¢1.3 million
Cr Deferred income – non-current liability GH¢11.7 million
(Government grant approved, not received yet)

Assuming the factory has a useful life of 10 years, as stated, 10% of the amount will
be recognised as income within the next financial year. This amount should be
treated as a current liability.

Year end 31 March 2020:

There are a number of transactions to record based on the new factory. These are
(1) depreciation and (2) amortisation of the grant. In addition, the cash was
received from the government agency.

Receipt of grant:
Dr Cash GH¢13 million
Cr Government grant receivable GH¢13 million
(Receipt of cash grant from government agency)

Option 1
Depreciation of factory:
Dr Profit or loss GH¢3.9 million
Cr Accumulated Depreciation – PPE GH¢3.9 million
(Depreciation of cost of factory net of grant over 10 years)

Option 2
Depreciation of factory:
Dr Profit or loss GH¢5.2 million
Cr Accumulated Depreciation – PPE GH¢5.2 million
(Depreciation of gross factory cost over 10 years)

Amortisation of grant:
Dr Deferred income GH¢1.3 million
Cr Profit or loss GH¢1.3 million
(Amortisation of grant over 10 years, reflecting the proportional expensing of the
factory to which the grant relates)
The employment grant relates entirely to the cost of employing staff in that year.
Hence it should be entirely recognised as income in the year ended 31 March 2019.

Recognition of employment grant:

Dr Cash GH¢1.2 million
Cr profit or loss 1.2 million
(recognition of employment grant as income as received)

Initial recognition of the factory in 2019: 1 mark

Page 18 of 28
 Recognition of the grant in 2019: 2 marks
Treatment of receipt of grant in 2020: 2 marks
Depreciation of factory in 2020: 1 mark
Treatment of amortization of grant: 1.5 marks
Recognition of employment grant: 1.5 marks

b) Maximum amount to capitalise (IAS 23 para 6):

GH¢’000
Overdraft 12
Foreign currency loan interest 84
Foreign currency loan exchange differences on capital -
Effective interest on loan ((2,000 – 20) x 6.88%) 136.2
232.2

Effective interest on loan: 2 marks

Overdraft interest: 1 mark
Foreign currency loan interest: 1 mark
Maximum amount: 1 mark

c) The applicable accounting standard is IAS 19 (Employee Benefits). Nzema’s

pension plan is a defined benefit plan as Nzema has an obligation to provide
agreed post-employment benefits and the entity carries the actuarial and
investment risk associated with the pension scheme.

The accountant has accounted for the employer contributions to the scheme
incorrectly by simply recognising the employer contributions in the profit or loss.
IAS 19 requires a defined benefit liability (asset) to be recognised on the balance
sheet at the new amount of the present value of the obligation less the fair value of
plan assets at reporting date.

A defined benefit plan may give rise to current service cost and net interest
expense, which should be recognised through the profit or loss. In addition, any
actuarial gains and/or losses from re-measurement of the defined pension liability
(asset) should be recognised through other comprehensive income.

Workings – Calculation of Actuarial Gain/Loss:

GH¢
Pension Asset
Opening balance 0
Return on assets 16,500
Employer contributions 550,000
Remeasurement –Actuarial Gain 13,500
Closing Balance 580,000

Pension Liability

Page 19 of 28
 Opening balance 0
Interest Cost 18,000
Current Service Cost 600,000
Remeasurement – Actuarial Loss 2,000
Closing Balance 620,000

Net Actuarial Gain: GH¢13,500 - GH¢2,000 = GH¢11,500

Journals:
DR Net Interest Expense (P+L) 1,500
CR Pension Liability 1,500
Net interest expense (18,000 – 16,500)

DR Current Service Cost (P+L) 600,000

CR Pension Liability 600,000
Current service cost

DR Net Pension Liability 11,500

CR Remeasurement – Actuarial Gain (OCI) 11,500
Recognition of net actuarial loss in OCI. (13,500 – 11,500)

Finally, the accountant’s previous accounting treatment for the employer’s

contributions should be corrected:
DR Net Pension Liability (SOFP) 550,000
CR Pension Contribution Expense (P&L) 550,000

Contributions paid into defined benefit scheme – correcting previous accounting

treatment of expensing contributions through P&L.

Identification of the appropriate standard to be applied: 1 mark

Net interest expense to Profit or Loss: 1 mark
Actuarial gain on pension asset: 1 mark
Actuarial loss on pension liability: 1 mark
Net actuarial gain to OCI: 1 mark
Currents service cost: 1 mark
(Total: 20 marks)

EXAMINER’S COMMENT
This question required candidates to apply the principles and concepts of IFRS to
resolve given cases. Application of IFRS has always been a challenge for candidates.
This question was the worse attempted question by candidates in the paper although
it focused on relatively moderate to answer accounting standards including: IAS 20:
Accounting for and Disclosure of Governments Grants; IAS 23: Borrowing Cost; and
IAS 19: Employee Benefit Cost. Again, due, perhaps, to lack of adequate preparation
and understanding of IFRS, majority of the candidates performed poorly in this
question.

Page 20 of 28
QUESTION THREE

a) Inventory, sale of goods and investment property

Inventory and payable
The inventory and trade payable would be recorded initially at GH¢10 million (16
million dinars  GH¢0.6250).
At the year-end on 31 October 2019, the amount payable is still outstanding. It
should be re-translated at the closing rate to. GH¢12.3 million (16 million dinars 
GH¢0.7692).
This creates an exchange loss of GH¢2.3 million (12.3 – 10) which should be
recognised in profit or loss.
Unless it has been impaired, the inventory (a non-monetary asset) should be
recorded at GH¢10 million at the year end.

Sale of goods
The sale of goods should be recorded at GH¢5 million (8 million dinars 
GH¢0.6250) million as revenue and as a trade receivable.
Payment in dinars was received on 31 October 2019 and the actual cedi value of
the dinars received was GH¢6.2 million (8 million dinars  GH¢0.7692). This
creates a gain on exchange of GH¢1.2 million (6.2 – 5) which should be recognised
in profit or loss.

Investment property
The investment property should be recognised on 1 November 2018 at GH¢40
million (56 million dinars  GH¢0.7143). At the year-end on 31 October 2019 the
property should be recognised at its fair value of GH¢36.9 million (48 million
dinars  GH¢0.7692). The fall in fair value (40 – 36.9 = 3.1) should be recognised in
profit and loss as a loss on investment property. The property is a non-monetary
asset and when a gain or loss on a non-monetary item is recognised in profit or
loss, the element of the gain or loss relating to exchange rates is also recognised in
profit or loss. (10 marks)

b)
i) Fundamental principles
Objectivity
Clearly there is a self-interest threat that arises because of the impact that
losing Akwaba Limited’s contract would have on Asasiyemedeh Company
Limited’s financial performance and reward policy. There is also intimidation
threat as other employees company may be affected due to the financial
implications of the contract not being renewed. You may also be feeling that you
would like to impress your new employer and help to make a successful bid for
the renewal of the contract, which may be normal. However, the most in important
question here is that “can you safeguard against the significant self-interest threat
which arises from Asasiyemedeh Company Limited’s performance-related bonus
scheme?

Page 21 of 28
 Confidentiality
Clearly there is a confidentiality threat here as you have worked with Akwaba Ltd
in the past. Your previous employment with Akwaba Ltd has provided you with
information which may be of value to Asasiyemedeh Company Limited.
The principle of confidentiality prohibits the use of confidential information
acquired as a result of your previous employment for your advantage or that of
your current employer. While you have a responsibility to advance the legitimate
aims of your employing organization, this should not extend to a breach of
confidentiality. In this case, you (because of Asasiyemedeh Company Limited’s
performance-related bonus) and Asasiyemedeh Company Limited stand to benefit
from the confidential information about how bids are assessed at Akwaba Ltd. The
principle would not be breached if you were in possession of information that was
in the public domain, or if you were simply to use experience gained in your
previous employment, so long as you do not use confidential knowledge that you
acquired as a result of that employment.

If you accept this role, can you ensure that you do not use confidential information
relating to your former employer to your advantage or to the advantage of your
current employer? You must be careful and professional as winning that contracts
may leads to confidential breaches against you or your current employers perhaps
from those bidders of the same contracts who might lose the bids.

Professional behavior
You must demonstrate professionalism here. For example, what can you do to
safeguard your reputation as a professional, the reputation of your employer, and
the accountancy profession to which you belong? You must consider the Institute
of Chartered Accountants (Ghana) code of ethics, applicable laws (procurement
Act 914) and regulations, your current and previous contracts of employment, and
your employer’s policies and procedures.
(Any 2 ethical issues discussed @ 2.5 marks each = 5 marks)

ii) Possible courses of action

 You should discuss the situation and your obligations with your managing
director in the first place, and ask for your involvement in the preparation of the
contract bid to be limited. For example, you may be able to contribute to aspects of
the bid that do not in any way require you to refer to confidential knowledge about
your previous employment with Akwaba Ltd.
 If the managing director fails to understand the conflict that you are facing,
probably he is not in your profession, you should request that you both discuss the
matter with the board chairman or other member of staff. During these
discussions, you should refer to the company’s ethical code, if it has one, as well
as that of the Institute of Chartered Accountants (Ghana).
 If there are no other formal channels available, you should make the entire board
aware of your dilemma by writing formally to them. If necessary, you must refuse
to take part in the bid without necessary safeguards being implemented.

Page 22 of 28
 Ultimately, disassociating yourself from Asasiyemedeh Company Limited may be
the only solution. However, before taking such a step, you should seek legal advice
on your employment
 Rights and responsibilities (subject to the rules and guidance of the Institute of
Chartered Accountants, (Ghana)).
 You should document, in detail, the steps that you take in resolving your dilemma,
in case your ethical judgement is challenged in future period.
 Looking at this issue from Asasiyemedeh Company Limited’s perspective, it may
be appropriate to suggest to managing director or the board of your employer that
a policy on conflicts of interest be developed and that the remuneration and bonus
policy be reviewed in light of this contract bid with Akwaba Ltd.

(1 mark for each action taken up to a maximum of 5 marks)

(Total: 20 marks)

EXAMINER’S COMMENT
Part of the weight for accounting standards was contained in question three together
with question on ethics. The ethics part was well answered by the candidates but not
the accounting standards part. Candidates exhibited lack of understanding of IAS 21:
Effects of Changes in Foreign Exchange Rates.

Candidates scored an average of 10 marks over 20 marks. The question was clear and
the marking scheme was fair.

Page 23 of 28
QUESTION FOUR

a)
Capital Reduction Account
GH¢000 GH¢000
Patents and copyright 75,000 Preference Shares 43,750
Plant and Machinery 75,000 Ordinary Shares 187,500
Inventories 20,000 Land & Buildings 25,000
Trade receivables 55,000 Warranties 10,000
Retained Earnings 75,000 Provision for reconstruction 50,000
Investment 25,000 Damages/claims 2,500
Capital surplus 6,250
325,000 325,000

(6 marks)

b)
Sasasila Limited
Statement of Financial Position as at 31 December, 2019
GH¢000 GH¢000
Non-Current assets
Land and Buildings (200 + 25) 225,000
Plant and Machinery (150 – 75 – 3.75) 71,250
296,250
Current Assets
Inventories (125 – 20 + 12.5) 117,500
Trade Receivables (125 – 55 + 20) 90,000
Bank and Cash (37.5 + 52.5 + 10 – 10 – 18.75) 71,250
Investment (100 – 25 – 52.5) 22,500
301,250
Current Liabilities
Trade payables (93.75 – 5) 88,750
Provision for warranties (37.5 – 10) 27,500
Accrued debenture; six months (18.76 x 6/12) 9,375
125,625
Net Current Assets 175,625

Non-Current Liabilities
15% debentures (125,000)
346,875

Financed by:
Stated Capital
Ordinary shares @ GH¢5 [375 – 187.5] 187,500
20% Cumulative Preference Shares @ GH¢7.5 [175 – 43.75] 131,250
Retained earnings 34,375

Page 24 of 28
 Capital Surplus (6,250)
346,875

WORKINGS
Sasasila Limited
W1): Statement of profit earned from 1 July to 31 December 2019
GH¢000 GH¢000
Addition to Net worth:
Bank and cash balances 10,000
Trade debtors 20,000
Stock 12,500
Creditors 5,000
47,500
Less: Depreciation
(0.1 x 75,000 x 6/12) 3,750
Debenture interest
(0.15 x 125,000 x 6/12) 9,375 (13,125)
NET PROFIT 34,375

Sasasila Limited
W2): Statement of Bank and Cash Balances as at 31 December 2019
GH¢000 GH¢000
Bank and cash balance as per Balance sheet 37,500

Add:
Proceeds from sale of investment 52,500
90,000
Less:
Liability for damages 10,000
Accrued debenture interest (15% x 125,000) 18,750 28,750
61,250
Add: Increase in Bank and Cash balances (Six months’ period) 10,000
Bank and Cash balances as at 31 December, 2019 71,250

Suggested marking scheme: (Maximum of 50 ticks including relevant workings at

0.28 marks per tick up to a maximum of 14 marks)

EXAMINER’S COMMENT
This question required the preparation of a capital reduction account and is fairly
straightforward. The standard of the question was appropriate for the level assessed
Majority of the candidates performed excellently in this question.

Page 25 of 28
QUESTION FIVE

To: MD of Gamashie Ltd

From: An Accountant
Date: 01/01/19
Subject: The financial position of Bossman Ltd

Introduction
This report has been prepared on the basis of the three most recent statements of
comprehensive income and statement of financial position of Bossman Ltd
covering the years 2016 to 2018 inclusive. Ratio analysis used in this report is based
on the calculations shown in the appendix attached.

Financial Performance
Sales have increased at a steady 5% per annum over the three-year period. In
contrast, the gross profit percentage has increased from 42% in 2016 to 45% in 2017
before dropping back to 40% in 2018. Similarly, operating profit as a percentage of
sales was 26% in 2016, 28.5% in 2017 and 25% in 2018. This may indicate some
misallocation of costs between 2017 and 2018 and should be investigated or it may
be indicative of a longer downward trend in profitability. Return on capital
employed, as one would expect, has shown a similar pattern with an increase in
2017 with a subsequent fall in 2018 to a level below that of 2016.

Financial Position
The debt ratio measures the ratio of a company’s total debt to its total assets.
Although we have no information as to the norm for the industry as a whole, the
debt ratios appear reasonable. However, it should be noted that it has risen steadily
over the three year period. When reviewing Bossman Ltd liquidity the situation
has improved over the period. The current ratio measures a company’s ability to
meet its current liabilities out of current assets. A ratio of at least 1 should therefore
be expected. Bossman Ltd did not meet this expectation in 2016 and 2017. This ratio
can be misleading as inventory is included in current assets. Because inventory can
take some time to convert into liquid assets a second ratio, the quick ratio, is
calculated which excludes inventory. As can be seen, the quick ratio, although
improving, is low and this shows that current liabilities cannot be met from current
assets if inventory is excluded. As a major part of current liabilities is the bank
overdraft, the company is obviously relying on the bank’s continuing support with
short-term funding. It would be useful to find out the terms of the bank funding
and the projected cash flow requirements for future funding.

The efficiency ratios, receivables ratio and inventory turnover, give a useful
indication of how the company is managing its current assets. As can be seen from
the appendix the receivables collection period has increased over the three years
from 29 days to 58 days. This may indicate that the company is failing to follow up
its debts efficiently or that it has given increased credit terms to some or all of its
customers. Looking at inventory turnover period, this has also risen from 62 days
to 122 days. This may be an indication of over-stocking, stocking up on the
Page 26 of 28
 expectation of a substantial sales increase or the holding of obsolete or slow-
moving inventory items which should be written down. More investigation needs
to be done on both receivables and inventory. The financing of additional
receivables and inventory has been achieved in the main through the bank
overdraft as the trade payables figure has not increased significantly.

Conclusion
The review of the three-year financial statements for Bossman Ltd has given rise
to a number of queries which need to be resolved before a useful conclusion can
be reached on the financial performance and position of Bossman Ltd. It may also
be useful to compare Bossman Ltd’s ratios to those of other companies in the same
industry in order to obtain some idea of the industry norms.

Structure of the report = 2 marks

Analysis of performance = 8 marks
10 marks

Appendix to Memorandum
2016 2017 2018
% sales increase 5% 5%
Gross profit % 42% 45% 40%
Operating profit % 25.5% 28.5% 25%
Return on capital employed
=
Profit before interest and tax
× 4,586 5,387 4,959
Capital employed
14,434 + 5,000 = 23.6% 15,313 + 5,000 15,584 + 5,000
100%
= 27% = 24.1%
Debt ratio
Total debt 4,187 + 5,000 5,804 + 5,0000 6,841 + 5,000
= × 100% = 38.9%
Total asset 20,356 + 3,265 21,114 + 4,976 20,211 + 7,214
= 41.4% = 43.2%
Current ratio
Current assets 3,265 4,976 7,214
= = 0.78 = 0.86 = 1.05
Current liabilities 4,187 5,804 6,814
Quick ratio
Current assets − inventory 3,265 − 1,775 4,976 − 2,663 7,214 − 3,995
= = 0.36
Current liabilities 4,187 5,804 6,814
= 0.40 = 0.47
Receivables collection period
Trade receivables 1,440 2,260 3,164
= = 29.2days
sales 18,000 18,900 19,845
× 365 days = 43.6 days = 58.2 days
Inventory turnover period
Inventory 1,775 2,260 3,995
= × 365 days = 62 days
Cost of sales 10,440 10,340 11,890
= 94 days = 122.6 days

Page 27 of 28
 1 mark for orderly presentation of computation of ratios = 1 mark
1 mark for each ratio computed for 2016 x 3 ratios = 3 marks
1 mark for each ratio computed for 2017 x 3 ratios = 3 marks
1 mark for each ratio computed for 2018 x 3 ratios = 3 marks
10 marks

EXAMINER’S COMMENT
This question on analysis of financial statements is the primary driver of the high pass
rate of the candidates in this exams diet. Majority of the candidates found this question
to be relatively easier to answer compared to the other questions as well as questions
on analysis of financial statements in previous exams diets in the corporate reporting
paper. The question was straight forward and the marking scheme very flexible.
Majority of the candidates scored the highest marks for this question. The average
score for this question is 17 marks out of 20 marks. A number of candidates scored 20
marks out of 20 marks.

CONCLUSION
It is still apparent that some candidates did not received adequate tuition before sitting
for the examinations. Candidates clearly lacked a proper appreciation of issues in IFRS
and preparation of consolidated financial statements. Steps should be taken to
improve tuition specifically in IFRS and preparation of consolidated financial
statements. In this regard, the special intervention programme of the Institute for
candidates should highlight on these areas.

Candidates should be encouraged to take their time to adequately prepare for the
paper before they sit the exams. The Institute should provide intervention to
candidates on how to answer exams questions as most candidates lack this critical
skill needed to pass examinations.

Page 28 of 28
 NOVEMBER 2020 PROFESSIONAL EXAMINATION
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS & MARKING SCHEME

EXAMINER’S GENERAL COMMENTS

The difficulty level of the November 2020 paper was relatively higher compared to
the May 2020 paper. Generally, candidates struggled with almost all the questions and
performance was far below average.
The questions generally followed the syllabus structure and marks allocated to
different questions as suggested in the syllabus. The marking scheme was appropriate
and provided a clear marking guide.
Candidates’ performance was however, abysmal and below average compared to the
previous diet.

STANDARD OF THE PAPER

The standard of the questions was appropriate for the level being assessed, although
the difficulty level was relatively higher compared to the May 2020 diet. The
requirements of the questions were clear.
Weights to the questions followed the pattern of the previous sittings and is generally
consistent in standard with the previous papers. The questions required critical
thinking and a good mastery of the relevant areas of the syllabus.
The mark allocations generally followed the weightings in the syllabus grid and marks
were fairly allocated to questions and sub questions. The marks allocated to questions
were commensurate with the amount of time and effort required to answer the
questions.

PERFORMANCE OF CANDIDATES
The performance of candidates was very poor with a pass rate of about 25% compared
with the pass rate of May 2020 diet of about 60%.
Candidates’ poor performance was consistent and was evenly spread across most
centres.
There were no signs of copying at any centre.
The worst attempted question was the question on the application of IFRS and the
question on preparing consolidated financial statements. Candidates lacked the skills
to apply the IFRS to the given scenarios and were unable to prepare consolidated
financial statements.

NOTABLE STRENGTHS AND WEAKNESSES OF CANDIDATES

The questions that candidates attempted averagely better were question five on ratios
and financial analysis; question three c) on ethics and question four a) on business
valuation. The rest of the questions; consolidated financial statements and IFRS were
poorly attempted.
Candidates’ weakest point was application of IFRS and preparation of consolidated
financial statements.

Page 1 of 27
The fundamental weaknesses observed is lack of appropriate knowledge, bad strategy
in use of time, wrong order in which questions were attempted, and inability to apply
concepts to practical scenarios.
Candidates lacked effective time management skills.
Some candidates numbered their questions wrongly.
Some candidates had very poor handwriting which made it difficult to read the
answers properly.
Some candidates answered the same question on several non-conservative pages
without cross referencing. This made tallying their marks very difficult.
Most candidates displayed inadequate knowledge of the issues in the syllabus.

Page 2 of 27
QUESTION ONE

Bolga Ltd is a limited liability company in Ghana, which has investments in a number of
other companies. The draft statements of profit or loss for Bolga Ltd and its other
investments for the year ended April 30 2020 are given below:
Bolga Ltd Navrongo Ltd Serrekunda Ltd
GH¢’000 GH¢’000 GMD’000
Revenue 286,000 136,000 840,000
Cost of sales (122,000) (84,000) (504,000)
Gross profit 164,000 52,000 336,000
Distribution costs (20,000) (12,000) (56,000)
Administrative expenses (46,000) (20,000) (116,000)
Operating profit 98,000 20,000 164,000
Investment income 2,000 4,000 -
Finance costs (4,000) (8,000) (12,000)
Profit before tax 96,000 16,000 152,000
Income tax expenses (22,000) (4,000) (36,000)
Profit for the period 74,000 12,000 116,000

Additional relevant information:

i) Bolga Ltd purchased 80% of Navrongo Ltd’s three million GH¢5 ordinary shares for
GH¢12 million two years ago. At the acquisition date, the carrying value of Navrongo’s
net assets was GH¢10 million, and this was deemed to be the same as their fair value. The
non-controlling interest was measured using the proportion of net assets method. Goodwill
on acquisition of Navrongo is not impaired. On 31 October 2019, Bolga Ltd sold one
million, four hundred and forty thousand of its shares in Navrongo Ltd for GH¢13 million.
The fair value of the interest retained was GH¢19 million. The retained earnings of
Navrongo Ltd was GH¢5 million as at April 30, 2019. The only entry posted in Bolga Ltd’s
individual financial statements was the GH¢13 million cash received. This was debited to
the bank account and the credit posted to the suspense account.

ii) On 1 May 2019, Bolga Ltd acquired 60% of Serrekunda Ltd’s one million GMD1 ordinary
shares for GMD284 million. Serrekunda is a Gambian based company with Gambian
Dalasi (GMD) as its currency. The non-controlling interest at acquisition was valued at
GMD116 million using the fair value method. At 1 May 2019, the carrying amount of
Serrekunda Ltd’s net assets was GMD240 million but the fair value was GMD280 million.
The excess in the fair value was due to a brand with a remaining useful economic life of 5
years at the date of acquisition.

On 30 April 2020, it was determined that goodwill arising on the purchased of Serrekunda
Ltd was impaired by GMD16 million. Goodwill impairments are charged as administrative
expenses.

iii) On 28 February 2020, Navrongo Ltd paid a dividend of GH¢2 million to its ordinary
shareholders.

Page 3 of 27
iv) On 1 June 2019, Bolga Ltd started a construction of a new building project and financed
this out of its general borrowings. The construction was completed on 30 April 2020 at a
total cost of GH¢20 million excluding interest on borrowings. Bolga Ltd has had the
following loans outstanding for the whole financial year:

GH¢000
10% bank loan 28,000
8% loan notes 12,000

All the interest for the year has been expensed to the statement of profit or loss. None of
the loan notes are held by any other companies within the Bolga Ltd.

v) On 1 November 2019, Bolga Ltd granted 20,000 share options to each of its 100 managers.
These options will vest on 31 October 2021 if the managers are still employed. However,
five managers had left the company by 30 April, 2020 and it is expected that another five
will leave by 31 October 2021. The fair value of the share options was GH¢3.10 on 1
November 2019 and GH¢10 on 30 April, 2020. There have not been any accounting entries
posted in relation to this scheme.

vi) The following exchange rates are relevant:

GMD: GH¢1

May 1 2019 10.0

April 30 2020 8.0
Average for the year ended 30 April 2020 9.2

Required:
Prepare the consolidated statement of profit or loss and other comprehensive income for
the year ended 30 April 2020.
(Total: 20 marks)

Page 4 of 27
QUESTION TWO

a) Katamanso Ltd (Katamanso) is a company which is a subsidiary of a media company.

Katamanso's principal asset is the rights it owns to a classic film. Katamanso had the
following intangible assets as at the year end 31 December 2017:
Classic Website Total
film
GH¢'000 GH¢'000 GH¢'000
Cost 10,000 150 10,150
Accumulated amortisation (6,000) (90) (6,090)
Carrying amount 4,000 60 4,060
The following information includes all relevant events that occurred during the year ended
31 December 2018:

i) The film was originally published on 1 January 1970 and the rights were acquired by
Katamanso on 1 January 2015 for GH¢10 million. Copyright was set at 50 years from the
date the film was originally published. The film was amortised by Katamanso using straight
line method over the remaining copyright period. However, recent legislative changes
passed on 1 January 2018 have extended the copyright period from 50 years to 70 years,
subject to payment of a registration fee prior to the original expiry date. This, together with
associated legal costs, amounted to GH¢70,000 and was paid on 1 January 2018.

As a result, the market value of the rights to the film was GH¢12.1 million at 31 December
2018, according to Katamanso's professional valuers, who determined the valuation on 1
January 2018.

ii) During the year Katamanso developed a new interactive website to market the film and
associated merchandise given its extended copyright period. The website includes its own
e-commerce system for online DVD sales, direct streaming of the film and associated
material and merchandise sales.

Costs incurred were as follows: GH¢'000

Planning the new website 8
Registration of various domain names 18
Internal design costs 85
External contractor design costs 112
New content development 38
Advertising of the new website 22

The new website went live on 1 July 2018 and the old website, which was being amortised
using straight line method over five years, was taken offline on that date and will not be
used for any other purpose.

Required:
Prepare a note reconciling the carrying amount of Katamanso's intangible assets from the
beginning to the year ended 31 December 2018 as required by IAS 38: Intangible Assets.
(Note: Comparative information is not required. All amounts are material)
(10 marks)

Page 5 of 27
b) Tekyiman Ltd (Tekyiman) sold one of its warehouses on 1 July 2019 to a finance house and
leased it back under an operating lease on the same date. The carrying amount of the
warehouse on 1 July 2019 was GH¢16 million. The terms of the sale and leaseback were
as follows; sale proceeds of GH¢23.5 million and half-yearly lease rental payments of
GH¢1 million paid in arrears on 31 December and 30 June over a period of 4 years.
The open market value of the property would have been GH¢20 million if not leased back
on these terms. The lease rental payments were approximately double market rates for such
a lease. The finance house can terminate the lease at any time with a month's notice to
Tekyiman, at which point any excess of the sales proceeds over market value of the property
not yet repaid becomes repayable immediately.
Tekyiman depreciated the property up to 1 July 2019 and then derecognised it, recognising
a profit of GH¢7.5 million (netted against expenses in the statement of profit or loss). The
first GH¢1 million, 6 monthly lease rental payment, made on 31 December 2019 has been
charged to cost of sales. No other accounting entries have been made.
Tekyiman now wishes to amortise the excess of the sales proceeds over market value on a
straight line basis over the period the warehouse will be used (4 years).
Required:

Advise the directors of the entity of the correct accounting treatment of the above
transaction under IFRS 16: Leases (as the information permits) for the year ended 31
December 2019. (6 marks)

c) A company is being sued by a customer in respect of some products supplied which the
customer claims are faulty. The customer is suing for GH¢220,000 plus damage. Court
costs are likely to amount to GH¢40,000. The company's lawyer has advised that there is
an 80% chance that the case will be lost and that the full amount claimed by the customer
will become payable against the company.

The company is fully insured and the lawyer has advised that the insurance policy covers
the event and should be utilized.

Required:
Determine the amount that should be recognised as a provision and charged to profit or loss
and determine the treatment of the insurance claim. (4 marks)

(Total: 20 marks)

QUESTION THREE

a) Tato Company (Tato), a listed company, purchased a significant item of equipment on 1

July 2018. The list price of the equipment was GH¢12 million, although the supplier always
gives Tato a 10% discount on its list prices. Tato was unable to finance the purchase
outright and the supplier therefore agreed to accept an arrangement whereby the amount of
the payment would be determined by Tato's share price on 30 June 2020.

At 30 June 2020, under the terms of the agreement, the supplier can choose to receive
either:

Page 6 of 27
 cash, equal to the value of 500,000 of Tato's shares on that date; or
 540,000 Tato's shares on 30 June 2020, provided that they cannot be sold for 1 year after
that date.

Tato's share price was GH¢19.80 per share on 1 July 2018 and GH¢20.40 on 30 June 2019.

Required:
Demonstrate with suitable calculations, how the arrangement should be accounted for in
Tato Company's financial statements for the year ended 30 June 2019. (6 marks)

b) During the year ended 31 December 2018 Pakyi Ltd invested in a convertible bond on its
issue date. The bond matures four years after the issue date and at that date the bond can be
converted into ordinary shares of the investee or repaid at par. The entity's plan for the bond
is to hold it until it matures and collect the cash flows.

Required:
Advise the directors of Pakyi Ltd of the accounting treatment on the above transaction
under IFRS 9: Financial Instruments for the year ended 31 December 2018. (4 marks)

c) Goodman recently qualified as accountant with the Institute of Chartered Accountants

(Ghana). He works with a manufacturing company in Tamale, Ghana, and he has been
asked, by his line manager, to complete a costing exercise and given a very short deadline
as well as limited resources for the exercise. Goodman thinks that the President of the
company is planning to use this information to restructure the company, including making
some of Goodman’s close colleagues redundant. Goodman is very worried that the outcome
of his work cannot be robust enough to be used for such a big business decision by the
company, but his line manager is putting him under a lot of pressure to complete the work
pretty much quickly.

Required:
Evaluate FOUR (4) ethical issues facing Goodman and recommend FOUR (4) possible
courses of action Goodman should consider taking. (10 marks)

(Total: 20 marks)

Page 7 of 27
QUESTION FOUR

a) Anidaso Ltd operates in the manufacturing industry in Ghana. The company is in the
process of selling some of its shares to the general public in order to raise enough funds to
expand its operations. Below are the financial statements of the company:

Statement of profit or loss for the year ended 30 September, 2019

GH¢000
Revenue 122,900
Cost of sales (58,650)
Gross profit 64,250
Selling, general & administration expenses (43,570)
Profit before interest & taxes 20,680
Finance cost (1,680)
Profit before taxation 19,000
Taxation @ 20% (4,750)
Profit after tax 14,250

Statement of changes in equity (extracts) for the year ended 30 September, 2019
GH¢000
Retained Earnings at October 1, 2018 47,970
Profit for the year 14,250
Dividend paid (6,200)
Retained Earnings at 30 September, 2019 56,020

Statement of Financial Position as at 30 September, 2019

Non-current assets: GH¢000 GH¢000
Development expenditure 13,050
Patents 8,200
Property, plant and equipment 98,750
120,000
Current assets:
Inventories 21,700
Trade receivables 12,501
Bank and cash 5,944
40,145
Current liabilities:
Trade payables (15,400) 24,745
Net current assets 144,745

Non-current liabilities:
10% Debenture loan stock (12, 000)
132,745
Equity:
Share capital 50, 000
Revaluation Surplus 26,725
Retained Earnings 56,020
132,745

Page 8 of 27
 Additional relevant information:
 The share capital of the company is composed of:
GH¢000
20% redeemable preference shares 10,000
Ordinary shares (issued @GH¢0.20 each) 40,000
50,000

 A review of the development expenditure indicated that only 50% of it is worthwhile.

 An independent valuer has placed values on some of the assets of Anidaso Ltd below:
GH¢000
Property, plant & equipment 111, 000
Inventories 16, 200
Trade receivables 10, 000
137, 200

 Profit forecasts for the next five years of Anidaso Ltd are as follows: The estimated profit
before tax figures are arrived at before charging the estimated depreciation charges.
Year-end 30 September Profit before Tax Depreciation Charge
GH¢000 GH¢000
2020 14,900 1,100
2021 16,000 1,225
2022 19,250 1,550
2023 19,800 2,025
2024 21,550 2,130

 The patents in the statement of financial position represents a license to produce an

improved variety of a product and is expected to generate a pre-tax profit of GH¢10,000
per year for the next five years.

 Abiola Limited is a competitor company listed on the Ghana Stock Exchange and data
extracted from its recently published financial statements revealed the following details:
Market capitalisation GH¢1,000,000
Number of ordinary shares 800,000
Earnings per share GH¢0.20
Dividend payout ratio 80%

 The cost of capital of Anidaso Ltd is 10%.

Required:
Determine the value to be placed on each share of Anidaso Ltd using the following methods
of valuation:
i) Net assets; (4 marks)
ii) Price-earnings ratio; (4 marks)
iii) Dividend yield; (3 marks)
iv) Discounted cash flow. (4 marks)

Page 9 of 27
b) Under IFRS 3: Business Combinations, the identifiable assets, liabilities and contingent
liabilities of subsidiaries are therefore required to be brought into the consolidated financial
statements at their fair value rather than their book value. The difference between fair
values and book values is a consolidation adjustment made only for the purposes of the
consolidated financial statements.

Required:
Explain the justification for undertaking fair value exercise when a parent acquires a
controlling stake in a subsidiary company. (5 marks)

(Total: 20 marks)

QUESTION FIVE

The following are the accounts of Bounce Back Ltd, a company that manufactures
playground equipment, for the year ended 30 November, 2019.

Statement of comprehensive income for year ended 30 November

2019 2018
GH¢’000 GH¢’000
Profit before interest and tax 2,200 1,570
Interest expense (170) (150)
Profit before tax 2,030 1,420
Taxation (730) (520)
Profit after tax 1,300 900
Dividends paid (250) (250)
Retained profit 1,050 650

Statement of financial position as at 30 November 2019

2019 2018
GH¢’000 GH¢’000
Non-current assets (written-down value) 6,350 5,600

Current assets
Trade receivables 2,100 2,070
Inventories 1,710 1,540
Total current assets 3,810 3,610

Creditors: amounts due within one year

Trade payables 1,040 1,130
Taxation 550 450
Bank overdraft 370 480
Total current liabilities 1,960 2,060

Net current assets 1,850 1,550

Total net assets 8,200 7,150

Page 10 of 27
 Creditors: amounts due after more than one year
10% debentures 2020/ 2021 1,500 1,500

Equity:
Share Capital (ordinary shares of 50p fully paid up) 3,000 3,000
Retained earnings 3,700 2,650
6,700 5,650

Long term liabilities and Equity 8,200 7,150

Required:
a) Calculate, for both years, the return on equity and the return on capital employed.
. (4 marks)
b) Calculate, for both years, TWO (2) investment ratios of interest to a potential investor.
(4 marks)
c) Calculate, for both years, TWO (2) ratios of interest to a potential long-term lender.
(4 marks)
d) Report on the performance and state of the business from the view point of a potential
shareholder and lender using the ratios calculated above and explain any weaknesses in
these ratios. (8 marks)

(Total: 20 marks)

Page 11 of 27
SOLUTION TO QUESTIONS

QUESTION ONE

Bolga Group
Consolidated statement of profit or loss and other comprehensive income for the
year ended 30 of April, 2020
GH¢ million

Revenue (GH¢286+ (GH¢136 x 6/12) + (GMD840/9.2) 445.3

Cost of sales (GH¢122 + (GH¢84 x 6/12) + (GMD504/9.2) (218.2)
Gross profit 227.1
Distribution costs (GH¢20 + (GH¢12 x 6/12) + (GMD56/9.2) (32.1)
Administrative expenses (GH¢46 + (GH¢20 x 6/12) + (GMD116/9.2) +
(1.7) + (1.4) + (GMD8/9.2) (72.6)
Operating profit 122.4
Share of profit of associate (GH¢12 million x 6/12 x 32%) 1.92
Profit on disposal (w6) 7.2
Investment income (GH¢2 + (GH¢4 x 6/12) – GH¢0.64 3.36
Finance costs (GH¢4 + (GH¢8 x 6/12) + (GMD12/9.2) - (GH¢1.7)
Borrowing costs (w4) (7.6)
Profit before taxation 126.9
Income tax expenses (GH¢22 + (GH¢4 x 6/12) + (GMD36/9.2)) (27.9)
Profit for the year 99
Other comprehensive income:
Total exchange gains on retranslation of foreign subsidiary (GH¢2.7
(w7) + GH¢8.8 (w8) 11.5
Total comprehensive income 110.5
Profit attributable to:
Shareholders of parent company 93.8
Non-controlling interest (see w9) 5.2
99
Total comprehensive income attributable to:
Shareholders of parent 100.7
Non-controlling interest (GH¢5.2 million + (GH¢1.1 million w7) +
(GH¢3.5 million w8) 9.8
110.5

Page 12 of 27
Workings

Group structure

BOLGA LTD

80%

(60% x 80% = 48%) disposal 6/12 year 60% - Full year

32%
Navrongo Ltd Serrekunda Ltd

W1) Brand of Serrekunda Ltd

GMD
million
Fair value of net asset at acquisition date 280
Carrying amount of net assets at acquisition date (240)
40
The excess amortization is depreciated over 5 years (GMD40/5years) GMD8/9.2.
This is treated as administration expenses in the statement of profit.

W2) Dividend paid – At the time the dividend was paid on February 2020 Bolga Ltd
had only 32% holdings in Navrongo Ltd. Therefore, investment income of GH¢0.64
million (GH¢2 x 32%) must be removed from consolidated profit or loss.

W3) The group share of the associate profit for the six months to 30 April 2020 is
GH¢1.92 million (GH¢12 million x 6/12 x 32%) per IAS 28 equity accounting.

W4). Borrowing cost (IAS 23)

Weighted average cost of borrowing should be calculated first, which is 9.4% (GH¢28
million x 10%) + (GH¢12 million x 8%)/ GH¢40). Therefore, the interest to be
capitalized for the 11 months’ period (June 1 2019 to April 30, 2020) is GH¢20 million
x 9.4% x 11/12 = GH¢1.7 million.
Accounting treatment:
Dr. Property, plant and equipment GH¢ 1.7 million
Cr. Finance costs (profit or loss) GH¢1.7 million

W5). Share options (IFRS 2)

This is an equity share option scheme and the expense to the profit or loss should be
based on the total number of shares expected to invest and the fair value of the share
option at the grant date. IFRS 2 requires that the expense is spread over the vesting
period.

Page 13 of 27
Year Expense Equity
To 30/4/20 (100-5-5) x 20,000 options x GH¢3.10 x 6/24 GH¢1.4
months GH¢1.4

Administrative expenses will be debited with GH¢1.4 and equity or special equity
credited with same for the year ended 30 April 2020.

W6). Profit on disposal of subsidiary Navrongo half-way into accounting period

GH¢ GH¢ million
million
Proceeds from disposal 13
Fair value of the retained investment 19
32
Net asset at disposal date 26
Goodwill at disposal 4
Non-controlling interest (5.2) (24.8)
Profit on disposal 7.2

NB:
Net asset at disposal calculated as:
Share capital (3 million shares x GH¢5) 15
Retained earnings brought forward 5
Profit up to disposal date (GH¢12 x 6/12) 6 26

Goodwill at acquisition:
Cost of investment 12
Non-controlling interest on acquisition (GH¢10 x 20%) 2
Net asset at acquisition date (10) 4

NCI at disposal calculated as:

NCI at acquisition date (GH¢10 x 20%) 2
NCI % share of post-acquisition profits up to disposal
date (20% x(GH¢26 - GH¢10)) 3.2 5.2

W7). Goodwill of the foreign subsidiary functional currency (GMD) – Serrekunda

Ltd
GMD
million
Cost of investment 284
Fair value of non-controlling interest at acquisition date 116
400
Fair value of net assets ate acquisition date (280)
120
Impairment loss (16)
104

Page 14 of 27
Retranslation of goodwill into presentation currency- Gain on retranslation
GMD Rate of GH¢
million exchange million
Goodwill 120 10 12
Impairment (16) 9.2 (1.7)
10.3
Foreign exchange gain on retranslation 2.7
Balance sheet date 104 8.0 13
The forex gain attributable to the non-controlling interest is GH¢1.1 million (GH¢2.7
million x 40%) and the parent company share is GH¢1.6 million (GH¢2.7 million x
60%).

W9). Foreign exchange gain on translation of net assets and profit

GMDmillion Exchange GH¢
rate Million
Opening net asset 280 10 28
Profit for the year (GMD116 million –
GMD 8 million – brand amortization 108 9.2 11.7
at acquisition
39.7
Forex gain on retranslation - - 8.8
Closing net asset at year end 388 8.0 48.5

The forex gain on the retranslation of net asset is attributable to the non-controlling
interest at GH¢3.5 million (GH¢8.8 million x 40%) and Bolga Ltd GH¢5.3 (GH¢8.8 x
60%).

W10). Profit for the year attributable to the non-controlling interest

GH¢ million
NCI share in Navrongo Ltd (GH¢12 x 6/12 x 20%) 1.2
NCI share in Serrekunda Ltd (GMD116 million – GMD8 million 4.7
/9.2 x 40%)
NCI share of goodwill impairment (GH¢1.7 million (w8) x 40%) (0.7)
5.2

Suggested marking scheme: 100 ticks at 0.2 marks each up to maximum of 20

marks. These include relevant workings.

EXAMINER’S COMMENTS
This question was on Consolidated Statement of Profit or Loss and Other
Comprehensive Income of a parent, foreign subsidiary and associate company and
attracted 20 marks. Question four b) was on justification for fair value in consolidation
and was for 5 marks making consolidation to have a total mark of 25 marks as
suggested in the syllabus.
The question was on translation of the results of a foreign subsidiary from foreign
currency to the presentation currency and also involved the disposal of a subsidiary

Page 15 of 27
to an associate status. These were generally difficult concepts for candidates to grasp.
Candidates demonstrated a lack of understanding of both concepts. A greater number
of the candidates were not able to solve this question and scored poor marks.

QUESTION TWO
a)
Classic film Website Total
GH¢'000 GH¢'000 GH¢'000
Carrying amount at 1 January 2018 4,000 60 4,060
Additions (W1) 70 215 285
Amortisation (W2) (185) (20) (205)
Disposals (60 – (W2) 15) (45) (45)
Carrying amount at 31 December 2018 3,885 210 4,095

At 31 December 2018
Cost/valuation (10,000 + 70)/(W1) 10,070 215 10,285
Accumulated amortisation
((10,000/5 x 3) + (W2) 185)/(W2) (6,185) (5) (6,190)
Carrying amount 3,885 210 4,095

Workings 1
Website development costs GH¢'000
Planning – expensed as akin to research per SIC-32 –
Registration of various domain names 18
Internal design costs 85
External contractor design costs 112
New content development - expensed because developed to market
the entity's own products (SIC-32 para 8) –
Advertising of new website - marketing expensed as no intangible asset
is created (IAS 38 para 69(c)) –
215
Workings 2
Amortisation GH¢'000
Classic film (4,000 + 70)/22 years 185
Website:
Old website (150/5 years x 6/12) 15
New website ((W1) 215/21½ years x 6/12) 5
20
205

(20 ticks @ 0.5 = 10 marks)

b) Sale and leaseback

Page 16 of 27
 Double entries performed by Tekyiman:
GH¢'000 GH¢'000
DR Cash 23,500
CR Property 16,000
CR (P/L) 7,500

DR Cost of sales (P/L) 1,000

CR Cash 1,000

Correcting double entries required for excess of sale proceeds over fair value:
GH¢'000
DR (P/L) (23,500 – 16,000) 7,500
CR Other income (P/L) (20,000 – 16,000) 4,000 genuine profit - moved
CR Deferred income (SOFP) (23,500 – 20,000) 3,500 excess profit – deferred

The deferred income should be amortised to profit or loss (other income) over the
period the asset is expected to be used:
GH¢'000
DR Deferred income (3,500/4 years x 6/12) 438
CR Other income (P/L) 438

Reversal of profit on sale: 1 mark

Recognition of fair value through profit or loss: 1 mark
Deferred income (excess profit): 2 marks
Journal entries for deferred income: 2 marks
(6 marks)

c) Provision is made for probable amount:

GH¢220,000 + GH¢40,000 = GH¢260,000
GH¢260,000 is charged to profit or loss.

The insurance recovery, while disclosed, is not virtually certain (as the court case
itself has not been lost) and therefore is disclosed as a contingent asset.

Provision for legal claim/damages charged to Profit or Loss: 3 marks

Disclosure of insurance claim as a contingent asset: 1 mark
(4 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
The question required candidates to apply the principles and concepts of IFRS to
resolve given cases. Application of IFRS has always been a challenge for candidates.
This question was the worse attempted question by candidates in the paper. The
question focused on IAS 38: Intangible Assets; IFRS 16: Leases and IAS 37: Provisions,
Contingent Liabilities and Contingent Assets. Candidates could not apply the
principles in the respective IFRS to the scenarios raised in the questions.

Page 17 of 27
QUESTION THREE

a) This arrangement is a share-based payment with a choice of settlement. As the

counterparty (the supplier) has the choice of settlement terms, a compound
instrument has been issued and needs to be split into liability and equity
components at the grant date.
The equity component is calculated as a residual after measuring the liability
component at the grant date:
GH¢m GH¢m
DR Plant (12 x 90%) 10.8
CR Liability (500,000 x GH¢19.80) 9.9
CR Equity (balancing figure) 0.9

The liability component is subsequently revalued to fair value at the year-end:

Fair value of liability at year end (500,000 x GH¢20.40) = GH¢10.2m
GH¢m GH¢m
DR Profit or loss (10.2 – 9.9) 0.3
CR Liability 0.3
Determination of fair value of equipment: 1 mark
Determination of liability component @ initial recognition: 1 mark
Determination of equity component @ initial recognition: 1 mark
Fair value of liability at year end: 1 mark
Charge to Profit or Loss for the year: 2 marks
(6 marks)

b) Investment in convertible loan

 An investment in a convertible loan effectively contains two elements: a loan
instrument and an equity option. The entity plans to hold the bond until it matures
so it would appear to fall into a group of assets where the entity’s business model
is to hold the assets to collect the interest and principal cash flows.
 However, for the instrument to be held at amortised cost in this category, the terms
of the instrument must give rise to cash flows that are solely payments of principal
and interest on the principal outstanding. That is not the case here as the bond can
be converted into equity at the end of its life.
 Consequently, the bond must be measured at its fair value with changes in value
being recognised in profit or loss.

Classification of the nature of financial instrument: 1 mark

Initial recognition and measurement of the financial instrument: 2 marks
Subsequent measurement of the financial asset: 1 mark
(4 marks)

c) Fundamental principles

 Integrity

Page 18 of 27
 Goodman could be honest and straightforward with the line manager and the
president of the company about the short time and limited resource to do a very
robust work capable of meeting the big business decision it is intended to be used
for. Can Goodman realistically produce a costing information with the time and
resources available, without compromising the standard of his work?

 Objectivity
Goodman could maintain an unbiased stance throughout the assignment given
him, in view of his close relationship with other colleagues in the company.
Goodman must not allow conflict of interest, bias and undue influence or pressure
to influence his professional judgement. For example, his line manager is putting
him under a lot of pressure to complete the work pretty much quickly.

 Professional competence and due care

The company may be restructuring, and the president needs to have the most up
to date and complete financial information to inform any big business decisions.
As a professional accountant, you must ensure that any financial information you
provide is robust. Can Goodman realistically produce a costing information, with
the time and resources available, without compromising the standard of his work?

 Confidentiality
Given the sensitivity of the situation, Goodman should maintain discretion and
not share your concerns with other staff, who may not be aware of the president’s
intentions. Is there anyone else in the company with whom Goodman can raise his
concerns? Is there a senior finance officer who could advise Goodman, or another
member of the board with whom Goodman can discuss his dilemma?

(4 ethical issues well explained @ 1.5 marks each = 6 marks)

Possible courses of action

 Goodman thinks that the president of the company is planning to use the
information he is asked to produce to restructure the company. As a professional
accountant, Goodman has a duty to make his line manager and other users of the
information aware of the limitations in the scope of his work.

 Goodman should attempt to obtain certainty regarding the use of the information
from his line manager and the president of the company. He should arrange a
meeting with his line manager and explain that he is unwilling to do the work to
the deadline requested, with the resources available, because the work could not
be relied upon. The process of clarifying the intended use of the information and
expressing his concerns regarding its reliability is likely to enhance your
credibility.
 Goodman could ask for more time to complete the work to the required standard,
or ask for the work to be outsourced altogether. This would have the added benefit
of enhanced objectivity.

Page 19 of 27
 Goodman could suggest that his head of department discuss the issue with the
president or other members of the board, as appropriate. If his head of department
is unsympathetic to his concerns, he should not allow himself to be associated with
information that may be misleading.

 Goodman should consider the most appropriate way in which to make his
concerns known to the board. This may be through the president or the company
secretary.

 If, after exploring all these routes of communication, he still finds himself under
unreasonable time pressure, he may have to make clear his refusal to conduct the
work, and possibly resign from the company.

 Goodman should document, in detail, the steps that he has taken in resolving his
dilemma, in case his ethical judgement is challenged in future period.

(1 mark for each action taken up to a maximum of 4 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
Question three a) and b) were a continuation of IFRS focusing on IFRS 2: Share Based
Payment and IFRS 9: Financial Instruments for a total of 10 marks to add to the 20
marks IFRS issues in question two thus bringing the total marks for IFRS to 30 marks.
Candidates could not apply the principles in the respective IFRS to the scenarios
raised in the questions.
Question three c) was on ethics and was well attempted by candidates. Candidates
were able to identify the ethical issues and suggested cause of action to resolve those
issues.

QUESTION FOUR
a) Anidaso Ltd
i) Net Assets Method
GH¢000
Property, plant and equipment 111,000
Patents (GH¢10,000 x 3.791) 37,910
Development expenditure (GH¢13,050 x 50%) 6,525
Inventories 16,200
Receivables 10,000
Bank & cash 5,944

Page 20 of 27
 Payables (15,400)
10% Debenture loan (12,000)
20% redeemable preference share (10,000)
NET ASSETS 150,179

Value per share = Net assets/No of shares issued

= GH¢150,179/ (GH¢40,000 ÷ 0.20)
= GH¢0.751 (4 marks)

ii) Price/Earnings Ratio Method

Value per share = P/E ratio x EPS
Earnings per share (EPS) = Earnings Attributable to Ordinary Shareholders
Total No of Shares Issued
= (GH¢14,250 – GH¢2,000) ÷ 200,000
= GH¢0.061

Abiola P/E Ratio: GH¢1.25/0.20 = 6.25 adjusted downwards 5 (80% x 6.25)

Value Per share = P/E Ratio x EPS
= 5 x GH¢0.061
= GH¢0.31 (4 marks)

iii) Dividend Yield Method

Value per share = Dividend per Share ÷ Dividend Yield
Dividend per Share = Total dividends paid to ordinary shareholders
No of shares issued
= (GH¢6,200 – GH¢2,000) ÷ 200,000
= GH¢0.021
Dividend yield = GH¢0.16/ GH¢1.25 x 100% = 12.8 adjusted upwards to 15 (1.2 x
12.8).
Value per share = Dividend per share ÷ Dividend yield
= GH¢0.021 ÷ 0.15
= GH¢0.14 (3 marks)

iv) Discounted Cash Flow Method

Value per share = Present value of discounted cash flows ÷ Total No. of Share
issued.

Determination of Discounted Cash Flow

Year Net cash flows GH¢ Risk Factor 10% PV of NCF GH¢
2020 14,900 0.909 13,544.10
2021 16,000 0.826 13,216.00
2022 19,250 0.751 14,456.75
2023 19,800 0.683 13,523.40
2024 21,550 0.621 13,382.55
Present value 68,122.80

Page 21 of 27
 Value per share = PV of NCF ÷ Total No. of shares
= GH¢68,122.80 ÷ 200,000
= GH¢0.34 (4 marks)

b) Fair value of assets and liabilities acquired

Assets and liabilities in an entity’s own financial statements are often not stated at
their fair value, for example, where the entity’s accounting policy is to use the cost
model for assets. If the subsidiary’s financial statements are not adjusted to their
fair values, where, for example, an asset’s value has risen since purchase, goodwill
would be overstated (as it would include the increase in value of the asset).

Consolidated accounts are prepared from the perspective of the group, rather than
from the perspectives of the individual companies. The book values of the
subsidiary's assets and liabilities are largely irrelevant, because the consolidated
accounts must reflect their cost to the group (i.e. to the parent), not their original
cost to the subsidiary. The cost to the group is their fair value at the date of
acquisition.

Purchased goodwill is the difference between the value of an acquired entity and
the aggregate of the fair values of that entity's identifiable assets and liabilities. If
fair values are not used, the value of goodwill will be meaningless.
(5 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question required the computation of values to be placed on shares using various
methods. The question was moderate and did not require adjustments to the financial
statements before the determination of the value per share
Most candidates deviated with respect to the application of the net cash flow method
to determine discounted cash flows. The question indicated that the profit before tax
was before charging depreciation but most candidates added back depreciation to it,
thus rendering their efforts to go unrewarded. The profit before tax was just to be
taken and discounted straight away. Candidates did not pay attention to details and
were not meticulous enough to spot this in the question.

QUESTION FIVE

a) Computation of return on equity and return on capital employed

Page 22 of 27
 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
Return on Equity = × 100%
𝐸𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑓𝑢𝑛𝑑
1,300
2019 𝑅𝑂𝐸 = × 100 = 19.4%
6,700
900
2018 𝑅𝑂𝐸 = × 100 = 15.93%
5,650

𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥

Return on Capital Employed = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡−𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠(𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑) × 100%
2,200
2019, 𝑅𝑂𝐶𝐸 = × 100 = 26.83%
8,200

1,570
2018, 𝑅0𝐶𝐸 = × 100% = 21.96%
7,150

b) Computation of investment ratios

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑖𝑑
Dividend per share = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

250
2019, 𝐷𝑃𝑆 = = ¢0.042 𝑝𝑒𝑟𝑠ℎ𝑎𝑟𝑒
6,000

250
2018, 𝐷𝑃𝑆 = = ¢0.042 𝑝𝑒𝑟𝑠ℎ𝑎𝑟𝑒
6,000

𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑

Earnings per share = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

1,300
2019, 𝐸𝑃𝑆 = = ¢0.22
6,000

900
2018, 𝐸𝑃𝑆 = = ¢0.15
6,000
𝐸𝑃𝑆
Dividend Cover = 𝐷𝑃𝑆

0.22
2019 = = 5.23
0.042

0.15
2018 = = 3.57
0.042

Page 23 of 27
 𝐷𝑃𝑆
Dividend Pay-out ratio = 𝐸𝑃𝑆

0.042
2019 = 𝑥 100% = 19.23%
0.22

0.042
2018 = 𝑥 100% = 27.78%
0.15

c) Computation of ratios of interest to a potential long-term lender

𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

3,460
2019 = = 34.06%
10,160
3,560
2018 = = 38.65%
9,210

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 (𝐿𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡)

Gearing = 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦+𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 × 100%

1500 1,500
2019 = = = 18.29%
6,700 + 1,500 8,200

1,500 1,500
2018 = = = 20.98%
5,650 + 1,500 7,150

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑑𝑒𝑏𝑡 (𝐿𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡)

Debt to equity ratio = × 100%
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦

1500
2019 = = 22%
6,700

Page 24 of 27
 1,500
2018 = = 27%
5,650

𝐸𝐵𝐼𝑇
Interest Cover: 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐ℎ𝑎𝑟𝑔𝑒𝑠

2,200
2019 = = 12.9 𝑡𝑖𝑚𝑒𝑠
170

1,570
2018 = = 10.5 𝑡𝑖𝑚𝑒𝑠
150

1 mark each for computation of return on equity x 2 years = 2 marks

1 mark each for computation of return on capital employed x 2 years = 2 marks
1 mark each for computation of 2 investment ratios of interest x 2 years = 4 marks
1 mark each for computation of 2 ratios of interest to a potential long-term lender x 2 years =
4 marks
(12 marks)

d) Report on performance and state of the business from the view point of a
potential shareholder and weaknesses in the ratios

From the view point of a potential shareholder who would be interested in the
returns on his investment, ratios such as return on equity, return on capital
employed, dividend per share, earnings per share, dividend yield and dividend
cover would be of essence to assessing the performance of the business.

The return on equity tells us the returns from the use of the shareholders fund and
this has increased from 15.93% to 19.4% between 2018 and 2019. This means the
business is performing well. The return on capital employed, tells us how the total
assets less current liabilities have been utilised to generate returns. The business
has an improved performance, because it has increased its return on capital
employed by 4.87% (26.83-21.96) between 2018 and 2019.

The earnings per share tells us about the earnings before interest and tax that is
attributable to ordinary shareholders and this has increased from ¢0.26 to ¢0.37.
This could increase shareholders confidence in the business from the viewpoint of
the lender, who would be interested in how the business can pay back it debt when
they fall due.

Page 25 of 27
 Debt ratio talks about the ratio of debt to asset in the business. Usually, a debt ratio
of less than 50% is considered acceptable. The business has managed to reduce this
ratio within the period under review. Gearing tells us about the ratio of long-term
debt in the business. Again, the business has performed well to reduce it between
the two years. This will increase her chance of getting more borrowings if needed.
Further, a gearing ratio of less than 50% is said to be low gearing and is acceptable
since the company depend less on borrowing. There is a reduction in risk that little
will be available for distribution to ordinary shareholders.

Interest cover tells us whether the business has earned enough profit before
interest and tax to pay its interest cost. From the analysis, the business has made
enough EBIT to pay it interest cost by 10.5 times in 2018 and 12.9 times in 2019. It
can be concluded that the business state of affairs currently is good and acceptable.
It has improved on her performance between 2018 and 2019.

Weaknesses in the ratios

 The ratios computed are not an end in themselves. More detailed analysis would
be required to draw any meaningful conclusions.
 Since the ratios are based on the accounting statements, they measure what has
happened in the past and not necessarily what will happen in the future.
 The interpretation of the ratios is sometimes dependent on how the ratio was
formulated.
 The accounting policies of the entity may have influenced the results of these
ratios. Different accounting methods (e.g. FIFO versus LIFO inventory valuation)
can have an impact on financial ratios. Ratios may therefore not reflect real
differences in the operations and financial health of companies.
 Making comparisons across industries can be difficult. Companies in different
industries tend to have different financial ratios.

Analysis of performance = 6 marks

Any two weaknesses identified = 2 marks
(8 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question on analysis of financial statements was well answered by a number of
candidates. A few ill prepared candidates could not compute the ratios correctly and
therefore had their analysis wrong.

CONCLUSION
Quite clearly, candidates lacked a proper appreciation and grasp of issues in IFRS and
preparation of consolidated financial statements. The Institute should try to focus
candidates in relevant IFRS for future exams as well as relevant concepts relating to

Page 26 of 27
the preparation of consolidated financial statements. This can be done through special
intervention programmes.
The Institute should consider a meet the examiner series as is done by other
professional examination bodies so that examiners share their observations of why
candidates repeatedly fail.

Page 27 of 27
 MAY 2021 PROFESSIONAL EXAMINATIONS
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

EXAMINER’S GENERAL COMMENTS

The performance of candidates in the May 2021 exams diet was a much improvement
over the November 2020 exams diet. A higher percentage of candidates performed
better in all the five questions. Candidates may have taken a cue from the abysmal
performance witnessed in November 2020. A few candidates, however failed to
demonstrate sufficient understanding of relevant concepts and principles. As usual,
poor preparedness and failure to focus on key aspects of the syllabus can be attributed
to their failure.

The nature of the question set, generally, was of the appropriate standard for the level
being assessed. The question mix was also evenly weighted. To some extent, the
questions did not demand too much from the candidates. Yet, a significant number
of the candidates could not pass.

Page 1 of 30
QUESTION ONE

Blavo Ltd (Blavo), a government business entity has acquired two subsidiaries and an
associate. The draft statement of financial position for each entity as at 31 May 2020 is as
follows:
Blavo Scarlet Flint
GH¢million GH¢million GH¢million
Non-current assets
Property, plant and equipment 265 230 161
Investments in subsidiaries:
Scarlet Ltd 300
Flint Ltd 128
Investment in associate – Charity Ltd 20
Financial assets through OCI 51 6 5
764 236 166
Current assets
Inventories 135 55 73
Trade receivables 91 45 32
Cash and cash equivalents 102 100 8
328 200 113
Total assets 1,092 436 279

Equity and liabilities

Stated capital 520 220 100
Retained earnings 240 150 80
Other components of equity 12 4 7
Total equity 772 374 187

Non-current liabilities
Long-term borrowings 145 24 8
145 24 8

Current liabilities
Trade and other payables 115 30 60
Current tax payable 60 8 24
175 38 84
Total liabilities 320 62 92
Total equity and liabilities 1,092 436 279

The following information is relevant to the preparation of the group financial statements:
i) On 1 June 2019, Blavo acquired 80% of the equity interests of Scarlet Ltd (Scarlet), a
private entity. The purchase consideration was cash of GH¢300 million. The fair value of
the identifiable net assets of Scarlet was GH¢400 million, including any related deferred
tax liability arising on acquisition. The owners of Scarlet had to dispose of the entity for
tax purposes by a specified date and, therefore, sold the entity to the first company to bid
for it, which was Blavo. An independent valuer has stated that the fair value of the non-
controlling interest in Scarlet was GH¢86 million on 1 June 2019. Blavo does not wish to
measure the non-controlling interest in subsidiaries based on the proportionate interest in
the identifiable net assets but hopes to use the 'full goodwill' method. The retained earnings

Page 2 of 30
 of Scarlet were GH¢136 million, and other components of equity were GH¢4 million at the
date of acquisition. There had been no new issue of capital by Scarlet since the date of
acquisition and the excess of the fair value of the net assets is due to an increase in the value
of non-depreciable land.

ii) On 1 June 2018, Blavo acquired 6% of the ordinary shares of Flint Ltd (Flint). Blavo had
treated this investment as a financial asset through OCI in the financial statements to 31
May 2019 but had restated the investment at cost on Flint becoming a subsidiary. On 1 June
2019, Blavo acquired a further 64% of the ordinary shares of Flint and gained control of
the company. The consideration for the acquisitions was as follows:
Holding Consideration
% GH¢’million
1 June 2018 6 10
1 June 2019 64 118
70 128

Under the purchase agreement, on 1 June 2019, Blavo is required to pay the former
shareholders 30% of the profits of Flint on 31 May 2021 for each of the financial years to
31 May 2020 and 31 May 2021. The fair value of this arrangement was estimated at GH¢12
million on 1 June 2019, and on 31 May 2020, this value had not changed. This amount has
not been included in the financial statements.

On 1 June 2019, the fair value of the equity interest in Flint held by Blavo before the
business combination was GH¢15 million. The fair value of the non-controlling interest in
Flint was GH¢53 million.

The fair value of the identifiable net assets at 1 June 2019 of Flint was GH¢170 million,
and the retained earnings and other components of equity were GH¢55 million and GH¢7
million, respectively. There had been no new issue of share capital by Flint since the date
of acquisition, and the excess of the fair value of the net assets is due to an increase in the
value of property, plant and equipment (PPE). The fair value of the PPE was provisional
pending receipt of the final valuations for these assets. These valuations were received on
1 December 2019, and they resulted in a further increase of GH¢6 million in the fair value
of the net assets at the date of acquisition. This increase does not affect the fair value of the
non-controlling interest. PPE is depreciated on a straight-line basis over seven years. Ignore
any tax implications.

iii) Blavo acquired a 10% interest in Charity Ltd, a government business entity, on 1 June 2018
for GH¢8 million. The investment was accounted for as a financial asset through OCI, and
on 31 May 2019, its value was GH¢9 million. On 1 June 2019, Blavo acquired an additional
15% interest in Charity for GH¢11 million and achieved significant influence. Charity
made profits after dividends of GH¢6 million and GH¢10 million for the years to 31 May
2019 and 31 May 2020.

iv) On 1 June 2018, Blavo purchased a foreign equity instrument of 11 million dinars at its fair
value. The instrument was classified as a financial asset through OCI. The relevant
exchange rates and fair values were as follows:

Page 3 of 30
 GH¢ to dinars Fair value of instrument – dinars million

1 June 2018 4.5 11

31 May 2019 5.1 10
31 May 2020 4.8 7

Blavo has not recorded any change in the value of the instrument since 31 May 2019.
The reduction in fair value as at 31 May 2020 is deemed to be as a result of impairment.

v) There is no impairment of goodwill arising on the acquisitions.

Required:
Prepare a consolidated statement of financial position as at 31 May, 2020 for the Blavo
Group. (20 marks)

QUESTION TWO

a) Gyamfi Ltd (Gyamfi) is an international company with a presence in Ghana providing spare
parts for the automotive industry. It operates in many different jurisdictions with different
currencies. During 2020, Gyamfi experienced financial difficulties partly due to the
COVID- 19 pandemic marked by a decline in revenue, a reorganisation and restructuring
of the business and as a result reported a loss for the year. An impairment test of goodwill
was performed, but no impairment was recognised. Gyamfi applied one discount rate for
all cash flows for all cash-generating units (CGUs), regardless of the currency in which the
cash flows would be generated. The discount rate used was the weighted average cost of
capital (WACC), and Gyamfi used the 10-year government bond rate at its jurisdiction as
the risk-free rate in this calculation.

Furthermore, Gyamfi built its model using a forecast denominated in the parent company's
functional currency. Gyamfi felt that any other approach would require a level of detail that
was unrealistic and impracticable. Gyamfi argued that the different CGUs represented
different risk profiles in the short term. Still, there was no basis for claiming that their risk
profiles were different over a longer business cycle.

Gyamfi has tested for the impairment of its non-current assets. It was decided that a building
located overseas was impaired due to flooding in the area. The building was acquired on 1
April 2020 at 25 million dinars when the exchange rate was 2 dinars to the Ghana Cedi.
The building is carried at cost. On 31 March 2021, the building's recoverable amount was
deemed 17·5 million dinars. The exchange rate at 31 March 2021 was 2·5 dinars to the
Ghana Cedi. Buildings are depreciated over 25 years. The tax base and carrying amounts
of the non-current assets before the impairment write-down were identical. The impairment
of the non-current assets is not allowable for tax purposes. Gyamfi has not made any
impairment or deferred tax adjustment for the above. Gyamfi expects to make profits for
the foreseeable future and assume the tax rate is 25%. No other deferred tax effects must
be taken into account other than on the above non-current assets.

Page 4 of 30
 Required:
i) Evaluate the acceptability of the above accounting practices under IAS 36: Impairment of
Assets. (6 marks)
ii) Recommend the accounting treatment of the above transaction to the directors of Gyamfi
for the year ended 31 March 2021, including financial statements extracts in accordance
with relevant International Financial Reporting Standards. (5 marks)

b) Berko Ltd acquired all the equity shares in Jamila Ltd on 1 January 2018 for a consideration
of GH¢1,250 million. The carrying amount and fair value of the identifiable net assets at
acquisition were GH¢1,230 million. On 31 December 2020, Berko Ltd was in the process
of selling its entire shareholding in Jamila Ltd, and so it was decided that Jamila Ltd should
be treated as a disposal group held for sale in accordance with IFRS 5: Non-current Assets
Held for Sale and Discontinued Operations at that date. The carrying amounts of Jamila
Ltd’s net assets before classification as held for sale at 31 December 2020 in the individual
statement of financial position are as follows:
GH¢’million
Property, plant and equipment 836
Intangibles (excluding goodwill) 428
Current assets (at recoverable amount) 584
Non-current liabilities (322)
Current liabilities (254)
1,272

The group has a policy of revaluing its property, plant and equipment in accordance with
IAS 16: Property, Plant and Equipment. There have been no revaluations or any other
gains or losses included within Jamila Ltd’s different components of equity since the date
of acquisition as the carrying amount was deemed to be a close enough approximation to
its fair value. However, on 31 December 2020, property with a carrying amount of GH¢330
million was considered to have a fair value of GH¢340 million. No adjustment has yet been
made for this fair value. The total fair value less costs to sell off the disposal group at 31
December was estimated to be GH¢1,220 million. There have been no previous
impairments to the goodwill of Jamila Ltd.

Required:
Recommend to the directors of Berko Ltd how the above transaction should be accounted
for in the consolidated financial statements as at 31 December 2020 including financial
statement extracts in accordance with relevant International Financial Reporting Standards.
(9 marks)

(Total: 20 marks)

Page 5 of 30
QUESTION THREE

a) Meagya Ltd is a government business entity in Ghana. Meagya Ltd operates a defined
benefit scheme which at 31 December 2019 was in deficit by GH¢120 million. Details for
the current year are as follows:
GH¢’million
Current service cost 55
Cash contribution to the scheme 100
Benefits paid in the year 80
Net loss on curtailment 11
Gain on remeasurement of liability at 31 December 2020 9

The rate of interest applicable to corporate bonds was 5% at 31 December 2019. The cash
contributions for the scheme have been correctly accounted for in the financial statements
for the year ended 31 December 2020. This is the only adjustment that has been made in
respect of the scheme.

Required:
Recommend the correct accounting treatment of the above transactions to the directors of
Meagya Ltd in the financial statements for the year ended 31 December 2020, including
financial statements extracts in accordance with IAS 19: Employee Benefits. (5 marks)

b) GHBank Ltd is a government-controlled bank. GHBank Ltd was taken over by the
government of Ghana during the recent financial sector clean up by the Bank of Ghana.
GHBank Ltd does not directly trade with other government-controlled banks but has
underwritten the development of the nationally owned postal service and the newly created
railway ministry. The directors of GHBank Ltd are concerned about the volume and cost
of disclosing its related party interests because they extend theoretically to all other
government-controlled enterprises and banks. The directors require general advice on the
nature and importance of the disclosure of related party relationships and specific advice
on the disclosure of the above relationships in the financial statements.

Required:
Advise the directors of the company on how to deal with the above transaction in the
financial statements in accordance with IAS 24: Related Party Disclosures. (5 marks)

c) You are the Finance Director of a limited liability company. The company started trading
with a handful of employees but now has a workforce of 200. You are aware that staff
purchases of goods manufactured by the company are authorised by production managers,
and then processed outside the accounting system. The proceeds from these sales are used
to fund the company’s annual christmas party, organised for Directors of the company.

Required:
Discuss the possible actions that you will take in order not to breach the fundamental
principles of the IFAC’s Code of Ethics. (10 marks)

(Total: 20 marks)

Page 6 of 30
QUESTION FOUR

a) Kanzo Ltd (Kanzo) is a company located in the Savannah Region. The company was
strategically located to produce cashew nuts and to take advantage of available tax
incentives. However, the company has incurred trading losses for many years now. The
Directors are considering the alternatives of liquidation and capital reduction. The
company's Statement of Financial Position as at 31 December 2020 is as follows:

Non-current assets GH¢’million

Property, plant and equipment 3,250
Patent 350
3,600
Current assets
Inventories 1,000
Accounts receivables 500
1,500
Total assets 5,100

Equity & Liabilities

Ordinary share capital (@GH¢1) 2,000
Retained earnings (750)
1,250

20% Preference shares 1,100

Non-Current liabilities
25% Debentures (unsecured) 1,000

Current liabilities
Accounts payables 1,000
Bank overdraft (secured on property, plant & equipment) 750
1,750
Total Equity & Liabilities 5,100

You are provided with the following additional information:

 In the event of a forced sale, the assets would probably raise the following amounts.
GH¢’million
Property, Plant and Equipment 1,500
Inventories 400
Accounts receivable 450
 The company is developing a new product, which is expected to generate profit before
interest and tax of GH¢500 million per annum in anticipation of an immediate capital
injection of GH¢2,000 million.
 The Ordinary share capital should be written down to 200 million shares of GH¢1.00 each.
In addition, they have agreed to provide the immediate capital injection.
 The 20% preference shares are to be converted into 500 million ordinary shares valued at
GH¢1 per share.
 It is proposed for GH¢650 million of the 25% Debentures to be converted into ordinary
shares at GH¢1 per share and the remainder to be converted into GH¢350 million 20%
Debentures.
Page 7 of 30
 Accounts payables to accept immediate payment of 50% and a moratorium of six (6)
months in payment of the remaining balance. New supplies would be paid for on delivery.
 A two-for-one rights issue will be made at a price of GH¢1 per share for cash after the
above conversions.
 Property, plant and equipment are to be revalued at GH¢2,250 million, inventories at
GH¢800 million and Accounts Receivables at GH¢450 million.
 The accumulated losses and intangible assets are to be written off.
 The corporate tax rate is 25%.
 Liquidation expenses will amount to GH¢10 million.

Required:
i) Prepare a Statement of Financial Position after reconstruction on the assumption that the
capital injection took place. (6 marks)
ii) Compute the expected profit after tax and the earnings per share after the reconstruction.
(2 marks)
iii) Prepare a statement of distribution if the company were to be liquidated now. (2 marks)
iv) Describe the steps the Directors of Kanzo Ltd should follow to appraise the proposed
scheme of reconstruction with an emphasis on the interest of shareholders. (5 marks)

b) Accra Ltd, a government business entity, acquires 40% of the voting rights of Tema Ltd.
The remaining investors each hold 5% of the voting rights of Tema Ltd. A shareholder
agreement grants Accra Ltd the right to appoint, remove and set the remuneration of
management responsible for key business decisions of Tema Ltd. To change this
agreement, a two-thirds majority vote of the shareholders is required.

Required:
In accordance with IFRS 10: Consolidated Financial Statements, discuss whether Accra
Ltd controls Tema Ltd.
(5 marks)

(Total: 20 marks)

Page 8 of 30
QUESTION FIVE

Shop First Ltd operates supermarket chains across the sixteen (16) regions of Ghana. The
firm has been in commercial operation for more than two decades, growing its operations
through an effective supply chain and financial management. However, in the last few
years, keen competition and worsening general economic performance have steadied the
consistent growths experienced over the years, resulting in the entity disposing off part of
its operations. Below are the financial statements of Shop First Ltd:

Income statement for the year ended 31 December 2020 (with comparatives)
2020 2019
Continuing Discontinued Total Continuing Discontinued Total
operations operations operations operations
GH¢000 GH¢000 GH¢000 GH¢000 GH¢000 GH¢000
Revenue 37,400 5,650 43,050 31,350 7,440 38,790
Cost of sales (32,190) (4,830) (37,020) (26,030) (6,390) (32,420)
Gross profit 5,210 820 6,030 5,320 1,050 6,370
Distribution (1,302) (425) (1,727) (1,160) (502) (1,662)
costs
Administrative (2,225) (657) (2,882) (1,330) (460) (1,790)
expenses
Interest (340) (12) (352) (284) (31) (315)
payable
Profit/(loss) 1,343 (274) 1,069 2,546 57 2,603
before tax
Tax (expense) (826) 50 (776) (1,210) (45) (1255)
/credit
Profit for the 517 (224) 293 1,336 12 1,348
period

Abridged statement of financial position as at 31 December 2020 (with comparatives)

2020 2019
GH¢000 GH¢000
Non-current assets 11,775 14,080
Current assets:
Inventories 4,986 5,445
Other current assets 4,044 6,525
Total assets 20,805 26,050

Share capital & reserves 8,896 8,798

Non-current liabilities:
Debenture loan 5,800 9,100
Current liabilities 6,109 8,152
Total equity and liabilities 20,805 26,050

Page 9 of 30
 Additional information
i) At a class meeting of key shareholders and debentures held on 30 June 2020, a decision
was taken to sell the entire operations of one of the firm's major retail shops as a response
to teething operational difficulties that started in the early part of the current period.
Operations, however, continued until 30 September 2020, when the sale transaction finally
closed and proceeds received. Results from these operations for the current period are
separately shown in the above income statement. Loss on sale of the operations amounting
to GH¢217,000 has been included within administrative expenses.
ii) On 31 December 2020, there was litigation and claim amounting to GH¢2.05 million
against the company by a supplier whose contract was terminated as part of the closure
process. Its legal counsel has advised the company that it has a good defence against the
claim. Accordingly, no provision has been made in respect of the potential liability in these
financial statements.
iii) The following ratios have been computed based on the 2019 financial statements of Shop
First Ltd
Gross profit margin 16.42%
Profit (before interest and tax) margin 6.71%
Return on equity 15.32%
Return on capital employed 16.30%
Inventory turnover 5.95
Current ratio 1.47
Assets turnover 2.17
Debt/debt+equity ratio 50.84%

Required:
Write a report to the Board of Directors analysing the financial performance and position
of Shop First Ltd, drawing their attention to the effects (or potential effects) of the
discontinued operations and the contingencies on overall performance. (20 marks)

Page 10 of 30
SOLUTION TO QUESTIONS

QUESTION ONE

Blavo Group
Consolidated Statement of Financial Position at 31 May 2020

GH¢m
Assets:
Non-current assets:
Property, plant and equipment (265+230+161+40+14-2)W7 708
Goodwill W2 22
Investment in associate W3 22·5
Available for sale financial assets (51+6+5-17.4) 44·6
797·1
Current assets:
Inventories (135+55+73) 263
Trade receivables (91+45+32) 168
Cash and cash equivalents (102+100+8) 210
641
Total assets 1,438·1

Equity and liabilities

Equity attributable to owners of parent
Share capital 520
Retained earnings W5 273.9
Other components of equity W5 9·5
803.4
Non-controlling interest W7 148·7
952.1
Non-current liabilities
Long-term borrowings (145+24+8) 177

Total non-current liabilities 177

Current liabilities
Trade and other payables (115+30+60+12) 217
Current tax payable (60+8+24) 92
Total current liabilities 309
Total liabilities 486
Total equity and liabilities 1,438·1

Page 11 of 30
WORKINGS

1. Group structure

Scarlet Flint Charity

Blavo’s interest 80% 70% 25%
NCI/Outside interest 20% 30% 75%
100% 100% 100%
1 year subsidiary 1 year subsidiary 1 year associate

Net Assets: Scarlet

At Reporting At Acquisition Post-Acquisition
Stated capital 220 220 -
Retained earnings 150 136 14
Other components 4 4 -
Fair value adjustment - 40 40 -
Land
414 400 14

Net Assets: Flint

At Reporting At Acquisition Post-Acquisition
Stated capital 100 100 -
Retained earnings 80 55 25
Other components 7 7 -
Fair value adjustment - PPE 12 14 (8+4) 2
414 400 14

2. Goodwill

Scarlet:
GH¢m
Fair value of consideration for 80% interest 300
Fair value of non-controlling interest 86
386
Amount of identifiable net assets acquired (400)
Gain on bargain purchase (14)

Essentially the entries would be:

Dr Net identifiable assets 400
Cr Cash 300
Cr Gain on bargain purchase 14
Cr Equity – non-controlling interest 86

Page 12 of 30
 Flint:
GH¢m
1 June 2020 (128 – 10) 118
Contingent consideration 12
Total consideration transferred 130
Fair value of equity interest held before business combination 15
Fair value of consideration 145

Fair value of non-controlling interest 53

198
Identifiable net assets (170)
Increase in value (6)
Goodwill 22

3. Investment in associate - Charity

The gain of 1 recorded within other equity should now be deemed realised once
the shareholding has been increased to 25%. An adjustment is required to reclassify
this gain.
Dr Other components of equity (9 – 8) 1
Cr Profit or Loss (Retained Earnings) 1
The amount included in the consolidated statement of financial position
would be:
GH¢m
Cost (GH¢9 million + GH¢11 million) 20
Share of post-acquisition profits (GH¢10 million x 25%) 2.5
22.5

4. Financial asset through OCI

Date Exchange Change

Rate Value in fair value
Dinars m GH¢m
1 June 2018 4·5 11 49·5
31 May 2019 5·1 10 51 1·5
31 May 2020 4·8 7 33·6 (17·4)

The asset’s fair value in the overseas currency has declined for successive periods.
However, no impairment loss is recognised in the year ended 31 May 2019 as there
is no loss in the reporting currency (GH¢). The gain of GH¢1·5 million would be
recorded in equity. However, in the year to 31 May 2020 an impairment loss of
GH¢17·4 million will be recorded as follows:
Dr Other components of equity 1.5
Dr Profit or loss 15.9

Page 13 of 30
 Cr Financial asset through OCI 17.4

5. Retained earnings

Blavo:
Balance at 31 May 2020 240
Associate profits (25% x 10) 2.5
Financial asset impairment W4 (15.9)
Increase in fair value of Charity now realized 1
Increase in fair value of equity interest – Flint (15 – 10) 5
Gain on bargain purchase 14
Post-acquisition reserves:
Scarlet: (150 -136) x 80% 11.2
Flint: [(80-55) - 2] x 70% 16.1
273.9

Blavo: Other components of equity

GH¢m
Balance at 31 May 2020 12
Investment in associate W3 (1)
Financial asset Impairment loss W4 (1.5)
9.5

6. Non-controlling interest GH¢m

Scarlet 86
Post-acquisition reserves (20% x 14) 2.8
88.8
Flint 53
Post-acquisition reserves [(80-55)-2] x 30% 6.9 59.9
Total 148.7

7. Property, plant and equipment

GH¢m

Blavo 265
Scarlet 230
Flint 161
656
Increase in value of land – Scarlet (400 – 220 – 136 – 4) 40
Increase in value of PPE – Flint (176 – 100 – 55 – 7) 14

Less: increased depreciation (14 ÷ 7) (2)

708

(100 ticks for maximum of 100 correct entries x 0.2 = 20 marks)

Page 14 of 30
EXAMINER’S COMMENT
Candidates generally excelled in answering this question. The question, itself, was
fairly straightforward requiring not too many adjustments to the consolidation
process. Few issues were however observed among some candidates. Candidates
had difficulty in accounting for the fair value change on the initial investment held,
6% before control was attained by Banco Ltd in Flint Ltd. The fair value change of
GH¢5million (i.e. GH¢15million – GH¢10million) was therefore not properly
accounted for by most candidates as they did not know that the difference of
GH¢5million is to be accounted for in the statement of retained earnings.

Also, candidates were also not aware that upon attaining control, initial investment
held in the investable company (i.e. Flint Ltd) has to be fairly valued, and this value
therefore becomes the amount used together with the current purchase consideration
in computing for goodwill in the cost of control account, and not the original cost of
investment of GH¢10 million in the acquisition of Flint Ltd.
The treatment of the ordinary trade investment accounted for under IFRS 9, as equity
instrument, was not properly done by many candidates. The downward change in
the fair value of the asset deemed to represent impairment loss in the asset in the year
ended 31 May 2020 of GH¢17.4 million (i.e. GH¢51 million - GH¢33.6 million) was
wholly taken to retained earnings. However, the asset in the period ended 31 May
2019 had a gain of GH¢1.5 million WHICH SHOULD BE USED TO FIRST OFFSET
THE LOSS OF GH¢17.4, in accordance with IFRS 9 (Financial Instruments), similar to
the treatment of revaluation surplus in IAS 16 (PP£).
Some candidates also had issues with accounting for the contingent consideration, in
the acquisition of Flint Ltd. Whereas most candidates did not include it in the
computation of the goodwill in the investee company as part of the purchase
consideration, others did not also know that it is a liability that ought to be presented
in the consolidated statement of financial position as 31 May 2020, as a current
liability.

Another difficulty candidates had was on the treatment of revaluation/fair value

charges in the investment in respect of charity Ltd (the Associate entity) held in the
account before the additional purchase of 15% shares making the investment an
associate undertaking or investment. Candidates could not identify that at
commencement of equity accounting, the fair value changes held under the treatment
under IFRS 9 becomes realized, as if the asset has been disposed. No transfer was
hence made by most candidates from the other components of equity of GH¢1 (IE.
GH¢9 – GH¢8) to the retained earnings account.

Page 15 of 30
QUESTION TWO
a)
i)
 The discount rate used by Gyamfi Ltd has not been calculated in accordance with
the requirements of IAS 36 Impairment of Assets. According to IAS 36, the future
cash flows are estimated in the currency in which they will be generated and then
discounted using a discount rate appropriate for that currency. IAS 36 requires the
present value to be translated using the spot exchange rate at the date of the value
in use calculation.
 Furthermore, the currency in which the estimated cash flows are denominated
affects many of the inputs to the WACC calculation, including the risk-free interest
rate.
Gyamfi Ltd has used the 10-year government bond rate for its jurisdiction as the
risk-free rate in the calculation of the discount rate. As government bond rates
differ between countries due to different expectations about future inflation, value
in use could be calculated incorrectly due to the disparity between the expected
inflation reflected in the estimated cash flows and the risk-free rate.
 According to IAS 36, the discount rate should reflect the risks specific to the asset.
Accordingly, one discount rate for all the CGUs does not represent the risk profile
of each CGU. The discount rate generally should be determined using the WACC
of the CGU or of the company of which the CGU is currently part. Using a
company’s WACC for all CGUs is appropriate only if the specific risks associated
with the specific CGUs do not diverge materially from the remainder of the group.
In the case of Gyamfi Ltd, this is not apparent.
(Three points well explained @ 2 marks each = 6 marks)

ii) A number of IASs are required to answer this question, which include the
knowledge of IAS 16, IAS 36, IAS 12 and IAS 21
 Carrying amount of building at 31 March 2021 GH¢ (25 – 1 depreciation) million,
i.e. 24 million dinars/2 = GH¢12 million. (0.5 mark)
 Recoverable amount of building at 31 March 2021 (17.5 million dinars/2.5 ) = GH¢7
million. (0.5 mark)
 Impairment loss to profit or loss = GH¢5 million (GH¢12 million – GH¢7 million)
(0.5 mark)
 The tax base and carrying amount of the non-current assets are the same before the
impairment charge. After the impairment charge, there will be a difference of GH¢
5 million. This will create a deferred tax asset of GH¢5 million x 25%, = GH¢1·25
million.
As Gyamfi Ltd expects to make profits for the foreseeable future, this can be
recognised in the financial statements. (1.5 marks)

Page 16 of 30
 Statement of profit or loss for the year ended 31/3/2021 extract
GH¢ million
Impairment of building (5)

Depreciation of building (25 dinnars/25 yrs = 1dinnar/2 (0.5)

(1 mark)

Statement of financial position extracts as at 31/3/2021

Non-current assets:
Deferred tax assets 1.25
Building (12 – 5) 7
(1 mark)

b) Jamila Ltd
 Goodwill in Jamila Ltd would originally be calculated as GH¢20 million (GH¢1,250
million – GH¢1,230 million). The net assets in Jamila Ltd are now GH¢1,292 million
at 31st December 2020 (GH¢1,272 million per question and GH¢20 million
goodwill).
 Since the group has a revaluation policy under IAS 16 Property, Plant and
Equipment, the group must revalue the property plant and equipment of Jamila Ltd
to fair value of GH¢340 million on classification as held for sale. A gain of GH¢10
million (GH¢340 million – GH¢330 million) would be recorded within other
components of equity.
 The net assets of Jamila Ltd would now have a carrying amount of GH¢1,302
million including GH¢846 million for property, plant and equipment. On
classification as held for sale, Jamila Ltd must be measured at the lower of carrying
amount and fair value less costs to sell. An impairment arises of GH¢82 million
(GH¢1,302 million – GH¢1,220 million).
 This will first be allocated to the goodwill of GH¢20 million. The remaining
impairment of GH¢62 million is allocated to non-current assets to which the
measurement requirements of IFRS5 Non-current Assets Held for Sale and
Discontinued Operations apply. No impairment will therefore be allocated to the
current assets of Jamila Ltd.

Calculations
The remaining impairment loss of GH¢62 million should be allocated to property, plant
and equipment and other intangible assets in proportion to their respective carrying
amounts as follows:
Property, plant and equipment GH¢62 million x (GH¢846m/ (GH¢846 million +
GH¢428 million)) = GH¢41 million Other intangible assets GH¢ 62 million x (GH¢428
million/( GH¢846 million + GH¢428 million)) = GH¢21 million.

Page 17 of 30
 Alternatively
The table below summarises the allocation of the impairment:
Carrying amount Allocated Carrying
Allocated Carrying impairment amount after
amount before allocation of
reclassified impairment
impairment after loss
allocation of as
held for sale
GH¢ million GH¢ million GH¢ million
Goodwill 20 (20) Nil
Property, plant and equipment 846 (41) 805
Other intangible assets 428 (21) 407
Current assets 584 nil 584
Non-current liabilities (322) nil (322)
Current liabilities (254) nil (254)
Total 1,302 (82) 1,220

The assets and the liabilities of the disposal group should be separately presented
within the current assets and current liabilities of the consolidated financial
statements. GH¢1,796 million (GH¢805 million + GH¢407 million + GH¢584
million) or (GH¢836 + GH¢10 + GH¢428 – GH¢62 + GH¢584) will be included
within current assets and GH¢576 million (GH¢322 million + GH¢254 million)
within current liabilities.
(5 marks evenly spread using ticks)

Statement of financial position as at (extract)

GH¢ million
Current assets:
Current assets -held for sale (805+407+584) 1,796
Equity and Liability
OCI – revaluation gain (340 – 330) 10
Current Liabilities:
Current liabilities – held for sale (322 + 254) 576
(3 marks)

Statement of profit or loss for the year ended 31/12/2020

GH¢ million
Share impairment (82)
(1 mark)
(Total: 20 marks)

EXAMINER’S COMMENTS
The question required the candidates’ appreciation of the application of IFRSs,
specifically IAS 36, IAS 16, IAS 12 and IAS 21. For IAS 36, candidates were not familiar
with the area the question addressed. Most candidates did not attempt this question
and those that attempted could not identify the wrong discount rate used and the

Page 18 of 30
incorrect way the cash flows were determined. They could also not identify the
deferred tax asset that arose as a result of impairment loss. Most of them also ignored
the effect of depreciation. Many candidates just explained the processes of IAS 36 but
did not address the issues stated in the question.
The second part of the question covered IFRS 5 and IAS 16. Most candidates who
attempted this question performed averagely but they had difficulty in allocating the
impairment loss to the various assets in the cash generating unit (CGU). The various
assets and liabilities in the CGU were not well classified. A few candidates did not
prepare the extracts of statement of profit or loss and the statement of financial
position.

Page 19 of 30
QUESTION THREE

a) Pension scheme
The defined benefit scheme for the year should have been recorded as follows:

GH¢ million
Net obligation at 31 December 2019 120
Cash contribution into the scheme (100)
Net finance cost for the year (GH¢120 million x 5%) 6
Current service cost 55
Loss on curtailment 11
Gain on remeasurement (9)
Net liability at 31 December 2020 83

The benefits paid do not affect the net liability for the year. Since only the cash
contributions have been recorded for the year, the net obligation should be
increased by GH¢63 million (GH¢83 million – GH¢20 million). GH¢72 million
should be expensed to profit or loss (W12) being the service cost component
(current and curtailment) plus the interest charge. GH¢9 million should be credited
to other components of equity being the gain on remeasurement.

Statement of profit or loss extract for the year ended (Extract)

GH¢ million
Defined benefit scheme (GH¢55 + GH¢6 + GH¢11) (72)

Statement of financial position extract

GH¢ million
Equity and liability:
OCI – remeasurment component 9
Non-current liabilities:
Increased in defined benefit obligation 63

3 marks for financial statement extracts

2 marks for reconciliation and movements

b) Under IAS 24: Related Party Disclosures, disclosures are required in respect of an
entity’s transactions with related parties. Related parties include parents,
subsidiaries, members of key management personnel of the entity or of a parent of
the entity and post-employment benefit plans. Where there have been related
party transactions during the period, management discloses the nature of the
relationship, as well as information about the transactions and outstanding
balances, including commitments, necessary for users to understand the potential

Page 20 of 30
 impact of the relationship on the financial statements. Disclosure is made by
category of related party and by major type of transaction. Management only
discloses that related party transactions were made on terms equivalent to those
which prevail in arm’s length transactions if such terms can be substantiated.

Government-related entities are defined as entities which are controlled, jointly

controlled or significantly influenced by the government. The financial crisis in the
financial services sector in Ghana widened the range of entities subject to the
related party disclosure requirements. This is not only peculiar in Ghana but many
countries. The financial support provided by government to financial institutions
in many countries meant that the government controls significantly influenced
some of those entities.

A government-controlled bank would, in principle, be required to disclose details

of its transactions, deposits and commitments with all other government-
controlled banks and with the Bank of Ghana or central bank. However, IAS 24 has
an exemption from all of the disclosure requirements of IAS 24 for transactions
between government-related entities and the government, and all other
government-related entities.

GHBank Limited is exempt from the disclosure requirements in relation to related

party transactions and outstanding balances, including commitments, in relation
to the following:
(a) a government which has control, joint control or significant influence over the
reporting entity; and
(b) another entity which is a related party because the same government has
control, joint control or significant influence over both the reporting entity and the
other entity.

Those disclosures are replaced with a requirement to disclose:

 The name of the government and the nature of their relationship; and
 The nature and amount of any individually significant transactions; and
 The extent of any collectively significant transactions qualitatively or
quantitatively.

(1 mark per valid point up to a maximum of 5 marks)

c) Integrity
You need to be honest and straightforward in exercising your integrity. Omitting
income from staff sales will result in the financial statements being misleading.
Again, this practice is dishonest, and what should be done is to formalise the
current system employed for staff sales and funding of Christmas party.

Objectivity
The reputation of your company may be vulnerable, and you should discuss this
ethical dilemma with your production managers and subsequently directors.

Page 21 of 30
 Professional competence and due care
You must ensure that the financial information that you produce for the company
is in accordance with technical and professional standards.

Professional behaviour
You need to act professionally in such a way to protect your reputation as a Finance
Director, and the accounting profession in general. In so doing, you need to
consider relevant accounting standards and any applicable laws and regulations.
You need to also determine the system currently employed for controlling and
controlling staff sales and funding the directors’ Christmas party.

Conflict of interest
There appears to be conflict of interest. You must be objective in reporting fully on
staff purchases of company goods.

Possible causes of action

 After bringing the issue to the attention of your partners and obtained the relevant
details of the client’s system for accounting for staff sales, you should raise your
concerns with the directors of the client company.
 You will also have to determine whether the financial statements of previous years
are likely to be misleading and, if so, consider your responsibility (or that of your
client) to inform the relevant authorities (including the tax authority).
 You should strongly advise the directors that a staff sales policy should be
introduced to ensure that these sales are fully recorded in the company’s
accounting system in the future.
 You should explain to the directors the implications of their actions, and that you
are safeguarding the interests of the company and its staff in advising how the
situation may be rectified.
 If the directors are co-operative, you should advise them of the recommended
changes to the accounting system and how they might disclose the past
undisclosed income to the tax authority.
 If the directors appear unwilling to change the system in respect of staff sales, you
are obliged to disassociate yourself from any involvement with the company’s
financial statements, and this will require you to resign as the company’s finance
director.
 At any time, you may seek advice from your professional body.
 In view of this, you are obliged to consider your whistleblowing obligations, and
may have to report the matter to one or more authorities. This will be in the public
interest and does not amount to breach of confidentiality.
 As a last resort, you should document, in detail, the steps that you take in resolving
your dilemma, in case your ethical judgement is challenged in the future.
(Any 5 causes of action to be taken @ 2 marks each = 10 marks)

(Total: 20 marks)

Page 22 of 30
EXAMINER’S COMMENTS
The question combined selected accounting standards and ethics. The part on selected
accounting standards was generally not well answered whilst the part on ethics was
better answered. The standards covered IAS 19 and IAS 24. It required correct
accounting treatments and financial statements extract. The IAS 24 segment of the
question required candidates to advise the directors of the GHBank Ltd on the
disclosure requirement of a related party disclosure in relation to a government-
related entity. Most candidates rather spent time explaining what related party
transaction and related parties are but could not identify the exemption to a
government-related entity as stated in paragraph 25 of IAS 24. They could not also
talk about the disclosures required by paragraph 26 of IAS 24.
The segment in ethics required candidates to discuss the possible actions that should
be taken in order not to breach the fundamental principles of the IFAC’s Code of
Ethics. Most candidates attempted this part of the question and scored above average
marks.

QUESTION FOUR
a)
i) Kanzo Ltd
Statement of Financial Position as at 31st December 2020
Non-current assets GH¢’million GH¢’million
Property, Plant & Equipment 2,250
Current assets
Inventories 800
Account receivables 450
Cash & Bank 7,450 8,700
10,950
EQUITY & LIABILITIES
EQUITY
Ordinary share capital 10,050
Capital reserve 50
10,100
Non-Current Liabilities
10% Debenture 350

Current Liabilities
Accounts Payables 500
Total Equity & Liabilities 10,950
(6 marks)

Page 23 of 30
ii) Expected Profit after Tax and EPS

GH¢’million
Expected Profit before Interest and tax 500
Debenture Interest [20% x 350,000] (70)
Profit before Tax 430
Tax (25% x 430) (107.50)
Profit attributable to ordinary shareholder 322.50

Number of shares issued after reconstruction = 6,700 million shares [2 x

(200+150+650)]

Earnings Per Share = GH¢322.50m = GH¢ 0.032

10,050
(2 marks)

iii) Statement of Distribution on Liquidation

Total Proceeds on liquidation GH¢’million GH¢’million

Property, plant & equipment 1,500
Inventories 400
Accounts receivable 450
2,350
Distribution
Liquidation Expenses 10
Secured Creditors – Bank Overdraft 750 (760)

Unsecured Creditors
25% Debenture holders 795
Accounts payable 795 1,590 (2,350)
nil

Since the unsecured creditors, who are the 25% Debenture holders and the
accounts payables amount to GH¢2,000 million they would receive GH¢0.795 per
GH¢1. [1,590 million/2,000 million]

Capital Reduction Account

GH¢’million GH¢’million
Property, plant & 1,000 Ordinary shares 1,800
equipment
Inventories 200 Preference 600
shares
Prov. - Bad Debts 50
Retained earnings 750
Capital reserve 50
Patent 350
2,400 2,400

Page 24 of 30
 Ordinary Share Account
GH¢’million GH¢’million
Capital reduction 1,800 Balance b/d 2,000
Balance c/d 10,050 Bank – immediate cash 2,000
Bank – rights issue 6,700
Debenture holders 650
Preference Shares 500
11,850 11,850

Preference Share Account

GH¢’million GH¢’million
Ordinary Share 500 Balance b/d 1,100
Capital reduction 600

1,100 1,100
Bank Account
GH¢’million GH¢’million
Ordinary Share – immediate cash 2,000 Balance b/d 750
Ordinary Share – rights issue 6,700 Accounts payable 500
Balance c/d 7,450

8,700 8,700

Total earnings for existing shareholders would be [0.032 x 4,400 million shares]
amounting to GH¢140.8 million per annum. This might seem a worthwhile return,
therefore they should accept the reconstruction.
(2 marks)

iv) Steps to follow to appraise a scheme

 A scheme of capital reduction will affect the rights of the various parties who have
a financial stake in the business including shareholders.
 The starting point is to construct a working showing how much cash could be
raised in the event of liquidation and to whom that cash would be paid. This would
provide an indication as to how much shareholders are to gain or lose.
 The scheme is designed to take this information into consideration. The party with
the most to gain from the scheme (usually the shareholders) would have to
demonstrate their commitment to the scheme by carrying the larger share of its
cost.
 The scheme must meet the following criteria:
 The scheme must ensure that there is equitable share in allocating losses
 The scheme must return to the entity to profitability
 The losses to be incurred under liquidation must exceed the losses to be
incurred under the capital reduction scheme
 The existing control structure must be maintained

Page 25 of 30
  Present debt or liabilities should be settled under the capital reduction
scheme
 The scheme must provide adequate working capital.
(Any 4 points @ 1.25 = 5 marks)

b) Composition of control according to IFRS 10

 Power over the investee to direct relevant activities
The absolute size of Accra Ltd' shareholding in Tema Ltd (40%) and the relative
size of the other shareholdings alone are not conclusive in determining whether
Accra Ltd has rights sufficient to give it power. However, the shareholder
agreement which grants Accra Ltd the right to appoint, remove and set the
remuneration of management responsible for the key business decisions of Tema
Ltd gives Accra Ltd power to direct the relevant activities of Tema Ltd. This is
supported by the fact that a two-thirds majority is required to change the
shareholder agreement and, as Accra Ltd owns more than one-third of the voting
rights, the other shareholders will be unable to change the agreement whilst Accra
Ltd owns 40%.

 Exposure or rights to variable returns of the investee

As Accra Ltd owns a 40% shareholding in Tema Ltd, it will be entitled to receive a
dividend. The amount of this dividend will vary according to Tema Ltd's
performance and Tema Ltd's dividend policy. Therefore, Accra Ltd has exposure
to the variable returns of Tema Ltd.

 Ability to use power over the investee

The fact that Accra Ltd might not exercise the right to appoint, remove and set the
remuneration of Tema Ltd's management should not be considered when
determining whether Accra Ltd has power over Tema Ltd. It is just the ability to
use the power which is required and this ability comes from the shareholder
agreement.

 Conclusion
The IFRS 10 definition of control has been met. Accra Ltd controls Tema Ltd and
therefore Accra Ltd should consolidate Tema Ltd as a subsidiary in its group
financial statements.
(Any 2 points at 2.5 marks each = 5 marks)

(Total: 20 marks)

EXAMINER’S COMMENT
This question on capital reduction/reconstruction should have been one of the easiest
question to answer. However, some of the candidates did not understand the
principles behind capital reduction. They lacked basic understanding of accounts
with debit/credit balances. For instance, bank overdraft balance in the statement of
financial position was debited instead of being credited in the cash book. The second
part of the question on determine control of an investee by an investor was fairly

Page 26 of 30
attempted by most candidates, although some did not answer the question in
accordance with the provisions of IFRS 10. Candidates must seriously study the IFRS
standards to abreast themselves with financial reporting requirement going forward.

QUESTION FIVE
Report

To: Board of Directors of Shop First Plc

From: Accountant
Date: 10 January, 2021
Subject: Analysis of the financial performance and position of Shop First Plc

Following the discussion we had on the above subject matter, this report is
submitted for your perusal. The report looks at profitability, working capital
management and gearing of the company for the year ended 31 December 2020, as
against its comparative period. This report should be read with the attached
appendix.

Profitability
There has been a fractional improvement in revenue in 2020 over 2019. This steady
rise in revenue resulted largely due to discontinuation of the retail shop. The sold
shop contributed 13.12% of the total revenue generated in 2020 against 19.18% in
2019. The company could however not keep its operational costs in line with the
revenue changes as all the profitability measures have dropped in 2020.
Management did poorly in controlling both direct trading costs and overheads as
gross profit margin as well as net profit margin has fallen. A separate analysis
carried out on margins between continuing and discontinued operations reveals
that while the stopped operations may have significantly contributed to the poor
operating margins especially because of the disposal loss recorded this part of the
entity operated on better gross margins than the rest of the company. Hence, the
company is likely not become any better after the sale of the operations if cost
controls are not significantly tightened for the remaining operations.
The low margins have had hugely negative impact on returns made for providers
of capital in 2020. Both ROCE and return on equity have slipped considerably even
though the company has seen some noticeable improvements in net asset and
inventory turnovers. Asset turnover shows that the firm turned its resources
roughly three times into sales this year as against little over two times in 2019.
Thus, the decline in profitability can be clearly attributed to high operating cost
levels.

Page 27 of 30
Working capital management
Overall, working capital has been effectively managed by Shop First Plc. With
current ratio of 1.48 in 2020, Shop First Plc’s current assets provide a good cover
for its short-term obligations. And this ratio is slightly up from 1.47 it had back in
2019. Current ratio measures how well a firm is positioned to apply current assets
to pay off current liabilities when they mature. The current ratio of 1.48 implies
that the company maintains GH¢1.48 of current assets to pay every GH¢1 of
current debt owed. As a cushion, Shop First achieves a good inventory turnover
rate and records a clear improvement over last year. This should reduce any fear
of liquidity concerns. On inventory turnover of 7.42 (as against 5.95 in 2019), the
company is able to empty its warehouse 7.5 times on average within 2020, as
against approximately 6 times back in 2019. The strong liquidity situation is further
helped by Shop First Plc being a retail firm which makes it more likely that it would
convert resources into liquid assets at an accelerated rate. However, were the
contingent liability to crystallize any time soon, it would have a damaging effect
on liquidity by bringing it down below 2019’s level.

Gearing
This measures the extent to which the firm finances its operations with funds
provided by external parties. Under this section, investors and lenders determine
how much risk the firm exposes them to. The proportion of debts in the total long-
term capital has seen a decline, as shown by its capital gearing ratio. While little
more than half of the total resources in 2019 was provided by lenders, around six
percent of total funds came from within for 2020. The reduction in debt used
implies that the firm is facing lower financial risk now, and the company is looking
healthy. But if profitability concerns are not overturned sooner than later, keeping
even minimal level of gearing may be unsustainable.

Conclusion
The analysis above has revealed that Shop First Plc’ profitability has worsened and
operational costs seem out of control. However, liquidity, efficiency and gearing
levels do not raise any concerns. Management are therefore entreated to institute
investigation into unearthing how best it can put costs under check and
consolidate its strong position.

I am available to provide any further clarification, if so needed. Thank you

(Signed)
Accountant

Appendix
Ratios Formula 2020 2019 (given)

Gross profit Gross profit x 100 6,030 x 100

margin Sales 43,050
= 14.01% 16.42%
Page 28 of 30
Profit (before PBIT x 100 (1,069+352) x 100
interest and tax) Sales 43,050
margin = 3.30% 7.52%

Return on yearend PAT – pref. div x 100 293 x 100

equity Equity 8,896
= 3.29% 15.32%

Return (before PBIT x 100 (1,069+352) x 100

interest and tax) on Capital employed (8,896+5,800)
yearend capital =9.67% 16.30%
employed

Inventory turnover Cost of sales 37,020

Inventory 4,986
= 7.42 5.95

Current ratio Current asset (4,986+4,044)

Current liabilities 6,109
=1.48 1.47

Assets turnover Sales 43,050

Capital employed 14,696
=2.93 2.17

Debt/debt + Long-term loan x 100 5,800 x 100

equity Long-term loan + (5,800+8,896)
Equity = 39.47% 50.84%

Separate analyses
Ratios 2020 2019
Continuing Discontinued Continuing Discontinued
operations operations operations operations

Revenue share 37,400 x 100 5,650 x 100 31,350 x 100 7,440 x 100
43,050 43,050 38,790 38,790
= 86.88% =13.12% = 80.82% =19.18%

Gross profit 5,210 x 100 820 x 100 5,320 x 100 1,050 x 100
margin 37,400 5,650 31,350 7,440
= 13.93% =14.51% = 16.97% =14.11%

Profit/(loss) 1,343 x 100 (274) x 100 2,546 x 100 57 x 100

before tax 37,400 5,650 31,350 7,440
margin = 3.59% =(4.85%) = 8.12% =0.77%

Page 29 of 30
 Computation of 2020 ratios; 10 x 1 mark = 10 marks
Report on the analysis = 6 marks
Comment on the effects of the discontinued operations = 4 marks

(Total: 20 marks)

EXAMINER’S COMMENTS
The question on financial statement analysis was very well answered by most
candidates. Most candidates attempted this question. The ratios were fairly
straightforward and most candidates were able to compute. Candidates were able to
provide a report to support the ratio computed. Most candidates did not however
discuss the effects (or potential effects) of the discontinued operations and the
contingencies on overall performance. Candidates are encouraged to always attempt
this question first but should not be tempted to spend too much time on this question.

Page 30 of 30
 NOVEMBER 2021 PROFESSIONAL EXAMINATION
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS & MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was slightly lower compared to previous diets. The
questions were based on the syllabus and were largely straightforward and of the
right level. The mark allocation followed the weightings in the syllabus and was fairly
allocated to each sub-question. Most questions were clearly stated and largely
followed higher order of the cognitive domains of learning outcomes. Questions that
required a considerable amount of work were commensurate with the allotted time
and marks.

PERFORMANCE OF CANDIDATES
The general performance of candidates in this examination diet was better than
previous diets. There was a marginal increase in the pass rate. Candidates who
performed well demonstrated a clear understanding of the subject matter. Some
candidates also showed abysmal performance. The poor level of preparedness of
candidates is reflected in their poor performance.

Page 1 of 30
QUESTION ONE

On 1 January 2016, Rafco Ltd acquired 4,500,000 GH¢1 ordinary shares of Namco Ltd for
GH¢12,000,000. The balance on Namco Ltd retained earnings as at this date was
GH¢2,350,000. On 1 January 2018, Namco Ltd acquired 2,560,000 GH¢1 ordinary share
of Tedco Ltd for GH¢6,000,000 when Tedco Ltd retained earnings as at that date was
GH¢1,600,000.

The Financial Statements of Rafco Ltd, Namco Ltd and Tedco Ltd for the year ended 31
December 2020 are as follow:
Rafco Ltd Namco Ltd Tedco Ltd
Draft Income statement
GH¢'000 GH¢'000 GH¢'000
Sales 75,000 40,800 37,500
Cost of sales (29,745) (9,000) (8,760)
Gross profit 45,255 31,800 28,740
Selling Cost (5,480) (3,521) (3,264)
Administrative cost (5,727) (1,566) (3,000)
Finance cost (536) - -
Profit before tax 33,512 26,713 22,476
Income tax expense (13,678) ( 8,879) (6,990)
Profit after tax 19,834 17,834 15,486

Draft Statement of financial Position

Non-Current Asset GH¢'000 GH¢'000 GH¢'000
Property, Plant and Equipment 58,500 40,000 21,528
Investment in Namco Ltd at cost 12,000
Investment in Tedco Ltd at cost - 6,000 -
70,500 46,000 21,528
Current Assets 2,584 14,873 14,640

Total Assets 73,084 60,873 36,168

Equity and Liabilities

Share Capital(GH¢1 ordinary Shares) 13,200 5,000 3,200
Retained Earnings 38,369 39,373 32,888
51,569 44,373 36,088
Current Liabilities 21,515 16,500 80

Total Equity and Liabilities 73,084 60,873 36,168

Additional Information
i) It is the group's policy to value the non-controlling interest at fair value at the date of
acquisition. The fair value of the non-controlling interest in Namco Ltd on 1 January 2016
was GH¢ 800,000. The fair value of the non-controlling interest in Tedco Ltd on 1 January
2018 was GH¢1,440,000.
ii) In 2020, Tedco Ltd made intragroup sales to Namco Ltd for GH¢768,000, making a profit
of 25% on cost, and GH¢120,000 of these goods were in inventory as at 31 December 2020.

Page 2 of 30
 In 2020, Namco Ltd also made intragroup sales to Rafco Ltd for GH¢416,000, making a
profit of 331/3% on cost, and GH¢96,000 of these goods were in inventory as at 31
December 2020.
iii) On 1 January 2020, Rafco Ltd sold a group of machines to Namco Ltd at their agreed fair
value of GH¢3 million. At the time of the sale, the carrying amount of the machines were
GH¢2 million. The estimated remaining useful life of the machines at the date of the sale
was four years. Plant and machinery are depreciated to a residual value of nil using straight-
line depreciation, and on 1 January 2020, the machines had an estimated remaining life of
five years.
iv) An impairment test at 31 December 2020 on the consolidated goodwill of Namco Ltd and
Tedco Ltd concluded that it should be written down by GH¢150,000 and GH¢100,000,
respectively. No other assets were impaired.

Required:
Prepare for the Rafco Group a Consolidated Income Statement for the year ended 31
December 2020 and a Consolidated Statement of Financial Position as at that date.

(Total: 20 marks)

Page 3 of 30
QUESTION TWO

a) On 1 April 2018, Mariam Plc granted 500 share appreciation rights (SARs) to its 300
employees. All of the rights vested on 31 March 2020 can be exercised from 1 April 2020
up to 31 March 2022. At the grant date, the value of each SAR was GH¢10, and it was
estimated that 5% of the employees would leave during the vesting period. The fair value
of the SARs is as follows:

Date Fair value of SAR

31 March 2019 GH¢9
31 March 2020 GH¢11
31 March 2021 GH¢12

All the employees who were expected to leave the employment did leave the company as
expected before 31 March 2020. On 31 March 2021, 60 employees exercised their options
when the intrinsic value of the right was GH¢10.50 and was paid in cash. Mariam Plc is,
however, confused as to whether to account for the SARs under IFRS 2: Share-based
Payment or IFRS 13: Fair Value Measurement and would like to be advised as to how
the SARs should have been accounted for from the grant date to 31 March 2021.

Required:
Advise Mariam Plc on how the above transactions should be accounted for in its financial
statements with reference to relevant International Financial Reporting Standards
(IFRS). (7 marks)

b) On 1 January 2020, Barikisu Ltd (Barikisu) entered into a contract with a customer to
construct a specialised building for a consideration of GH¢2 million plus a bonus of
GH¢0.4 million if the building is completed within 18 months. The estimated cost to
construct the building is GH¢1.5 million. If the customer terminates the contract, Barikisu
can demand payment for the cost incurred to date plus a mark-up of 30%. However, on 1
January 2020, due to factors outside of its control, such as the weather and regulatory
approval, Barikisu is not sure whether the bonus will be achieved.

As at 31 December 2020, Barikisu has incurred a cost of GH¢1.0 million. They are still
unsure as to whether the bonus target will be met. Therefore, Barikisu decided to measure
progress towards completion based on the cost incurred. To date, Barikisu has received
GH¢1 million from the customer.

Required:
Recommend to the directors of Barikisu how this transaction should be accounted for in
the financial statements for the year ended 31 December 2020 in accordance with relevant
International Financial Reporting Standards (IFRS). (7 marks)

c) Zunka Ltd (Zunka) is a private pharmaceutical company in Ghana, which imports medical
equipment manufactured under a patent. Zunka subsequently adapts the equipment to fit
the market in Ghana and sells the equipment under its own brand name. Zunka originally
spent GH¢6 million in developing the know-how required to adapt the equipment, and, in
addition, it costs GH¢100,000 to adapt each piece of equipment. Zunka has capitalised the
cost of the know-how and the cost of adapting each piece of equipment sold as patent rights.

Page 4 of 30
 Zunka is being sued for patent infringement by Sajida Ltd (Sajida), the owner of the original
patent, on the grounds that Zunka has not materially changed the original product by its
subsequent adaptation. If Sajida can prove infringement, the court is likely to order Zunka
to pay damages and stop infringing its patent. Zunka’s lawyers are the view that the court
could conclude that Sajida’s patent claim is not valid.

Sajida has sued Zunka for GH¢10 million for using a specific patent and a further GH¢16
million for lost profit due to Zunka being a competitor in the market for this product. Zunka
has offered GH¢14 million to settle both claims but has not received a response from Sajida.

As a result, the directors of Zunka estimate that the damages it faces will be between the
amount offered by Zunka and the amount claimed by Sajida. The directors of Zunka would
like an advice as to whether they have correctly accounted for the costs of the adaptation
of the equipment and whether they should make a provision for the potential damages in
the above legal case, in the financial statements for the year ended 31 March 2021.

Required:
Advise the directors of Zunka on how the above transaction should be accounted for in its
financial statements for the year ended 31 March 2021 in accordance with relevant
International Financial Reporting Standards (IFRS). (6 marks)

(Total: 20 marks)

QUESTION THREE

a) An entity sometimes displays its financial statements or other financial information in a

currency that is different from either its functional currency or its presentation currency
simply by translating all amounts at end-of-period exchange rates. This is sometimes called
a convenience translation. A result of making a convenience translation is that the resulting
financial information does not comply with all IFRS, particularly IAS 21: The effects of
Changes in Foreign Exchange Rates.

Required:
Explain the disclosure requirements when convenience translation is used to display
financial information. (5 marks)

b) Ajara Ltd has two receivables that it has factored to a factoring agency, the GBB Bank, in
return for immediate cash proceeds of less than the face value of the invoices for the year
ended 31 December 2020. Both receivables are due from long standing customers who are
expected to pay in full and on time. In addition, Ajara Ltd has agreed to a three-month
credit period with both customers.

The first receivable is for GH¢400,000, and in return for assigning the receivable, Ajara
Ltd has just received from the factor GH¢360,000. Under the terms of the factoring
arrangement, this is the only money that Ajara Ltd will receive regardless of when or even
if the customer settles the debt; that is, the factoring arrangement is said to be "without
recourse".

Page 5 of 30
 The second receivable is for GH¢200,000, and in return for assigning the receivable, Ajara
Ltd has just received GH¢140,000. Under the terms of this factoring arrangement, if the
customer settles the account on time, then a further GH¢10,000 will be paid by the factoring
agency, the GBB Bank to Ajara Ltd, but if the customer does not settle the account in
accordance with the agreed terms, then the receivable will be reassigned back to Ajara Ltd
who will then be obliged to refund to the factor the original GH¢140,000 plus a further
GH¢20,000. This factoring arrangement is said to be “with recourse”.

Required:
Advise the directors of Ajara Ltd on the proper accounting treatment of the monies received
under the terms of the two factoring arrangements in the financial statements for the year
ended 31 December 2020 in accordance with IFRS 9: Financial Instrument. (5 marks)

c) Linda is a junior member of an audit firm and has just returned to work after taking
compassionate leave to care for her sick mother. For financial reasons, Linda needs to work
full-time. Linda has been having difficulties with her mother's home care arrangements,
causing her to miss several team meetings, which usually occur at the start of each day, and
she needs to leave work early as well.

In terms of her capabilities, Linda is very competent at her work, but her frequent absence
puts severe pressure on her and her overworked colleagues. Linda's manager know that
workflow through the practice is coming under intense pressure and in order that the team’s
output is not affected, had a discussion with the audit team on Linda’s circumstance. This
has however led to some members of the audit team undermining Linda at every given
opportunity, putting Linda under even greater stress.

Required:
i) In accordance with the IFAC’s code of ethics, assess THREE (3) possible fundamental
ethical principles that might have been breached. (5 marks)
ii) Recommend the possible actions that the manager should take as a member of the Institute
of Chartered Accountant, Ghana in dealing with this ethical dilemma (5 marks)

(Total: 20 marks)

Page 6 of 30
QUESTION FOUR

a) Aboto Ltd is a private company in the printing industry. It was established by the Aboto
family some twenty years ago with Mrs Aboto as the Managing Director. The business has
grown in size over the years and the Directors are now considering listing the company on
the Ghana Stock Exchange. The financial statements of the company for the year 2020 are
given below:

Statement of Profit or Loss for the Year ended 31 December 2020

GH¢
Turnover 220,600
Cost of Sales (58,900)
Gross Profit 161,700
Selling, general and administrative expenses (107,900)
Profit before tax 53,800
Tax (12,300)
Profit after tax 41,500
Proposed dividend (16,000)
Retained profit 25,500

Statement of Financial Position as at 31 December 2020

Non-Current Assets GH¢
Patent 40,000
Property, Plant & Equipment 236,000
276,000
Current Assets
Inventory 26,520
Receivables 25,800
Bank & Cash 7,200
59,520
Total Assets 335,520

Equity & Liabilities

Equity
Share Capital 200,000
20% Irredeemable Preference Shares 35,000
Retained earnings 74,320
309,320

Non-current liabilities
20% Debenture 13,000

Current Liabilities
Trade Creditors 11,600
Accrued Charges 1,600
13,200
Total Equity & Liabilities 335,520

Page 7 of 30
 Additional information
1) The Share Capital of Aboto Ltd consists of the ordinary share capital of no par value issued
at GH¢100 per share.
2) An independent valuer estimated the fair value of the Property, Plant & Equipment at
GH¢500,000. Valuation charges of 2% have not been accrued for in the above accounts.
3) The inventory includes obsolete items worth GH¢5,000 being held despite persistent advice
by the auditors to have them written off.
4) Receivables include an amount of GH¢12,000 resulting from the bankruptcy of a major
customer. Aboto Ltd is not likely to realise any amount from this, but the directors have
refused to make any provision.
5) The patents represent a right to sell a special product. This product is expected to generate
cash flows of GH¢2,000 per annum indefinitely.
6) The discounted present value of future cash payments in respect of the debentures is
GH¢20,000.
7) Profits after tax of Aboto Ltd over the past four years were as follows:
Year 2019 2018 2017 2016
Profits (GH¢) 38,000 36,000 32,000 30,000
8) A corporate plan prepared by the directors of Aboto Ltd in 2018 included the following
positions:
Year to 31 December Profit after tax and depreciation Depreciation
GH¢ GH¢
2019 38,000 5,600
2020 41,500 8,300
2021 43,000 12,000
2022 45,000 15,000
2023 48,000 17,000
2024 52,000 18,000
2025 60,000 20,000
9) The price-earnings ratio and a dividend yield of quoted companies in the same industry
Aboto Ltd operates are 8 and 4%, respectively.
10) The net assets of Aboto Ltd as at 31 December 2019 was GH¢251,100
11) The cost of capital of Aboto Ltd is 20%.
12) Investing in unlisted securities is about 20% more risky than investing in listed securities.

Required:
Determine the value to be placed on each share of Aboto Ltd using the following methods
of valuation:
i) Net assets (4 marks)
ii) Price-earnings ratio (4 marks)
iii) Dividend yield (3marks)
iv) Discounted cash flow (4 marks)

Note:
Adjustment (2), (3), (4) above would necessitate a revision of the 2020 draft profit before
tax. The dividend payment will, however, not be affected.

b) What are the disclosure requirements of a parent company that is exempt from preparing
consolidated financial statements and elects not to do so and instead prepares separate
financial statements? (5 marks)

(Total: 20 marks)

Page 8 of 30
QUESTION FIVE

You are the Senior Financial Accountant at Saglema Plc (Saglema), a company that
manufactures and sells painting materials in the local market and around the West African
sub-region. At the first one-on-one meeting with the recently appointed chairperson of your
company's governing board, she asked you to produce a concise report on Saglema's cash
flow performance relative to that of Adidome Plc (Adidome), a close competitor, over the
last two years.
The following are the cash flow statements for the last two years for Saglema and Adidome:

Cash flow statements for the year ended 31 August 2020 (together with
comparatives)
Saglema Adidome
2020 2019 2020 2019
GH¢000 GH¢000 GH¢000 GH¢000
Cash flows from operating activities
Profit before tax 454,000 338,000 306,000 124,870
Depreciation 137,000 114,000 71,370 70,170
Net finance costs 19,100 29,200 11,000 37,310
Gain on sale of assets (6,330) (97,050) (940) (3,640)
603,770 384,150 387,430 228,710
Changes in working capital:
Decrease/(increase) in inventory (32,000) (5,600) 172,380 (183,000)
Decrease/(increase) in trade receivables (176,700) 230,800 (58,040) 112,340
Increase/(decrease) in trade payables 58,560 (88,850) 59,230 (348,060)
Cash generated from operations 453,630 520,500 561,000 (190,010)
Finance costs paid (20,330) (29,150) (24,000) (49,000)
Income tax paid (60,280) (176,600) (44,690) (1,060)
Net cash from operating activities 373,020 314,750 492,310 (240,070)

Cash flows from investing activities

Purchase of Property, Plant, and (270,690) (445,250) (87,180) (105,600)
Equipment
Purchase of long-term financial (129,210) - - -
investments
Proceeds from sale of non-current assets 25,060 229,630 2,320 10,980
Investment income received 30,140 24,500 11,800 10,490
Net cash from investing activities (344,700) (191,120) (73,060) (84,130)

Cash flows from financing activities

Additional borrowings 26,640 349,750 - -
Repayment of loans (188,500) (57,330) (47,810) (106,600)
Dividends (113,700) (149,230) - -
Rights issue - - - 634,630
Net cash from financing activities (275,560) 143,190 (47,810) 528,030

Net increase/(decrease) in cash and (247,240) 266,820 371,440 203,830

cash equivalents
Cash and cash equivalents at beginning 753,770 486,950 237,910 34,080
Cash and cash equivalents at end 506,530 753,770 609,350 237,910

Page 9 of 30
 Required:
i) Produce a report showing the comparative analysis of the cash flow performance and
situation of Saglema over the last two years, relative to that of Adidome. (15 marks)
ii) Explain TWO (2) uses and THREE (3) limitations of such analysis. (5 marks)

(Total: 20 marks)

Page 10 of 30
SOLUTION TO QUESTIONS

QUESTION ONE

a) Rafco Group
Consolidated Income Statement for the Year Ended 31 December 2019
GH¢’000
Revenue (W4) 152,116
Cost of sales (W5) (47,169)
Gross profit 104,947
Distribution costs (5,480 + 3,521 + 3,264) (12,265)
Administrative expenses (5,727 +1,566 + 3,000 + 150 + 100) (10,543)
Finance costs (536)
Profit before tax 81,603
Income tax expense (13,678 + 8,879 + 6,990) (29,547)
Profit after tax 52,056

Profit attributable to:

Owners of the parent 45,968.64
Non-controlling interest (W6) 6,087.36
52,056

b) Rafco Group
Consolidated Statement of Financial Position as at 31 December 2019
GH¢’000
Property, plant & equipment (58,500+40,000+21,528–(W3)1,000+(W3)200) 119,228
Goodwill (W7) 7,240
126,468
Current assets (2,584 + 14,873 + 14,640 – (W2) 24 – (W2) 24) 32,049
158,517
Equity attributable to owners of the parent
Stated capital 13,200
Retained earnings (W9) 93,171
106,371
Non-controlling interest (W8) 14,051
120,422
Current liabilities (21,515 + 16,500 + 80) 38,095
158,517

Page 11 of 30
Workings
1. Group structure
Rafco
90%
Namco Effective control interest (90% x 80%) = 72%
80% ∴ Effective non-controlling interest (100% - 72%) = 28%
Tedco 100%

2. Intragroup trading
i) Reversal
Dr group revenue (768 + 416) GH¢1,184,000
Cr group cost of sales GH¢1,184,000

ii) PUP
Namco (120 x 25/ 125) GH¢24,000
Tedco (96 x 33 1/3/133 1/3) GH¢24,000
Adjust in books of seller:
Dr Cost of sales/retained
earnings

3. Intragroup transfer of equipment

i) Cancel intragroup sale/purchases:
Dr group revenue GH¢3,000,000
Cr group cost of sales GH¢3,000,000

ii) Unrealised profit on the intragroup sale of

equipment:
Adjust in books of the seller (Rafco):
Dr Cost of sales/retained earnings GH¢1,000,000
Cr Group property, plant and equipment GH¢1,000,000

iii) Excess depreciation:

(3,000,000 – 2,000,000) x 20% GH¢200,000
Adjust in books of the seller (Rafco):
Dr Property, plant and equipment GH¢200,000
Cr Cost of sales/retained earnings GH¢200,000

4. Revenue
GH¢’000
Rafco 75,000
Namco 40,800
Tedco 37,500
Less intragroup sales (W2) (1,184)
152,116

Page 12 of 30
 5.
5. Cost of sales

GH¢’000
Rafco 29,745
Namco 9,000
Tedco 8,760
Less intragroup purchases (W2) (1,184)
Add unrealised profit on transfer of equipment (W3) 1,000
Less excess depreciation (3,000 – 2,000) x 20% (200)
Add PUP (W2): Namco 24
Tedco 24
47,169
6. 6. Non-controlling interest (income statement)

GH¢’000
Namco ((17,834 – (W2) 24 + 200 – 150) x 10%) 1,786
Tedco ((15,486 – (W2) 24 – 100) x 28%) 4,301.36
6,087.36

7. Goodwill
Rafco Ltd in Namco Ltd Namco Ltd in Tedco Ltd
Group NCI Group NCI
GH¢’000 GH¢’000 GH¢’000 GH¢’000 GH¢’000 GH¢’000
Consideration
transferred/FV NCI 12,000 800 90% × 6,000 5,400 1,440
Share of net assets
acquired:
Share capital 5,000 3,200
Retained earnings at
acquisition 2,350 1,600
7,350 4,800
Group/NCI share 90% 10% 72% 28%
(6,615) (735) (3,456) (1,344)
5,385 65 1,944 96
Impairment (135) (15) (72) (28)
5,250 50 1,872 68
Total Goodwill 5,300 + 1,940 = 7,240

8. Non-controlling interest (in SFP)

Namco Tedco
GH¢’000 GH¢’000
Net assets per question 44,373 36,088
Less: PUP (W2) (24) (24)
Less: Cost of investment in Tedco (6,000)
38,349 36,064
x10% x 28%
Non-controlling interest share 3,835 10,098
Non-controlling interests in goodwill (W7) 65 96
Page 13 of 30
 Goodwill impairment (15) (28)
3,885 10,166
Total NCI = 3,885 + 10,166 = 14,051

9. Retained earnings
Rafco Namco Tedco
GH¢’000 GH¢’000 GH¢’000
Retained earnings per question 38,369 39,373 32,888
Less: PUP (W2) (24) (24)
Transfer of equipment (W3): PUP (1,000)
Excess depreciation 200
Goodwill impairment (150) (100)
Pre-acquisition retained earnings (2,350) (1,600)
36,849 31,164
Share of Namco (36,849 x 90%) 33,164
Share of Tedco (31,164 x (W1) 72%) 22,438
93,171

(Total: 20 marks)

EXAMINER’S COMMENTS
All candidates averagely answered this question on consolidated financial statements.
Performance was average as candidates showed lack of understanding of the
principles of consolidation. The question was a straightforward one with less complex
consolidation adjustments.

Page 14 of 30
QUESTION TWO

a) Mariam Limited will account for this transaction under the provisions of IFRS 2;
Share based payments. IFRS 13 applies when another IFRS requires or permits fair
value measurements or disclosures about fair value measurements (and
measurements, such as fair value less costs to sell, based on fair value or
disclosures about those measurements). IFRS 13 specifically excludes transactions
covered by certain other standards including share-based payment transactions
within the scope of IFRS 2 Share-based Payment and leasing transactions within the
scope of IFRS 16 Leases. (1 mark)

Thus share-based payment transactions are outside the scope of IFRS 13. For cash
settled share-based payment transactions, the fair value of the liability is measured
in accordance with IFRS 2 initially, at each reporting date and at the date of
settlement using an option pricing model. Unlike equity settled transactions, the
measurement reflects all conditions and outcomes on a weighted average basis.
Any changes in fair value are recognised in profit or loss in the period.

Therefore, the SARs would be accounted for as follows:

Year expense liability calculation
31st March 641,250 641,250 285 x 500 x Time apportioned over the
2019 GH¢9 x ½ vesting period. Using the
estimated (300 x 95%) 285
employees
31 March 2020 926,250 1,567,500 285 x 500 x Expense is the difference
GH¢11 between liabilities at 31
March 2020 and 31 March
2021
31 March 2021 97,500 1,350,000 225 x 500 x Cash paid is 60 x 500 x
GH¢12 GH¢10.50, i.e. GH¢315,000.
The liability has been reduced
by
GH¢217,500 and therefore the
expense is the difference of
GH¢97,500

The liability's fair value would be GH¢1,350,000 at 31 March 2021 and the expense
for the year would be GH¢97,500. (4 marks)

Statement of profit or loss for the year ended (Extracts)

2019 2020 2021
GH¢ GH¢ GH¢
Staff costs 641,250 926,250 97,500
(1 mark)

Page 15 of 30
 Statement of financial position extract as at (Extracts)
2019 2020 2021
GH¢ GH¢ GH¢
SARs liabilities 641250 1,567,500 1,350,000
(1 mark)
Determination of applicable standard 1 mark
Workings 4 marks
SOPL (Extract) 1 mark
SOPL (Extract) 1 mark
7 marks

b) Constructing the building is a single performance obligation in accordance with

IFRS 15 Revenue.
The bonus is a variable consideration. It is excluded from the transaction price
because it is not highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur. The construction of the building
should be accounted for as an obligation settled over time. Barikisu Ltd should
recognise revenue based on progress towards satisfaction of the construction of
the building.

1) Overall Contract profit

GH¢000
Contract price 2,000
Contract cost: Costs to date (1,000)
Costs to complete (500)
Overall profit __500

2) Progress
An input method calculates the progress, being costs to date compared to total
costs.
1,000,000/1,500,000 =66.7% (or 2/3)

3) Statement of profit or loss

GH¢000
Revenue (2,000,000 x 2/3) 1,333.33
Costs of sales (1,500,000 x 2/3) (1,000)
Profit 333.33

4) Statement of financial position

GH¢000
Costs to date 1,000
Profit to date 333.33
Less: Billed to date (1,000)
Contract asset 333.33

Page 16 of 30
 Marking scheme:
Statement of profit or loss extract = 2 marks
Statement of financial position = 2 marks
Determining total contract price = 2 marks
Identifying relevant standards and principles of accounting = 1 mark
7 marks

c) In accordance with IAS 38 Intangible Assets, the three features to intangible assets
are identifiability, control and future economic benefits. In addition, the cost of the
intangible asset should be capable of reliable measurement. Development costs are
capitalised only after the technical and commercial feasibility of the asset have
been established. The entity must intend and be able to complete the intangible
asset, and either use it or sell it and be able to demonstrate how the asset will
generate future economic benefits.

It appears in principle that the above criteria may have been satisfied in the case of
the costs of adapting the medical equipment imported by Zunka Ltd. However,
only the costs incurred in developing the initial know-how of GH¢6 million may
be capitalised as these are the costs of establishing the technical and commercial
feasibility of the equipment.

The costs of adapting each piece of equipment of GH¢100,000 are simply

production costs to be included in costs of sales and, if the equipment is not sold,
they should be included in the inventory valuation of the equipment.

IAS 37 Provisions, Contingent liabilities and Contingent Assets requires that a

provision be recognised if the following conditions are met:
1. present obligation (legal or constructive) due to a past event.
2. the probable outflow of economic resources to settle the obligation; and
3. the amount of the obligation can be estimated reliably.

An outflow of economic resources is deemed probable when the outflow of

resources is more likely than not to occur. For an estimate of the amount of the
obligation to be reliable, it is sufficient if a range of probable outcomes can be
determined.

The amount recognised as a provision should be the best estimate of the

expenditure that an entity would rationally pay to settle. Zunka Ltd’s lawyers feel
that the court could conclude that the patent claim is not valid. However, Zunka
Ltd has offered GH¢14 million to settle both claims without going to court.
Therefore, this implies that Zunka Ltd believes that it is more likely than not that
a present obligation exists, resulting from a past event. The amount of the
provision may not correspond to the amount which has been offered to Sajida Ltd
as there is no certainty that Sajida Ltd will accept the offer. Therefore, as it is
difficult to determine the amount of the provision within a range of probable
outcomes, IAS 37 states that where a continuous range of possible outcomes exists,

Page 17 of 30
 and each point in that ranges is as likely as any other, the mid-point of the range
should be used. Thus, Zunka Ltd should recognise a provision of GH¢10 million
in its financial statements at 31 March 2021 and disclose the uncertainties relating
to the amount or timing of these cash outflows.
Making scheme
1 mark per valid point up to maximum of 6 marks

(Total: 20 marks)

EXAMINER’S COMMENTS
This question on selected accounting standards (IFRS) was difficult for most
candidates. Candidates performed poorly in this question, with most candidates
leaving the question unanswered. It seems candidates were not familiar with IFRS
provisions of shared-based payments and particularly share appreciation rights.
Some, however, averagely answered the part of the question dealing with revenue
from a contract with customers and intangible assets.

Page 18 of 30
QUESTION THREE

a) The disclosure requirement when convenience translation is used include:

 Identify the information as supplementary information to distinguish it from the
information that complies with IFRS.
 Disclose the currency in which the supplementary information is displayed.
 Disclose the entity’s functional currency and the method of translation used to
determine the supplementary information. (5 marks)

b) Accounting for factoring arrangements depends on whether there have been sales
of receivables or the arrangement is a financing one with receivables used as
collateral. This is determined by using the substance of the transaction as to
whether rewards and risks associated with the debtors, which is bad debt, is
transferred to the factor or retained by the entity.
The testing principle at stake with de-recognition or otherwise of receivables is
whether, under the factoring arrangement, the risks and rewards of ownership
pass from the trading company that is, Ajara Ltd in accordance with IFRS 9. The
principal risk with regard to receivables is the risk of bad debt. In the case of non-
recourse (without) factoring arrangements, the entity transfers the risk of bad debt
to the factor and hence the arrangement represents sales of the receivable. On the
other hand, for a (with) recourse factoring arrangement, the entity retains the risk
of losses of receivables or bad debt.

The GH¢360,000 has been received as a one-off, non-refundable sum in the first
arrangement. This is factoring without recourse for bad debts. The risk of bad debt
has clearly passed from Ajara Ltd to the factoring agency, the GCB Bank Ltd.
Accordingly, Ajara Ltd should derecognise the receivable and there will be an
expense of GH¢40,000 recognised. No liability will be recognised.
(2.5 marks)

In the second arrangement, the GH¢140,000 is simply a payment on account. More

cash may be received by Ajara Ltd, meaning that Ajara Ltd retains an element of
reward. The monies received are refundable in the event of default and as such,
represent an obligation. This means that the risk of slow payment and bad debt
remains with Ajara Ltd and not the factoring agency, the GCB Bank, who is liable
to repay the monies so far received. As a result, despite the passage of legal title of
the asset (i.e. receivable) should remain recognised in the accounts of Ajara Ltd. In
substance, Ajara Ltd has borrowed GH¢140,000, and this loan should be
recognised immediately. This will increase the gearing of Ajara Ltd. (2.5 marks)

c) i)
The case is on Linda, a junior audit member faced with juggling disturbing family
issue of the mother's ailment and her work schedule, as part of an audit team.
However, Linda's situation has been brought to the notice of the Audit manager,
and the manager has also informed team members of her current challenge.

Page 19 of 30
Unfortunately, some team members have rather decided to put her under even
greater stress
despite being told this.

Integrity:
Linda might have breached the principle of integrity as she has not been honest
and straightforward in her employment with the company. The circumstance of
Linda clearly, shows that she is not in the position to work on a full-time basis but
chose to do full-time on purely financial grounds.
As the manager of Linda, you could easily violate the principle of integrity.
Therefore, you need to ensure that you are always fair to all those involved and act
straightforwardly and honestly.

Professional competence and due care

Though the competence of Linda is not in doubt, as a result of not finding enough
time for her job, the diligence expected that she executes her assigned duties is or
will be missing. The principle of professional competence and due care might have
been breached;

Objectivity
The "compassionate" approach used by the manager in handling Linda's issue also
raises an issue on the objectivity required by professionals in managing positions
or handling tasks. Linda, on this same matter of taking care of her ailing mother,
was given a compassionate leave and after her resumption to work, is being
"managed" even though the manager is aware of the negative effect of her lateness
and absence at team meetings on the work flow and the team's performance. There
seems to be some sort of "bias" demonstrated by the manager in handling the issue.
The manager wants the team members to help overcome the problem caused by
Linda's current challenge without any action being taken against Linda. The
principle of objectivity is seemingly breached here.

Confidentiality:
As the manager of Linda, you owe a duty of confidentiality to the staff involved.
Therefore, do not disclose the personal circumstances of Linda to others without
her permission to do so unless it is in the public interest or related to her
employment contract. It would be best if you, the manager, remind the other team
members to ensure that the confidentiality of Linda's situation is maintained.

Professional behaviour:
The manager must ensure that all relevant laws and regulations are followed to
ensure that he or she can proceed with dealing with the matter so as not to discredit
himself or herself, his or her profession or the practice for which you the manger
work for.
Therefore, consider the firm's policies, procedures and guidelines, best practices
and, with legal assistance if required, applicable laws and regulations. The
manager needs to refer to a staff handbook or similar internal publication if there
is one. The manager also needs to consider whether it is his or her proper role to

Page 20 of 30
 manage this staffing issue. Finally, the manager needs to check the appropriateness
of referring the issue to the department responsible for personnel issues if the
practice has one.
(Any 3 points well explained @ 1.67 marks each = 5 marks)
ii)
Possible causes of action
 As Linda's manager, you need to check all the relevant facts. If necessary, clarify
staff procedures with the personnel department. Take legal advice if required.
 Discuss the matter with the junior member of staff. Possible solutions may include
suggesting a more flexible approach to team meetings. Do these always have to be
in the morning? At times, working from home may be an option for the junior
member of staff, especially with recent technologies such as MS Teams, Zoom,
Voov, to mention but a few.
 You also need to deal with Linda’s colleague member of staff, who needs to be
reminded about proper conduct and how such behaviour may amount to
harassment and be in breach of the practice’s code of conduct.
 The process of considering the issues and trying to identify a solution enables you
to demonstrate that you are behaving professionally and attempting to resolve the
difficulties faced by Linda, a junior member of staff. Throughout, it would be best
if you were seen to be acting reasonably – both towards Linda, the junior member
of staff, who is responsible for taking care of her mother's sickness and towards
other members of staff as well.
 After you have considered all reasonable compromises, if the conclusion is reached
that Linda, the junior employee, cannot carry out the work for which she was
employed, you must turn your attention to her ongoing employment within the
practice.
 This will probably be out of your hands, and you should deliver the relevant facts
of the situation to the personnel department or the owners of the practice.
 You need to ensure that appropriate confidentiality must always be maintained.
 You need to document, in detail, the steps that you take in resolving your dilemma
in case your ethical judgement is challenged in the future.
(Any 3 points @ 1.67 marks each = 5 marks)

(Total: 20 marks)

EXAMINER’S COMMENT
The question was in two parts: accounting standards and ethics. As usual, the
accounting standards part of the question dealing with the effects of changes in
foreign exchange rates and factoring of receivables under financial instruments were
poorly answered by most candidates. A more significant percentage of the marks
earned by candidates came from the ethics part of the question. Candidates provided
reasonable responses regarding the potential fundamental ethical breaches and the
possible courses of action to be taken.

Page 21 of 30
QUESTION FOUR
a)
i) Net assets method
Fair value of assets less fair value of liabilities
No of ordinary shares in issue
GH¢
Property, plant & equipment 500,000
Patent (2,000/0.20) 10,000
Inventory (26,520-5,000) 21,520
Receivables (25,800-12,000) 13,800
Cash & Bank 7,200
Trade payables (11,600)
Accrued charges (1,600 +10,000) (11,600)
20% Debenture (20,000)
20% irredeemable preference shares (35,000)
474,320

Net assets-Alternative method (equity method)

GH¢
Equity per given SOFP 309,320
20% preference share capital (35,000)
274,320
Revaluation differences:
Patent (10,000-40,000) (30,000)
PPE (500,000-236,000) 264,000
20% debenture (20,000-13,000) (7,000)

Obsolete stock (5,000)

Bad debt (12,000)
Valuation charges (2% *500,000) (10,000)
Total Value 474,320

No of shares 2,000
Value per share = 𝟒𝟕𝟒, 𝟑𝟐𝟎/𝟐, 𝟎𝟎𝟎 = GH¢237.16 (4 marks)

ii) Price-earning ratio method

Estimating earnings using the current year’s profit (i.e profit after tax less preference
share dividend of FY 2020).

GH¢
Profit after tax 41,500
Less:
Valuation charges (2% x 500,000) (10,000)
Obsolete Inventory (5,000)
Bad debts (12,000)
Adjusted Profit After Tax 14,500

Page 22 of 30
 Equity dividend
Proposed dividend 16,000
Preference share dividend (20% x 35,000) (7,000)
9,000

EPS = 14,500 – 7,000 = GH¢3.75 per share

2,000

Since Aboto Ltd is not listed, it is necessary to use P/E ratio of 80% counterparts
on the exchange. The P/E ratio of 8 should be deflated as profit growth is uncertain
and the shares are less market table.
If the P/E ratio is marked down from 8 to 6.4:
Value per share = 6.4 x GH¢3.75
= GH¢24 per share (4 marks)

iii) Dividend yield method

Shares are valued by reference to prospective future dividends.

Value per share = Required dividend

Required dividend yield

As Aboto Ltd, an unlisted company, intends listing, it must offer a dividend that
compares favourably with quoted companies in the same industrial section.

Dividend per share = GH¢(16,000-7,000) = 9,000

2,000
= GH¢4.5 per share

Dividend yield of similar company = 4%

Incorporating risk differential in the dividend yield = 4 x 1.20 = 4.80%

Value per share = 4.5

0.048
= GH¢93.75per share (3 marks)

iv) Discounted cash flow

Cash flows are discounted to their present values raising the cost of capital. The
sum of the present values (PVs) of the cash flows divided by the number of shares
gives the value per share.

Page 23 of 30
 Cash
Years Profit after tax Depreciation flows DCF@20% PV
2021 43,000 12,000 55,000 0.833 45,815
2022 45,000 15,000 60,000 0.694 41,640
2023 48,000 17,000 65,000 0.579 37,635
2024 52,000 18,000 70,000 0.482 33,740
2025 60,000 20,000 80,000 0.402 32,160
190,990
Value per share = 190,990
2,000
= GH¢95.50 per share (4 marks)

b) When a parent, in accordance with paragraph 4(a) of IFRS 10, elects not to prepare
consolidated financial statements and instead prepares separate financial
statements, it shall disclose in those separate financial statements:

1. The fact that the financial statements are separate financial statements; that the
exemption from consolidation has been used; the name and principal place of
business (and country of incorporation, if different) of the entity whose
consolidated financial statements that comply with International Financial
Reporting Standards have been produced for public use; and the address where
those consolidated financial statements are obtainable.
2. A list of significant investments in subsidiaries, joint ventures and associates,
including:
 the name of those investees.
 The principal place of business (and country of incorporation, if different)
of those investees.
 its proportion of the ownership interest (and its proportion of the voting
rights, if different) held in those investees.
3. A description of the method used to account for the investments listed under (2).
(5 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question was expected to be one of the simplest for candidates. As such, most
candidates earned very high marks on this question. They could use the net assets,
price-earning ratio and dividend bases to determine the value per share. Surprisingly,
almost all candidates failed to appropriately answer the second part of the question
related to the disclosure requirements of a parent company that is exempt from
preparing consolidated financial statements and elects not to do so and instead
prepares separate financial statements.

Page 24 of 30
QUESTION FIVE

a) Report

To: Board Chairperson

From: Senior Financial Accountant
Date: 1/1/2021

Subject: Cash flow performance and situation of Saglema

This report analyses the cash flow performance of Saglema, relative to its
competitor, Adidome, between 2019 and 2020 financial periods on the basis of
published statements of cash flows.

Movements in cash and cash equivalents

Saglema has reported a net decrease in cash and cash equivalents in 2020, a drop
in cash flow performance compared to last year. This contrasts sharply with the
situation at Adidome, which experienced not just positive net cash flows in 2020
but an improvement in its cash generation over last year. The decline in cash
balances at Saglema in the current period came about more cash was spent heavily
in returning monies to lenders and shareholders and acquiring new long-term
assets. However, it generated positive flows from operating activities. But
Adidome was less active in its investment efforts and returned a relatively smaller
amount to lenders.
Saglema has maintained a huge cash balance at 2020 yearend if these balances are
related to outflows under investing and financing activities, though this situation
is not any different at Adidome. Could the idle cash of our company not have been
released to invest profitably elsewhere?

Cash flows from operating activities.

Both companies had seen improvement in their profits before tax though Adidome
more than doubled its numbers over the two years. However, Saglema appears
more profitable in absolute terms. In relative terms, Saglema is likely to
underperform Adidome as the larger depreciation and amortisation charges of
Saglema may suggest a larger asset base being employed. Profits are sufficiently
backed by cash from operations by both firms. But given that it has turned negative
cash from operations figure last year to a huge positive figure this year, Adidome
has performed creditably better in managing its operations in 2020 over last year.
Saglema, meanwhile, has suffered some reduction in its cash generated from
operations. The better operational performance by Adidome was due to both
improved profit performance and much better management of working capital. It
has managed inventory and payables so well this year by reversing the slow
inventory turnover and short supplier payment period experienced in 2019 even
though collections from the customer slowed in 2020. Saglema’s situation is
explained mainly by poor working capital management, given its improved profit
generation. Clearly, sale of inventory has become even slower in 2020 and much
more significantly, very slow collections have replaced the accelerated collections

Page 25 of 30
in 2019 as receivables have badly built up in 2020. These could only be partially
helped by the hold-up in supplier settlement.

Cash flows from investing activities.

Both Saglema and Adidome have undertaken some investments in long-term
assets over the two years. The numbers show that they are both trying to scale their
operations, albeit at a slower rate. However, Saglema appears more active in this
regard. Saglema has been increasing its investment in both non-financial and
financial assets. The huge investment in financial assets in 2020 by Saglema and its
relatively higher investment returns may indicate that it is more committed than
Adidome to diversifying asset portfolio. The two have used different mixes of
funds to finance their investment. While Saglema has relied on operating cash
flows, asset sale, borrowings and positive cash balance over the two years,
Adidome has mainly used share issue and operating cash flows to fund the new
assets.

Cash flows from financing activities.

Saglema appears to favour the use of debts to augment its own resources, while
Adidome prefers to rely on equity finance. Saglema’s net financing flows had
become negative in 2020 from the positive in 2019 when it received new large
loans. This year, it has borrowed less than how much has been repaid to lenders
and distributed to shareholders. Though large amount of loans have been repaid,
Saglema seems to be more geared than Adidome, which obtained a huge amount
from equity holders and at the same time repaid lenders last year. Saglema has
consistently made dividend payments over the two years, in sharp contrast with
Adidome, which has paid nothing over the period. Saglema’s dividends are safely
covered by net cash from operating activities and appear sustainable. Though it is
possible the zero distribution by Adidome could mean it may have some future
commitments to fulfil with the cash reserved or its shareholders are not dividend
dependent, this situation does not provide a good signal to market players about
Adidome.

Conclusion
In sum, our company has fared well in managing its operations to generate enough
cash flows as well as profit, though Adidome has done remarkably better in 2020
than us. Going forward, we should take a close look at working capital
management and improve upon it. Saglema has been active in committing
resources to long-term assets and diversifying its activities and relied more on
internal resources and debt finance, when compared to Adidome. Finally, I suggest
we should identify better ways of releasing the large cash balance to undertake
more profitable ventures than keeping the monies in cash equivalents.
Should any need arise for clarification, you may contact me through my official
mail.
(Signed)
Accountant
(15 marks)

Page 26 of 30
b) Uses of cash flow analysis may include:
 Investors, lenders, and other creditors are most interested in an entity's ability to
generate future net cash inflows, so assessing cash flow position would enable
users to appreciate how well entities have deployed their resources to generate
cash flows from their activities.
 Users are able to assess the quality of reported profit. Cash generated from
operations is a useful indication of the quality of the profits generated by a
business. Good quality profits will generate cash.
 Users learn how the entity generates and spends its cash and cash equivalents.
 Cash flow information has some predictive value. It may assist stakeholders in
making judgements about the amount, timing and certainty of future cash flows.
Users can form reasonable expectations about the entity's future cash flows in
terms of amount and terms of nature.
 It can provide valuable information to stakeholders on the financial adaptability
of the entity.
(Any 2 points @ 1 mark each = 2 marks)

Limitations of this analysis may include:

 Cash flow performance, unlike profit performance, can be affected by one-off
payments or receipts.
 Cash receipts and payments can be manipulated. Entities may intentionally delay
payments in order to meet flow target.
 Comparing two different entities based on cash flow statements may be flawed as
different items can be presented in different classes.
 The analysis is based on historical information and might not predict the entity's
future cash flows or performance. The statement is based on past cash receipts and
payments.
 Significant non-cash transactions of the entity have not been considered.
 It does not properly assess the company's liquidity as it only presents the cash
position analysis.
(Any 3 points @ 1 mark each = 3 marks)

(Total: 20 marks)

Page 27 of 30
Workings/appendix

` Saglema Adidome
2020 2019 Change % Change 2020 2019 Change % Change
GH¢000 GH¢000 GH¢000 GH¢000 GH¢000 GH¢000
Cash flows from operating
activities:
Profit before tax 454,000 338,000 116,000 306,000 124,870 181,130
Depreciation 137,000 114,000 23,000 71,370 70,170 1,200
-
Net finance costs 19,100 29,200 - 10,100 11,000 37,310 26,310
Gain on sales of assets - 6,330 - 97,050 90,720 - 940 - 3,640 2,700
603,770 384,150 219,620 387,430 228,710 158,720
Changes in working capital:
Decrease/(increase) in inventory - 32,000 - 5,600 - 26,400 172,380 - 183,000 355,380
Decrease/(increase) in trade -
receivables - 176,700 230,800 - 407,500 - 58,040 112,340 170,380
Increase/(decrease) in trade payables 58,560 - 88,850 147,410 59,230 - 348,060 407,290
Cash generated from operations 453,630 520,500 - 66,870 -12.85 561,000 - 190,010 751,010 -395.25
Finance costs paid - 20,330 - 29,150 8,820 -30.26 - 24,000 - 49,000 25,000 -51.02
-
Income tax paid - 60,280 - 176,600 116,320 -65.87 - 44,690 - 1,060 43,630 4116.04
Net cash from operating activities 373,020 314,750 58,270 18.51 492,310 - 240,070 732,380 -305.07

- -
Cash flows from investing
activities: - -

Page 28 of 30
Purchase of property, plant and
equipment - 270,690 - 445,250 174,560 -39.2 - 87,180 - 105,600 18,420 -17.44
Purchase of long-term financial
investments - 129,210 - - 129,210 - - -
Proceeds from sale of non-current -
assets 25,060 229,630 - 204,570 -89.09 2,320 10,980 8,660 -78.87
Investment income received 30,140 24,500 5,640 23.02 11,800 10,490 1,310 12.49
Net cash from investing activities - 344,700 - 191,120 - 153,580 80.36 - 73,060 - 84,130 11,070 -13.16

Cash flows from financing activities - -

Additional borrowings 26,640 349,750 - 323,110 -92.38 - - -

Repayment of loans - 188,500 - 57,330 - 131,170 228.8 - 47,810 - 106,600 58,790 -55.15

Dividends - 113,700 - 149,230 35,530 -23.81 - - -

-
Rights issue - - - - 634,630 634,630 -100
-
Net cash from financing activities - 275,560 143,190 - 418,750 -292.44 - 47,810 528,030 575,840 -109.05

- -
Net increase/(decrease) in cash and
cash equivalents - 247,240 266,820 - 514,060 -192.66 371,440 203,830 167,610 82.23
cash and cash equivalents at
beginning 753,770 486,950 266,820 54.79 237,910 34,080 203,830 598.09
cash and cash equivalents at end 506,530 753,770 - 247,240 -32.8 609,350 237,910 371,440 156.13
Page 29 of 30
EXAMINER’S COMMENTS
The question was on the analysis of cash flow statement. Most candidates were unfamiliar with cash flow statement analysis. They,
however used their knowledge of financial statements analysis to respond averagely to the question. The question was in two parts.
Part one required a comparative analysis of one entity's cash flow performance and situation over two years, relative to that of
another entity. The second part was basically on the uses and limitations of cash flow analysis. Most candidates could not provide
the horizontal analysis for the comparative analysis. In addition, most candidates did not relate their analysis to the context set out
in the question. Some, however, used the cash flow statements provided in the question to comment on the cash flow performance
and situation of both entities. The candidate must always be mindful that the syllabus does not limit financial statement analysis to
only the statement of profit or loss and the statement of financial position. Another area of concern is report writing and the format
of writing reports. Some of the candidates failed to write a report using the appropriate form.

CONCLUSION
As indicated earlier, overall, candidates performed better than previous diets. However, the nature of candidates' responses suggest
that there is evidence of ill preparation and lack of appreciation of accounting standards. It seems that the exemptions granted to
most candidates is a factor of poor performance, given that candidates lack the pre-requisite knowledge and competence for corporate
reporting. It is suggested that candidates preparing for a corporate reporting paper should thoroughly revise the financial reporting
paper even when they are exempted from taking the financial reporting paper.

Page 30 of 30
 APRIL 2022 PROFESSIONAL EXAMINATIONS
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was moderate. The questions were based on the syllabus
and were largely straight forward and of the right level. The mark allocation followed
the weightings in the syllabus and was fairly allocated to each sub-question. Most
questions were clearly stated and followed higher order learning outcomes. Questions
that required considerable amount of work were commensurate with the allotted time
and marks.

PERFORMANCE OF CANDIDATES
The general performance of candidates in this exams diet was better than previous
diets. There was a marginal increase in the pass rate. Candidates who performed well
demonstrated a clear understanding of the subject matter. Some candidates also
showed abysmal performance. The poor level of preparedness of candidates reflected
in their poor performance.

Page 1 of 29
QUESTION ONE

Below are statements of financial position for three companies as at 31 July 2021.

Statements of Financial Position as at 31 July 2021

Papa Plc Mama Plc Bebe Plc
GH¢’million GH¢’million GH¢’million

Non-current assets:
Property, plant and equipment 3,888 1,680 1,224
Investments 3,560 2,600 200
7,448 4,280 1,424
Current assets:
Inventories 1,080 368 300
Trade receivables 1,376 416 100
Cash & bank 368 104 64
2,824 888 464

Total assets 10,272 5,168 1,888

Equity:
Share capital of GH¢ 1 each 4,000 1,200 640
Revaluation surplus 2,400 960 400
Retained earnings 1,432 800 760
7,832 2,960 1,800
Current liabilities:
Trade payables 1,144 1,080 56
Taxation 1,296 1,128 32
2,440 2,208 88

Total equity and liabilities 10,272 5,168 1,888

i) Papa Plc (Papa) bought 720 million shares in Mama Plc (Mama) on 1 August 2019, at a
cost of GH¢2.50 per share paid in cash. On that date, the retained earnings of Mama stood
at GH¢480 million and the net assets of Mama were equal to their carrying amounts except
for certain items of property, plant and equipment, which had a fair value of GH¢320
million in excess of their carrying amount.
ii) Papa has had a policy of carrying property, plant and equipment at fair values. This policy
is implemented across all group companies from the date of acquisition. Hence, the fair
values were incorporated into the books of Mama at the acquisition date, and depreciation
provided for appropriately.
iii) On 1 August 2020, Mama bought 512 million shares in Bebe Plc (Bebe). The consideration
for the purchase was GH¢3 per share in cash. In addition, it was agreed that a further
payment of GH¢1 per share would be made on 31 July 2022. The fair value of this
component of the consideration was GH¢320 million on 1 August 2020, and GH¢416
million on 31 July 2021. The cash payment was recorded in the books of Mama, but no
entry was made to record the contingent element of the purchase price. On 1 August 2020,
the retained earnings reserve of Bebe stood at GH¢664 million, and the revaluation surplus
at GH¢360 million. Bebe has always had a policy of measuring property, plant and

Page 2 of 29
 equipment at fair value, hence the carrying values of these assets were equal to their fair
values at the acquisition date.
iv) Bebe controls a famous brand name “Y start”, estimated to have a useful economic life of
20 years from 1 August 2020 with a fair value as at the same date of GH¢40 million. This
has not been recognised in the books of accounts.
v) Papa wishes to use the fair value method to measure the non-controlling interests of Mama
at the acquisition date. The share price of GH¢2.50 should be used for this purpose.
vi) On 31 July 2021, goodwill was assessed for impairment, and the calculation showed that
an impairment loss of GH¢40 million would be recognised in the case of Mama, and
GH¢20 million in the case of Bebe. No impairment losses had been recognised in the year
to 31 July 2020.
vii) During the year, Mama bought goods from Bebe for a total sum of GH¢16 million. These
goods cost Bebe GH¢12 million. 60% of the goods remained unsold by Mama at the
reporting date.

Required:
Prepare a Consolidated Statement of Financial Position for the Papa Group for year ended
31 July 2021 in accordance with IFRS.
(Total: 20 marks)

Page 3 of 29
QUESTION TWO

a) An assessment of accounting practices for asset impairments is important in the context of

financial reporting quality in that it requires the exercise of considerable management
judgement and discretionary reporting. The importance of this issue is heightened during
periods of ongoing economic uncertainty as a result of the need for companies to reflect
the loss of economic value in a timely fashion through the mechanism of asset write-downs.

There are many factors which can affect the quality of impairment accounting and
disclosures. These factors among others include changes in circumstance in the reporting
period; the market capitalisation of the entity and the allocation of goodwill to cash
generating units.

Required:
Discuss the significance of the THREE (3) factors above when conducting an impairment
test under IAS 36: Impairment of Assets. (6 marks)

b) Kaase Ltd, a public limited company, operates in the technology sector in Ghana. The
company prepares its financial statements to 31 March each year. Kaase Ltd has decided to
restructure one of its business segments. The plan was agreed by the board of directors on
1 January 2021 and this affected employees in two different locations. In the first location
(A), half of the factory units were closed by 31 March 2021 and the affected employees’
pension benefits were frozen. In effect, any new employees will not be eligible to join the
defined benefit plan. After the restructuring, the present value of the defined benefit
obligation in this location was GH¢8 million.

The following information relates to location A.

Value before restructuring GH¢ million
Present value of defined obligation (10)
Fair value of defined assets 7
Net pension liability (3)

In the second location (B), all activities were discontinued. It was agreed that employees
will receive a payment of GH¢4 million in exchange for the pension liability of GH¢2.4
million in the unfunded pension scheme.

Kaase Ltd estimates that the costs of the above restructuring excluding pension costs will
be GH¢6 million. Kaase Ltd has not accounted for the effects of the restructuring in its
financial statements because it is planning a rights issue and does not wish to depress the
share price. Therefore, there has been no formal announcement of the restructuring. The
pension liability is shown in non-current liabilities.

Required:
Recommend the accounting treatment of the above transaction in the financial statement of
Kaase Ltd including financial statement extracts for the year ended 31 March 2021 in
accordance with relevant International Financial Reporting Standards. (7 marks)

c) On 1 January 2020, Kalimba Ltd had 2 million ordinary shares in issue. On 30 April 2020
the company issued at full market price, 270,000 ordinary shares. On 31 July 2020 the
company made a rights issue of 1 for 10 at GH¢2. The fair value of the shares on the last

Page 4 of 29
 day before the issues from the rights issue was GH¢3.10. Finally, on 30 September 2020
the company made a 1 for 20 bonus issue. Profit for the period was GH¢400,000. The
reported earnings per share for the year ended 31 December 2019 was GH¢0.186.

Required:
Calculate the earnings per share for the year ended December 31, 2020 and the restated
earnings per share for the year ended 31 December 2019 in accordance with relevant
International Financial Reporting Standards. (7 marks)

(Total: 20 marks)

QUESTION THREE

a) Zeus Ltd manufactures equipment for lease or sale. The following transactions relates to
Zeus Ltd for the year ended 31 December 2020:

i) On 31 December 2020, Zeus Ltd leased out equipment under a 10-year finance lease. The
selling price of the leased item was GH¢50 million, and the net present value of the
minimum lease payments was GH¢47 million. The carrying value of the leased asset was
GH¢40 million and the present value of the residual value of the product when it reverts
back to Zeus Ltd at the end of the lease term is GH¢2.8 million. Zeus Ltd has shown sales
of GH¢50 million and cost of sales of GH¢40 million in its financial statements.
(5 marks)

ii) On 1 January 2020, Zeus Ltd raised finance by issuing a two-year deeply discounted 2%
bond with a nominal value of GH¢20,000 that is issued at a discount of 5% and is
redeemable at a premium of GH¢2,150. There were no issue costs. The bond has an
effective rate of interest of 10%. (5 marks)

Required:
Recommend to the directors of Zeus Ltd how the above transactions should be accounted
for in the financial statements for the year ended 31 December 2020 in accordance with
relevant International Financial Reporting Standards.

b) You are a newly qualified accountant in your fifth year of employment in a limited liability
company. Your immediate supervisor has been on sick leave, and you are due for study
leave. You have been told by the Finance Director that, before you go on leave, you must
finish a task which should have been completed by your immediate supervisor. The
deadline suggested to complete the task appears unrealistic, given the complexity of the
task.

You feel that you are not sufficiently experienced to complete the task alone and for that
matter would need additional supervision to complete it to the required standard. The
Finance Director appears unable to offer the necessary support in this regard. Should you
try to complete the work within the proposed timeframe but fail to meet the expected
quality, you could face repercussions on your return from study leave. You feel slightly
intimidated by the Finance Director, and also feel pressure to do what you can for the
company in what is regarded as challenging times.

Page 5 of 29
 Required:
i) Using the IFAC Code of Ethics as a guide, explain the ethical principles that apply in the
above scenario. (5 marks)
ii) Recommend the possible actions that you should take as a member of the Institute of
Chartered Accountant, Ghana in dealing with this ethical dilemma. (5 marks)

(Total: 20 marks)

QUESTION FOUR

a) Ega Ltd is a Private Limited Liability company that has been operating in the Agro
processing industry over the years. The company, which was very successful over the years
is now facing trading difficulties. The most recent statement of financial position for the
company is shown below:

Statement of Financial Position as at 31 March 2021

GH¢’million GH¢’million
Non-Current Assets
Land and buildings 100
Plant and machinery 362
Development expenditure 15
Goodwill 12
489
Current Assets
Inventory 235
Receivables 93 328
Total Assets 817

Equity
Ordinary share capital (@ GH¢1) 400
Retained earnings (94)
306
Non-current liabilities
12% debenture 80

Current liabilities
Trade creditors 184
Bank overdraft (secured on fixed asset) 247 431
Total Equity and Liabilities 817

The following additional information is provided:

The company’s activities have been rationalised and the loss-making departments closed.
The following scheme for financial reorganisation has been drawn up:
1) Intangible fixed assets should be written off and the remaining assets restated at their
market values:

Page 6 of 29
 GH¢’million
Land & Buildings 161
Plant & Machinery 200
Inventory 162
Receivables 88

2) The ordinary share capital should be written down as necessary, to enable assets and
liabilities to be restated at realistic figures and to clear the debit balance on retained earnings
account.
3) The 12% debenture should be converted into 80 million ordinary shares at no par value to
be issued at GH¢1 each in full satisfaction of the amount due.
4) The directors should subscribe for a further 200 million ordinary shares of GH¢1 each at
par to provide the cash needed to complete the reorganisation.
5) The bank is to convert GH¢200 million of overdraft into a loan carrying interest at 14% per
annum, repayable in four equal annual instalments commencing 31 December 2021.

Required:
i) Calculate the amount to be written off the existing share capital. (4 marks)
ii) Prepare a revised statement of Financial Position of Ega Ltd as at 1 April 2021 taking into
effect the proposed scheme for reorganisation. (6 marks)
iii) Provide an assessment of the proposal for the future prospect of the company. (6 marks)

b) All business combinations are accounted for by the acquisition method which involves
identifying the acquirer. However, it might not be easy identifying the acquirer.

Required:
Explain TWO (2) reasons why it might be difficult to identify the acquirer. (4 marks)

(Total: 20 marks)

Page 7 of 29
QUESTION FIVE

Azure Plc is a company which trade its ordinary shares on the Ghana Stock Exchange.
Below are the statements of profit or loss for the year ended 31 December 2020 and for the
first three quarters in 2020 published in line with the Ghana Stock Exchange regulations:

Statements of profit or loss of Azure Plc

Year ended 31 Quarter 3 Quarter 2 Quarter 1
December 2020 (unaudited) (unaudited) (unaudited)
(audited)
GH¢’million GH¢’million GH¢’million GH¢’million
Revenue 2,829 544 810 624
Cost of sales (1,754) (346) (489) (412)
Gross profit 1,075 198 321 212
Other operating income 72 32 21 23
Administrative expenses (572) (94) (183) (146)
Distribution costs (265) (73) (62) (65)
Finance costs (15) (11) (2) (2)
Profit before tax 295 52 95 22
Tax (101) (17) (31) (11)
Profit for the year 194 35 64 11

Statement of financial position as at 31 December 2020

GH¢’million GH¢’million
Non-current assets
Property, plant and equipment 442
Intangible assets 85
Financial assets 6
533
Current assets
Inventories 728
Trade receivables 476
Other receivables and prepayments 22
Cash and bank 492 1,718
Total assets 2,251

Equity and liabilities

Share capital 535
Retained earnings 610
Other reserves 92
1,237
Non-current liabilities
Borrowings 304

Current liabilities
Trade and other payables 501
Unearned revenues 66
Provisions 25
Current tax 118 710
Total equity and liabilities 2,251

Page 8 of 29
Additional information
The following ratios have been calculated for the relevant sector for the year ended 31
December 2020:
Return on year end capital employed 18.30%
Return on year end equity 16.05%
Profit (before interest and tax) margin 12.1%
Gross profit margin 43.22%
Current ratio 2.60
Quick ratio 1.25
Assets turnover 1.02
Debt-to-equity ratio 30.50%

Required:
Write a report to the Board of Directors of Azure Plc. analysing the financial performance
and financial position of the company as the above information permits to assist the Board
in determining whether strategic adjustments are required, and where, if any.
(Total: 20 marks)

Page 9 of 29
SOLUTION TO QUESTIONS

QUESTION ONE

Papa Group
Consolidated Statement of Financial Position as at 31 July 2021
GH¢ million

Assets
Non-current assets:
Property, plant and equipment (3,888+1680+1,224) 6,792
Other investments (3,560+2,600+200-1,800Wk3-1,536Wk3) 3,024
Brand name (40-2)Wk3 38
Goodwill (960 + 275.68)Wk3 1,235.68
11,089.68
Current assets:
Inventories (1,080+368+300-2.4URP) 1,745.6
Trade receivables (1,376+416+100 1,892
Cash & bank (368+104+64) 536
4,173.6
Total assets 15,263.28

Equity:
Share capital 4,000
Revaluation surplus (Wk5) 2,803.2
Retained earnings (Wk5) 1,566.37
8,369.57
Non-controlling interest (787.2+954.51)Wk4 1,741.71
10,111.28

Current liabilities:
Trade payables (1,144+1,080+56) 2,280
Taxation (1,296+1,128+32) 2,456
Deferred consideration 416
5,152
Total equity and liabilities 15,263.28

Page 10 of 29
Workings:
(Wk1) Group structure
Papa

720 x 100 = 60%

1200

Mama (2yrs)

512 x 100 = 80%

640

Bebe (1yr)

Summary of percentages
Mama Bebe
Parent % - Direct 60% -
Indirect - 48%
(60% x 80%)

Non-controlling interests % 40% 52%

100% 100%

(Wk2) Net assets schedules

Acq. date Rep. date Post-acq
GH¢’million GH¢’million GH¢’million

Mama
Share capital 1,200 1,200 -
Revaluation surplus (inclusive of fair 320 960 640
value adjustment)
Retained earnings 480 800 320
2,000 2,960 960
Alternatively,
Share capital 1,200 1,200 -
Revaluation surplus - 960 960
Retained earnings 480 800 320
Fair value adj-PPE 320 - (320)
2,000 2,960 960
Note: Post-acquisition movements consist of retained earnings of 320 and revaluation surplus
of 640 (960-320).

Bebe
Share capital 640 640 -

Page 11 of 29
 Revaluation surplus 360 400 40
Retained earnings 664 760 96
Brand name 40 40 -
Brand amortisation (40/20yrs) - (2) (2)
Unrealised profit (60% x (20 – 16)) - (2.4) (2.4)
1,704 1,835.6 131.6

(Wk3) Goodwill
Mama (Fair value method)
GH¢ million
Cost of investment (720 x 2.5) 1,800
Fair value of NCI at acquisition ((1200 – 720) x 2.5) 1,200
3,000
Fair value of identifiable net assets acquired (Wk2) (2,000)
Goodwill at acquisition 1,000
Impairment to date (40)
At reporting 960

Bebe (Proportionate share method)

GH¢’million

Cost of investment:
Cash payment (512 x 3) 1,536
Deferred consideration 320
1,856
Less: Indirect holding adjustment (40% x 1856) (742.4)
NCI at acquisition (52% x 1704(Wk2)) 886.08
1,999.68
Fair value of identifiable net assets acquired (Wk2) (1704)
Goodwill at acquisition 295.68
Impairment to date (20)
At reporting 275.68

Page 12 of 29
(Wk4) Non-controlling interests
GH¢’million

Mama (Fair value method)

Fair value of NCI at acquisition (Wk3) 1,200
Add: NCI % of post –acquisition movements (40% x 960) Wk2 384
Less: Indirect holding adjustment (Wk3) (742.4)
Less: NCI% of impairment (40% x 40) Wk2 (16)
Less: Share of finance cost on deferred consideration (40%x96) (38.4)
At reporting 787.2

Bebe (Proportionate share method)

NCI at acquisition (Wk3) 886.08
Add: NCI % of post –acquisition movements: (52% x 131.6) 68.43
At reporting 954.51

(Wk5) Group retained earnings

GH¢’million

Papa
Balance b/d 1,432
Movement in contingent consideration (416-320) x 60% (57.6)

Mama
Parent% of post-acquisition earnings (60% x 320) Wk2 192
Parent% of impairment (60% x 40) (24)

Bebe
Parent% of post-acquisition earnings (48% x (131.6-40)) Wk2 43.97
Impairment (20)
At reporting 1,566.37

Page 13 of 29
 Group revaluation surplus
GH¢’million
Papa
Balance b/d 2,400

Mama
Parent% of post-acquisition (60% x 640)Wk2 384

Bebe
Parent% of post-acquisition (48% x 40)Wk2 19.2
At reporting 2,803.2

(100 ticks @ 0.2 marks) (Total: 20 Marks)

EXAMINER’S COMMENTS
The challenge for some candidates was the determination of the indirect holding
adjustment. This question on consolidated financial statements was well answered by
all candidates. It was a straightforward question involving a sub-subsidiary.
Candidates generally had a satisfactory performance in answering the question, which
tested the candidates’ understanding on preparing consolidated statement of financial
position for a group comprising of a direct subsidiary as well as an indirect subsidiary.

Notwithstanding the satisfactory performance candidates had in their responses to

the question, the following observations were made, and it is important to point out,
to guide candidates who will be sitting for the paper in the future:

1) Some candidates had difficulty in establishing the fact that Papa plc (parent) has
indirect control over Bebe plc (indirect subsidiary) because of its direct control
over Mama plc (direct subsidiary). Candidates determined whether Bebe should
be consolidated or otherwise using the effective control of 48% instead of the
principle of indirect control. Thus, some candidates were not consolidating Bebe
plc’s assets and liabilities, and resorted to presenting the assets and liabilities as a
single line item (i.e. investment in associate).

2) Generally, candidates also had issues with incorporating the effect of footnote (2)
on the consolidated statement of financial position. Fair value adjustment (surplus)
of GH ¢320 million occurred upon acquisition of Mama plc by Papa plc. However,
Papa plc has a policy of using fair values for the property, plant and equipment
including its subsidiaries. As a result, the subsidiary has incorporated the fair
value adjustment already. However, it was observed that some candidates were
adding the GH¢320 million again to the assets on the consolidated statement of
financial position. Also, candidates failed to identify that the GH¢320 million is
included in the revaluation surplus of GH¢960 million, and has to be excluded in
computing the parent’s share of the post-acquisition revaluation surplus.
Alternatively, candidates could have presented the fair value adjustment of GH¢

Page 14 of 29
 320 million as a separate line item on the net assets movement of Mama plc only at
the acquisition date, and nothing recorded at the reporting date.

3) Though fundamental to preparing consolidated financial statements, some

candidates still lack understanding of the concept of equity as a residual interest
in a company’s assets after taking all liabilities and the fundamental principles of
consolidation. Once assets and liabilities at the acquisition date have been
recognised and pre-acquisition equity already subsumed in goodwill, pre-
acquisition equity (stated capital and all pre-acquisition reserves) of the
subsidiaries cannot be recognised again. Some candidates were still consolidating
these pre-acquisition equity items.

4) The treatment of the deferred consideration arising upon the acquisition of the
indirect subsidiary (Bebe plc), also presented a challenge to some candidates. The
present value of the consideration at acquisition date was given and also at the
reporting or consolidation date. Candidates struggled in identifying correctly
which of the figures to use in the goodwill computation. Some candidates lacked
the understanding that in goodwill computation, it is only the values of assets and
liabilities as at the acquisition date that are used, and not the reporting date value.
The treatment of the unwound interest (i.e. the difference between the present
value of the consideration at the reporting date and as at the acquisition date) was
also not accounted for correctly by some candidates. Candidates generally failed
to incorporate this in the consolidated retained earnings, and also presenting the
amount of GH¢416 million as a current liability. Candidates who incorporated it
in computing the consolidated retained earnings failed to prorate it for the Papa
plc and the Non-controlling interest at 60% and 40% respectively.

QUESTION TWO

a) All assets, including goodwill and intangible assets, have to be tested for
impairment at the end of each reporting period, if there are indicators of
impairment. The main issues in relation to IAS 36: Impairment of Assets are as
follows:

Changes in circumstances
Changes in circumstances between the date of the impairment test and the next
reporting period end may give rise to impairment indicators. If so, more than one
impairment test may be required in an annual period. Where an annual
impairment test is required for goodwill and certain other intangible assets, IAS 36
allows the impairment test to be performed at any time during the period,
provided it is performed at the same time every year.

Many entities test goodwill at an interim period in the year. In times of high
uncertainty, goodwill may have to be tested for impairment at year end and at a
subsequent interim reporting date as well, if indicators of impairment arise after

Page 15 of 29
 the annual test has been performed. If an entity has to test for impairment at the
end of the reporting date as well as at the scheduled annual date, it does not
necessarily mean that the whole budget process needs to be redone, as top-down
adjustments may be sufficient to assess any changes in the period since the latest
goodwill impairment review.

Volatility in financial statements may indicate impairment. For example, falls or

rises in commodity prices may affect impairment indicators for energy and mining
entities, and require those assets to be tested for impairment in the next interim
financial statements.

Market capitalisation as a special impairment indicator

Market capitalisation is a powerful indicator, if it shows a lower figure than the
book value of net assets, it inescapably suggests the market considers that the
business is overvalued. However, the market may have taken account of factors
other than the return which the entity is generating on its assets. A market
capitalisation below book equity will not necessarily lead to an equivalent
impairment loss. Entities should examine their cash generating units (CGUs) in
these circumstances and may have to test goodwill for impairment. IAS 36 does
not require a formal reconciliation between the market capitalisation of the entity,
fair value less costs to sell (FVLCS), and value in use (VIU). However, entities need
to be able to understand the reason for the shortfall.

Allocating and reallocating goodwill to cash generating unit (CGU)

Given the complexity, sensitivity and need for significant judgement, companies
experience issues assessing goodwill for impairment. The identification of CGUs
and the allocation of acquired goodwill is unique to each entity and requires
significant judgement. This allocation process in itself determines the appropriate
carrying amount to test and should be a reasonable and supportable method.

Acquired goodwill is allocated to each of the acquirer’s CGUs, or to a group of

CGUs, which are expected to benefit from the synergies of the combination. If
CGUs are subsequently revised or operations disposed of, IAS 36 requires
goodwill to be reallocated, based on ‘relative values’, to the units affected.
However, the standard does not expand on what is meant by ‘relative value’. It
does not mandate FVLCS as the basis, but it might mean that the entity has to carry
out a valuation process on the part retained. There could be reasonable ways of
estimating relative value by using an appropriate industry or business surrogate
(for example, revenue, profits, industry KPIs).
(3 points @ 2 marks = 6 marks)

b) After restructuring, the present value of the pension liability in the first location is
reduced to GH¢8 million. Thus, there will be a negative past service cost in this
location of (GH¢10 – GH¢8) million, i.e. GH¢2 million. As regards the second
location, there is a settlement and a curtailment as all liability will be extinguished
by the payment of GH¢ 4 million. Therefore, there is a loss of GH¢1.6 million

Page 16 of 29
 (GH¢2.4 million – GH¢4 million). The changes to the pension scheme in both
locations will both affect profit or loss as follows:
First location
Dr Pension obligation GH¢2 million
Cr Retained earnings GH¢2 million (1 mark)

Second location
Dr Pension obligation GH¢2·4 million
Dr Retained earnings GH¢1·6 million
Cr Current liabilities GH¢4 million (1 mark)

Even though there has been no formal announcement of the restructuring, Kaase
Ltd has started implementing it and therefore it must be accounted for under IAS
37: Provisions, Contingent Liabilities and Contingent Assets. A provision of GH¢6
million should also be made at the year end.

Statement of profit or loss extract

GH¢ million
First Location – Negative past service costs 2
First Location – Pension payment – loss suffered (1.6)
Restructuring provision (6)
(2 marks)
Statement of financial position extract
GH¢ million
Non –current liabilities:
Reduction in pension obligation (2+ 2.4) (4.4)
Current liabilities:
Pension payment 4
Restructuring provision 6
(3 marks)

c)
EPS = Earnings for the period attributable to ordinary shareholders
Weighted average number of ordinary shares outstanding during the period
GH¢400,000
2,431,508 = GH¢16.5p.

The restated EPS for the year ended December 31, 2019 is:
GH¢0.186 x 3/3.10 x 20/21 = GH¢0.171.
Weighted
Date Narrative No. of Time TERP Bonus Ave no.
shares fraction shares
1/1/20 b/d 2,000,000 4/12 3.10/3 21/20 723,333
30/4/20 Issued at FMP 270,000
2,270,000 3/12 3.10/3 21/20 615,738
Page 17 of 29
 31/7/20 Right issue 1/10 227,000

2,497,000 2/12 - 21/20 436,975

30/9/20 Bonus issue 124,850
1/20
2,621,850 3/12 - 655,462
2,431,508

Calculation of theoretical ex rights price (TERP)

GH¢
10 @ GH¢3.10 31
1 @ GH¢2 2
11 33

Fair value per share immediately before the exercise of rights

Theoretical ex rights price (TERP)
TERP = GH¢33/11 = 3 therefore the right issue fraction = 3.10/3

Marking Scheme:
calculation of EPS =1 mark
restatement of the 2019 EPS = 1 mark
calculation of the weighted average number of shares = 4 marks
calculation of the TERP = 1 mark
7 marks

(Total: 20 Marks)

EXAMINER’S COMMENTS
This question on selected accounting standards (IFRS) was a difficult question for
most candidates. It was generally not well answered though the questions were
straight forward. The question was in three (3) parts. Part a) was on IAS 36 Impairment
of assets. It required the candidates to discuss the three (3) factors which affect the
quality of impairment accounting and disclosures - changes in circumstances in the
reporting period; the market capitalization of the entity; and the allocation of goodwill
to cash generating units. Almost all candidates deviated in answering this question.
They were discussing general factors that indicate impairment test and IAS 36. Part b)
was on IAS 19 employee benefits. It required the candidates to recommend accounting
treatment and financial statements extract in accordance with relevant IFRS. Many
candidates were not able to produce the financial statements extract with the correct
amounts. Some candidates deviated and were writing on IFRS 5 non-current assets held
for resale and discontinued operation. Part c) required candidates to calculate earnings
per share. Just as the above parts, it was poorly answered. Many candidates were not
able to compute weighted average number of ordinary shares outstanding during the
period in accordance with IAS 33 earnings per share. Whiles relatively few candidates
had the calculation of earnings per share correct, a greater number of candidates got

Page 18 of 29
it wrong. The theoretical ex-rights price fraction and the bonus fraction calculation
affected the weighted average number of shares.

Page 19 of 29
QUESTION THREE

a)
i) Zeus Ltd should have shown the lease receivable at the lower of the fair value of
the asset and the present value of the minimum lease payments, i.e. GH¢47 million.
Therefore, an adjustment of GH¢3 million will have to be made to profit or loss
and the lease receivable. Similarly, the cost of transaction should have been
(GH¢40 – GH¢2.8) million, i.e. GH¢37.2 million as the asset reverts back to Zeus
Ltd at the end of the lease. Therefore, an adjustment should be made to profit or
loss and lease receivable of GH¢2.8 million.

Dr Profit or loss GH¢3 million

Cr Lease receivable GH¢3 million

Dr Lease receivable GH¢2.8 million

Cr Profit or loss GH¢2.8 million
(The net amount of GH¢0.2 million could be adjusted in this case.)
The finance lease receivable figure in the financial statements will be (GH¢50 –
GH¢3 + GH¢2.8) million, i.e. GH¢49.8 million.

Statement of profit or loss for the year ended 31/12/20 -extract

GH¢ million
lease -revenue (3)
lease – cost of sales 2.8

Statement of financial position as at 31/12/2020 –extract

GH¢ million
Non –current assets:
Lease receivable 49.80

Marking Scheme:
financial statement extracts = 3 marks
calculations = 2 marks

ii) Zeus Ltd has a financial liability to be measured at amortised cost in accordance
with IFRS 9. It is a financial liability because the company is raising finance. This
financial liability is initially recorded at the fair value of the consideration received,
that is, the net proceeds of issue. This amount is then increased each year to
redemption by interest added at the effective rate of 10% and reduced by the
interest actually paid at 2%, with the result that the carrying amount at the end of
the first year is at amortised cost.

Zeus Ltd has no issue costs and the net proceeds are GH¢20,000 less 5% discount
= GH¢19,000. The annual cash payment is the 2% coupon rate on the nominal value
of the debt GH¢20,000.

Page 20 of 29
 Reporting date Bal b/fwd Eff rate 10% Cash paid Bal c/fwd
@2%
GH¢ GH¢ GH¢ GH¢
31 Dec 2020 19,000 1,900 (400) 20,500
31 Dec 2021 20,500 2,050 (400) nil
3,950 (22,150)

Zeus Ltd
Statement of profit or loss extract for the year ended 31st December 2020
GH¢
Finance cost 1,900

Statement of financial position extract

GH¢
Financial Liability 20,500

Marking scheme:
statement of profit or loss extract =1 mark
statement of financial position extract = 1 mark
amortised cost table = 3 marks
5 marks
b)
i) Implications on fundamental principles
Integrity
You need to be open and honest about the situation with your Finance Director.
You need to be straightforward with your Finance Director since it will not be right
to attempt to complete work that is technically beyond your abilities, without
proper supervision.
In the first instance, you should attempt to resolve the issue with your Finance
Director, although it may be necessary to involve the person responsible for
training within the practice. You might, at an appropriate stage, suggest that the
client be involved.

Objectivity
The short period of time given to perform the work puts undue pressure on the
trainee accountant which breaches the principle of objectivity. There may be an
element of bias towards the trainee accountant by his or her Finance Director.

Professional competence and due care

You are not technically competent in the complicated work given you and while
you will be learning on the work and the timeline is too tight to be able to exercise
due diligence. It is virtually impracticable to complete the work within the time
available and still act diligently to achieve the required quality of output. Discuss
with the Finance Director supervisory arrangement and support in order not to do
poor work.

Page 21 of 29
 Professional behaviour
The practice firm that employs you is small and under pressure due to the sickness
of a member of staff. However, the work you are being asked to perform is beyond
the usual ability of a trainee at your level. Determine whether the deadline can be
extended; when your colleague is expected to return from sick leave; and what
other resources might be available to the practice. Consider the policies and
procedures of the practice, as well as your professional body’s code of ethics. You
cannot refuse to do the work as this will damage your reputation and the
reputation of the firm will also suffer if you attempt to perform the work without
sufficient knowledge and support. Therefore, avoid discrediting yourself, the
practice firm you work for, and the accountancy profession in general.
(4 points @ 1.25 marks each = 5 marks)

ii) Possible causes of action to be taken

 You should explain to your Finance Director that you do not have sufficient time
and experience to complete the work to a satisfactory standard. However, you
should demonstrate a constructive attitude, and suggest how the problem may be
resolved. (Your professional body is available to advise you in this respect.) For
example, you might suggest the use of a subcontract bookkeeper, or contacting the
client to enquire if the deadline might be extended so that the work may be
performed when you return from study leave or when your colleague returns from
sick leave. You might also explore the possibility of assigning another member of
staff to supervise your work.

 If you feel that your Finance Director is being unsympathetic or simply fails to
understand the issue, you should consider how best to raise the matter with the
person within the practice responsible for training. It would be diplomatic to
suggest to your Finance Director that you raise the matter together and present
your respective views. This would have the added advantage of involving a third
party.

 It would be unethical to attempt to complete the work if you doubt your

competence. However, simply refusing to, or resigning from your employment,
would cause significant problems for both you and the practice. You could consult
your professional body. If you seek advice from outside the practice (for example
legal advice), you should be mindful of the need for confidentiality as appropriate.

 You should document, in detail, the steps that you take in resolving your dilemma,
in case your ethical judgement is challenged in the future.
(4 points @ 1.25 mark each = 5 marks)

(Total: 20 marks)

Page 22 of 29
EXAMINER’S COMMENTS
This question was in two parts: accounting standards and ethics. As usual, the
accounting standards part of the question dealing with the lease and financial
instruments were poorly answered by most candidates. Most candidates could not
determine finance lease receivable, the lease revenue and lease cost of sales. A greater
percentage of the marks earned by candidates came from the ethics part of the
questions. Candidates provided reasonable responses regarding the fundamental
ethical principles that apply and the possible courses of action to be taken to deal with
the ethical dilemma. Some candidates, however, did not understand the requirements
of the ethical question and therefore wrote on intimidation threats instead of ethical
principles.

QUESTION FOUR
a) i)
Amount written off share capital GH¢’million
Goodwill 12
Development expenditure 15
Land and building (61)
Plant and machinery 162
Inventory 73
Receivables 5
Retained earnings 94
300
(4 marks)

i) Revised Statement of Financial Position as at 1 April 2021

Non-current asset GH¢’million GH¢’million
Land and buildings 161
Plant and machinery 200
361
Current Assets
Inventory 162
Debtors 88
Bank balance 153
403
Creditors falling due within one year
Trade creditors 184
Bank loan 50
234
Net current assets 169
Total assets less current liabilities 530
Creditors falling due after one year
Bank loan 150
380
Equity

Page 23 of 29
 Ordinary share capital (W1) 380

W1.
400 million (opening balance)-300 million (written off) +80 million (Debenture
conversions) + 200 million (new issues).
(6 marks)

ii) The assessment should deal with the following matters:

 The full amount of the loss is to be borne by ordinary shareholders which is
entirely reasonable in view of the fact that they would be the last in line for
repayment in the event of liquidation.
 The future prospects of the company must be carefully investigated. Past
performance has been poor and the bank must be convinced that loss making
activities have indeed been closed down and that the management expertise
currently available is capable of directing affairs more successfully in the future.
 The financial position displayed in the revised Statement of Financial Position
appears sound. Again, investigation must be made to ensure that cash available is
sufficient to meet the cost of any planned investment in fixed asset plus associated
working capital requirements.
 The bank is being asked to exchange a bank overdraft for an immediate payment
of GH¢47 million and repayment of the balance over a four year period.
 The bank overdraft is secured on fixed assets which have a value of GH¢361
million; it is therefore fully secured, and the balance outstanding would be
recovered in full if the company went into liquidation.
 The social and financial effects of liquidation, such as the loss of a customer and
the associated bad publicity, must be assessed.
 The bank would expect to see budget and projection in order to judge future
development and assess how the cash balance is to be utilized.
 The bank should only support the reorganization if it is offered adequate security;
one possibility would be fixed charge on the land and buildings and floating
charge over the remaining assets of Harbour Ltd.
(Any 4 points @ 1.5 marks each = 6 marks)

b) IFRS 3 initially directs an entity to IFRS 10 ‘Consolidated Financial Statements’ to

identify the acquirer, and to consider which entity controls the other (ie the
acquiree). In most business combinations identifying the acquirer is
straightforward and is consistent with the transfer of legal ownership. However,
the identification can be more complex for business combinations when:
 businesses are brought together by contract alone such that neither entity has legal
ownership of the other
 a combination is affected by legal merger of two or more entities or through
acquisition by a newly created parent entity
 there is no consideration transferred (combination by contract), or
 a smaller entity arranges to be acquired by a larger one.
(Any 2 points @ 2 marks each = 4 marks)
(Total: 20 marks)

Page 24 of 29
EXAMINER’S COMMENTS
This question on capital reduction was expected to be one of the simplest for
candidates. Unfortunately, some candidates could not answer this question
appropriately. Some candidates had problems with computing the maximum amount
to be written off, getting negative instead of positive and vice versa. Many candidates
instead of evaluating the proposed scheme rather restated the scheme as in the
question. The revised statement of financial position was not presented as expected,
especially determining ordinary share capital, bank balance and bank loan.
Surprisingly, almost all candidates failed to answer appropriately the second part of
the question that related to business combinations. Candidates did not understand the
concept of identifying an acquirer. They interpreted “identifying an acquirer” as
looking for a buyer or investor.

QUESTION FIVE

Report

To: Board of Directors of Azure Plc

From: Accountant
Date: 10 January, 2021
Subject: Analysis of the financial performance and position of Azure Plc

This report discusses the financial performance and position of Azure Plc for the
year ended 31 December, 2020, relative to its sector average on the basis of
profitability, liquidity, and gearing ratios.

Profitability
This is concerned with how well resources are deployed to generate income for
investors and other providers of capital. It is about how efficient and effective
operational costs are controlled while maximizing the use of the firm’s assets to
generate sales for the business. Profitable companies are the ones who maximize
revenue without compromising on effective cost controls.

Return on capital employed measures how well capital is used to generate profits
for shareholders and creditors. Azure Plc’s ROCE of 20.13% marginally topples
that of the average firm (18.3%). This implies that Azure Plc is better at committing
its resources to use than its competitors. A higher ROCE signifies more judicious
use of capital introduced by fund providers. ROCE should be higher than the
company’s capital cost; otherwise it indicates that the company is not employing
its capital effectively and is not generating shareholder value.
A critical look into the ROCE ratios revealed, that Azure’s better showing is
basically due to better asset utilization, rather than to its margins. The company
turns its net assets over little less than twice into revenue, compared to the average

Page 25 of 29
competitor’s 1.02 times. Thus, the company is more efficient than competitors in
allocating resources to generate sales.

Profit margins have not been as impressive for Azure as its turnover, when
compared to the sector. Both gross profit margin and operating profit margin have
fallen. Gross profit margin of 40%, compared to the sector’s 43.22%, suggests that
Azure Plc has underperformed its competitors in keeping costs of production
under control. Deeper analysis on Azure’s quarterly results for the current period
reveals interesting relationships. The company could not keep costs below 60% in
any of the four periods with exception of the last quarter which produced the
highest revenue and the lowest cost to sales ratio. The first quarter proved to be
the least profitable.
The poor gross margins seem to have fed into operating margins. Azure’s
operating profit margin of 10.96% compares less favourably with that of the
average player (12.1%) within the sector. This suggests that Azure is also not as
good at managing operational expenses. The quarterly analysis shows that if not
for the far poor showing in the first quarter where the margin is only 3.85%, the
impressive performance (14.81%) in the final quarter would have led Azure
coming on top of its competitors in managing operational costs.

Unlike ROCE which could not be adversely affected by poor margins, return on
equity of Azure (15.68%) is slightly below that of the average firm (16.05%). The
lower return on equity means Azure is less able to apply funds attributable to
equity holders to generate profit for shareholders. Thus, investors would find
competitors as better users of equity capital than us.

Liquidity
Liquidity ratios depict how capable an entity is in using its current assets to meet
its current liabilities (including any long-term liabilities that have less than one
year to mature).

Current ratio shows well current liabilities are covered by current assets of an
entity. The higher this ratio the higher the firm’s ability to meet its current liabilities
with its available current assets, and vice versa. With current ratio of 2.42, Azure
is less liquid than its competitors (2.60). This means Azure is less able to meet its
short-term obligations with its current assets. For every GH¢1 of current liability,
Azure has GH¢2.42 available to pay for the debt, relative to the average player’s
GH¢2.60.

However, quick ratio which is a stricter measure of liquidity places Azure ahead
of competitors. For every GH¢1 of current obligations, Azure has GH¢1.39 quick
assets (current assets without inventories) available to meet them. It thus appears
competitors maintain a higher level of inventories than Azure.
Gearing
Gearing ratio compares a company’s level of long-term debt to its equity
capital/capital employed. The ratio helps to know the level of financial risk or

Page 26 of 29
financial stability of an entity. Generally, a lower gearing ratio means lower
financial risk. The use of debts is not necessarily bad especially for highly profitable
companies whose returns are far greater than interest costs. Azure’s 24.6% debt to
equity ratio compares more favorably than the average firm’s 30.5%. This indicates
that Azure employs only 24.6 pesewas for GH¢1 of each equity capital used,
compared to the average firm’s 30.5 pesewas, hence, Azure is lowly geared and
less financially risky than competitors.

Conclusion
From the analysis and discussion above, it is clear that profitability performance
has been generally bad. The various margins have been poor and thus shown that
the firm’s cost controls have not been apt. But in terms of efficiency and gearing,
Azure has done better while liquidity paints a mixed picture.
For clarification on any of the above points raised, I am ready to avail myself.
Thank you.
(Signed)
Accountant

Appendix
Ratios Formula 2020 Sector

Return on yearend Operating profit x 100 (295+15) x 100

capital employed Capital employed (2,251-710)
=20.13% 18.3%

Return on yearend PAT – pref. div x 100 194 x 100

equity Shareholders’ fund 1,237
= 15.68% 16.05%
Profit (before Operating profit x 100 310 x 100
interest and tax) Sales 2,829
margin = 10.96% 12.1%

Gross profit Gross profit x 100 1,075 x 100

margin Sales 2,829
= 38% 43.22%

Current ratio Current asset 1,718

Current liabilities 710
=2.42 2.60

Quick ratio Current assets – 1,718-728

Inventory 710
Current liabilities =1.39 1.25

Page 27 of 29
 Assets turnover Sales 2,829
Capital employed 1,541
=1.84 1.02
or

Assets turnover Sales 2,829

Total Assets 2,251
=1.26 1.02

Debt/equity Long-term loan x 100 304 x 100

Equity 1,237
= 24.6% 30.50%

4th 3rd 2nd 1st

quarter quarter quarter quarter
GH¢m GH¢m GH¢m GH¢m
Revenue size 30.08% 19.22% 28.63% 22.06%
Cost of sales/revenue 59.58% 63.60% 60.37% 66.03%
percentage
Gross profit margin 40.42% 36.40% 39.63% 33.97%
Overheads-to-sales 25.15% 30.70% 30.25% 33.81%
Operating profit margin 14.81% 11.58% 11.98% 3.85%

EXAMINER’S COMMENTS
This question required analysis of the financial performance and financial position of
a company using comparative ratios for the relevant sector. The question was
attempted by all the candidates. The question was unambiguous but rather clear to be
understood by an average student or a well-prepared student. The statement of profit
or loss however provided year end as well as quarterly information which distracted
some candidates. Some candidates erroneously computed some ratios meant for the
statement of financial position using the quarterly information. Some candidates did
not compute the required ratios to be used to compare with the given ones in the
question before writing the report. They went ahead to use the given ratios for their
analysis in the reports. Surprisingly, some of the candidates had basic ratios like
current ratios, quick ratio, gross profit margin and asset turnover formula wrong.
Most candidates could not interpret the ratios and relate it to the demands of the
question with reference to financial performance and financial position of the entity
in question. Another area of concern is the report writing and the format of writing
reports. Some of the candidates failed to write a report using the appropriate format.
Some candidates just quoted the ratios in the report, comparing them period to period
without analysing or explaining their relationships.

Page 28 of 29
CONCLUSION
As indicated earlier, overall, candidates performed better than previous diets
although the nature of responses from candidate suggest that there is evidence of ill
preparation and lack of appreciation of accounting standards. It seems that the
exemptions granted to most candidates is a factor of poor performance given that
candidates lack the pre-requisite knowledge and competence for corporate reporting.
It is suggested that candidates preparing for corporate reporting paper should
thoroughly revise the financial reporting paper even when they are exempted from
taking the financial reporting paper.

Page 29 of 29
 AUGUST 2022 PROFESSIONAL EXAMINATION
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS & MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was moderate. The questions were based on the syllabus
and were largely straight forward and of the right level. The mark allocation followed
the weightings in the syllabus and was fairly allocated to each sub-question. Most
questions were clearly stated and followed higher order learning outcomes. Questions
that required considerable amount of work were commensurate with the allotted time
and marks.

PERFORMANCE OF CANDIDATES
The general performance of candidates in this exams diet was better than previous
diets. There was a marginal increase in the pass rate. Candidates who performed well
demonstrated a clear understanding of the subject matter. Some candidates also
showed abysmal performance. The poor level of preparedness of some candidates
reflected in their poor performance.

Page 1 of 27
QUESTION ONE

Below are the summarised statements of financial position of three entities: Labone Ltd
(Labone), Nungua Ltd (Nungua) and Teshie Ltd (Teshie) as at 31 December 2021.

Statements of financial position as at 31 December 2021

Labone Nungua Teshie
GH¢million GH¢million GH¢million
Assets
Non-current assets
Property, plant and equipment 1,150 800 400
Investment in Nungua 560 - -
Investment in Teshie 60 - -
Other investment 140 - -
1,910 800 400
Current assets 490 200 100
Total assets 2,400 1,000 500
Equity and liabilities
Equity:
Equity shares of GH¢1 each 400 320 200
Retained earnings 1,225 440 200
Other reserves 95 - -
1,720 760 400
Non-current liabilities 300 80 40
Current liabilities 380 160 60
Total equity and liabilities 2,400 1,000 500

Additional information
i) On 1 January 2018, Labone acquired 80% of the equity share capital of Nungua for cash
consideration of GH¢560 million. At the same date, Labone acquired 70% of the equity
share capital of Teshie for cash consideration. Labone has correctly recorded both
transactions. At this time, the balances on the retained earnings, the fair values of non-
controlling interests and fair values of the identifiable net assets of Nungua and Teshie were
as follows:
Nungua Teshie
GH¢million GH¢million
Retained earnings 300 120
Fair value of non-controlling interests 140 80
Fair value of net assets 640 310

Any difference between the acquisition date fair value and book value of the identifiable
net assets of both investees was due to land. Fair value adjustments should be deemed as
temporary differences which are subject to tax of 20%. The fair values of identifiable net
assets above are not yet adjusted for tax. Shortly after acquisition, Teshie incorporated the
fair values (together with any tax effects) into its separate financial statements, but Nungua
had not yet incorporated the fair values into its separate financial statements.

ii) On 1 October 2021, Labone disposed off 40% out of the 70% equity shares of Teshie for
GH¢220 million. Labone credited the proceeds received to its “Investment in Teshie” and
debited “Cash”. At this time, it was determined that the fair value of the remaining interest

Page 2 of 27
 was GH¢180 million. Following the sale, Labone could only exert significant influence
over Teshie.

iii) During the financial year, Labone transferred goods worth GH¢5 million every month to
Teshie. By 31 December 2021, Teshie had not sold the last two months’ deliveries and had
included them in its year-end inventory. Labone charges three-seventh (3/7) mark-up on all
sales.

iv) Labone’s receivable balance include GH¢12 million owed by Teshie in respect of the last
three months’ sales. This balance agreed with the corresponding payables in Teshie’s
financial statements.

v) In its separate financial statements, Labone has accounted for its investments in both
Nungua and Teshie at cost. It is the policy of Labone group to measure goodwill in full and
to record non-controlling interests at fair value at acquisition. Neither goodwill of Nungua
nor that of Teshie has suffered any impairment since acquisition.

vi) Labone has two internal business segments: Construction Division and Merchandize
Division. On 1 July 2021, the Construction Division entered into a 1-year fixed price
contract to construct an ultra-modern office complex at a contract sum of GH¢60 million
for a district government agency located in the Eastern zone of Ghana. Total estimated
costs at the time the contract was concluded were GH¢52 million. Actual costs incurred up
to 31 December 2021 amounted to GH¢32 million. At 31 December 2021, the Directors of
Labone revised its total construction costs on the project to GH¢64 million. No progress
payments have been received from the agency. The only entries made have been to include
the costs incurred in Labone’s inventory. Labone measures progress to completion on the
basis of cost.

vii) During the current year, Nungua and Teshie reported profits after tax of GH¢48 million
and GH¢40 million respectively. Unless otherwise stated, it may be assumed that profits
accrued evenly over the year and that no dividends were paid during the year.

(Note: Deferred tax adjustment should be ignored, unless otherwise indicated.)

Required:
Prepare the consolidated statement of financial position of the Labone Group as at 31
December 2021.
(Total: 20 marks)

Page 3 of 27
QUESTION TWO

Unity Link Ltd (ULL) has enjoyed a significant market share in the southern part of Ghana
over the years. However, ULL has suffered liquidity challenges due to the effects of the
pandemic lock down and its subsequent restrictions. ULL’s main source of income,
dealings in luxurious goods, has reduced significantly because customers have shifted their
demand to necessities of life.

The following transactions were undertaken by ULL:

a) ULL has entered into a contract to sell one of their gold refinery equipment on 31 January
2023 and immediately lease it back. The Finance Director in consultation with the Finance
Manager has decided to classify this transaction as a non-current asset “held for sale” in its
financial statements for the year ended 31 December 2022 as he rates this transaction as
highly probable. The market value for the gold refinery equipment has not changed in many
years and is unlikely to change in the foreseeable future. The contract states that the gold
refinery equipment should be disposed off at its fair value of GH¢6 million and for ULL to
lease it back over a period of 10 years. It is estimated that GH¢400,000 is needed to
refurbish the gold refinery equipment and there is no legal requirement to do so. ULL has
in error, treated this amount as a reduction of the asset’s carrying amount at 31 December
2022 and the corresponding debit has been made to profit or loss. The gold refinery
equipment is depreciated at 5% per annum using the reducing balance method and at 31
December 2022, the carrying amount after depreciation and deduction of the proposed cost
of refurbishment is GH¢3.6 million. (7 marks)

b) ULL has established a chain of business franchise. This franchise was obtained from a
foreign company. In this arrangement, dealers in luxury items, especially refined gold
obtain a franchise under a brand name “Lockhert” from ULL to sell its own refined gold.
The budgeted costs of obtaining a franchise from a foreign company are based on the
estimated revenues from the franchise given out to local companies. These costs of
obtaining a franchise are then capitalised as an intangible asset and called “Franchise cost”.
The Finance Director is convinced that the franchise is consumed as Franchisees produce
their own refined gold. ULL currently amortises the franchise based on estimated future
revenues from the franchise. For example, the franchise is estimated to generate GH¢1.6
million of revenue in total and GH¢800,000 of that revenue will be generated in year one.
The intangible asset will be amortised by 50% in year one. However, industry practice is
to amortise the capitalised cost less its recoverable amount over its remaining useful life.
(6 marks)

c) ULL’s franchise registration fee, which is separate from the franchise fee, is treated as an
intangible asset and is initially recognised at the fair value of the consideration paid for the
registration. Subsequent franchise fee which is paid yearly are subject to negotiation. The
franchise contract has an embedded contingent performance conditions where a franchisee
may be paid a bonus based on increase in sales. This bonus is an additional contract cost.
ULL has reasoned that the only way to determine the value-in-use of the cost of franchise
is when a new customer takes over from an existing one who is prepared to sell his
franchise. This treatment is what prevails in the industry. (7 marks)

Required:
In accordance with International Financial Reporting Standards, discuss the appropriate
accounting treatment of the above transactions in the financial statements of ULL.
(Total: 20 marks)

Page 4 of 27
QUESTION THREE

a) Hamma Ltd is the parent company of a multinational listed group of companies. Hamma
Ltd uses the dollar ($) as its functional currency. Hamma Ltd recently acquired 80% of the
equity shares of Sunyani Ltd, a company located in the Bono Region of Ghana on 1 January
2022. The group’s current financial year-end is 31 December 2022.

The head office of Sunyani Ltd is located in Sunyani which uses the Ghana Cedi (GH¢) as
its main currency. However, its staff are spread across various locations. Consequently,
half of the staff are paid in GH¢ and the other half are paid in $. Sunyani Ltd has a high
degree of autonomy and is not reliant on finance from Hamma Ltd, nor do sales to Hamma
Ltd make up a significant proportion of their income. All of its sales and purchases are
invoiced in GH¢ and therefore Sunyani Ltd raises most of its finance in GH¢. Cash receipts
are retained in GH¢. Sunyani Ltd does not operate a $ bank account. Sunyani Ltd is required
by law to pay tax on its profits in GH¢.

Required:
In accordance with IAS 21: The Effects of Changes in Foreign Exchange Rates, explain
to the directors of Hamma Ltd, how the functional currency of Sunyani Ltd should be
determined. (5 marks)

b) Tieku Technologies (Tieku) imports customised equipment from Europe and China for
onward delivery in Ghana. It is the policy of Tieku that customers make payment for their
supplies one year before delivery. Tieku does not offer discounts for advance payments.
The advance payment allows Teiku to manage its import levels and to communicate
delivery of supply to its customers. On 1 April 2021, Tieku received GH¢5 million from a
customer to supply a customised equipment, and on 31 March 2022, Tieku delivered the
equipment. Tieku’s incremental borrowing rate on 1 April 2021 was 10%.

Required:
In line with IFRS 15: Revenue from Contract with Customers, provide explanation (with
calculations and entries, if necessary) as to how the above scenario would be treated by
Tieku during the year ended 31 March 2022. (5 marks)

c) Mr Ben Terkper, the Finance Director of Gogo Ltd, is known to be very strict in managing
his staff and his dealings with other employees. A new product introduced by the company
is yielding high sales. This has led to increases in cash shortages. In order to reduce the
cash shortages, Management employed Hannah, a cousin of the Managing Director, Mr
Okantey.

It is the policy of the company to recover cash shortages made by Cashiers by the end of
the next working day. Over the years, Mr. Terkper has applied this policy without fear or
favour. Hannah, since her employment as a Cashier, has made several cash shortages which
have come to the attention of Mr. Terkper, the Finance Director and Mr. Okantey, the
Managing Director. However, Hannah has never been asked to refund any of the cash
shortages made so far. The financial statements for the year ended 31 December 2021 is
being prepared and Mr. Okantey has instructed Mr. Terkper to write off the losses made by
Hannah.

Page 5 of 27
 Required:
i) Assess the possible ethical breaches committed by Hannah, Mr. Terkper and Mr. Okantey.
(4 marks)
ii) Recommend FOUR (4) possible actions that should be taken in dealing with the ethical
breaches raised above. (6 marks)

(Total: 20 marks)

QUESTION FOUR

a) When acquiring an unquoted company in a takeover bid, the final price will be agreed by
negotiation. However, the crucial role of the price-earnings ratio in arriving at the final
price cannot be over emphasized.

Required:
State THREE (3) factors that are likely to influence the value of the price earnings ratio.
(3 marks)

b) Tinto Ltd produces handicrafts for both local and foreign markets. The company was
incorporated several years ago. The shareholders of Tinto Ltd would now like to realise
their investment. In order to arrive at an estimate of what they believe the business is worth,
they have identified a long established quoted company, Dingo Ltd, which has similar
business, but however produces for the European market only.

Summarised financial statistics for the two companies for the most recent financial year are
as follows:
Tinto Ltd Dingo Ltd
Issued shares (million) 8 20
Net assets value (GH¢ ’million) 14.4 30
Earnings per share (GH¢) 0.35 0.28
Dividend per share (GH¢) 0.20 0.24
Debt: Equity ratio 1:7 1: 6.5
Share price (as quoted on the stock market) - GH¢ 0 1.60
Expected rate of growth in earnings/dividends 5% 5%

Additional Information:
1) The net assets of Tinto Ltd are the net book values of tangible non-current assets including
working capital. However:
 A recent valuation of the buildings were GH¢1,500,000 above book value.
 An investment held which is designated as Equity Financial Asset at Fair Value through
Profit or Loss with a carrying value of GH¢1,000,000 is fair valued at GH¢1,100,000.
 Due to a dispute with one of their clients, an additional allowance for bad debts of
GH¢750,000 could prudently be made.
 An item of plant with a carrying value of GH¢800,000 is assessed to have value-in-use of
GH¢760,000 and fair value less cost to sell of GH¢780,000.

Page 6 of 27
2) Growth rate should be assumed to be constant per annum. Tinto Ltd’s earnings growth rate
estimate was provided by the marketing manager, based on expected growth in sales
adjusted by normal profit margins. Dingo Ltd’s growth rates are gleaned from press reports.

3) The dividend yield of Dingo Ltd approximates its cost of equity.

Required:
Compute a range of valuations for the business of Tinto Ltd, using the information available
and stating any assumptions made. Use the following methods for the valuation:
i) Net assets method (5 marks)
ii) Price earning method (3 marks)
iii) Dividend growth method (4 marks)

(Note: Ignore tax implications.)

c) Explain the consolidation implication of a change in group structure that does not result
in loss of control. (5 marks)

(Total: 20 marks)

Page 7 of 27
QUESTION FIVE

Wadie Ltd has been in operation for the past ten years. The company started operations in
Kumasi with just three employees, but currently operates in all the regions in Ghana, with
over five hundred employees.

The final meeting for the year of the Board of Directors of the company is to be convened
and as a tradition, the Finance Manager presented analysis of the financial performance of
the company for the financial year end. Below are the financial statements for the year
ended 31 December 2021:

Statement of Comprehensive Income for the year 31 December

2021 2020
GH¢000 GH¢000
Revenue 373,578 424,486
Cost of sales (253,604) (254,210)
Gross profit 119,974 170,276
Impairment of financial assets (2,477) (1,800)
Distribution costs (87,036) (91,309)
Administrative expenses (32,566) (50,656)
Other income 2,369 10,039
Operating profit 264 36,550
Finance income 2,594 4,949
Finance costs (2,069) (2,765)
Profit before income tax 789 38,734
Income tax expense (285) (13,718)
Profit for the year 504 25,016

Statement of Financial Position as at 31 December

Assets 2021 2020
GH¢000 GH¢000
Non-current assets
Property-plant & equipment 178,315 187,380
Financial asset 2,793 3,726
Intangible assets 1,426 867
182,534 191,973
Current assets
Inventories 94,372 96,606
Trade receivables 100,612 47,024
Other receivables 4,713 1,184
Cash and cash equivalents 54,021 39,032
253,718 183,846

Total assets 436,252 375,819

Equity & Liabilities:
Share capital 10,000 10,000
Retained earnings 250,105 249,591
260,105 259,591

Page 8 of 27
 Non-current liability
Deferred taxation 9,349 11,295
Employee benefit obligations 284 1,222
Interest-bearing liabilities 1,833 3,717
11,466 16,234
Current liabilities
Current tax 713 425
Employee benefit obligations 39 168
Trade payables 160,923 96,363
Dividend payable 3,006 3,038
164,681 99,994
Total equity & liabilities 436,252 375,819

Additional information:
i) Finance income relates to interest earned on the company’s investment in Government of
Ghana loan notes.
ii) Dividend payable represents the dividend declared or approved by shareholders at the last
Annual General Meeting.

Required:
As the Finance Manager of the company, write a report to the Board of Directors, assessing
the comparative performance of the company for the year ended 31 December 2021.
Your report should use THREE (3) profitability ratios, TWO (2) liquidity ratios, THREE
(3) efficiency ratios and TWO (2) gearing ratios.
(Total: 20 marks)

Page 9 of 27
SUGGESTED SOLUTION

QUESTION ONE
Labone Group
Consolidated statement of financial position as at 31 December 2021
Assets: GH¢m
Non-current assets:
Property, plant and equipment (1,150 + 800 + 20) 1,970
Goodwill (W3) 64
Other investments 140
Investment in associate (W7) 182.1
2,356.1
Current assets (490 + 200 – 4 (W8)) 686
Total assets 3,042.1

Equity and liabilities

Share capital 400
Retained earnings (W5) 1,455.1
Other reserves 95
Total equity attributable to shareholders of parent 1,950.1
Non-controlling interest (W4) 168
Total equity 2,118.1
Non-current liabilities (300 + 80 + 4 deferred tax(W2)) 384
Current liabilities (380 + 160) 540
Total liabilities 924
Total equity and liabilities 3,042.1

Workings:
1. Group structure
Labone

80% 70%-40%=30%

Nungua (4yrs sub) Teshie (3.5 yrs subsidiary; 3 months associate)

Summary of percentages
Nungua Teshie
No Change Before Disposal After
disposal disposal
Parent’s % 80% 70% (40%) 30%
Non-controlling 20% 30% - -
interests
100% 100%

Page 10 of 27
2. Net assets schedule
Acq. date Rep. date Post-acq
GH¢m GH¢m GH¢m
Nungua
Share capital 320 320 -
Retained earnings 300 440 140
Fair value adj. – land (640 – 320 – 300) 20 20 -

640 780 140

Deferred tax (20% x 20) (4) (4) -
636 776 140

Acq. date Rep. date Post-acq

GH¢m GH¢m GH¢m
Teshie
Share capital 200 200 -
Retained earnings 120 200 80
Fair value adj. – land (310 – 200 – 120) (10) - 10

310 400 90
Deferred tax (20% x 10) 2 - (2)
312 400 88

Net assets at disposal date (1 Oct 21) and post-acquisition

movement analysis:
Total post-acquisition movements 88
Less: Profit after disposal (1/10 – 31/12/21) (40 x 3/12) (10)
Post-acquisition before disposal 78

At disposal (312 + 78) 390

3. Goodwill
Nungua
GH¢m
Cost of investment 560
Fair value of NCI at acquisition 140
Fair value of identifiable net assets acquired (W2) (636)
Goodwill at acquisition and reporting 64

Teshie
GH¢m
Cost of investment (60 + 220) 280
Fair value of NCI at acquisition 80
Fair value of identifiable net assets acquired (W2) (312)
Goodwill at acquisition and disposal 48

Page 11 of 27
4. Non-controlling interests
GH¢m
Nungua
Fair value of NCI at acquisition 140
Add: NCI % of Nungua’s post –acquisition movements: (20% x 140) 28
NCI at reporting 168

Teshie
Fair value of NCI at acquisition 80
Add: NCI % of Teshie’s post –acquisition movements:
Up to disposal (30% x 78) 23.4
NCI at disposal 103.4

5. Retained earnings
GH¢m
Labone
Balance b/d 1,225
PUP on inventory (30% x 3/10 x 2mths x 5) (0.9)
Loss on fixed price contract (W8) (4)

Nungua:
Parent’s share of post-acquisition earnings (80% x 140) 112

Teshie:
Parent’s share of post-acquisition earnings
Up to 1 October 2021 (70% x 78) 54.6
From 1 October 2021 to reporting (30% x 10) 3
Gain on disposal of subsidiary (W6) 65.4
At reporting 1,455.1

6. Disposal of 40% holding in Nungua

GH¢m GH¢m
Fair value of consideration received 220
Fair value of remaining interest at disposal 180
Net assets at disposal (W2) 390
Goodwill at disposal (W3) 48
Less: NCI at disposal (W4) (103.4) (334.6)
Gain on disposal 65.4

7. Investment in associate (30% remaining – Nungua)

GH¢m
Fair value of remaining interest at disposal 180
Add: Parent’s share of post-acquisition movements (W5) 3
Less: PUP on inventory (W5) (0.9)
At reporting 182.1

Page 12 of 27
 8. Long-term contract
GH¢m
Determination of contract profit/loss at 31 December 2021:
Contract price 60
Less: total contract costs (64)
Contract loss (4)

Calculation of percentage of completion as at 31 December

2021
= 32/64 x 100
= 50%

Revenue to recognise for the year (50% x 60) 30

Cost for the year (50% x 64) (32)
Provision for expected contract losses (50% x 4) (2)
Loss to recognise within profit (4)

Contract asset/liability:
Actual costs to date 32
Less: contract loss recognized (4)
Contract asset 28

GH¢32m actual cost included within inventory (current assets) would reduce by
the recognised loss of GH¢4m to obtain the correct asset value of GH¢28m. Or the
GH¢32m can be removed and replaced with the GH¢28m.

(100 ticks @ 0.20 marks = 20 marks)

EXAMINER’S COMMENTS
Candidates generally had a satisfactory performance in answering the question, which
tested the candidates’ understanding on preparing consolidated statement of financial
position. Notwithstanding the satisfactory performance candidates had in their
responses to the question, the following observations were made, and it is important
to point out, to guide candidates of ICAG who will be sitting for the paper in the
future:
 Candidates had difficulty in accounting for the change in group structure leading to
loss of control. Some candidates were still consolidating the assets and liabilities of the
subsidiary that was disposed.
 Though fundamental, some candidates still included pre-acquisition equity elements
like share capital, and retained earnings in the consolidated statement of financial
position and in addition, the investment in the subsidiaries in the consolidated
statement of financial position.
 Generally, the gain on the disposal of the subsidiary upon losing control in the
subsidiary was incorrectly done by almost all the candidates.
 Candidates must be familiar with the correct computation of gain or loss in the
consolidated statement of financial position, whenever there is disposal leading to loss
of control.

Page 13 of 27
QUESTION TWO

a) This scenario would be accounted using the rules under IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations, IAS 37 Provisions, Contingent Liabilities and
Contingent Assets and IFRS 16 Leases.
1 mark for stating the standards

 IFRS 5 addresses the accounting for assets which are classified as held for sale.
IFRS 5 requires a non-current asset to be classified as held for sale if its carrying
amount will be recovered principally through a sale transaction rather than
through its continuing use.

It must be available for immediate sale in its present condition, and its sale must
be highly probable within 12 months of classification as held for sale.

United Link Ltd (ULL) has entered into a firm sales commitment, the price quoted
appears reasonable and the sale will occur within the next one month (on 31
January 2023). Therefore, the finance director is on point in his position to classify
the equipment as held for sale.

The equipment would therefore be measured at the lower of carrying amount and
fair value less cost of disposal, not depreciated any longer and presented under
current assets.

However, a sale and leaseback transaction is outside the scope of IFRS 5 and is
covered by IFRS 16 Leases.
Any 2 valid points for 2 marks

 The GH¢400,000 to be spent on refurbishment of the gold refinery equipment

should not be treated as an impairment of the asset’s carrying amount at 31
December 2022.

There is no present constructive or legal obligation as a result of a past event and

there is no probable payment. ULL may decide not to carry out the refurbishment,
especially as the equipment is going to be sold and then subsequently leased back.

Therefore, the GH¢400,000 should be added back to the carrying amount of the
equipment and a corresponding credit made to profit or loss. The above is in line
with IAS 37.
Any 1 valid points for 1 mark

 A sale and leaseback transaction occurs where an entity transfers an asset to

another entity and leases that asset back from the buyer/lessor.

The first required criteria of IFRS standards is to determine whether a sale has
occurred. Under IFRS 16, an entity must apply the IFRS 15 requirements to
determine when a performance obligation is satisfied. If it is concluded that the
Page 14 of 27
 transfer of an asset is not a sale, then the seller/lessee will continue to recognise
the transferred asset. In this event, a financial liability and financial asset will be
recognised under IFRS 9 Financial Instruments.

In this case, it seems that a sale will occur on 31 January 2023 because of the binding
sale commitment. If the fair value of the sale consideration equals the asset’s fair
value, and the lease payments are at market rates, there is no need to adjust the
sales proceeds under IFRS 16.

ULL should follow IFRS 15 to account for the sale and then apply IFRS 16 to
account for the lease. Thus, ULL should account for the sale and leaseback as
follows:
 Derecognise the underlying asset.
 Recognise the sale at fair value.
 Recognise only the gain/loss which relates to the rights transferred to
buyer/lessor.
 Recognise a right-of-use asset as a proportion of the previous carrying amount of
the underlying asset.
 Recognise a lease liability.

ULL should account for the sale and leaseback at 31 January 2023 as follows:
Carrying amount of equipment is GH¢ (3.6 + 0.4) million = GH¢4 million
Assuming the present value of the lease is equivalent to the equipment’s fair value
at 31 January 2023, right-of-use asset would be equal to the carrying amount (GH¢4
million) of the underlying asset (equipment).
Any 3 valid points for 3 marks

b) This scenario would be accounted using rules under IAS 38 Intangible Assets.
ULL’s accounting policy to base the amortisation of the intangible asset for
franchise rights on revenue stemming from the rights seems reasonable and
systematic. However, IAS 38 Intangible Assets sets out a rebuttable presumption
that amortisation based on revenue generated by an activity which includes the
use of an intangible asset is not appropriate. This presumption can be overcome
when it can be demonstrated that revenue and the consumption of the economic
benefits of the intangible asset are highly correlated.

The good brand embodied in the franchise rights will generate cash flows through
the subscription by local companies (sub-franchisees) for the franchise rights and
the estimated revenues from the franchise given out to local companies determine
the amount to be spent on obtaining the franchise rights from the foreign company.

Therefore, revenue reflects a proxy for the pattern of consumption of the benefits
received. Revenue and consumption of the economic benefits of the intangible
asset seem highly correlated and therefore a revenue-based amortisation method
seems appropriate.

Page 15 of 27
 The industry practice method is also acceptable and conceptually sound as it is
based on an analysis of the remaining useful life of the rights and the recoverable
amount. Such an approach does not contradict IAS 38’s prohibition on revenue-
based amortisation because it is not based on direct matching of revenue and
amortisation.
The useful life of an asset is required to be reassessed in accordance with IFRS
Standards at least at each financial year end. Where this results in a change in
estimate, this is will be accounted for prospectively from the date of reassessment.
IAS 38 also states that if a pattern of amortisation cannot be measured reliably, the
straight-line method must be used.
1 mark for stating the standard
Any 2 valid points for 5 marks

c) This scenario would be accounted using rules under IAS 38 Intangible Assets and
IAS 36 Impairment of Assets
 When a franchise agreement is concluded and registered, management should
make an assessment of the likely outcome of performance conditions. Contingent
consideration will be recognised in the franchise’s initial registration costs if
management believes the performance conditions will be met in line with the
contractual terms.

Periodic reassessments of the contingent consideration should be made. Any

contingent amounts which the directors of ULL believe will be payable should be
included in the franchise costs from the date management believes that the
performance conditions will be met. Any additional amounts of contingent
consideration not included in the costs of franchise registration will be disclosed
separately as a commitment.

Amortisation of the costs of the contract will be based upon the length of the
franchise agreement. The costs associated with the renegotiation of a franchise
agreement should be added to the residual balance of the franchise agreement
costs at the date of extending the agreement. The revised carrying amount should
be amortised over the remaining renegotiated contract length.

 In line with IAS 36, the franchise right should be only charged with impairment if
its carrying amount exceeds its recoverable amount, which is given by the higher
of the right’s fair value less cost of disposal and its value-in-use. Where either of
the two cannot be reliably estimated, the known amount becomes the recoverable
amount.
Value-in-use is given by the present value of the future cash flows expected to be
derived from continuing use and ultimate disposal of an asset or cash-generating
unit. The current industry practice in determining value-in-use for franchise seems
to be at odds with the requirements of IAS 36. However, if no clear-cut way out is
available, being consistent with the general practice is a welcomed stance under
IAS 8.

Page 16 of 27
 There is the need to determine whether it is possible to estimate value-in-use for
franchise rights as individual asset or as part of a cash generating unit. To a large
extent, it appears franchise right will most likely not be able to generate cash
inflows that are largely independent of other assets of an entity. Hence, it may be
more appropriate to include the rights in a cash generating unit for impairment
assessment.
1 mark for stating the standards
Any 2 valid points for 4 marks for the first section
Any 2 valid points for 2 marks for the second section

(Total: 20 marks)

EXAMINER’S COMMENTS
This question on selected accounting standards (IFRS) was a difficult question for
most candidates. It was generally not well answered though the questions were
straight forward. Although, the question covered the syllabus and straight forward,
most candidates were unable to express themselves adequately as expected. The
response or answers produced were very scanty and not addressing the key issues.
Most candidate failed to identify the applicable standards for the transactions as well
as illustrate or produce the financial statement extracts.

Page 17 of 27
QUESTION THREE

a) In accordance with IAS 21, the functional currency is the currency of the primary
economic environment in which the entity operates. With a foreign acquisition,
consideration should be given as to whether Sunyani Ltd should adopt the same
functional currency as its parent, Hamma Ltd. However, Sunyani Ltd appears to
be largely independent and is not reliant on Hamma Ltd for either sales or finance.
It is not required therefore for Sunyani Ltd to adopt the same functional currency
as Hamma Ltd which in this case is the dollar ($). Sunyani Ltd does not appear to
have transactions in dollars or have a dollar bank account and it can be concluded
that the dollar should not be their functional currency.

In determining its functional currency, Sunyani Ltd should consider the currency
which mainly influences its sales price of goods and the currency which mainly
influences its labour and other costs. This is likely to be the currency which goods
are invoiced in and the currency in which costs are settled. The location of the
entity’s head office is irrelevant except to the extent that it is likely that the costs of
running the head office are likely to be settled in the domestic currency. For
Sunyani Ltd, it appears that the vast majority of their transactions are in Ghana
Cedis (GH¢). All sales and purchases are invoiced in Ghana Cedis as well as
approximately half of their staff being paid in Ghana Cedis (GH¢). Funds for
finance are raised in Ghana Cedis (GH¢) which further suggests that Ghana Cedis
should be chosen as the functional currency of Sunyani Ltd.
(5 marks)

b) IFRS 15 requires an entity to recognise revenue at an amount that reflects the price
that a customer would have paid for the promised goods or services if the customer
had paid cash for those goods or services when (or as) the entity transfers to the
customer. The amount therefore should reflect the cash selling price at the
transaction date.

Where a contract requires payment by a customer significantly before

performance, the contract is said to contain significant financing component,
unless the prepayment is clearly for reasons other than financing.

There was no significant financing component in the arrangement between Tieku

and the retailer. The upfront payment was made to secure the future supply of
gadgets and not to provide Tieku with the provision of finance.
Hence, the cash selling price is the amount received.

Entries required
DR CR
GH¢000 GH¢000
At 01 April 2021:
Bank 5,000
Contract liability 5,000

Page 18 of 27
 At 31 March 2022:
Contract liability 5,000
Revenue 5,000

(Any 3 valid points for explanations for 3 marks;

calculations and entries for 2 marks)

c)
i) The following fundamental ethical principles might have been breached:
Integrity
The Accountant is expected to be straightforward and honest in his dealings. By
overlooking the shortages of Hannah when there is a policy for shortages to be
refunded the next working day, it only suggests that the Accountant is not honest
and straightforward in his dealings.

Objectivity
This principle enjoins the Accountant to be unbiased in his dealing without any
undue influence. The “special” treatment given to Hannah with respect to her
shortages made, can only suggest that she is treated differently from the others.
The influence of the Managing Director on Hannah’s case seems to have impaired
Mr. Terkper’s objectivity.

Professional competence
The instruction of the Managing Director to Mr. Terkper that the shortage made
by Hannah should be written off, can only suggest that the professional
competence the Accountant is expected to demonstrate on the job seems to be
impaired also. Writing off assets (cash) that do not lack recoverability is not
consistent with Accounting standards.

Professional behaviour
An Accountant is expected to conduct himself in a way that brings respect and
honour and not disrepute to the Accountancy profession. The disposition of Mr.
Terkper on the issue of Hannah to the point where he is “directed” by the
Managing Director that losses made by her are written off. This puts the
Accountancy profession into disrepute when an Accountant is expected to be
aware of the condition under which an asset/receivable is written off.
(4 points @ 1 mark each = 4 marks)

ii) Possible actions that the Finance Director should take include:
 The Finance Director needs to engage the Cashiers including Hannah on the
possible cause of the cash shortages they make for an immediate solution to be
given.

 The Finance Director should also organize requisite training for the Cashiers
including Hannah to minimize cases of cash shortages, if not eradicated entirely.

Page 19 of 27
 Mr. Terkper needs to engage the Managing Director on the “special treatment”
Hannah is being given on her cash shortages and its negative implication on the
company. The Managing Director should be made to understand how this special
treatment affects the work of the relative, Hannah herself and the other Cashiers.

 Mr. Terkper, again, needs to discuss with the Managing Director on why the cash
shortages made by Hannah cannot be written off, and the need to find a way for
the accumulated shortages to be recovered.

 Hannah needs to be engaged that all cash shortages made by her would be
refunded from her to the company to serve as a deterrent.

 Where the Managing Director insists that the loss made by Hannah should be
written off, the Finance Director must draw the attention of the company’s Board
to the issue.

 Mr. Terkper can always seek advice from the Professional body especially when
the Board of Directors is not able to provide guidance on the matter.
(Any 4 points @ 1.5 mark each = 6 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question was in two parts: accounting standards and ethics. As usual, the
accounting standards part of the question was poorly answered by most candidates.
Majority of candidates were familiar and were able to express themselves by
answering the functional currency relating to IAS 21. They were able to talk about the
determinants for the functional currency but only a few were able to state the
functional currency of the Subsidiary. With regards to the IFRS 15, they were not able
to state the entries appropriately. A greater percentage of the marks earned by
candidates came from the ethics part of the questions. Candidates provided
reasonable responses regarding the fundamental ethical principles that apply and the
possible courses of action to be taken to deal with the ethical dilemma.

Page 20 of 27
QUESTION FOUR

a) Factors likely to influence the value of the price-earnings ratio include:

 Investor sentiment
 Debt acquisition/leverage
 General market instability
 Earnings reports
(Any points @ 1 mark each = 3 marks)
b)
i) Net Assets Method
GH¢ million
Net Assets as per the draft account 14.40
Adjustments: Revaluation surplus –buildings 1.50
Fair value movement -Financial asset 0.10
Allowance for doubtful debts (0.75)
Impairment loss (0.02)
Value of business 15.23
(5 marks)
ii) Price-earnings Ratio Method
Value of business = Earnings x P/E Ratio
GH¢ million
Per draft accounts [GH¢0.35 X 8 million shares] 2.80
Adjustments:
Fair value gain 0.1
Allowance for doubtful debts (0.75)
Impairment loss (0.02)
Revised earnings 2.13

P/E Ratio Taken that the P/E Ratio of the unlisted entity must be adjusted for lack
of marketability and higher risk.
P/E Ratio of Dingo = 160p/28 p =5.7
Adjusted to say 4
Value of business = GH¢2.13 X 4 = GH¢8.52 million
(3 marks)
Dividend Growth method
Value of business = Do (1+g)/(DY-g)
Do = GH¢0.20 X 8 million shares = GH¢1.6 million
DY = that of listed entity (appropriately adjusted)
= 24p/160p =15%
Adjusted to say 20%

Value of business = GH¢1.6 million X 1.05

0.20 – 0.05
= GH¢1.680/0.15
= GH¢11.2
(4 marks)

Page 21 of 27
 Summary GH¢ million
P/E Ratio 8.52
Dividend growth 11.20
Net Assets 15.23

c) The following accounting implications should be noted when an NCI in a

subsidiary changes but the same parent retains control:
 no gain or loss is recognised when the parent sells shares (so increasing NCI)
 a parent’s purchase of additional shares in the subsidiary (so reducing NCI) does
not result in additional goodwill or other adjustments to the initial accounting for
the business combination
 in both situations, the carrying amount of the parent’s equity and NCI’s share of
equity is adjusted to reflect changes in their relative ownership interest in the
subsidiary. Any difference between the amount of NCI adjustment and the fair
value of the consideration received or paid is recognised in equity, attributed to
the parent.
(5 marks)

(Total: 20 marks)
EXAMINER’S COMMENTS
This question on share/business valuation was expected to be one of the simplest for
candidates. Unfortunately, some candidates could not answer this question
appropriately. The net assets method was very well answered by most candidates that
attempted it. Except that after determining the value of Tinto (which was the
requirement) some went ahead to determine the MPS, though not specifically
required. The P/E ratio method was also well attempted, but most candidates failed
to adjust the earnings of Tinto to reflect the additional information provided. Also, in
determining the P/E ratio of Dingo Ltd in order to discount to reflect that of Tinto,
they mistakenly used the EPS of Tinto instead of being consistent with the information
on Dingo. Some who were able to determine accurately the P/E ratio of Dingo but
failed to discount it to reflect the risk in Tinto and used it directly. Most candidates
also attempted the dividend growth method well except that after determining the
dividend yield (DY) of Dingo to be used as the cost of equity, they again did not adjust
it to reflect the risk in Tinto, thereby making the value of Tinto higher than expected.

Page 22 of 27
QUESTION FIVE

Memorandum

To: The Board of Directors

From: The Finance Manager
Date: 3rd April 2022
Subject: Analysis of the performance of Wadie Ltd
This report assesses the performance of the company for the year ended 31 st
December 2021 using the comparative year 2020 as the benchmark. Relevant
figures used or emphasized in the report can be referenced in the appendix
attached. The basis of performance deployed in this report are profitability,
working capital management and leverage/gearing.

Profitability
The company’s sales revenue in 2021 year reduced by approximately 12%,
resulting in reduction in the profit before interest and tax. The company’s profit
before interest and tax declined astronomically by 97.99%. The company as a result
in the 2021 year generated only GH¢0.001 return on the capital of all long-term
investors, compared to the returns generated in the 2020 year of GH¢0.14. The
gross profit margin of the company has reduced in the 2020 year, suggesting
decline in the performance of the company in controlling its cost of sales. The profit
before interest and tax of the company declined also per every revenue generated
in the 2021 year. In 2020, the company generated GH¢0.09 on a cedi revenue but
in 2021, the performance reduced significantly to GHp0.07.
Working capital management
The current assets of the company in the 2021 year could cover the current
liabilities 1.54 times. This represents a reduction in performance as in the
comparative year; the company could cover the current liabilities with the
available current assets by 1.84 times. The Acid-test ratio, which excludes the
inventory from the company’s available current assets because of its low liquidity,
however, indicates an improvement in the liquidity of the company for the 2021
year.
There has also been an improvement in the trade receivables collection of the
company. In 2020, it took the company average days of 139 to recover cash from
customers who had purchased on credit, but in the 2021 year, the company used
average days of 136.
The company also improved in the credit days received from suppliers for goods
purchased on credit. There was an extension in the days used to pay suppliers by
94 days, and this is good for cash flow purpose.

Leverage/gearing
Assessing the capital structure of the company, reveals that the company is lowly
geared. The proportion of long-term debt deployed by the company even reduced
in the 2021 year. Though the company is lowly geared, the capacity of the company
to pay its financing fixed cost or interest expense, reduced in the 2021 year. In the
Page 23 of 27
 year 2020, the profit from operations could cover interest cost by 13.22, but in 2021,
this reduced sharply to 0.13 times.

Conclusion
The company’s profitability has reduced but has experienced an improvement in
its management of receivables, inventory and payables. Generally, the company’s
working capital management has improved. The financial risk of the company is
still lowly geared but lacks the capacity to generate enough profit to cover the
current interest obligation it has.

Signed
Finance Director

Appendix:
RATIOS FORMULA 2021 2020
Profitability:
Return on 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 264 36,550
= 𝑥 100 𝑥100 𝑥100
capital 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 261,938 263,308
employed (𝑆𝐹 + 𝐿𝑜𝑛𝑔 𝑙𝑖𝑎𝑏. )
=0.10% =13.88%
Return on 𝑃𝐵𝐼𝑇 264 + 2,594 36,550 + 4,949
= 𝑥 100 𝑥100 𝑥100
capital 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 261,938 263,308
employed (𝑆𝐹 + 𝐿𝑜𝑛𝑔 𝑙𝑖𝑎𝑏. )
=1.09% =15.76%
Return on 𝑃𝐵𝐼𝑇 264 + 2,594 36,550 + 4,949
= 𝑥 100 𝑥100 𝑥100
capital 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 436,252 − 164,681 375,819 − 99,994
employed (𝑇𝐴 − 𝐶𝐿)
=1.05% =15.05%
Return on 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 264 36,550
= 𝑥 100 𝑥100 𝑥100
capital 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 436,252 − 164,681 375,819 − 99,994
employed (𝑇𝐴 − 𝐶𝐿)
=0.097% =13.25%
Return on 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 789 38,734
= 𝑥 100 𝑥100 𝑥100
capital 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 436,252 − 164,681 375,819 − 99,994
employed (𝑇𝐴 − 𝐶𝐿)
=0.29% =14.04%
Return on 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 789 38,734
= 𝑥 100 𝑥100 𝑥100
capital 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 261,938 263,308
employed (𝑆𝐹 + 𝐿𝑜𝑛𝑔 𝑙𝑖𝑎𝑏. )
=0.3% =14.71%
Return on 𝑃𝐵𝐼𝑇 504 25,016
= 𝑥 100 𝑥100 𝑥100
Equity 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 260,105 259,591

=0.19% =9.64%
Return on 𝑃𝐴𝑇 264 + 2,594 36,550 + 4,949
= 𝑥 100 𝑥100 𝑥100
Assets 𝐸𝑞𝑢𝑖𝑡𝑦 436,252 375,819
Page 24 of 27
 =0.66% =11.04%
Gross profit 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 119,974 170,276
= 𝑥 100 𝑥100 𝑥100
margin 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 373,578 424,486

=32.11% =40.11%
Operating 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 264 36,550
𝑥 100 𝑥100 𝑥100
profit 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 373,578 424,486
margin
=0.07% =8.61%
Net profit 𝑃𝐵𝐼𝑇 264 + 2,594 36,550 + 4,949
𝑥 100 𝑥100 𝑥100
margin 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 373,578 424,486

=0.77% =9.78%
Net profit 𝑃𝐴𝑇 504 25,016
𝑥 100 𝑥100 𝑥100
margin 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 373,578 424,486

=0.13% =5.89%
Net profit 𝑃𝐵𝑇 789 38,734
𝑥 100 𝑥100 𝑥100
margin 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 373,578 424,486

=0.21% =9.12%

Liquidity
Current ratio 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 253,718 183,846
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 164,681 99,994

=1.54:1 =1.84:1
Acid-test 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 253,718 − 94,372 183,846 − 96,606
=
ratio 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 164,681 99,994

=0.97:1 =0.87:1
Cash ratio 𝑐𝑎𝑠ℎ & 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣. 54,021 39,032
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 164,681 99,994

=0.3:1 =0.39:1

Efficiency
Inventory 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 94,372 96,606
= 𝑥365 𝑥365 𝑥365
turnover 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 253,604 254,210
Period
(days) =136 days =139 days
Inventory 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 253,604 254,210
=
turnover 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 94,372 96,606

=2.69 times =2.63 times

Page 25 of 27
Trade 𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 100,612 47,024
= 𝑥365 𝑥365 𝑥365
receivables 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 373,578 424,486
collection
period = 98 days =40 days
(days)
Trade 𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 373,578 424,486
=
Receivables 𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 100,652 47,024
turnover
=3.71 times =9.03 times
Trade 𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 160,923 96,363
= 𝑥365 𝑥365 𝑥365
payables 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 253,604 254,210
settlement
period =232 days =138 days
(days)
Trade 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 253,604 254,210
=
Payables 𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 160,923 96,363
turnover
=1.58 times =2.64 times

Net Assets 𝑆𝑎𝑙𝑒𝑠 373,578 424,468

=
Turnover 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 − 436,252 − 164,681 375,819 − 99,994
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 1.38 times =1.54 times
Total Assets 𝑆𝑎𝑙𝑒𝑠 373,578 424,468
=
Turnover 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 436,252 375,819

= 0.86 times =1.13 times

Working = Inventory turnover = 136 + 98 -232 = 139 + 40 – 138
capital cycle Period (days)+ Trade
receivables collection
period (days)- Trade
payables settlement = 2 days = 41 days
period (days)

Gearing:
Interest 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 264 36,550
cover ratio 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 2,069 2,765
=0.13 times =13.22 times

Interest 𝑃𝐵𝐼𝑇 264 + 2,594 36,550 + 4,949

cover ratio 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 2,069 2,765
=1.38 times =15 times
Debt-to- 𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 1833 3,717
𝑥 100
equity ratio 𝐸𝑞𝑢𝑖𝑡𝑦 260,105 259,591
(%)
=0.70% =1.43%

Page 26 of 27
 Debt-to- 𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 1,833 3,717
𝑥 100
Equity plus 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝐷𝑒𝑏𝑡 260,105 + 1,833 259,591 + 3,717
Debt ratio
(%) =0.7% =1.41%

(1/2 mark for each correct computation of ratio = 10 marks; 10 marks for the report)
(Total = 20 marks)

EXAMINER’S COMMENTS
This question required a comparative analysis of the financial performance of a
company over a two year period. The question was attempted by all the candidates.
The question was unambiguous but rather clear to be understood by an average
candidate or a well-prepared candidate. The main challenge with this question was
the definition of the ratios computed. Another area of concern is the report writing
and the format of writing reports. Some of the candidates failed to write a report using
the appropriate format. Some candidates just quoted the ratios in the report,
comparing them period to period without analysing or explaining their relationships.

CONCLUSION
As indicated earlier, candidates performed better than previous diets although the
nature of responses from candidate suggest that there is evidence of ill preparation
and lack of appreciation of accounting standards. It seems that the exemptions granted
to most candidates is a factor of poor performance given that candidates lack the pre-
requisite knowledge and competence for corporate reporting. It is suggested that
candidates preparing for corporate reporting paper should thoroughly revise on the
financial reporting paper even when they are exempted from taking the financial
reporting paper. The exemptions criteria or policy must be re-looked at. Some
candidates just register and sit the paper without the aim of passing but because
he/she must register for all subjects. So, they prepare for other subject(s) they have
interest in.

Page 27 of 27
 DECEMBER 2022 PROFESSIONAL EXAMINATIONS
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was moderate. The questions were based on the syllabus
and were largely straight forward and of the right level. The marks allocation followed
the weightings in the syllabus and was fairly allocated to each sub-question. Most
questions were clearly stated and followed higher order learning outcomes. Questions
that required considerable amount of work were commensurate with the allotted time
and marks.

PERFORMANCE OF CANDIDATES
The general performance of candidates in this exams diet was poor compared to
previous diets. There was a marginal decrease in the pass rate. Candidates who
performed well demonstrated a clear understanding of the subject matter. Some
candidates also showed abysmal performance. The poor level of preparedness of some
candidates reflected in their poor performance.

Page 1 of 31
QUESTION ONE

Blackstars Ltd is a very successful SME business operating in a very good commercial
location in Accra. The following statements of financial position are as at 30 June 2022:

Blackstars Ltd Meteors Ltd Satellite Ltd

GH¢’million GH¢’million GH¢’million
Assets:
Tangible non-current assets 1,024 352 224
Investment in Meteors Ltd 320 - -
Investment in Satellite Ltd 48 - -
Current assets 435 152 104
Total assets 1,827 504 328
Equity and liabilities:
Share capital 760 208 184
Revaluation reserve 72 - -
Retained earnings 312 168 75.2
Total equity 1,144 376 259.2
Non-current liabilities 512 24 12.8
Current liabilities 171 104 56
Total equity and liabilities 1,827 504 328

On 1 July 2019, Blackstars Ltd acquired 10% holding of Meteors Ltd when the fair value
of the net assets was GH¢260 million at a purchase consideration of GH¢24 million. On 1
July 2021, Blackstars Ltd further acquired 70% holding in Meteors Ltd when the fair value
of the net assets was GH¢368 million at a purchase consideration of GH¢296 million.

The following additional information will be relevant to the consolidated financial

statement of Blackstars Ltd:
i) The estimated fair value of the initial 10% investment in the shares of Meteors Ltd was
GH¢32 million at 30 June 2021.

ii) Blackstars Ltd wishes to use the full fair value method of accounting for the acquisition of
Meteors Ltd. At 1 July 2021, the estimated value of the non-controlling interests was
GH¢76 million.

iii) The difference between the carrying amount of Meteors Ltd’s net assets and their fair value
at the date of acquisition was due to land valued at cost which on 1 July 2021 had a fair
value of GH¢20 million in excess of its carrying value. There has been no subsequent
significant change in that value.

iv) On 1 July 2021, Blackstars Ltd acquired 25% holdings in Satellite Ltd when the fair value
of the net assets was GH¢160 million for a purchase consideration of GH¢48 million.

v) On 1 July 2021, the fair value of Satellite Ltd’s land was GH¢12.8 million in excess of its
carrying value. There has been no subsequent significant change in that value.

vi) Goodwill arising on acquisition is tested for impairment at each year end. The recoverable
amount of goodwill in Meteors Ltd at 30 June 2022 was GH¢24 million. There has been
no impairment of the investment in Satellite Ltd.

Page 2 of 31
vii) During the year, the Directors of Blackstars Ltd decided to form a defined benefit pension
scheme for its employees. The company contributed cash amounting to GH¢200 million to
the scheme but the only accounting entry for this has been to include it in receivables at 30
June 2022. At 30 June 2022 the following details relate to the pension scheme:
GH¢’million
Present value of obligation 253.6
Fair value of plan assets 241.6

Required:
Prepare the consolidated statement of financial position of the Blackstars Ltd group as at
30 June 2022.
(Total: 20 marks)

QUESTION TWO

a) Inaki Group (Inaki) has held a 90% interest in a subsidiary for over five years and prepares
its consolidated financial statements to 31 March each year. The share consideration given
for this investment was GH¢3,960 million and fair value increase in respect of non-
depreciable land was GH¢200 million (this has not changed since acquisition). Due to the
difficulties in determining reliable fair value of the investment in the subsidiary, Inaki
measures the non-controlling interests at their proportion of the subsidiary’s net assets. The
subsidiary’s net assets (excluding any fair value adjustment and goodwill) at acquisition
and current reporting dates are provided below:
Reporting Acquisition
GH¢’million GH¢’million
Properties 2,300 1,800
Plant & equipment 1,500 1,400
Net current assets 680 600
4,480 3,800

Inaki has determined the recoverable amount of the subsidiary to be GH¢4,140 million at
reporting date. No impairment losses have previously been recognised for the goodwill.
Net current assets above are stated below their recoverable amount.

Required:
From the above, determine how much impairment loss (if any) would be recognised by
Inaki Group at the current reporting date and indicate the revised carrying amounts (if
applicable) of the subsidiary in line with the applicable IFRS. (7 marks)

b) On 1 January 2020, Zigi Plc (Zigi) entered into a 6-year lease of manufacturing plant with
annual lease payments of GH¢5.5 million, starting from 31 December 2020. The lease
agreement specified that the lease payments (except yearly baseline payments of GH¢1
million included in the GH¢5.5 million) would increase every two years on the basis of
increase in the Consumer Price Index (CPI) for the preceding 24 months. The CPI at the
commencement date was 125. Additionally, Zigi is required to pay GH¢500,000 every year
once cost savings in that year is at least GH¢6 million. Zigi’s cost savings achieved with
its other assets had been averaging GH¢5.1 million prior to 1 January 2020. The initial
direct non-reimbursable cost incurred by Zigi was GH¢350,000.

Page 3 of 31
 The rate implicit in the lease, which should have been 12% per annum, was not readily
determinable by Zigi. Zigi’s incremental borrowing rate was 14% per annum. At 31
December 2021, the CPI was revised to 138. The actual cost savings achieved by Zigi in
the years ended 31 December 2020 and 31 December 2021 were GH¢5.3 million and
GH¢6.8 million respectively.

The cumulative discount factors based on 12% and 14% are provided below:
Years 12% 14%
6 4.11 3.89
5 3.60 3.43
4 3.04 2.91

Required
In accordance with IFRS 16: Leases, explain how the above lease would affect Zigi’s
financial statements for the years ended 31 December 2020 and 2021. (8 marks)

c) Ayew Plc (Ayew) decided to dispose off one of its major production plants which had
become surplus to requirement. At 31 January 2021, all criteria were met for the plant to
be classified as held for sale. On 31 July 2022, there was material evidence that the original
sale plan would change and hence, it was considered not appropriate to retain the plant as
held-for-sale. Plant is carried under the cost model.

Details of the plant are as follows:

GH¢’million
Cost – acquired on 1 August 2019 20
Depreciation rate (straight line to nil residual value) 10%

At 31 January 2022:
Fair value 14
Costs to sell 0.4

At 31 July 2022:
Recoverable amount 15.2

Required:
In line with IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations,
recommend how the above would be accounted for within the financial statements of Ayew
for the year ended 31 July 2022. (5 marks)

(Total: 20 marks)

Page 4 of 31
QUESTION THREE

a) Samed Ltd is a Ghanaian company located in the Northern Region which manufactures
goods such as washing machines, tumble dryers and dishwashers. The manufacturing
industry in Ghana is highly competitive with many products on the market. Samed Ltd
current accounting year end is 31 December 2022.

Samed Ltd has a production facility which started showing serious cracks and signs of
possible leakage since July 2022. It is probable that Samed Ltd will have to undertake a
major repair somewhere during 2023 in order to rectify the problem. Samed Ltd does not
have an insurance policy covering the production facility. The Chief Operating Officer has
refused to disclose the issue in the financial statement for the year ended 31 December 2022
and no repair costs have yet been undertaken although he is aware that this is contrary to
International Financial Reporting Standards (IFRSs). According to the Chief Operating
Officer, he does not think that the need for major repairs on the production facility is an
indicator of impairment. The Chief Operating Officer argues that no provision for the repair
to the production facility should be made due to the fact that there is no legal or constructive
obligation to repair the facility.

Samed Ltd has a revaluation policy for property, plant and equipment and there is a balance
on the revaluation surplus of GH¢20 million in the financial statements for the year ended
31 December 2022. However, this balance does not relate to the production facility, but the
Chief Operating Officer is of the opinion that this surplus can be used for any future loss
arising from the collapse of the production facility.

Required:
In accordance with relevant IFRSs, discuss the accounting treatment which Samed Ltd
should adopt to account for the above transaction in its financial statements for the year
ended 31 December 2022. (5 marks)

b) Mensah Ltd is a telecommunication company with year end 30 September 2022 that
operates a defined benefit pension scheme. On 31 March 2022, the company announced
that it was to close down a business division and agreed to pay each of its 300 staff a cash
payment of GH¢100,000 to compensate them for loss of pension arising from wage
inflation. It is estimated that the closure will reduce the present value of the pension
obligation by GH¢11.6 million. Mensah Ltd is unsure of how to deal with the settlement
and curtailment and has not yet recorded the transaction in its financial statements.

Required:
In accordance with IAS 19: Employee Benefits, show the accounting treatment for the
above transaction in Mensah Ltd’s financial statement for the year ended 30 September,
2022. (5 marks)

c) Salisu Medical Centre runs 24-hours services every day. To ensure smooth cash collection
from walk-in-clients, the company also operates a 24-hour cash office. The cashiers work
on shift basis to cover the morning, afternoon, evening and the night services. There are
five (5) cashiers employed by the firm who are all supposed to work at least once in each
of the shift period before the year ends. Jennifer, one of the cashiers, has never worked on
night duties since she was employed. The Finance Director of the company prepares the
duty roster (time-schedule) for the cashiers’ shifts together with the Chief Cashier.

Page 5 of 31
 Jennifer’s special treatment has been justified continuously by the Finance Director that,
her place of abode is far from the work place. However, there are other Cashiers who come
on night-shift staying in her vicinity.

Jennifer is also noted in the company for her constant “excuse” duty she receives from
Doctors of the medical centre to stay away from work and her spontaneous usage of the
annual leave days, to the extent of always getting additional casual leave. This behaviour
of Jennifer continuously affects workflow at the Cash office, and in most cases a Cashier
not on duty is called to stand in for her, and an overtime is paid to that Cashier at the end
of the month. The conduct of Jennifer and the manner the Finance Director handles her
case is a great worry to the other Cashiers.

Required:
i) Describe the ethical issues involved and its implications on work output at Salisu Medical
Centre. (4 marks)
ii) Recommend the possible measures that could be instituted to prevent the occurrence of
such ethical challenges in the future. (6 marks)

(Total: 20 marks)

Page 6 of 31
QUESTION FOUR

a) Kudus Ltd (Kudus) is an unlisted agro-processing company which operates locally within
the Middle Belt. Amartey Mutual Funds Ltd has identified Kudus as a target firm and would
like to estimate its worth for the purpose of acquisition.

The following financial summaries relate to Kudus as at 31 March 2022:

GH¢ million
Non-current assets 150
Current assets 145
Ordinary shares (@ GH¢1.5) 30
20% Preference shares 10
Non-current liabilities 50
Current liabilities 110
Profit after tax (Draft) 38

Number of authorised ordinary shares 30 million

Additional information:
1) Kudus has the following ordinary dividends:
GH¢ million
Announced on 15 March 2021 but 2.5
declared on 10 April 2021
Declared on 30 June 2021 but paid on 31 1.5
July 2021
Announced on 25 March 2022 but 2
declared on 5 April 2022
Kudus has correctly accounted for ordinary dividends in the financial statements.
2) The preference shares are irredeemable.

3) Due diligence was carried out on Kudus as at 12 April 2022 and the following were
identified which may necessitate the revision of the draft profit:
 Non-current assets include Kudus’s office building with carrying value of GH¢95 million.
The building is estimated to have a fair value of GH¢160 million, if used for rental
purposes, and GH¢180 million, if used for industrial purposes. The rental value is before
considering substantial rework required to be carried out on the property. The location of
the property currently makes it legally impermissible to use it for industrial activities. The
market value of the building in its current use is estimated at GH¢120 million. A plant with
a carrying value of GH¢10 million is not in usable condition but could be scrapped for
GH¢2 million. The value of the remaining plant and equipment has not changed.

 Non-current assets of Kudus include a four-year secured debenture carried at its year end
amortised cost. No allowance was made for credit losses against this investment as the
directors believed that the investment was exposed to only minimal risk of default. At year
end, allowance based on lifetime expected credit loss was estimated at GH¢1.8 million
while allowance for next-12 months’ expected credit loss was assessed at GH¢1 million.

 The current assets include an amount due from a customer totalling GH¢20 million which
has been outstanding for the last two years due to a dispute with the customer. No provision
was made in relation to this. The auditors have qualified the audit report to this effect. With
Page 7 of 31
 several follow-up activities, the customer as at 31 March 2022 has agreed to pay GH¢8
million at 31 March 2023 and GH¢4 million at 31 March 2024. However, Kudus has
decided to file a case against the customer to recover the entire amount due by 31 March
2025.

 Non-current liability represents three-year 5% GH¢50 million loan notes issued on 1 April
2021 at nominal value when their effective interest rate was 7% because of a large premium
at redemption. Kudus has taken the “fair value option” for these notes. At 31 March 2022,
fair value of the notes based on a widely used valuation model is GH¢47 million and based
on inputs drawn from a vibrant market is GH¢49 million. No fair value change is
attributable to Kudus’s own credit risk. Coupon has been paid and charged to income
statement.

4) The following details relate to Bukari Plc, a listed firm which operates in the same sector
as Kudus.
Indicators Ratio
Dividend cover 4
Yield on earnings 12.5%
Annual sales growth (over last 5 years) 18%
Annual earnings growth (over last 5 years) 17%

5) Assume discount rate of 10% and unlisted firm risk factor of 20%.

Required:
Determine a range of values for each ordinary share of Kudus using:
i) Net Assets basis. (6 marks)
ii) Price/Earnings basis. (5 marks)
iii) Dividend Yield basis. (4 marks)
(Note: Ignore tax implications)
b) The loss of control of a subsidiary that is a business, other than in a nonreciprocal transfer
to owners, results in the recognition of a gain or loss on the sale of the interest sold and on
the revaluation of any retained non-controlling investment. A loss of control is an economic
event, similar to that of gaining control, and therefore is a re-measurement event.

Required:
Explain in what ways an investor may lose control over an investee, indicating how such
accounting event should be dealt in the consolidated financial statements. (5 marks)

(Total: 20 marks)

Page 8 of 31
QUESTION FIVE

Partey Ltd is a company engaged in continuous casting and cold rolling of aluminium
products in Ghana. The company has been in operation for several decades, and its
operation did not change in the year ended 31 December, 2021.

Below are financial statements for the years 2021 and 2020:

Statement of Profit or Loss and Other Comprehensive Income

2021 2020
GH¢000 GH¢000
Revenue 389,507 445,963
Cost of sales (240,731) (237,345)
Gross profit 148,776 208,618
Other income 19,315 10,983
Distribution costs (76,366) (108,137)
Administrative expenses (74,520) (46,216)
Operating profit 17,205 65,248
Finance cost (21,287) (21,537)
Profit before tax (4,082) 43,711
Tax expense - (16,521)
Profit for the year (4,082) 27,190

Statement of Financial Position

2021 2020
GH¢000 GH¢000
Non-current assets:

Property, plant and equipment 196,784 183,190

Investment securities 137 348
196,921 183,538
Current assets
Inventories 50,400 66,351
Trade receivables 23,769 27,688
Other receivables 9,343 1,833
Cash and cash equivalents 45,969 20,699
129,481 116,571
Total assets 326,402 300,109

Equity & Liabilities:

Stated capital 10,000 10,000
Retained earnings 124,575 111,676
134,575 121,676

Non-current liabilities
15% Loan notes 8,580 10,247
20% Loan notes-NGIC Pension Fund 100,000 100,000
108,580 110,247

Page 9 of 31
 Current liabilities
Trade payables 80,182 65,082
Current tax - 3,104
Accrued expenses 3,065 -
83,247 68,186
Total equity & Liabilities 326,402 300,109

Required:
a) As the Finance Manager of Partey Ltd, you have been tasked by the Board of Directors to
produce a report. Assess the performance of the company over time based on profitability,
liquidity, efficiency and gearing.
(Note: Your report should include TWO (2) ratios each of profitability, liquidity,
efficiency and gearing). (16 marks)

b) Management of the company wants to achieve improvement in technology and production

process of the company to stimulate growth. This, however, will require further injection
of funds and less strain on operating cash flows. To achieve this, the Board of Directors of
the company has resolved to convince the company’s largest debtholder, NGIC Pension
Fund, to exercise the conversion right attached to the debt. The total value of the debt
included in the financial statements above for both financial years is GH¢100 million. The
debt was issued at a coupon rate of 20% per annum. The annual coupon payments are also
included in the financial statements above for both financial years. NGIC Pension Fund is
also the second largest shareholder of the company.

The estimated tax expense on the company’s profit for the year ended 31 December 2021
if the debt owed to NGIC Pension Fund is converted is GH¢3.172 million. Current tax
liability at 31 December 2021 is expected to increase by the same amount.

Required:
Assess the performance of the company for the year ended 31 December 2021 upon
conversion of the debt owed to NGIC Pension Fund on 1 January 2021 at its carrying
amount. (4 marks)

(Total: 20 marks)

Page 10 of 31
SUGGESTED SOLUTION

QUESTION ONE
Blackstars Ltd Group
Consolidated Statement of Financial Position as at 30 June 2022
GH¢’million
Assets:
Tangible non-current assets (1,024+352+20wk2) 1,396
Goodwill (wk3) 24
Investment in associate (wk6) 76
1,496
Current assets (435+152-200wk7) 387
Total assets 1,883

Equity and liabilities

Share capital 760
Revaluation reserves 72
Retained earnings (wk5) 148.8
Total equity attributable to shareholders of parent 980.8
Non-controlling interest (wk4) 79.2
Total equity 1,060

Non-current liabilities (512+24+12pensions(wk7)) 548

Current liabilities (171+104) 275
Total liabilities 823
Total equity and liabilities 1,883

Page 11 of 31
 Workings (GH¢ million):

1. Group structure
Blackstars Ltd

80% 25%

Meteors Ltd Satellite Ltd

(1 yr sub) (1 yr associate)

Summary of percentages
Meteors Ltd Satellite Ltd
1st 2nd After No change
purchase purchase changes
Parent % 10% 70% 80% 25%
NCI % - - 20% -
100%

2. Net assets schedule

Reporting Acquisition Post-
date date acquisition
Meteors Ltd
Share capital 208 208 -
Retained earnings (368-208-20) 168 140 28
Fair value adj. – land 20 20 -
396 368 28
Satellite Ltd
Share capital 184 184 -
Retained earnings (160-12.8-184) 75.2 (36.8) 112
Fair value adj. – land 12.8 12.8 -
272 160 112

3. Goodwill – Meteors Ltd

Cost of investment (32+296) 328
Fair value of NCI at acquisition 76
404
Fair value of identifiable net assets acquired (W2) (368)
Goodwill at acquisition 36
Impairment (bal. fig.) (12)
Revised goodwill (recoverable amount) 24

4. Non-controlling interests – Meteors Ltd

Fair value of NCI at acquisition 76

Page 12 of 31
 Add: NCI % of Meteors Ltd’s post –acquisition (20%x28) 5.6
Less: NCI’s share of impairment (20%x12) (2.4)
79.2

Alternatively:
Book Value (20%x376) 75.2
Fair Value adjustment (20%x20) 4
Goodwill (76 – (20%x368) – impairment (2.4)) (0)
79.2

5. Retained earnings
Blackstars Ltd
Balance b/d 312
Fair value gain on remeasurement of 10% holdings (32-24) 8
Pension expense (wk7) (212)

Meteors Ltd
Parent’s share of post-acquisition earnings (80% x 28) 22.4
Impairment (80%x12) (9.6)

Satellite Ltd
Parent’s share of post-acquisition earnings (25% x 112) 28
148.8

6. Investment in associate
Cost of investment 48
Add: Share of profit 28
76

7. Pensions
Net pension liability movements:
Bal b/d -
Contributions made into the scheme* (200)
Combined pension expenses (bal. fig.) 212
Bal c/d (253.6-241.6) 12

*Correction required for wrong posting to receivables

account
Dr. Net pensions liability 200
Cr. Receivables (current assets)
200

(Marks are evenly spread using ticks = 20 marks)

EXAMINER’S COMMENT
Candidates generally had a satisfactory performance in answering the question, which
tested the Candidates’ understanding on preparing consolidated statement of

Page 13 of 31
financial position. Notwithstanding the satisfactory performance candidates had in
their responses to the question, some candidates had difficulty in accounting for the
step acquisition and the fair value gain on re-measurement of the initial 10% holdings.
Some could not also determine the goodwill on acquisition of the subsidiary. Though
fundamental, some candidates still were found including pre-acquisition equity
elements like share capital, retained earnings, in the consolidated statement of
financial position and in addition, the investment in the subsidiaries in the
consolidated statement of financial position.

Page 14 of 31
QUESTION TWO

a) Inaki Group
Computation of goodwill
GH¢ million
Purchase consideration 3,960
Add: NCI’s share of net assets at acquisition
(10% x (3,800+200 =4,000)) 400
4,360
Less: Net assets at acquisition (4,000)
Goodwill 360

Test for impairment at reporting date:

Carrying amount: GH¢ million

Goodwill gross-up (360 x 100/90) 400

Properties (2,300+200) 2,500
Plant & equipment 1,500
Net current assets 680
5,080
Recoverable amount 4,140
Impairment (5,080 – 4,140) 940

Allocation of impairment loss:

Existing carrying Loss Revised carrying
amount allocated amount
GH¢ million GH¢ million GH¢ million
Goodwill 400 (400) -
Properties 2,500 (337.5)* 2,162.5
Plant & equipment 1,500 (202.5)** 1,297.5
Net current assets 680 - 680
5,080 (940) 4,140

*Loss allocated to properties is given by (940 – 400) x 2,500/4,000 = 337.5

**Loss allocated to plant & equipment is given by (940 – 400) x 1,500/4,000 = 202.5

Impairment loss which would be recognised is GH¢900 million (i.e. GH¢940

million less GH¢40 million loss attributed to the notional NCI’s goodwill).

(30 ticks @ 0.17 mark each = 5 marks)

Explanations
 The applicable standards for the above are IAS 36 and IFRS 3.
 Impairment review under IAS 36 requires the carrying amount of a relevant asset
or cash generating unit to be compared against its recoverable amount to
determine whether the latter is lower. If the recoverable amount is lower, an
impairment loss given by the difference would be recognised.

Page 15 of 31
 Where the test is conducted at cash generating unit level, IAS 36 requires the unit’s
carrying amount to include assets directly and exclusively attributable to the unit
and an allocation of assets that are indirectly attributable on a reasonable and
consistent basis to the unit, including corporate assets and goodwill acquired
through business combinations. The standard requires that a cash generating unit
that contains goodwill should be test for impairment annually.
 However, the way that an entity chooses to measure the goodwill and non-
controlling interests affects the nature of the test and the amount of impairment
loss recognised. Under proportionate share method, a notional gross-up of the
entity’s goodwill balance is required to ensure the carrying value of the unit
includes any goodwill attributable to the non-controlling interests.
 The grossed up amount is compared to the recoverable amount of the unit and an
impairment loss calculated. Only the parent’s share of the goodwill impairment
loss is recognised.
 An impairment charge calculated for a cash generating unit should be allocated to
the unit’s individual assets as follows:
 first of all, to goodwill allocated to the unit, and
 then to the other assets of the unit on a pro-rata basis according to the
carrying amount of each asset in the unit.

In allocating the loss, the carrying amount of each asset within the unit should not
be reduced below the highest of fair value less costs of disposal, value-in-use and
zero. of any related goodwill to be included in the unit’s total carrying amount.
The applicable goodwill, if determined on the basis of proportionate share of the
subsidiary’s net assets (at their fair value), is grossed up for the review purpose.

(Appropriate explanation = 2 marks)

b) Zigi would account for the lease by recognizing right-of-use asset and a
corresponding lease obligation. IFRS 16 requires a lessee to recognise the asset
initially at cost (including initial direct costs and lease liability). Subsequently, the
asset would be depreciated over the lease term of six years.

The lease liability is recognised initially based on the present value of future lease
payments discounted using the lease’s implicit interest rate, or the lessee’s
incremental borrowing rate, if the former is not readily determinable. Since the
implicit rate was not known by Zigi, Zigi would use its incremental borrowing rate
of 14%. Subsequently, the lease liability is adjusted for finance charges, lease
payments and any re-measurement of the liability.

On commencement, Zigi would determine the lease payments as follows:

 The baseline payments of GH¢1.0 million in years 1–6 represent fixed lease
payments, are unavoidable and should be part of lease payments
 The payments of GH¢4.5 million (GH¢5.5 million less GH¢1 million) in years 1–6
represent variable lease payments that depend on an index, and therefore
unavoidable and should be included in the lease payments

Page 16 of 31
 The payments of GH¢500,000 a year represent variable payment that depends on
usage (cost savings), are avoidable and should be excluded from the lease
payments. IFRS 16 requires them to be expensed as and when they are incurred.

The initial (estimate of) lease payments would be applied to determine lease
liability and right-of-use asset. At subsequent date, the lease liability would be
adjusted for finance charges, lease payments and any changes in estimates.
Any re-measurement of lease liability is adjusted against the related right-of-use
asset.

Workings:
Lease liability
The initial lease liability is given by the present value of future lease payments
discounted at the lessee’s incremental borrowing rate of 14%:

Years Future lease payments D.F. (14%) Present value

GH¢000 GH¢000
1-6 5,500 3.89 21,395

Lease table for subsequent measurement of lease liability:

Year Bal. at Interest Lease Bal. at Re- Revised
start (14%) payment end measurement bal.
GH¢000 GH¢000 GH¢000 GH¢000 GH¢000 GH¢000
2020 21,395 2,995.30 (5,500) 18,890.30 - 18,890.30
2021 18,890.30 2,644.64 (5,500) 16,034.94 1,331.94 17,366.88
(see
below)
2022 17,366.88 2,431.36 (5,968) 13,830.24 - 13,830.24

Re-measured lease liability at 31 December 2021 is given by:

Years Future lease payments D.F. (14%) Present value of payment
GH¢000 GH¢000
1-4 5,968 2.91 17,366.88
(1,000+(4,500x138/125))

The change in liability of GH¢1,331,940 (i.e. GH¢17,366,880 less GH¢16,034,940)

due to the re-measured liability is applied to revise both lease liability and right-
of-use asset at 31 December 2021.

Right-of-use asset:
Initial amount: GH¢000
Initial direct 350
costs
Lease liability 21,395
21,745

Page 17 of 31
 Subsequent measurement of right-of-use asset:
Year Bal. at start Depreciation Bal. at end Re-measurement Revised bal.
at end
GH¢000 GH¢000 GH¢000 GH¢000 GH¢000
2020 21,745 (3,624.17) 18,120.83 - 18,120.83
2021 18,120.83 (3,624.17) 14,496.66 1,331.94 15,821.83
(see lease table)

Zigi
Statements of profit or loss (extract) for the years ended 31 December
2020 2021
GH¢000 GH¢000
Finance cost (2,995.30) (2,644.64)
Depreciation (3,624.17) (3,624.17)
Additional lease payment - (500)

Zigi
Statements of financial position (extract) as at 31 December
2020 2021
GH¢000 GH¢000
Non-current assets:
Right-of-use asset 18,120.83 18,902.04

Non-current liabilities:
Lease liability
2020 (16,194.30–3,232.80 see below) 12,961.50
2021 (17,366.88–3,536.64 see below) 13,830.24

Current liabilities
Lease liability
2020 (5,500–2,267.20) 3,232.80
2021 (5,968–2,431.36) 3,536.64

Appropriate explanations = 3 marks

40 ticks @ 0.125 marks each = 5 marks
8 marks

c) Ayew PLC
Statement of profit or loss (extract) for the year ended 31 July 2022
GH¢000
Depreciation (1,000)
Impairment (1,400)
Gain on reclassification 400

Page 18 of 31
 Ayew PLC
Statement of financial position (extract) as at 31 July 2022
GH¢000
Non-current assets:
Plant 14,000

Workings
1.
GH¢000
Cost – acquired on 31 July 2019 20,000
Depreciation: 1/8/19 – 31/7/21 (4,000)
(10% x 20,000 x 2)
Carrying amount at 31/7/21 16,000
Depreciation: 1/8/21 – 31/1/22 (1,000)
(10% x 20,000 x 6/12)
Carrying amount at 31 January 2022 15,000
Impairment charge (1,400)
At 31 January 2022: Fair value less costs to sell 13,600
Gain on reclassification (bal. fig.) 400
At 31 July 2022:Restated carrying amount (see below) 14,000

2.
GH¢000
Cost – acquired on 1/8/19 20,000
Accumulated depreciation which would have been required: (6,000)
1/8/19 – 31/7/21
(10% x 20,000 x 3)
Carrying amount at 31/7/21 would have been (A) 14,000

Recoverable amount at 31/7/21 (B) 15,200

Plant would be restated to the lower of A and B: 14,000

(25 ticks @ 0.2 marks each = 5 marks)

Note:
IFRS 5 requires an asset held for sale to be initially re-measured to its carrying
amount using the existing accounting standard. Afterwards, the asset should be
held at the lower of its carrying amount and fair value less costs of disposal and
would not be charged with any further depreciation. Any required impairment
loss is chargeable to profit or loss.

Where, the asset held for sale no longer meets the classification criteria, IFRS 5
requires a revision of the carrying amount of the asset based on the lower of its
carrying amount without the initial classification and recoverable amount on that
date. This may be result in recognition of gain or loss, which should be reported
within profit or loss.
(Total: 20 marks)

Page 19 of 31
EXAMINER’S COMMENTS
This question on selected accounting standards (IFRS) was a difficult question for
most candidates. It was generally not well answered though the questions were
straight forward. Although, the question covered the syllabus and straight forward,
most candidates were unable to express themselves adequately as expected. The
response or answers produced were very scanty and not addressing the key issues.
Most candidate failed to identify the applicable standards for the transactions as well
as illustrate or produce the financial statement extracts.

Page 20 of 31
QUESTION THREE

a) In line with IAS 36, the subsidence is an indication of impairment in relation to the
production facility. Consideration would be required to choose a suitable cash
generating unit as presumably the factory would not independently generate cash
flows for Tamale Ltd as a standalone asset. The facility is likely to consist of both
the factory and various items of plant and machinery and so it would not be
possible to independently measure the cash flows from each of the assets. The
recoverable amount of the unit would need to be assessed as the higher of fair
value less costs to sell and value in use in accordance with IAS 36.

In addition, reference to IFRS 13 Fair Value Measurement would be required in

estimating the fair value of the facility. For instance, by considering whether
similar facilities have been on the market or recently sold. Value in use can be
calculated by estimating the present value of the cash flows generated from the
production facility discounted at a suitable rate of interest to reflect the risks to the
business. For example, if the carrying amount exceeds the recoverable amount, an
impairment has occurred.

Any impairment loss is allocated to reduce the carrying amount of the assets of the
unit. This will be expensed in profit or loss and cannot be netted off the
revaluation surplus as the surplus does not specifically relate to the facility
impaired. No provision for the repair to the factory should be made because there
is no legal or constructive obligation to repair the factory in accordance with IAS
37. (5 marks)

b) The estimated settlement on the pension liability is GH¢30 million (300 x

GH¢100,000) and should be included within current liabilities in the statement of
financial position. As this is GH¢18.4 million more than the estimated curtailment
gains of GH¢11.6 million, a loss of GH¢18.4 million should be included within
retained earnings. Non-current liabilities are reduced by the reduction in pension
obligations of GH¢11.6 million. (5 marks)

c)
i) Fundamental ethical principles of IFAC code of ethics that might have been
breached are:
 Integrity
The Finance Director’s posture on issues regarding Jennifer smacks of dishonesty.
The Finance Director is not straightforward on even allocating of the cashiers’
shifts. Jennifer is excluded from night shifts because she stays far from the
workplace when other cashiers who are living at the same area she lives, are put
on night shifts.

 Objectivity
The application of the principle of objectivity ensures that the Accountant does not
show bias. The special treatment given to Jennifer over the others on the time she

Page 21 of 31
 is allowed to come to work and her haphazard taking of days off work without a
remedial action from the Finance Director only shows bias on the part of the
Finance Director.

 Professional behaviour
The discriminatory treatment given by the Finance Director to the cashiers which
has engendered worry in the Cashiers, and the additional cost incurred by the
company through overtime payment to Cashiers who stand in for Jennifer anytime
she is off, only brings the reputation of the Director of Finance into question. This
behaviour of the Finance Director does not portray him as a good “ambassador”
of the Accounting profession, and this can bring the Accountancy profession into
disrepute.

 Professional competence
The professional competence of the Accountant is always expected to be
demonstrated in his work. The Accountant is even encouraged to go through
continuous development programme to ensure that he is able to demonstrate it.
The non-responsiveness of the Director on the haphazard days Jennifer takes off
work is increasing the staff cost of the company through overtime payments. The
professional competence of the Director of Finance should have alerted him on the
need to minimize controllable or variable costs such as overtime payments which
seemingly has become a fixed cost. The professional competence principle seems
to have been breached.
(Any 3 points @ 1.33 = 4 marks)

ii) Possible actions that the Finance Director should take include:
 Jennifer should be encouraged on the need to find accommodation closer to the
workplace if that indeed is a challenge or be prepared to come to work regardless
of the time of the shift.

 In consultation with the Human resource department, annual duty roster for the
cash office should be prepared for the year to know the exact time each cashier
plans to go on leave. This will help in planning on the smooth flow of work at the
cash office.

 In consultation with the Human Resource department, modalities should be set for
the granting of casual leave for staff members who have exhausted their allocated
leave days in the year.

 In consultation with the Human Resource department, modalities should be set for
the issue of excuse duty to workers by Doctors at the operational level.

 Also, in consultation with the Managing Director of the Medical centre, Doctors
should be engaged on the need to stop “rampant” issue of excuse duty to workers
who are not eligible to be issued excuse duty and the new modalities designed on
the issue of the excuse duty.

Page 22 of 31
 The Director of Finance should have a meeting with all the cashiers to drum home
the need for them to work as a team and show dedication to work, willingness to
stand in for one another without hesitation when the original cashier on duty is
indisposed.
(Any 4 actions @ 1.5 marks each = 6 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question was in two parts: accounting standards and ethics. As usual, the
accounting standards part of the question was poorly answered by most candidates.
Majority of candidates were unable to identify the relevant IFRSs required in
addressing the treatment of the transactions in the financial statements. The question
required demonstrating an understanding of IAS 36, IFRS 13 and IAS 19. A greater
percentage of the marks earned by candidates came from the ethics part of the
questions. Candidates provided reasonable responses regarding the fundamental
ethical principles that apply and the possible courses of action to be taken to deal with
the ethical dilemma.

Page 23 of 31
QUESTION FOUR
a)
i) Net Asset Basis
Value per share is given by net assets valuation divided by number of ordinary
shares issued

Revision of net assets:

GH¢ million
Non-current assets (150 + (120 – 95) – (10 – 2) – 1 166
Current assets (145 – 9.09(W2)) 135.91
301.91
Non-current liabilities 49
Current liabilities 110 (159)
142.91
Less: 10% Preference shares (10)
Restated net assets 132.91

Net assets value per share = 132.91/20 = GH¢6.65

Workings (All in GH¢ million)

Receivables
Carrying value 20
Impairment charge (9.09)
Recoverable amount [(8/1.1) + (4/1.12)] 10.91

(Marks are evenly spread using ticks = 6 marks)

ii) Price/Earnings Basis

Value per share = EPS of Kudus x PE Ratio of Bukari
EPS = GH¢18.91million (see below)/20 million shares
= GH¢0.9455

Considering the risk factor of 20%,

Value per share = 0.9455 x 8 x 80% risk
= GH¢6.05

Revision of profit GH¢ million

Profit per draft accounts 38
Adjustments:
Impairment of plant (10 – 2) (8)
Expected credit losses (1)
Irrecoverable debts (9.09)
Fair value gain on loan notes (50 – 49) 1
Revised profit 20.91
Less: Preference dividend (20% x 10) (2)
Profit for ordinary shareholders 18.91

Page 24 of 31
 Determination of price/earnings ratio – Kudus = 100/12.5 or 1/.125
=8
(Marks are evenly spread using ticks = 5 marks)

iii) Dividend Yield Basis

Value per share = DPS of Kudus

Dividend yield of Bukari

DPS = (GH¢2.5million+ GH¢1.5 million/20 million shares

= GH¢0.20
Dividend yield = 1/dividend cover x earnings yield
= 1/4 x 12.5%
= 3.125% or 0.03125

Considering the risk factor of 20%,

Value per share = GH¢0.20 x 80%
0.03125
or
GH¢0.20
0.03125x100/80
= GH¢5.12
Alternatively, dividend yield can be adjusted upwards to 120% or 1.2 of the
original
Value per share = GH¢0.20
0.03125x1.2
= GH¢5.56
Range of values per share: From GH¢2.34 to GH¢5.99
(Marks are evenly spread using ticks = 4 marks)

b) Events that may result in deconsolidation of a subsidiary that is a business include

the following:
 A parent sells all or part of its ownership interest in its subsidiary, thereby losing
its controlling financial interest in its subsidiary.
 Expiration of a contractual agreement that gave control of the subsidiary to the
parent expires.
 The subsidiary issues shares, thereby reducing the parent’s ownership interest in
the subsidiary so that the parent no longer has a controlling financial interest in
the subsidiary.
 The subsidiary becomes subject to the control of a government, court,
administrator, or regulator.

If a parent loses control of a subsidiary that is a business through means other than
a nonreciprocal transfer to owners, it must:

Page 25 of 31
 Derecognize the assets (including an appropriate allocation of goodwill) and
liabilities of the subsidiary at their carrying amounts at the date control is lost.
 Derecognize the carrying amount of any NCI at the date control is lost (including
any components of accumulated other comprehensive income attributable to it).
 Recognize the fair value of the proceeds from the transaction, event, or
circumstances that resulted in the loss of control.
 Recognize any non-controlling investment retained in the former subsidiary at its
fair value at the date control is lost.
 Reclassify to income [profit or loss], or transfers directly to retained earnings if
required, in accordance with other US GAAP [IFRS], the amounts recognized in
other comprehensive income in relation to that subsidiary.
 Recognize any resulting difference as a gain or loss in income [profit or loss]
attributable to the parent The gain or loss is calculated as the difference between:
 The aggregate of:
o The fair value of the consideration transferred.
o The fair value of any retained noncontrolling investment in the former
subsidiary on the date the subsidiary is deconsolidated.
o The carrying amount of any noncontrolling interest in the former
subsidiary (including any accumulated other comprehensive income or
loss attributable to the NCI) on the date the subsidiary is deconsolidated.
 The carrying amount of the former subsidiary’s net assets.
(5 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question on share/business valuation was expected to be one of the simplest for
candidates. Unfortunately, some candidates could not answer this question
appropriately due to the application of standards (IFRS 13 and IFRS 9) in the valuation
process. The net assets method was satisfactorily answered by most candidates that
attempted it. The P/E ratio method was also well attempted, but most candidates
failed to adjust the earnings to reflect the additional information provided. Most
candidates also attempted the dividend yield method except that they could not
determine the yield to use in the valuation.

Page 26 of 31
QUESTION FIVE

a) Partey Ltd
Memorandum

To: The Board of Directors

From: The Finance Manager
Date: 3rd April 2022
Subject: Analysis of the performance of Partey Ltd for the year ended 31
December 2021
This report assesses the current performance of the company given its existing
capital structure using the comparative year 2020 as the benchmark. As per the
request, the report also assesses the expected performance of the company when
existing long-term debt issued to NGIC Pension Fund, the convertible bondholder,
is exercised. The performance of the company is discussed in this report on the
bases of profitability, working capital management and leverage.

Profitability
The company recorded a decline in operating profit in the 2021 year. In the 2020
year, the company generated returns of GH¢0.28 on every cedi investment made
by long-term investors, but recorded profit of GH¢0.07 for long-term capital
providers in the 2021 year. The earnings of shareholders was even negative, with
the company generating negative returns of GH¢0.03 for the shareholders in the
2021 year, but generated GH¢0.22 per cedi investment in the comparative year. The
company’s ability in managing its cost of sales also dwindled in the 2021 year as
measured by the decline in the gross profit margin. The negative profit recorded
by the company in the 2021 year is explained by the decline in revenue and
disproportionate increase in cost of sales vis-à-vis increase in revenue. Revenue in
the 2021 year declined by 12.66%. Cost of sales, however, did not decline but rather
increased by 1.43%.

Working capital management

The current ratio declined in the 2021 year suggesting a weakening in the liquidity.
The current assets in 2020 could cover the current liabilities 1.71 times, but reduced
to 1.56 times in the year 2021. The acid-test ratio, however, has improved in the
2021 year suggesting a strengthening in the liquidity of the company when
inventory is excluded.

There has also been a reduction in the inventory turnover, and this represents an
improvement in management of the company’s inventory. The company’s trade
receivables collection days reduced slightly in the 2021 year, representing an
improvement in the performance of the company in managing its trade receivables
days. There is also an improvement in the company’s management of trade
payables. In the 2020 year, the company had average days of 100 from its suppliers
for payment of credit purchases, but had an extended credit of 122 days in the 2021
year.

Page 27 of 31
 Gearing/leverage
The long-term debt capital employed by the company reduced in the 2021 year. In
both years, the company was highly geared, but experienced a reduction in gearing
in the 2021 year. The interest cover ratio shows a reduction in the 2021 year, even
though debt capital reduced in the 2021 year. The capacity of the company to cover
its finance cost with profit from operations has reduced and this represents a
decline in performance.

Conclusion
The company’s profitability has reduced. The trade payables management, trade
receivables management and inventory management also saw an improvement in
the 2021 year. However, the strain of interest expense erodes the profitability of
the company when incorporated. It is expected that upon conversion of the
convertible bond, profit after tax will increase, gearing level will improve or
financial risk will be reduced. Liquidity will however weaken because of expected
reduction in tax shield on interest expense.

Signed
Finance Manager

Appendix
RATIOS FORMULA 2021 2020
Profitability:
Return on capital 𝑃𝐵𝐼𝑇 17,205 65,248
= 𝑥 100 𝑥100 𝑥100
employed 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 243,155 231,923

=7.08% =28.13 %
Return on Equity 𝑃𝐴𝑇 −4082 27,190
= 𝑥 100 𝑥100 𝑥100
𝐸𝑞𝑢𝑖𝑡𝑦 134,575 121,676

= -3.03% =22.35%
Gross profit 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 148,776 208,618
= 𝑥 100 𝑥100 𝑥100
margin 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 389,507 445,963

=38.20% =46.78%

Liquidity
Current ratio 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 129,481 116,571
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 83,247 68,186

=1.56:1 =1.71:1
Acid-test ratio 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 129,481 − 50,400 116,571 − 66,351
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 83,247 68,186

= 0.95:1 =0.74:1

Page 28 of 31
 Efficiency
Inventory 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 50,400 66,351
= 𝑥365 𝑥365 𝑥365
turnover (days) 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 240,731 237,345

=76 days =102 days

Trade 𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 23,769 27,688
= 𝑥365 𝑥365 𝑥365
receivables 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 389,507 445,963
collection (days)
=22 days =23 days
Trade payables 𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 80,182 65,082
= 𝑥365 𝑥365 𝑥365
settlement 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 240,731 237,345
period
=122days =100 days

Gearing:
Interest cover 𝑃𝐵𝐼𝑇 17,205 65,248
𝑥100
ratio 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 21,287 21,537
=0.81 times =3.03 times

Debt-to-equity 𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 108,580 110,247

ratio (%) 𝐸𝑞𝑢𝑖𝑡𝑦 134,575 121,676

=80.68% =90.61%

Each ratio computed for 2 years @ 0.5 marks each = 8 marks

Report on each ratio @ 1 mark each = 8 marks
16 marks

b) Effect of conversion of the convertible bond

Upon conversion of the GH¢100 million convertible debt, finance cost, profit before
tax, profit after tax, current liabilities, long-term debt and equity of the company
will change. Profitability, liquidity and leverage will therefore be affected. Profit
after tax of the company will be GH¢12,746,000 (-4,082,000 + 20,000,000 -3,172,000).
Earnings of shareholders on the investment is expected to increase from 7.08% to
9.47%, representing an expected improvement in the performance of shareholders’
investment.
The reduction in debt is, however, expected to reduce interest expense which is a
deductible tax expenditure. Taxable income is expected to increase and hence
current tax liability, increasing current liabilities of the company. This is expected
consequently to cause a reduction in the liquidity of the company, all other things
being equal. Current ratio and acid-test ratios will reduce to 1.50 and 0.92 times.
The proportion of long-term debt in the company’s capital structure will reduce.
The expected debt-to-equity ratio is a reduction from 80.68% to 3.66% given that

Page 29 of 31
 other things stay the same. The financial risk of the company is expected to reduce
as the interest cover ratio, will also increase to 13.37 times from 0.81times.

Appendix
RATIOS FORMULA 2021
Profitability:
Return on Equity 𝑃𝐴𝑇 12,746
= 𝑥 100 𝑥100
𝐸𝑞𝑢𝑖𝑡𝑦 134,575

= 9.47%

Liquidity
Current ratio 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 129,481
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 (83,247 + 3,172)

=1.50:1
Acid-test ratio 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 129,481 − 50,400
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 (83,247 + 3,172)

= 0.92:1

Gearing:
Interest cover ratio 𝑃𝐵𝐼𝑇 17,205
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 (21,287 − 20,000)

=13.37 times
Debt-to-equity ratio 𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 8,580
(%) 𝐸𝑞𝑢𝑖𝑡𝑦 234,575

=3.66%

Assessment of expected performance upon conversion of the convertible debt = 4

marks
(Total: 20 marks)

EXAMINER’S COMMENTS
This question required a comparative analysis of the financial performance of a
company over a two-year period. The question was attempted by all the candidates.
The question was unambiguous but rather clear to be understood by an average
candidate or a well-prepared candidate. The main challenge with this question was
the definition of the ratios computed. Another area of concern is the report writing
and the format of writing reports. Some of the candidates failed to write a report using
the appropriate format. Some candidates just quoted the ratios in the report,
comparing them period to period without analysing or explaining their relationships.
The second part of the question on conversion of the convertible bond was poorly

Page 30 of 31
answered by most candidates. It seems most candidates did not understand the
requirement of that particular question.

CONCLUSION
As indicated earlier, overall, candidates performed poorer than previous diets
although the nature and standard of the questions set were appropriate for the level
being assessed. There was evidence of ill preparation and lack of appreciation of
accounting standards. It seems that the exemptions granted to most candidates is a
factor of poor performance given that candidates lack the pre-requisite knowledge
and competence for corporate reporting. It is suggested that candidates preparing for
corporate reporting paper should thoroughly revise on the financial reporting paper
even when they are exempted from taking the financial reporting paper. The
exemptions criteria or policy must be re-looked at. Some candidates just register and
sit the paper without the aim of passing but because he/she must register for all
subjects. So, they prepare for other subject(s) they have interest in.

Page 31 of 31
 MARCH 2023 PROFESSIONAL EXAMINATIONS
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was moderate. The questions were based on the syllabus
and were largely straight forward and of the right level. The mark allocation followed
the weightings in the syllabus and was fairly allocated to each sub-question. Most
questions were clearly stated and followed higher order learning outcomes. Questions
that required considerable amount of work were commensurate with the allotted time
and marks.

PERFORMANCE OF CANDIDATES
The general performance of candidates in this exams diet was worse than previous
diets. Candidates who performed well demonstrated a clear understanding of the
subject matter. Some candidates also showed abysmal performance. The poor level of
preparedness of some candidates reflected in their poor performance.

Page 1 of 28
 QUESTION ONE

Below are statements of financial position of three companies: Abuakwa, Tanoso and
Kwadaso as at 31 December 2021:
Statements of financial position as at 31 December 2021
Abuakwa Tanoso Kwadaso
GH¢ million GH¢ million GH¢ million

Non-current assets
Tangible assets 358.0 169.5 120.0
Investments 170.0 6.5 -
528.0 176.0 120.0
Current assets 264.0 172.0 116.0
Total assets 792.0 348.0 236.0

Equity and liabilities

Share capital:
Ordinary shares at GH¢2 each 180.0 50.0 30.0
Preference shares at GH¢2 each - 40.0 13.0
Retained earnings 330.0 66.0 56.0
Other reserves 50.0 23.0 8.0
560.0 179.0 107.0
Current liabilities 232.0 169.0 129.0
Total equity and liabilities 792.0 348.0 236.0

Additional information:
i) Abuakwa acquired 20 million shares in Tanoso on 1 January 2019, when retained earnings
and other reserve balances of Tanoso were GH¢12 million and GH¢8 million respectively.
The consideration, which has been correctly accounted for, was settled by Abuakwa issuing
its own ordinary shares of 7.5 million. Abuakwa’s share price was GH¢8 at 1 January 2019.
The fair value of non-controlling interest of Tanoso at the date of acquisition was GH¢25
million.

ii) On 1 January 2019, the fair value of the identifiable net assets of Tanoso was equal to their
book value except a brand name with a fair value of GH¢2 million which was not validly
recognised. The brand was determined to have a useful economic life of five years. At 31
December 2021, an impairment review carried out on the brand showed that its recoverable
amount was GH¢1.1 million. No previous impairment losses had been recognised.

iii) Abuakwa acquired 10.5 million shares in Kwadaso on 31 December 2019, when retained
earnings and other reserve balances of Kwadaso were GH¢11 million and GH¢10 million
respectively. Abuakwa satisfied this consideration by deferring the cash payment for a year.
The amount which was eventually paid to the former shareholders of Kwadaso amounted
to GH¢49.5 million, but the discounted present value of this payment at acquisition was
estimated at GH¢45 million. Abuakwa has correctly recorded these figures.

iv) Other than a fair value uplift of GH¢3 million on a non-depreciable land, no fair value
adjustment in respect of Kwadaso’s net assets was considered necessary at acquisition. The

Page 2 of 28
 land’s fair value has not been reassessed since acquisition. The fair value of non-controlling
interests in Kwadaso at acquisition was GH¢11 million.

v) On 31 December 2020, Tanoso acquired 1.5 million shares of Kwadaso for immediate cash
consideration of GH¢6.5 million. Kwadaso’s identifiable net assets (as appropriately
adjusted for consolidation purposes) on this date was estimated at GH¢72 million.

vi) On 1 January 2021, Tanoso sold a piece of machinery to Abuakwa. The carrying amount
of this machinery at the date of sale was GH¢5 million and its original cost was GH¢7
million. Tanoso had originally attributed the machinery with a useful economic life of
seven years. Tanoso made a profit of 20% on cost. Abuakwa depreciates this type of
machinery at 10% on cost per annum.

vii) Goodwill in Tanoso was impaired by 10% but goodwill in Kwadaso remained unimpaired.
Abuakwa does not hold any preference shares in both Tanoso and Kwadaso.

viii) Abuakwa’s trade payables include GH¢7 million due to its foreign suppliers. This amount
has not yet been updated with related exchange loss of GH¢2 million.

Required:
Prepare the consolidated statement of financial position as at 31 December 2021 for the
Abuakwa Group. (All figures should be stated in nearest GH¢0.1 million)
(Total: 20 marks)

Page 3 of 28
QUESTION TWO

a) On 31 December 2022, Hamza Ltd purchased GH¢10 million 5% bonds in Jins Ltd at par
value. The bonds are repayable on 31 December 2025 and the effective rate of interest is
8%. Hamza Ltd’s business model is to collect the contractual cash flows over the life of the
asset. At 31 December 2022, the bonds were considered to be low risk and as a result, the
12-month expected credit losses are expected to be GH¢10,000. On 31 December 2023,
Jins Ltd paid the coupon interest, however, at that date the risks associated with the bonds
were deemed to have increased significantly.

The present value of the cash shortfall for the year ended 31 December 2024 were estimated
to be GH¢462,963 and the probability of default is 3%. On 31 December 2023, it is also
anticipated that no further coupon payments would be received during the year ended 31
December 2025 and only a portion of the nominal value of the bonds would be repaid. The
present value of the bonds was assessed to be GH¢6,858,710 with a 5% likelihood of
default in the year ended 31 December 2025.
Required:
With reference to IFRSs, calculate and discuss the financial reporting treatment of the
bonds in the financial statements of Hamza Ltd as of 31 December 2022 and for the year
ended 31 December 2023, including any impairment losses. (10 marks)

b) Sanda Ltd is a consumer electronics company in Accra, Ghana which has faced a
challenging year due to increased competition and the impact of COVID 19. Sanda Ltd has
a year end of 31 December 2021 and the unaudited draft financial statements reported an
operating loss. Additionally, debt covenant limits based on gearing are close to being
breached by Sanda Ltd and the company has reached its overdraft limit. The following
occurred during the year:
i) On 1 January 2021, the Finance Director and the CEO paid GH¢3 million cash each in
exchange for preference shares from Sanda Ltd which provide cumulative dividends of 7%
per annum in line with the Companies Act, 2019 (Act 992). These preference shares can be
either converted into a fixed number of ordinary shares in three years’ time, or redeemed
at par on the same date, at the choice of the preference shareholders. The Finance Director
has suggested to the Accountant that the preference shares should be classified as equity
because the conversion is into a fixed number of ordinary shares on a fixed date (‘fixed for
fixed’) and conversion is certain (given the current market value of the ordinary shares).
(5 marks)

ii) Sanda Ltd has included a deferred tax asset in its statement of financial position, based on
losses incurred in the previous two years. The Finance Director has asked the Accountant
to include the deferred tax asset in full. The Finance Director has suggested this on the basis
that Sanda Ltd will return to profitability once its funding issues are resolved. (5 marks)

Required:
With reference to International Financial Reporting Standards:
Discuss appropriate accounting treatments which Sanda Ltd should adopt for the issues
identified in i) and ii) and their impact on gearing as at 31 December 2021.
(Total: 20 marks)

Page 4 of 28
QUESTION THREE

a) Dajanso Plc (Dajanso) owns a number of printing shops across the country. On 1 January
2021 the carrying amount of Dajanso’s largest printing machine was GH¢65 million. The
machine had a remaining useful life of five years and a residual value of GH¢7 million
using the cost model. Demand for printed books fell during the early quarters of the current
year due to the increased popularity of e-Book readers. As a result, Management conducted
an impairment review of the printing machine on 30 June 2021.
At this date the printing machine had an estimated selling price of GH¢55 million
(including GH¢4 million which would only be received after an expected reconditioning
work has been carried out on the asset) with agent fees being 5% of the appropriate fair
price. If the machine is kept in use, it is estimated to generate cash flows (in real terms) of
GH¢20 million a year over its remaining life which was now estimated to be three years,
with the original residual value revised to GH¢6 million. Dajanso has the following
discount rates:
Pre-tax nominal Pre-tax real Post-tax nominal Post-tax real
discount rate discount rate discount rate discount rate
11.9% p.a. 8.3% p.a. 10.5% p.a. 6.6% p.a.

Required:
In line with IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets,
recommend how Dajanso would account for the plant in its financial statements for the year
ended 31 December 2021. Show appropriate computations where necessary. (5 marks)

b) Sadio Plc (Sadio) imports wheat from Ukraine for wholesale distribution to local groceries
shops in Ghana. It prepares its financial statements to 31 October each year. Sadio
purchased goods for €7.2 million cash when the exchange rate was GH¢1: €0.12. Sadio had
not sold any of the goods at 31 October 2022 and the net realisable value was estimated to
be €7.0 million at 31 October 2022. The exchange rate at this date was GH¢1: €0.14. The
only entries made by directors of Sadio were to include the inventory at its purchase cost
(in cedis) in Sadio’s financial statements for the year ended 31 October 2022.

Sadio only receives tax relief for any inventory loss when the related item is sold. The
company’s tax rate at 31 October 2022 was 20%, but a revised rate of 25% was substantially
introduced on 18 November 2022. Assume that Sadio has sufficient taxable future profit.

Required:
Recommend, with brief explanations, the correct financial reporting treatment of the above
in Sadio’s financial statements for the year ended 31 October 2022. (5 marks)

c) BYF Health Facility offers varied medical services; It is known for its high-quality
laboratory services. In 2021, the company added to its laboratory services, testing of
Covid-19 following the increased demand by Airlines that, travelers have to be certified to
have negative Covid-19 status either through PCR or Antigen tests. Consequently, the
company recruited additional workers in the year to work in the new Covid-19 Lab on a
part-time basis. All part-time employees (Locum staff) are paid based on hours worked,
either on an 8-hour or 12-hour cycle.

Page 5 of 28
 As a precondition, part-time workers are to log in and also log out on every working day,
for hours worked to be computed by the log-in device.

Bismark Appau (Bismark), a brother of the Director of Health Services of BYF Health
Facility, is one of the employees who was employed on part-time basis at the Covid-19 Lab
on an 8-hour cycle. Bismark has permanent employment with KBT hospital and hardly gets
time to work at the Covid-19 Lab of BYF Health Facility. However, in preparing payroll
of Locum staff, the Director of Health Services, continuously insists that in the case of
Bismark, the full hours for the total working days in the month on the 8-hour cycle should
be used, regardless of the hours he worked. Colleague workers are aware of this special
treatment to Bismark, and are unhappy about this preferential treatment.

Required:
i) Based on the scenario above, justify the possible ethical principles that might have been
breached and its effect on productivity. (6 marks)

ii) Recommend the possible actions to be taken in dealing with this ethical dilemma.
(4 marks)

(Total: 20 marks)

Page 6 of 28
QUESTION FOUR

a) For some years now, Adonten has been reporting operating losses, principally due to
competition from better models. Adonten is now considering reorganising its operations
and financial structure to allow it to obtain new funding required to develop and launch its
new product. This product is tipped by technical experts to fare strongly on the market once
launched.
The Statement of Financial Position as at 31 December 2021 is available:
GH¢ million GH¢ million
Non-current assets
Tangible assets 5,000
Financial instruments 1,000
Current assets 4,125
10,125
Equity and liabilities
Ordinary shares of GH¢1 each 4,000
20% Cumulative preference shares of GH¢1 each 1,500
Retained earnings (2,918)
2,582
Non-current liabilities
20% Bonds 750

Current liabilities
Trade payables 1,968
Bank overdraft (secured on properties) 3,900
Loan from Venture Capital Fund 925 6,793
10,125

Additional information
i) Preference dividends have been in arrears for three years.
ii) Retained earnings balance is to be eliminated.
iii) The following details relate to the assets:
 Tangible assets: 15% of the book value is to be transferred to the bondholders for an agreed
value of GH¢720 million as full settlement of the debt, and the remaining book value of
these assets marked up to 110%;
 Inventories include obsolete items worth GH¢540 million below their book value of
GH¢680 million;
 A bond investment (having 10 months to maturity date) is to be revised to GH¢280 million
from its carrying value of GH¢370 million.
 Receivables with carrying amount of GH¢1,200 million to be factored out for 70% advance
under terms that will allow for refund of any difference between actual collections and the
upfront payment from the factor.
 One customer who owes GH¢828 million is in serious financial difficulty. Only 50% is
expected to be received from this customer in one year’s time.

iv) The bank has demanded repayment of the bank overdraft, while Venture Capital Fund
(VCF) has accepted to receive 92% of their existing loan in new ordinary shares as full
settlement. Upon successful completion of the reorganisation process however, VCF is
ready to immediately buy 15% GH¢900 million debentures in the reconstructed entity’s

Page 7 of 28
 debts provided the directors will attach right to convert the debt into shares at maturity.
VCF will also require 10% discount on the convertible debt at issue and repayment period
of three years. The effective rate of interest on this convertible debt, if the discount is
granted, is estimated to be 18.7% and the effective rate of interest on an equivalent non-
convertible instrument will be 22.5%.

v) Existing ordinary shareholders are prepared to inject GH¢4,200 million for 840 million
new ordinary shares, while preference shareholders have pledged to finance a new
production equipment whose estimated fair value is GH¢1,350 million in exchange for 250
million ordinary shares. Each of these shares currently has a value of GH¢5.

vi) Half of the trade payables (suppliers) are satisfied to receive ordinary shares in the
reconstructed firm.

vii) The directors are projecting annual profit before interest and tax in the reconstructed entity
to be GH¢650 million.

viii) A firm order has been received from Amanten, a competitor to buy all the business assets
for GH¢7,200 million. 60% of these proceeds relate to properties. Closure costs are
estimated at GH¢50 million.

ix) Assume a discount rate of 15%, unless a different rate is more appropriate.

Required:
Suggest a scheme of capital reorganisation that would be acceptable to all stakeholders,
including a revised statement of financial position.

Note
The present value of GH¢1 receivable at the end of the year, based on discount rates of
10%, 15%, 18.7% and 22.5% can be taken as:
Year 10% 15% 18.7% 22.5%
1 0.91 0.87 0.84 0.82
2 0.83 0.76 0.71 0.67
3 0.75 0.66 0.60 0.54
(15 marks)

b) Whether an investor’s rights in an entity are voting or contractual under IFRS 10:
Consolidated financial statements, these rights should be carefully evaluated to find out
whether they are mere protective or actually confer power over investee.

Required:
Explain protective rights, providing FOUR (4) instances where voting or contractual rights
could be regarded as protective. (5 marks)

(Total: 20 marks)

Page 8 of 28
QUESTION FIVE

Atiku Ltd operates in the same business sector as Obi Ltd. The directors of Atiku Ltd would
like to understand the firm’s strengths and weaknesses relative to Obi Ltd from the latest
financial statements of the two entities as set out below:

Summerised Statements of profit or loss for the year ended 30 June 2022
Atiku Ltd Obi Ltd
GH¢’000 GH¢’000
Revenue 25,600 21,900
Net Profit 1,500 1,260

Net Profit figures were arrived at after considering

among others, the following items:
Depreciation and amortisation 3,110 2,850
Employee benefits 7,200 6,050
Finance cost 1,050 880
Provision for current tax - 2022 1,004 925
Deferred tax (decrease in provision) – 2022 116 55
Current tax under-provision (2021) - 32

Statements of financial position as at 30 June 2022

Atiku Ltd Obi Ltd
Non-current assets GH¢’000 GH¢’000
Tangible assets 18,300 16,770
Receivables 2,500 3,020
20,800 19,790
Current assets
Inventory 4,600 4,200
Receivables 6,300 5,000
Cash 2,000 1,500
12,900 10,700
Total assets 33,700 30,490

Equity
Share capital (@ GH¢0.50 per ordinary share) 1,500 2,100
Retained earnings 8,800 10,150
12% Convertible loans 3,100 2,450
13,400 14,700
Non-current liabilities
8% Redeemable preference shares 3,000 1,800
12% Convertible loans 7,510 8,337
10,510 10,137
Current Liabilities
15% Debenture 5,600 -
Trade payables 3,940 5,123
Others 250 530
9,790 5,653
Total equity and liabilities 33,700 30,490

Page 9 of 28
 Additional information
The following ratios have been extracted from the Directors’ Report accompanying the
financial statements:
Atiku Obi
Ltd Ltd
Gross profit margin 22% 25%
Dividend coverage 4 5
Current share price (GH¢) 2.10 1.55

Required:
a) Compute the following ratios for both entities for the year ended 30 June 2022:
i) Operating profit margin (1.5 marks)
ii) Return on capital employed (capital employed defined as all interest-bearing liabilities and
equity) (1.5 marks)
iii) Inventory turnover period (1.5 marks)
iv) Current ratio (1.5 marks)
v) Capital (long-term) gearing (1.5 marks)
vi) Dividend yield (2.5 marks)

b) Write a report to the Chief Executive Officer analysing Atiku Ltd’s financial performance
and position relative to Obi Ltd, for the year ended 30 June 2022. For the report writing,
use only the following ratios: operating profit margin, return on capital employed, capital
gearing and dividend yield. (10 marks)

(Total: 20 marks)

Page 10 of 28
SUGGESTED SOLUTION

QUESTION ONE

Abuakwa Group
Consolidated statement of financial position as at 31 December 2021
GH¢’million
Assets:
Non-current assets:
Tangible assets (358.0 + 169.5 + 120.0 – 1.0(W2) – 0.4(W2) + 3(W2)) 649.1
Investments (170.0 + 6.5 – 60.0(W3) – 45.0(W3) – 6.5(W7)) 65.0
Goodwill (11.7 + 2.0) W3 13.7
Brand (2.0 – 1.2 (W2)) 0.8
728.6
Current assets (264.0 + 172.0 + 116.0) 552.0
Total assets 1,280.6

Equity and liabilities

Ordinary shares 180.0
Retained earnings (W5) 400.2
Other reserves (W6) 61.2
Total equity attributable to shareholders of parent 642.9
Non-controlling interest (76.7 + 30.5) W4 107.2
750.6
Current liabilities (232 + 169 + 129 + 2 exchange loss) 532.0
Total equity and liabilities 1,280.6

Workings
1. Group structure
Abuakwa

10.5m x100 = 70%

20m x100 = 80% 15m
25m Kwadaso (1 yr)

1.5m x 100 = 10%

15m
Tanoso (3yrs sub)

Page 11 of 28
 Summary of percentages
Tanoso Kwadaso
Before change After change

Parent% - Direct 80% 70% 70%

Indirect - - 8%
(80%x10%)
78%
NCI% 20% 30% 22%
100% 100% 100%

2. Net assets schedule

Acq. Date Rep. date Post-acq
Tanoso GH¢ million GH¢ million GH¢ Million
Ordinary shares 50.0 50.0 -
Retained earnings 12.0 66.0 54.0
Other reserves 8.0 23.0 15.0
Brand 2.0 2.0 -
Amortisation (2 x 3/5) - (1.2) (1.2)
PUP on equipment (20% x 5) - (1.0) (1.0)
Additional depn on equipment
[(7/7) – (10% x (5 + 1))] - (0.4) (0.4)
72.0 138.4 66.4

Kwadaso
Ordinary shares 30.0 30.0 -
Retained earnings 11.0 56.0 45.0
Other reserves 10.0 8.0 (2.0)
Land 3.0 3.0 -
54.0 97.0 43.0

Further analysis of net assets and post-acquisition movements

GH¢ million
Net assets at reporting 97.0
Movements after step-acquisition (25.0)
Net assets at step-acquisition date 72.0
Movements before step-acquisition (18.0)
Net assets at acquisition 54.0

3. Goodwill
Tanoso GH¢ million
Cost of investment (7.5 x 8) 60.0
Fair value of NCI at acquisition 25.0
Fair value of identifiable net assets acquired (W2) (72.0)
Goodwill at acquisition 13.0
Impairment (10% x 13) (1.3)

Page 12 of 28
 Goodwill at reporting 11.7

Kwadaso GH¢ million

Cost of investment 45.0
Fair value of NCI at acquisition 11.0
Fair value of identifiable net assets acquired (W2) (54.0)
Goodwill at acquisition and reporting 2.0

4. Non-controlling interest
GH¢ million
Tanoso
Fair value of NCI at acquisition 25.0
Add: NCI % of post –acquisition (20% x 66.4) 13.3
Less: Indirect holding adjustment (20% x 6.5) (1.3)
Impairment (20% x 1.3) (0.3)
Add: Preference shares 40.0
76.7

Kwadaso
Fair value of NCI at acquisition 11.0
Add: NCI % of post-acq before step-acquisition (30% x 18 (W2)) 5.4
NCI at step acquisition 16.4
Less: Transfer to group (8/30 * 16.4) (4.4)
Add: NCI% of post-acq. from step-acquisition to reporting 5.5
(22% x 25 (W2))
Add: Preference share capital 13.0
30.5

5. Retained earnings
GH¢ million
Abuakwa
Balance b/d 330.0
Exchange loss (2.0)
328.0
Tanoso
Parent’s share of post-acq earnings (80% x (66.4 – 15 other res.)) 41.1
Impairment charge (80% x 1.3 (W3)) (1.0)

Kwadaso
Parent’s share of post-acquisition earnings (W2):
From acquisition to step-acquisition (70% x 18) 12.6
From step-acquisition to reporting (78% x 25) 19.5
At reporting 400.2

Page 13 of 28
 6. Other reserves
GH¢ million
Abuakwa
Balance b/d 50.0
Control-to-control adjustment (see W7) (0.8)

Tanoso
Parent’s share of post-acquisition (80% x 15) 12.0
At reporting 61.2

7. Control-to-control adjustment
GH¢ million
Cost of additional shares acquired (6.5)
Less: Indirect holding adjustment (W4) 1.3
Transfer from NCI (W4) 4.4
Excess payment to other reserves (0.8)

(Total: 20 marks)

EXAMINER’S COMMENTS
Candidates generally had a satisfactory performance in answering the question, which
tested the candidates’ understanding on preparing consolidated statement of financial
position. Notwithstanding the satisfactory performance candidates had in their
responses to the question, the following observations were made. This is to guide
candidates of ICAG who will be sitting for the paper in the future:
 Candidates had difficulty in the treatment of preference shares held by the
subsidiaries. The generality of candidates failed to identify that preference
shareholder’s capital should be added to the non-controlling interest so far as they are
not held by the parent company. They rather recorded it separately under the equity
side of the statement of financial position.
 Computation of the net assets at the acquisition date by candidates also captured the
preference share capital of the subsidiaries. Candidates failed to realise that the fair
value of the subsidiaries at the date of acquisition is determined from the perspective
of only equity shareholders and hence included in the preference share capital.
 Candidates also failed to realise that any subsequent purchase after the date control is
gained is not considered in computing goodwill. The further purchase by Tanoso in
Kwadaso was considered by most candidates in their goodwill computation in
Kwadaso.

Page 14 of 28
QUESTION TWO

a) The business model of Hamza Ltd is to collect the contractual cash flows of the
bonds over the life of the asset, the bonds should be measured at amortised cost.
All financial assets including amortised cost assets should initially be recognised
at fair value. This would be equal to the GH¢10 million paid on acquisition of the
bonds. IFRS 9 Financial Instruments requires entities to adopt an expected value
approach to the consideration of impairment losses on financial assets.

On acquisition, the bonds are considered low risk and are not credit impaired. The
bonds would be classified as a stage one financial asset as of 31 December 2022.
This implies that Hamza Ltd should create an expected credit loss equal to 12
months expected credit losses. It is important to appreciate that the 12-month
expected credit loss is not the lifetime expected credit loss which an entity will
incur which it predicts will default in the next 12 months. The 12-month expected
credit loss is defined as a portion of the lifetime expected credit losses which
represent the expected credit losses which result from a default within the next 12
months. In effect, the proportion of the lifetime expected credit losses which are
expected should a default occur within 12 months are weighted by the probability
of a default occurring.

Hamza Ltd should therefore recognise a default allowance of GH¢10,000 as at 31

December 2022. This will be expensed to profit or loss and a separate allowance
created rather than offset against the GH¢10,000,000 bonds. The allowance is,
however, netted off the GH¢10,000,000 bond in the statement of financial position
of Hamza Ltd as at 31 December 2022. The carrying amount of the bonds in the
statement of financial position at 31 December 2022 will be GH¢9·99 million
(GH¢10 million – GH¢10,000). As the bonds are to be measured at amortised cost,
the effective rate of interest of 8% will be included in profit or loss and added to
the bonds. This is calculated on the initial GH¢10,000,000 and is not affected by the
loss allowance of GH¢10,000. The coupon interest of GH¢500,000 (GH¢10,000,000
x 5%) is deducted from the carrying amount of the bonds. This implies that the
bonds would have a carrying amount of GH¢10,300,000 at 31 December 2023
before considering the impairment allowance.

Amortised cost table 31 December 2023

Bal b/fwd Interest rate 8% Coupon rate 5% Bal c/fwd
GH¢10,000,000 GH¢800,000 GH¢500,000 GH¢10,300,000

At 31 December 2023, there has been a significant increase in credit risk. As no

actual default has yet occurred, the bonds should be classified as a stage two
financial asset. This implies that Hamza Ltd should make an allowance to
recognise the lifetime expected credit losses. This is defined as the expected credit
losses (cash shortfalls) which result from all possible default events over the
expected life of the bonds. An allowance is required equal to the present value of

Page 15 of 28
 the expected loss in contractual cash flows as weighted by the probability of
default. The expected default losses are discounted using the original effective rate
of interest of 8%.

Date Calculation of Cash flow loss Present value of default

31 December 2024 3% x GH¢462,963 GH¢13,889
31 December 2025 5% x GH¢6,858,710 GH¢342,936
GH¢356,825

The expected loss allowance should be increased to GH¢356,825 with an expense

recorded in profit or loss of GH¢346,825 (GH¢356,825 – GH¢10,000). The loss
allowance is deducted directly from the bonds with future interest income
recorded on the gross position. The carrying amount of the bonds on 31 December
2023 would be GH¢9,943,175 (GH¢10,300,000 – GH¢356,825).

Marks allocation marks

Identification of IFRS 9 1
Classification of financial assets 1
Determination of allowance to P&L 2
Amortised cost table 3
Present value of expected default losses 2
Determining carrying amount of the bond 1
10

b)
i) IAS 32 defines an equity instrument as any contract which evidences a residual
interest in the assets of an entity after deducting all of its liabilities. An equity
instrument has no contractual obligation to deliver cash or another financial asset,
or to exchange financial assets or financial liabilities under potentially
unfavourable conditions. If settled by the issuer’s own equity instruments, an
equity instrument has no contractual obligation to deliver a variable number or is
settled only by exchanging a fixed amount of cash or another financial asset for a
fixed number of its own equity instruments. Preference shares which are required
to be converted into a fixed number of ordinary shares on a fixed date should be
classified as equity (this is known as the ‘fixed for fixed’ requirement to which the
finance director refers).

However, a critical feature in differentiating a financial liability from an equity

instrument is the existence of a contractual obligation of the issuer either to deliver
cash or another financial asset to the holder, or to exchange financial assets or
financial liabilities with the holder, under conditions which are potentially
unfavourable to the issuer. In this case, Sanda Ltd has issued convertible
redeemable preference shares – which makes little commercial sense from the
company’s perspective, as they offer the holder the benefit of conversion into

Page 16 of 28
 ordinary shares if share prices rise, and the security of redemption (at the choice
of the holder) if share prices fall.

IAS 32 notes that the substance of a financial instrument, rather than its legal form,
governs its classification in the entity’s statement of financial position. A
preference share which provides for mandatory redemption for a fixed or
determinable amount at a fixed or determinable future date or gives the holder the
right to require the issuer to redeem the instrument at a particular date for a fixed
or determinable amount is a financial liability. Since the preference shares offer
the holder the choice of conversion into ordinary shares as well as redemption in
two years’ time, the terms of the financial instrument should be evaluated to
determine whether it contains both a liability and an equity component. Such
components are classified separately as compound financial instruments,
recognising separately the components of a financial instrument which creates
both a financial liability of the entity (a contractual arrangement to deliver cash or
another financial asset) and an equity instrument (a call option granting the holder
the right, for a specified period of time, to convert it into a fixed number of ordinary
shares of the entity).

Per IFRS 9 Financial Instruments, when the initial carrying amount of a

compound financial instrument is allocated to its equity and liability components,
the equity component is assigned the residual amount after deducting from the
fair value of the instrument as a whole the amount separately determined for the
liability component. Sanda ltd would measure the fair value of the consideration
in respect of the liability component based on the fair value of a similar liability
without any associated equity conversion option. The equity component is
assigned the residual amount. Gearing would decrease if the draft financial
statements had included the preference shares within equity: the correction would
increase non-current debt (the present value of the future obligations) and decrease
equity.

ii) In accordance with IAS 12: Income Taxes, a deferred tax asset shall be recognised
for the carry-forward of unused tax losses to the extent that it is probable that
future taxable profit will be available against which the unused tax losses can be
utilised. However, the existence of unused tax losses is strong evidence that future
taxable profit may not be available. Therefore, when an entity has a history of
recent losses, the entity recognises a deferred tax asset arising from unused tax
losses only to the extent that it has convincing evidence that sufficient taxable
profit will be available against which the unused tax losses can be utilised. In such
circumstances, the amount of the deferred tax asset and the nature of the evidence
supporting its recognition must be disclosed.

The directors of Sanda Ltd should consider whether it is probable that Sanda Ltd
will have taxable profits before the unused tax losses or unused tax credits expire,
whether the unused tax losses result from identifiable causes which are unlikely to

Page 17 of 28
 recur; and whether tax planning opportunities are available to the entity which
will create taxable profit in the period in which the unused tax losses or unused
tax credits can be utilised. To the extent that it is not probable that taxable profit
will be available against which the unused tax losses or unused tax credits can be
utilised, the deferred tax asset should not be recognised. However, the impact on
the financial statements is that the removal of a deferred tax asset would reduce
net assets, and equity and increase gearing.

Marks allocation marks

i)
Identification of IAS 32: Financial Instrument -Presentation 1
Recognition and classification as compound instrument 1
Splitting compound instruments into equity and debt 1
Financial liability measured at amortised cost 1
Impact on gearing and equity 1
5
ii)
Identification of IAS 12 1
The use of future profit to support tax losses 4
5

(Total: 10 marks)

EXAMINER’S COMMENTS
This question on selected accounting standards (IFRS) was a difficult question for
most candidates. It was generally not well answered though the questions were
straight forward. The question was on precisely IFRS 9, IAS 32 and IAS 12. Candidates
performed poorly in this question with few scoring average marks.
Some candidates did not attempt this question at all. It seems most candidates were
not familiar with IFRS provisions on financial instruments, particularly the issues
regarding impairment arising from expected credit losses. Deferred tax arising from
carry-forward of unused tax losses was also a problem to most candidates. Most
candidates just defined deferred tax but were not able to speak to the issues raised in
the question. In general, the performance was below average.

Page 18 of 28
QUESTION THREE

a) Whenever impairment indicators are present, IAS 36 requires the relevant asset to
be assessed for impairment loss which is the amount by which the asset’s or the
group’s carrying amount exceeds its recoverable amount. The recoverable amount
is given by the higher of fair value less cost of disposal and value-in-use of the asset
or the unit. (0.5 marks)

The carrying amount of the machine at 30 June 2021 would be GH¢59.2 million
[GH¢65 million less depreciation charge of GH¢5.8 million, i.e. ((GH¢65 million -
GH¢7 million) x 1/5 x 6/12)]. (0.5 marks)

The fair value is estimated in line with IFRS 13: Fair value measurement and hence,
the amount should reflect the perspective of market participants. The GH¢4
million would therefore not be deducted before arriving at the fair value as market
players would consider such required reworking before agreeing on the price to
pay for asset. Hence, the fair value less cost of disposal would be GH¢52.25 million
(i.e. GH¢55 million less agent fees of GH¢2.75 million). (1 mark)

Whereas the machine’s value in use would be computed by discounting the

projected real cash flows using pre-tax real discount rate. The value-in-use based
on annual cash flows of GH¢20 million over the next three years using 8.3% would
be GH¢51.26 million (i.e. GH¢20 million x 3-year annuity of 2.563), plus present
value of residual value of GH¢6 million x 3-year discount factor of 0.787,
amounting to GH¢4.72 million. The total value in use will be GH¢55.98 million.
(1.5 marks)

The recoverable amount is therefore GH¢55.98 million, and the impairment

required is GH¢3.22 million (i.e. GH¢59.2 million less GH¢55.98 million) which is
a charge against profit. (0.5 marks)
Subsequent depreciation charge for the current period would be GH¢8.33 million
((GH¢55.98 million - GH¢6 million) x 1/3 x 6/12), reducing the revised carrying
amount further to GH¢47.65 million (GH¢55.98 million less GH¢8.33 million) at
current yearend. Total current depreciation charge would be GH¢14.13 million
(GH¢5.8 million plus GH¢8.33 million). (1 marks)

b) The recommendation for dealing with the above issues requires the application of
IAS 2, IAS 12 and IAS 21.
 IAS 2 requires inventories to be measured initially at cost and later at the lower of
cost or net realizable value.
 At the transaction date, IAS 21 requires any foreign-denominated transaction to be
translated into the entity’s functional currency, and at each date of any re-
measurement of the non-monetary item, the item is retranslated into the entity’s
functional currency as though the item is reacquired for its revised amount. Any
resultant retranslation gain or loss is treated along with any required write-down
within profit or loss.

Page 19 of 28
 IAS 12 requires provision to be made for deferred tax due to deductible temporary
difference created as a result of asset write-down.

At transaction date:
Initial recognition
Purchases (7.2 million/0.12) GH¢60 million
Bank GH¢60 million

At 31 October 2021:
Inventory write-down and retranslation of inventory:
Cost of sales GH¢10 million
(GH¢60 million – (7 million/0.14))
Inventory GH¢10 million

At 31 October 2022:
Deferred tax asset provision computed based on the temporary difference and
existing tax rate as the new rate is a non-adjusting event:
Deferred tax asset GH¢2 million
(20% x GH¢10 million)
Profit or loss GH¢2 million

(2 marks for explanations and 3 marks for computations and entries)

c) BYF Health facility

i) The following fundamental principles of the IFAC code of ethics might have been
breached:
Integrity
An Accountant is encouraged to be honest and straightforward in carrying out his
duties. The Locum staff members are paid based on hours worked. Thus, under
no circumstance is a locum staff member expected to be paid for hours he did not
work in the month. By complying with the directive of the Director of Health
Services to pay Bismark the full allocated hours for the month, when he actually
did not work, only suggests dishonesty in the work of the Accountant.

Objectivity
The IFAC code of ethics expects Accountants to be unbiased in their work and not
succumb to any undue influence. The use of full hours allotted to Bismark in
computing his salary when other Locum staff members are paid strictly on the
hours they work, suggests only one thing, “bias” on the part of the Accountant.
The objectivity of the Accountant might be impaired by the influence of the
Director of Health Services.

Professional behaviour
The conduct of Accountants at their work place, in carrying out their duty or
wherever they find themselves, is expected to maintain the good reputation of the
Accountancy profession, and not to soil it. The “inconsistent” treatment given to

Page 20 of 28
 the Locum staff which has become known to other Locum staff does not speak well
of the Accountant, and could put the Accountancy profession in a bad image.
(3 principles @ 2 marks each = 6 marks)

ii) Possible actions that the Finance Director should take include:
 The Finance Director should engage the Human Resource Director and the
Laboratory manager, if any or whoever Bismark reports to on the issue of
Bismark’s continuous absence from work. The Human Resource Director should
be encouraged to bring the matter to rest by ensuring that Bismark reports to work
during the allotted hours or lose it to a willing and ready Lab professional.
 There is the need to engage the Director of Health services also on why an
exception cannot be made for Bismark regarding the determination of his earned
salary in a month.
 Also, the Finance Director should engage Bismark to reiterate the point that he is
only paid on his hours worked and not on the allotted hours, and hence will not
be paid for any hours not indicated by the device.
 Where there is a designated person in charge of payroll of the Locum staff and not
the Finance Director, the Finance Director should communicate to the officer or the
manager to pay all Locum staff including Bismark using only the output of the
clock-in device, and nothing else.
 Where the Director of Health Services insists that Bismark should be given that
special treatment, the Finance Director can draw the attention of the Board of
Directors to the matter.
 The Finance Director can always seek advice from the Professional body on the
matter if it lingers.
(Any 4 points @ 1 mark each= 4 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question was in two parts: accounting standards and ethics. As usual, the
accounting standards part of the question was poorly answered by most candidates.
The accounting standards aspect related to IAS 36, IFRS 13, IAS 2, IAS 12 and IAS 21.
Candidates could not demonstrate sufficient understanding of the accounting
treatments relating to these standards. A greater percentage of the marks earned by
candidates came from the ethics part of the questions. Candidates provided
reasonable responses regarding the fundamental ethical principles that apply and the
possible courses of action to be taken to deal with the ethical dilemma.

Page 21 of 28
QUESTION FOUR

a) The following steps are followed to propose a scheme of capital reorganisation:

Step 1: Show liquidation option

GH¢ million GH¢ million
Expected proceeds:
Properties (60% x 7,200) 4,320
Other assets 2,880
7,200
Distributed as follows:
Closure costs (50)
Bank overdraft (3,900)
Amount available to creditors 3,250

Unsecured creditors:
Bond 750
Trade payables 1,968
Loan from venture capital fund 925
3,643
(3,250)
Available to shareholders -

Recovery rates:
Unsecured creditors: 3,250/3,643 = GH¢0.89 in GH¢1
Shareholders: nil

Step 2: Estimate the maximum loss

GH¢ million
Retained earnings 2,918
Preference div (20% x 1,500 x 3) 900
Tangible assets (to be taken over) 30
(750 – 720)
Other tangible assets (85%x5,000x10%) (425)
Bondholders (750 – 720) (30)
Inventories 540
Bond investment (370 – 280) 90
Irrecoverable debts [828 – (50%x828/1.15%)] 468
Loan from venture capital fund (8% x 925) (74)
Maximum loss 4,417

Step 3: Allocate the maximum loss to stakeholders (Show the sacrifice table)
Since ordinary shareholders and preference shareholders are the only losing
stakeholder groups, it may be appropriate to ask them to dear the available
reorganization loss of GH¢4,417 million in the proportion of their capital balances.
Hence, it is proposed that GH¢3,212 million (GH¢4,417 million x 4,000/5,500) of

Page 22 of 28
 the loss be allocated to ordinary shareholders and the remaining GH¢1,205 million
(GH¢4,417 million less GH¢3,212 million) allocated to the preference shareholders.

Other proposed changes

 In exchange of the sacrifice by the ordinary shareholders, they are to subscribe for
new ordinary shares in order to benefit from the projected good years.
 The remaining preference share capital and preference dividends in arrears to be
converted into ordinary shares.
 Deficient retained earnings account to be cancelled
 Asset values to be restated to reflect their true worth

Note: Other capital changes are permissible, if reasonable.

Adonten
Revised statement of financial position (immediately after reorganization)
GH¢ million GH¢ million
Tangible assets ((85%x5,000x110%) + 1,350) 6,025
Financial instruments 1,000
Other current assets (4,125-540-90-468) 3,027
Bank (W1) 1,950
Total assets 12,002

Equity & liabilities 9,368

Ordinary share capital (W2) 50
Equity option (15% convertible debenture) – W3 9,418

Non-current liabilities:
15% Convertible debenture (W3) 760

Current liabilities: 984

Trade payables (50%x1,968) 840
Advance from factor(W1) 1,824
Total equity & liabilities 12,002

Workings
1. Bank Account
GH¢ million GH¢ million
Factoring (70%x1,200) 840 Bank overdraft 3,900
Venture capital fund (90%x900) 810
Ordinary shares 4,200 Balance c/d 1,950
5,850 5,850

2. Ordinary share capital

GH¢ million GH¢ million
Capital reduction 3,212 Balance b/d 4,000
Loan (92%x925) 851
Creditors (50%x1,968) 984
Preference shares 1,195

Page 23 of 28
 (1,500-1,205+900)
Cash 4,200
Balance c/d 9,368 Equipment 1,350
12,580 12,580

3. Convertible debentures
Split the proceeds between liability and equity at the initial date. Liability is given
by the present value of the expected interest payments and principal repayments,
discounted at the rate (22.5%) carried by equivalent non-convertible debentures.

Year Future cash flows [email protected]% PV of Cash flow

GH¢ million GH¢ million
1 135 0.82 111
2 135 0.67 90
3 135 0.54 73
3 900 0.54 486
Liability component 760
Proceeds (90%x900) 810
Equity component (residual amount) 50

(15 marks)

b) Protective rights are rights designed to protect the interest of the party holding
those rights without giving that party power over the entity to which those rights
relate. Protective rights relate to fundamental changes to the activities of an
investee or apply in exceptional circumstances. However, not all rights that apply
in exceptional circumstances or are contingent on events are protective. Because
protective rights are designed to protect the interests of their holder without giving
that party power over the investee to which those rights relate, an investor that
holds only protective rights cannot have power or prevent another party from
having power over an investee.
(1 mark)
Some examples of the types of rights that might be protective include:
 Rights held by a lender that can be used to prevent borrower from undertaking
activities that could significantly change the credit risk of the borrower.
 Rights held by a lender to seize assets in the event of default.
 The right of a party holding a non-controlling interest in an investee to approve
capital expenditure above set limits or to approve the issue of equity or debt
instruments.
 Blocking rights over matters such as foreign takeovers or changes to an investee’s
founding charter held by a governments or founding party via a ‘golden share’.
 Rights held by a franchisor to protect the franchise brand against adverse actions
by a franchisee.
(Any 4 points @ 1 mark each = 4 marks)

(Total: 20 marks)

Page 24 of 28
EXAMINER’S COMMENTS
This question on capital reduction/reorganization was expected to be one of the
simplest for candidates. Unfortunately, some candidates could not answer this
question appropriately. Most candidates could not determine the maximum loss and
how to distribute the loss to the respective stakeholders. The second part of the
question on protective rights was poorly answered by almost all the candidates.

QUESTION FIVE

a) Computation of relevant ratios

i) Operating profit margin =
PBIT x100
Revenue

PBIT is given by:

Atiku Ltd Obi Ltd
GH¢ 000 GH¢ 000
Profit after tax 1,500 1,260
Finance cost 1,050 880
Provision for current tax 1,004 925
Decrease in deferred tax (116) (55)
Under provision of 2021 tax 32
3,438 3,042

Atiku Ltd Obi Ltd

Operating profit margin = 3,438 x 100 3,042 x 100
25,600 21,900
=13.43% = 13.89%
(1.5 marks)

ii) Return on capital employed

Atiku Ltd Obi Ltd
= PBIT x 100 3,438 x 100 3,042 x 100
Capital employed 13,400+10,510+5,600 14,700+10,317
=11.65% = 12.24%
(1.5 marks)

iii) Inventory turnover period

= Inventory x 365
Cost of sales
Cost of sales is given by:

Page 25 of 28
 Atiku Ltd Obi Ltd
Cost of sales 19,968 16,425
Atiku (25,600 × (100%-22%))
Obi (21,900 × (100%-25%))

Inventory period = 4,600 x 4,200 × 365

365 16,425
19,968 = 93days
= 84 days
(1.5 marks)

iv) Current ratio

=Current assets Atiku Ltd Obi Ltd
Current liabilities 12,900 10,700
9,790 5,653
= 1.32:1 = 1.89:1
(1.5 marks)

v) Capital (long-term) gearing

Atiku Ltd Obi Ltd
Long-term debts x100 10,510 x100 10,137 x100)
Long-term debts + Equity (10,510+13,400) (10,137+14,700)
= 43.96% = 40.81 %
(1.5 marks)

vi) Dividend yield

Atiku Ltd Obi Ltd
Dividend per share x 100 0.125 x 100 0.06 x 100
Share price 2.10 1.55
=5.95% =3.87%

Dividend per share was found using the coverage ratio. Dividend coverage
indicates how many times earnings cover dividends or how many times dividends
go into earnings. So if earnings per share is available, we can easily determine
dividend per share. Earnings per share is calculated as follows:

Earnings per share

Atiku Ltd Obi Ltd
PAT – Pref. Div 1,500 1,260
No. of ordinary shares 1500/0.5 2,100/0.5
= 0.50 = 0.30

Dividend per share 0.50 0.30

4 5
=0.125 =0.06
(2.5 marks)

Page 26 of 28
 Summary
Atiku Ltd Obi Ltd
Gross profit margin 22% 25%
Operating profit margin 13.43% 13.89%
Return on long-term capital employed 11.65% 12.24%
Inventory turnover period 84 days 93 days
Current ratio 1.32:1 1.89:1
Capital gearing 43.96% 40.81%
Dividend yield 5.95% 3.87%
Dividend coverage 4.0 5.0

b) Report to the Board

To: Board
From: Accountant
Date: 1 July 2022
Subject: Analysis of financial performance and position of Atiku Ltd

This report provides an assessment of the financial performance and position of

Atiku Ltd, relative to its competitor, Obi Ltd, for the year ended 30 June 2022. Four
ratios: operating margin, ROCE, capital gearing and dividend yield have been
used for this analysis, and hence the report should be read with reference to the
ratios computed.

Operating profit margin

Operating margin is a key profitability measure and provides an indication of how
well cost of operations has been controlled. It shows how much an entity earns as
profit after covering all of its operational expenses. Atiku reports an operating
margin of 13.43% which is slightly lower than that of Obi (13.89%). This signifies
that Atiku is operating a bit less efficiently in managing overall operational costs
incurred to earn revenue.

Return on capital employed

ROCE is a popular indicator of management efficiency and for strategic planning.
A comparison of the operating profit generated by an entity with the book value
of the non-current and working capital indicates how many cedis of profit are
obtained from every cedi of resource under management’s control. It throws light
on how profitable the entity appears to providers of long-term capital. On ROCE
of 11.65% compared Obi’s 12.24%, Atiku looks not as good in terms of how much
profit is generated for long-term financiers. A critical look is required to find out
whether this picture is as a result of only the lower margins Atiku earns as poor
asset utilisation could play part role.

Gearing
Capital gearing ratio is measure of financial risk and expresses the amount of a
company’s debt relative to its equity. The capital gearing of Atiku Ltd and Obi Ltd
are 43.96% and 40.81% respectively. Since both companies’ capital gearing is below

Page 27 of 28
 50%, it means that the companies are lowly geared. This indicates that they use less
debt in financing the businesses. Therefore, it would not be difficult for the entities
to borrow more when there is the need to raise new capital. There is also low risk
that the entity will be unable to meet its payment obligations to lenders when these
obligations are due for payment.

Dividend Yield
Dividend yield measures how much income has been received relative to share
price. A higher dividend yield is more attractive while a lower yield can make a
stock less competitive relative to its industry. The dividend yield for Atiku Ltd and
Obi Ltd are 5.95% and 3.87%. This indicates that the stock of Atiku Ltd is more
attractive and competitive as compared to Obi Ltd.

Conclusion
The overall performance and position of both companies are very similar. Per the
ratios calculated, there is only a slight difference in the companies’ performance.
Even though the financial performance and position of both companies are okay,
Obi Ltd is performing a bit better than Atiku Ltd.
(10 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question on analysis of the financial statements was of the appropriate standard.
Most candidates could not however compute operating profit from the data given.
This led to them getting operating profit margin and ROCE ratios wrong. Some could
not also derive dividend per share from the data given, hence, their inability to
correctly compute dividend yield. Few candidates also devoted separate headings
analysing current ratio and inventory holding period in the report even though that
was not a requirement.

CONCLUSION
As indicated earlier, overall, candidates performed poorly than previous diets. The
results provide some indication of ill preparation and lack of appreciation of
accounting standards. It seems that the exemptions granted to most candidates is a
factor of poor performance given that candidates lack the pre-requisite knowledge
and competence for corporate reporting. It is suggested that candidates preparing for
corporate reporting paper should thoroughly revise on the financial reporting paper
even when they are exempted from taking the financial reporting paper. The
exemptions criteria or policy must be re-looked at. Some candidates just register and
sit the paper without the aim of passing but because he/she must register for all
subjects. So, they prepare for other subject(s) they have interest in.

Page 28 of 28
 JULY 2023 PROFESSIONAL EXAMINATION
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was more challenging than the previous diet. Although the
questions were based on the syllabus and were largely straight forward and of the right
level, some of the topics that were examined in this diet were not expected by most
candidates. The mark allocation followed the weightings in the syllabus and was fairly
allocated to each sub-question. Most questions were clearly stated and followed higher
order learning outcomes. Questions that required considerable amount of work were
commensurate with the allotted time and marks.

PERFORMANCE OF CANDIDATES
The general performance of candidates in this exams diet was 18% as compared to the
previous (March) diet of 15%. Candidates who performed well demonstrated a clear
understanding of the subject matter. Some candidates also showed abysmal performance.
The poor level of preparedness of some candidates reflected in their poor performance.
Some candidates did not attempt the paper at all.

Page 1 of 32
QUESTION ONE

The following Statements of Financial Position relate to Banky Ltd (Banky), Zinko Ltd (Zinko)
and Tooli Ltd (Tooli):
Statements of Financial Position as at 28 February 2023
Banky Zinko Tooli
GH¢ GH¢ GH¢
million million million
Assets
Non-current assets
Property, plant and equipment 1,500 1,040 960
Deferred tax - 80 -
Current assets 1,188 584 600
Total assets 2,688 1,704 1,560

Equity and liabilities

Equity:
Equity shares of GH¢5 each 600 500 500
Other reserves 150 90 60
Retained earnings 976 390 355
1,726 980 915
Current liabilities 962 724 645
Total equity and liabilities 2,688 1,704 1,560

Additional information:
i) On 1 March 2022, Banky purchased 80 million equity shares in Zinko through share exchange
of three shares in Banky for every two shares in Zinko. The fair values of each share of Banky
and Zinko were GH¢7 and GH¢10.5 respectively at acquisition date. Shares issued by Banky
have not yet been recorded in the books.

ii) On acquisition date, Zinko’s retained earnings and other reserves were GH¢230 million and
GH¢60 million respectively. Fair value of Zinko’s identifiable net assets was equal to their
carrying value except that Zinko had a disclosed contingent liability with a fair value of GH¢8
million at acquisition. Provision in respect of this contingent liability has been recognised by
Zinko at GH¢7.2 million as at 28 February 2023.

iii) On the same date Zinko was acquired, Zinko also purchased 60% equity holding in Tooli. The
purchase and sale agreement for this transaction provided that Zinko would pay cash amount
of GH¢500 million (excluding GH¢2 million consultancy costs which Zinko settled
immediately and charged against its other comprehensive income) to the former shareholders
of Tooli in two years’ time on condition that Zinko’s sales growth exceeds 20% per annum.
The fair value of this consideration was estimated at GH¢450 million at acquisition and
GH¢438 million at 28 February 2023. Zinko has not yet recorded this transaction. Both values
were deemed as final on the two given dates.

Page 2 of 32
iv) However, the professional valuation of Tooli’s identifiable net assets was not finalised at
acquisition so a provisional fair valuation of GH¢845 million for the net assets was applied to
arrive at the purchase consideration. The final valuation report which was released on 31
January 2023 showed a revised fair value of GH¢860 million for Tooli’s identifiable net assets.
Any fair value adjustment was due to an item of plant whose remaining useful life was 5 years
at acquisition. On this date, Tooli’s retained earnings and other reserves were GH¢275 million
and GH¢55 million respectively.

v) Banky’s closing inventories include goods sold by Zinko at a margin of 20%. These items were
invoiced at GH¢5 million but are currently included in Banky’s inventories at their net
realisable value of GH¢4.2 million.

vi) The policy of the group is to measure non-controlling interests using their proportion of the
fair value of identifiable net assets. An impairment review carried out revealed that goodwill
in Zinko at this year-end had a “gross” recoverable amount of GH¢230 million.

vii) Ignore deferred tax adjustments unless otherwise indicated.

Required:
Prepare the Consolidated Statement of Financial Position for Banky Ltd as at 28 February
2023.
(All figures should be approximated to the nearest GH¢0.1 million)
(Total: 20 marks)

QUESTION TWO

a) Digital Ghana Ltd has agreed to work with Pixel Ghana Ltd in order to develop a new musical
platform for the Ghana Musician Association. On 31 December 2021, the companies
established a new entity called Flowbeat Ltd with equal shareholdings and share in profit.
Digital Ghana Ltd has contributed its own intellectual property in the form of employee
expertise, cryptocurrency with a carrying amount of GH¢6 million, which now has a fair value
of GH¢8 million and an office building with a carrying amount of GH¢12 million with a fair
value of GH¢20 million. The cryptocurrency has been recorded at cost in Digital Ghana Ltd.’s
financial statements.

Pixel Ghana Ltd has contributed the technology and marketing expertise required for the
smooth operations of Flowbeat Ltd. The board of Flowbeat Ltd will comprise of directors
appointed equally by Digital Ghana Ltd and Pixel Ghana Ltd. Decisions are made by a
unanimous vote.

Required:
In accordance with the provisions of relevant International Financial Reporting Standards:
i) Advise on the classification of the investment which Digital Ghana Ltd has in Flowbeat Ltd.
(3 marks)

Page 3 of 32
ii) Advise on the derecognition of the assets exchanged for the investment in Flowbeat Ltd and
any resulting gain/loss on disposal in the financial statements of Digital Ghana Ltd at 31
December 2021. (2 marks)
iii) Advise whether the cryptocurrency should be classified as a financial asset or an intangible
asset. (2 marks)

b) On 1 April 2020, each of the seven (7) directors of Jantua Ltd received 16,000 share options
as an award. Jantua Ltd prepares its accounts to 31 March each year. The condition attached
to the award is that the directors must remain employed by Jantua Ltd for three years. The fair
value of each option at the grant date was GH¢100 and the fair value of each option at 31
March 2022 was GH¢110. At 31 March 2021, it was estimated that two (2) directors would
leave before the end of three years. Due to an economic upturn, the estimate of directors who
were going to leave was revised to one (1) director at 31 March 2022. The expense for the year
as regards the share options had not been included in profit or loss for the current year and no
director had left by 31 March 2022.

Required:
With reference to International Financial Reporting Standards, advise the directors on how to
account for the above transactions of Jantua Ltd in its financial statements as at 31 March 2022.
(6 marks)

c) On 1 January 2021 Partey Leasing PLC (Partey), acquired a large-scale custom-made

equipment and leased it to Mane Ltd (Mane) for six years. Mane makes annual payments of
GH¢10 million, commencing on 31 December 2021. The equipment has a useful life of seven
years. Mane is responsible for insuring and maintaining the equipment, and is required to pay
additional GH¢1.5 million at the end of each year provided a defined performance target is
met. Mane has guaranteed that the value of the equipment at 31 December 2026 will not be
less than GH¢1 million, although Partey anticipates that the open market value at that date will
be approximately GH¢2.5 million. The costs incurred by Partey and Mane in arranging the
lease amounted to GH¢2.1 million and GH¢1.6 million respectively. The rate of interest
implicit in the lease is 9.49% per annum. Mane achieved the defined performance target on 31
December 2021 and made the required payment.

Required:
In line with IFRS 16: Leases, explain how Partey would account for the above lease in its
financial statements for the year ended 31 December 2021. (7 marks)

(Total: 20 marks)

Page 4 of 32
QUESTION THREE

a) Sandoo Ltd is a company which manufactures machinery for industrial use and has a year end
of 31 December 2021. The directors of Sandoo Ltd require advice on the following transaction:

i) Sandoo Ltd acquired a cash-generating unit (CGU) several years ago but, at 31 December
2021, the directors of Sandoo Ltd were concerned that the value of the CGU had declined
because of a reduction in sales due to new competitors entering the market. At 31 December
2021, the carrying amounts of the assets in the CGU before any impairment testing were:
GH¢ million
Property, Plant and Equipment (PPE) 20
Goodwill 6
Other assets 38
64

ii) The fair values of the Property, Plant and Equipment and the other assets at 31 December 2021
were GH¢20 million and GH¢34 million respectively and their costs to sell were GH¢200,000
and GH¢600,000 respectively. The CGU’s cash flow forecasts for the next five years are as
follows:
Date year ended Pre-tax cash flow Post-tax cash flow
GH¢ million GH¢ million
31 December 2022 16 10
31 December 2023 14 10
31 December 2024 10 6
31 December 2025 6 3
31 December 2026 26 20

iii) The pre-tax discount rate for the CGU is 8% and the post-tax discount rate is 6%. Sandoo Ltd
has no plans to expand the capacity of the CGU and believes that a reorganisation would bring
cost savings but, no plan has been approved. The directors of Sandoo Ltd need advice as to
whether the CGU’s value is impaired. The following extract from a table of present value
factors has been detailed below:
Year Discount rate 6% Discount rate 8%
1 0·9434 0·9259
2 0·8900 0·8573
3 0·8396 0·7938
4 0·7921 0·7350
5 0·7473 0·6806

Required:
With reference to relevant International Financial Reporting Standards:
Advise the directors of Sandoo Ltd on how the above transactions should be accounted for in
its financial statements as at 31 December 2021. (10 marks)

b) Axim Manufacturing plc has just employed Mr. Kennedy Owusu as the Finance Director of
the company. The previous Finance Director, Mr. Ebenezer Anokye, completed the financial

Page 5 of 32
 statements for the year ended 31 December 2021 before he left. The Auditors of the company
are also done with the audit of the financial statement for the year, expressing an unmodified
opinion on the accounts. Mr. Ebenezer Anokye is loved by the General staff, Management
members and the Board of Directors for his ability in making the organisation profitable over
the years, and “guaranteeing” increased end-of-year bonus payments to staff, as a consequence.

Mr. Kennedy Owusu wanted to familiarise himself with the operations of the company, and
therefore decided to go through the financial statements for the previous year. He is dismayed
to find several errors in the financial statements. The previous Finance Director, Mr. Ebenezer
Anokye, passed several adjusting entries in January, 2022 to reflect in the 2021 financial
statements. In one of such instances, Mr. Ebenezer Anokye recognised revenue on a large order
received on December 28, 2021 but shipped on January 3, 2022. The narration or explanation
given to this adjusting entry is, “omission of previous year sales, now recorded”.

Also, purchase of inventory in October 2021, which was fully sold by the end of the year had
been recognised in January 2022. Finally, depreciation expense had been reduced by
GH¢230,000. All these adjustments were designed to increase profit after tax or earnings per
share, culminating in increased bonus payment to Management and the General staff.

Required:
i) Identify the ethical issues involved in the adjustments made by Mr. Ebenezer Anokye.
(5 marks)
ii) Recommend the possible actions that Mr. Kennedy Owusu, the new Finance Director, should
take to resolve the ethical breaches and to reverse the wrong accounting treatments.
(5 marks)

(Total: 20 marks)

Page 6 of 32
QUESTION FOUR

a) Alomo Investments and Financial Services (Alomo) is a locally based investment portfolio
firm which holds several financial assets across different industries in Ghana. Alomo holds
some equity assets in Bediako Metals Ltd (Bediako). Currently, Alomo is preparing its
financial statements and would like to know the fair value of its current year-end 20% equity
holdings in Bediako based on the latter’s recently available financial data (for the year ended
31 December 2021) provided below:
GH¢ million
Tangible assets 895
Non-current financial assets 150
Current assets 485
Total liabilities (including all redeemable preference share capital) 750
Irredeemable preference share capital 100
Draft profit after tax 170

Additional information:
1) At year-end, the entity had to make downward revision of decommissioning provision relating
to one of its plant as both the expected cash outflows and the current-market rate discount rate
were reassessed. Reduction of GH¢40 million (appropriately discounted) has been used to
revise liability, and same credited to profit or loss.

2) Bediako holds some 3-year bonds which are measured at fair value through other
comprehensive income. Coupon and effective interest rates, which are same, have been
correctly dealt with. The carrying value of these bonds is GH¢92 million, and the bonds are
yet to be revised to reflect their year-end fair value. For the purpose of obtaining the appropriate
fair value in line with IFRS 13: Fair value measurement, the following information has been
obtained:
Reference to most Reference to principal
advantageous market market
GH¢ million GH¢ million
Quoted market prices 120 90
Quoted market prices (with minor 85 105
adjustment)
Based on own model 140 150

3) The directors of Bediako Ltd have refused to agree with their external auditors to a reduction
in the year-end inventory value for the firm’s main product. As a result, the auditors have
issued a qualified opinion on the financial statements. The items in question are being included
in current assets at the cost of GH¢200 million. The auditors noted during their subsequent
event procedures that 90% of these items had been sold for 95% of their cost.

4) The directors also failed to cooperate with the Finance Director (FD) over how the issued 5-
year bonds should be accounted for. The FD’s position is that though the firm has clear
intention to pay all interests and principal on the bonds to the bondholders, such treatment
would result in a very huge measurement mismatch. Hence, the fair value option should be

Page 7 of 32
 taken. Taking that option would have created a fair value gain on the bond by GH¢12 million
(including credit-worthiness element of GH¢5 million)

5) On 30 June 2021, Bediako Ltd made an issue of 30 million new ordinary shares to a venture
capital firm to raise GH¢120 million. Later, on 1 November 2021, the entity also made a
capitalisation issue on the basis of one new share for every four shares held at that time.
Bediako has correctly accounted for these issues in its financial statements. Its total number of
ordinary shares outstanding as at 31 December 2021 was 200 million.

6) Ordinary dividends for the current period, when compared to the draft profit attributable to
ordinary shareholders translate into dividend cover of 5:1. The following details relate to
preference dividends paid by Bediako during the current year:
Class of shares Type of GH¢ million
dividend
Irredeemable preference shares (non-cumulative) Final 10
Redeemable preference shares (non-cumulative) Final 15
Note: Bediako has correctly accounted for these dividends.

7) A comparable listed firm provides price/earnings ratio of 12 and dividend yield of 4%. Risk
factor of 20% should be assumed.

Required:
Determine a range of values for Alomo’s equity investment in Bediako using the following
bases:
i) Net assets basis
ii) Earnings basis; and
iii) Dividend yield basis.

Note:
1. Additional information contained in 2), 3) and 4) may or may not necessitate revision of the
draft profit but not the tax or the dividends.
2. Bediako’s weighted average number of shares based on 5) should be used for the earnings
and dividend yield valuations.
(15 marks)

b) An acquirer may obtain control of an acquiree without transferring consideration. In such

cases, IFRS 3 requires an acquirer to be identified, and the acquisition method to be applied.

Required:
Briefly explain how this situation may come about, and highlight on the appropriate
consolidation treatment required. (5 marks)

(Total: 20 marks)

Page 8 of 32
QUESTION FIVE

Presented below are the common-sized financial statements of Towobo Ltd over the last five
years:
Vertical common-sized statements of profit or loss for the years ended 31 December
2022 2021 2020 2019 2018
% % % % %
Revenue 100.00 100.00 100.00 100.00 100.00
Cost of sales (88.58) (85.45) (84.92) (87.36) (92.70)
Gross profit 11.42 14.55 15.08 12.64 7.30
Distribution and marketing costs (1.00) (0.86) (0.83) (1.15) (0.87)
Administrative expenses (0.74) (0.79) (0.88) (0.85) (0.73)
Other operating income 2.06 1.78 0.77 0.58 0.69
Other operating expenses (1.36) (0.86) (1.21) (1.20) (0.94)
Profit from operations 10.38 13.82 12.93 10.02 5.45
Finance cost (0.02) (0.04) (0.02) (0.05) (0.10)
Profit before tax 10.36 13.78 12.921 9.97 5.35
Tax (3.25) (3.98) (4.05) (3.25) (2.61)
Profit after tax 7.11 9.80 8.86 6.72 2.74

Vertical common-sized statements of financial position as at 31 December

2022 2021 2020 2019 2018
% % % % %
Non-current assets:
Property, plant and equipment 8.49 8.55 15.50 20.27 23.33
Intangible assets 0.52 0.72 0.44 0.51 0.70
Capital work-in-progress 0.13 0.39 7.39 0.28 0.66
Long-term loans and advances 0.33 0.22 0.52 3.20 3.65
Total non-current assets 9.47 9.88 23.85 24.26 28.31
Current assets:
Inventories 14.20 13.19 25.51 40.61 32.25
Receivables 0.16 0.09 0.53 0.32 -
Prepayments, advances and other 22.33 17.65 6.21 10.69 20.33
receivables
Short-term investments 35.15 40.67 7.10 - -
Cash and bank balances 18.69 18.52 36.80 24.12 19.11
Total current assets 90.53 90.12 76.15 75.74 71.69
Total assets 100.00 100.00 100.00 100.00 100.00

Equity:
Issued, subscribed and paid up capital 2.43 2.77 8.81 10.25 11.59
Retained earnings 16.50 10.69 18.24 3.78 0.62
Other reserves 10.10 11.91 21.95 22.74 7.20
Total equity 29.03 25.37 49.00 36.77 19.41
Non-current liabilities:
Pensions liabilities 0.16 0.12 0.51 0.38 0.36

Page 9 of 32
Deferred tax 0.74 0.71 0.83 - -
Deferred revenue 0.02 0.02 0.06 0.08 0.10
Total non-current liabilities 0.92 0.85 1.40 0.46 0.46
Current liabilities:
Trade, dividend and other payables 70.04 73.15 49.6 62.73 80.02
Current portion of deferred revenue 0.01 0.01 0.04 0.03 -
Income tax - 0.62 - 0.01 0.11
Total current liabilities 70.05 73.78 49.60 62.77 80.13
Total equity and liabilities 100.00 100.00 100.00 100.00 100.00

Required:
As the Financial Advisor to ABC Mutual Funds, report on the financial health or otherwise of
Towobo Ltd based on the vertically analysed financial statements and advise ABC Mutual
Funds on whether to invest in Towobo Ltd. Your report should focus on the profitability and
cost control analysis, asset structure, capital structure and working capital structure.
(Total: 20 marks)

Page 10 of 32
SOLUTION TO QUESTIONS

QUESTION ONE

Banky Group
Consolidated statement of financial position as at 28 February 2023
Assets: GH¢ million
Non-current assets:
Property, plant and equipment 3,524
(1,500 + 1,040 + 960 + 30(W2) – 6(W2))
Goodwill (W3) 184
Deferred Tax 80
3,788
Current assets (1,188 + 584 + 600 – 1(W2)+0.80) 2,371.80
Total assets 6,159.8

Equity and liabilities

Ordinary shares (600 + 840(W3)) 1,440
Other reserves (W6) 178
Retained earnings (W5) 1,176.30
Total equity attributable to shareholders of parent 2,794.30
Non-controlling interest (488.30+108.20)W4 596.50
3,390.80
Total liabilities (962 + 724 + 645 + 438 contingent consideration) 2,769
Total equity and liabilities 6,159.8

Workings:
1. Group structure
Banky

80%

Zinko (1 yr)

60%

Tooli (1 yr)

Page 11 of 32
 Summary of percentages
Zinko Tooli
Parent’s % - Direct 80% -
Indirect - (80% x 60%) 48%
Non-controlling interests 20% 52%
100% 100%

2. Net assets schedule

Acq. date Rep. date Post-acq
Zinko GH¢’million GH¢’million GH¢’million
Equity shares 500 500 -
Other reserves 60 90 30
Retained earnings 230 390 160
Consultancy Cost - 2 2
Other Reserve Adjustment (2) (2)
Contingent liability (8) - 8
Prov. for Unrealized Profit (5*20%) - (1) (1)
Reduction in contingent
consideration (450 – 438) - 12 12
782 991 209

Tooli
Equity shares 500 500 -
Other reserves 55 60 5
Retained earnings 275 355 80
Plant (bal. fig.) (860 – 500 – 55 – 275) 30 30 -
860 945 85
Plant depreciation (30 x 1/5) - (6) (6)

860 939 79

Note on treatment of intra-group inventory:

The total profit on the intra-group inventory is GH¢1 million (20% of GH¢5 million). So the
group should reduce inventory to its original cost by eliminating this unrealised profit of
GH¢1 million. However, since the items have already been written down by loss of GH¢0.8
million (i.e. GH¢5 million less GH¢4.2 million NRV) and are being currently carried at
GH¢4.2 million, the write-down of GH¢0.8 million should be should be reversed from the
group retained earnings and PUP reported in the inventory.

Page 12 of 32
3. Goodwill
Zinko GH¢ million

Cost of investment
Fair value of shares issued (80% x 500/5 x 3/2 x 7) 840
Add: NCI% of net assets at acquisition (20% x 782) 156.40
996.40
Fair value of identifiable net assets acquired (W2) (782)
Goodwill at acquisition 214.40
Less: Impairment (see below) (80% x 38) (30.40)
Goodwill at reporting 184

Test for goodwill impairment GH¢ million

Carrying amount (at gross) (214.40 x 100/80) 268
Impairment loss (38)
Gross recoverable amount 230

Note
20% loss attributable to the notional NCI’s goodwill would not be recognised; only 80% of
the impairment loss would therefore be charged against profit and goodwill.

Tooli
GH¢ million
Cost of investment:
Contingent consideration 450
Less: indirect holding adjustment (20% x 450) (90)
360
Add: NCI% of net assets at acquisition (52% x 860) 447.20
Fair value of identifiable net assets acquired (W2) (860)
Bargaining gain on acquisition (Negative goodwill) (52.80)

4. Non-controlling interest
GH¢’million
Zinko:
NCI at acquisition (20% x 782) 156.40
Add: NCI% of Zinko’s post –acquisition (20% x 209) 41.8
Less: Indirect holding adjustment (20% x 450) (90)
NCI at reporting 108.20

Tooli:
Fair value of NCI at acquisition (52% x 860) 447.20
Add: NCI% of Tooli’s post-acquisition (52% x 79) 41.1
NCI at reporting 488.3

Page 13 of 32
5. Retained earnings
GH¢’million
Banky
Balance b/d 976
Reversal of Inventory Valuation (5 – 4.20) 0.80

Zinko
Parent’s share of post-acq. earnings (80% x (209 – 30-2)) 141.60
Impairment loss – goodwill (30.40)

Tooli
Parent’s share of post-acq. earnings (48% x (79 – 5)) 35.5
Bargaining gain (W3) 52.80
1,176.30

6. Other reserves
GH¢’million
Banky
Balance b/d 150

Zinko
Parent’s share of post-acquisition (80% x 32 (30+2)W2 25.6

Tooli
Parent’s share of post-acquisition (48% x 5)W2 2.4
At reporting 178

(20 marks evenly spread using ticks)

EXAMINER’S COMMENTS
Candidates generally had a satisfactory performance in answering the question, which
tested the candidates’ understanding on preparing consolidated statement of financial
position. Notwithstanding the satisfactory performance candidates had in their
responses to the question, the following observations were made, and it is important to
point out, to guide candidates of ICAG who will be sitting for the paper in the future:
a) Candidates had difficulty in determining the goodwill arising on acquisition. The
question had a gross recoverable amount of goodwill. Candidates were to use this
gross recoverable amount to compare with the gross (full) after grossing up the
computed goodwill or deflating the recoverable amount given at the notional NCI of
20% in Zinko. Candidates struggled generally to apply this aspect of IAS 36
Impairment of Assets.

Page 14 of 32
b) Though candidates could compute the gain on bargain purchase in the sub-
subsidiary, they struggled to identify the appropriate treatment for the computed
amount, whereas some added or netted to or against the positive goodwill, others
could not identify what to do with the figure. Candidates were expected to add to the
retained earnings in the group.
c) On the average, candidates also failed to identify the correct cost of investment to be
used in the computation of the goodwill in the sub-subsidiary. Majority of candidates
used the full investment made by the subsidiary instead of the proportion of the
parent’s shareholding in the subsidiary. The indirect holding adjustment which takes
effect of removing the contribution of non-controlling interest (NCI) in the investment
was not made by most candidates.
d) In computing the NCI, candidates failed to adjust the NCI in the subsidiary with the
proportion of the NCI’s contribution in the sub-subsidiary (that is the indirect
holding).
e) The footnote (v) presented candidates with unrealised profit on goods sold by the
subsidiary to the parent company. However, the buyer (parent) had at the statement
of financial position date, the inventory recorded at net realisable value (NRV).
Adjustment of NRV however showed that the inventory was not impaired and should
not be at net realizable value since the cost was lower than the NRV. A reversal of the
written down value was to be made by candidates in the books of the buyer (Banky)
whiles the provision for unrealized profit (PUP) reversal is made in Zinko’s books.
This was generally not done by candidates.

Page 15 of 32
QUESTION TWO
a)
i) This appears that Digital Ghana Ltd and Pixel Ghana Ltd jointly control Flowbeat Ltd
and it appears as though the arrangement is a joint venture under IFRS 11 Joint
Arrangements as the parties have joint control of the arrangement and have rights to
the net assets of the arrangement.

Joint control is the contractually agreed sharing of control of an arrangement, which

exists only when decisions about the relevant activities require the unanimous
consent of the parties sharing control. This is the case with Flowbeat Ltd. A joint
venturer recognises its interest in a joint venture as an investment and accounts for
that investment using the equity method in accordance with IAS 28 Investments in
Associates and Joint Ventures unless the entity is exempted.
Marks allocation:
Identification of IFRS 11: Joint arrangement = 1 mark
An understanding of Joint control = 1 mark
Treatment of joint venture in accordance with IAS 28 = 1 mark
3 marks

ii) Digital Ghana Ltd has exchanged non-monetary assets for its investment in Flowbeat
Ltd, and thus needs to de-recognise the assets it is contributing to Flowbeat Ltd in its
financial statements. The carrying amount of GH¢12 million of the property is
derecognised but the intellectual property of Digital Ghana Ltd has been generated
internally and does not have a carrying amount. The cryptocurrency is recorded as an
asset in the financial statements of Digital Ghana Ltd at GH¢6 million but will be
valued at GH¢8 million, its fair value in the financial statements of Flowbeat Ltd.
Accordingly, when a joint venturer contributes a non-monetary asset to a joint venture
in exchange for an equity interest in the joint venture, the joint venturer recognises a
portion of the gain or loss on disposal which is attributable to the other parties to the
joint venture (except when the contribution lacks commercial substance).

Basically, Digital Ghana Ltd is required by IAS 28 to limit the profit on disposal of its
non-monetary assets to 50%. Effectively, Digital Ghana Ltd has only disposed of 50%
of the asset contributed to the joint venture. Therefore, the carrying amount of the
joint venture in Digital Ghana Ltd.’s financial statements at 31 December 2021 will be
GH¢23 million ((GH¢12 + GH¢6 carrying amounts derecognised for property and
cryptocurrency) + ((GH¢8 – GH¢6)/2) + ((GH¢20 – GH¢12)/2)). A gain of GH¢5
million will be recorded in profit or loss.
Marks allocation:
Derecognition of assets and Cryptocurrency to be value at fair value in Joint
venture = 1 mark
50% profits to be recognized = 1 mark
2 marks

Page 16 of 32
iii) A crypto currency is a form of digital asset based on a network that is distributed
across a large number of computers. This decentralized structure allows cypto
currencies to exist outside the control of governments and central authorities.

Cryptocurrency cannot be considered a financial asset since there is not contractual

right to receive cash or another financial instrument from an entity. It does not
represent cash or an equity instrument.

Since the cryptocurrency is not cash or cash equivalents as its value is exposed to
significant changes in market value and there is no contractual right to receive either
cash or cash equivalents, it fails the definition of a financial asset.

The cryptocurrency is to be recognised as an intangible asset, and the default position

would be to measure it at cost. However, there may be an argument to say that there
is an active market for the cryptocurrency in which case, it would be possible for it to
be measured at fair value. In this case, movements in that fair value would be
recognised through other comprehensive income and the gain would not be recycled
through profit or loss when the cryptocurrency is realised. The best way to account
for a cryptocurrency would be fair value as that is the value at which the entity will
realise their investment or transact in exchange for goods and services. Accounting
for cryptocurrency at fair value with movements reflected in profit or loss would
provide the most useful information to investors but existing accounting
requirements do not appear to permit this.

Marks allocation:
An understanding of the treatment of crypto currency as an intangible asset = 2 marks

b) This transaction is accounted for under IFRS 2: Share Based Payments. Specifically,
this is an equity-settled share based payment scheme and is accounted for below:
Calculation of expenses and cumulative expenses.
year Expense for the year Cumulative expenses Calculations
GH¢ million) GH¢ million)
31 March 2021 2.67 2.67 5 directors x
GH¢100 x 16,000 x
1/3
31 March 2022 3.73 6.4 6 directors x
GH¢100 x 16,000 x
2/3

Page 17 of 32
 Profit or loss extract – for the year ended 31 March 2022
GH¢ million
Staff cost -share based scheme 3.73

Statement of financial position -Extract as at 31 March 2022

Equity GH¢ million
Special share - share based scheme 6.4
Marks allocation:
Identification of IFRS 2 = 1 mark
Calculations = 2 marks
Profit or loss extract = 1.5 marks
Statement of financial position extract = 1.5 marks
6 marks

c) Partey would account for the lease agreement as a finance lease based on the following
reasons:
 The lease term of six years occupies more than 75% of the equipment’s useful
economic life of seven years;
 Mane, the lessee, is responsible for insuring and maintaining the equipment; and
 The underlying asset is custom-made.

At the initial recognition date, Partey would recognise a lease receivable for the
finance lease. The receivable would be initially measured at either the sum of the
equipment’s fair price and lessor’s initial direct costs or the present value of
minimum lease payments and unguaranteed residual value, and subsequently
adjusted for interest income, lease payments, any required re-measurements and
impairment (if any).

The lease payments would exclude the variable payment as the variability depends
on management’s own performance. Partey would only account for such payment as
income if the predefined condition is met:
Year Future lease D.F. Present
payments (9.49%) value
GH¢’000 GH¢’000
1 10,000 0.913 9,130
2 10,000 0.834 8,340
3 10,000 0.762 7,620
4 10,000 0.696 6,960
5 10,000 0.636 6,360
6 10,000 0.580 5,800
6 (GRV) 1,000 0.580 580
Present value of 44,790
minimum lease payments

Page 18 of 32
 6 (URV) 1,500 0.580 870
Lease receivable 45,660

Or Using the annuity formula

Year Future lease Annuity factor Present
payments (9.49%) value
GH¢000 GH¢000
1-6 10,000 4.4210 44,210
6 (GRV) 1,000 0.580 580
Present value of 44,790
minimum lease payments
6 (URV) 1,500 0.580 870
Lease receivable 45,660

Lease table for subsequent measurement of the lease receivable:

Year Balance at Interest Lease Balance at
start (9.49%) receipts end
GH¢000 GH¢000 GH¢000 GH¢000
2021 45,660 4,333 (10,000) 39,993
2022 39,993 3,795 (10,000) 33,788

Partey
Statement of profit or loss (extract) for the year ended 31 December 2021
GH¢000
Finance income 3,795
Additional lease payment 1,500

Partey
Statement of financial position (extract) as at 31 December 2021
GH¢000
Non-current assets:
Lease receivable (39,993 – 6,205) 33,788

Current assets
Lease receivable (10,000 – 3,795) 6,205

Marks Allocation:
Lease classification = 1 mark
Explanation of initial and subsequent recognition of lease receivable = 1 mark
Treatment of variable payment = 1 mark
Computations and extracts = 4 marks
7 marks
(Total: 20 marks)

Page 19 of 32
EXAMINER’S COMMENTS
This question on selected accounting standards (IFRS) was a difficult question for most
candidates. Despite the question being relatively straight forward, candidates failed to
identify the relationship but directed attention more to the standards applicable. It was
generally not well answered. The question focused on IFRS 11, IAS 28, IFRS 2, and IFRS
16. It seems candidates were unfamiliar with these standards. Candidates performed
poorly in this question with few scoring average marks available. Overall, question 2 was
partly attempted and answered. Some candidates did not attempt this question at all.
ICAG should intensify revision on standards to enhance better appreciation by
candidates.

Page 20 of 32
QUESTION THREE

a) IAS 36 Impairment of Assets requires that assets be carried at no more than their
carrying amount. Therefore, entities should test all assets within the scope of the
standard if there is potential impairment when indicators of impairment exist. If fair
value less costs of disposal or value in use is more than carrying amount, the asset is
not impaired. It further says that in measuring value in use, the discount rate used
should be the pre-tax rate which reflects current market assessments of the time value
of money and the risks specific to the asset. The discount rate should not reflect risks
for which future cash flows have been adjusted and should equal the rate of return
which investors would require if they were to choose an investment which would
generate cash flows equivalent to those expected from the asset. Therefore, pre-tax
cash flows and pre-tax discount rates should be used to calculate value in use.
Discounting post-tax cash flows with a post-tax discount rate could give the same
result in an entity were it not for any temporary differences and/or tax losses which
might exist.

Year-end dates Pre-tax cash flow Discount factor PV of cash flows

GH¢’million 8% GH¢’million
31 December 2022 16 0.9259 14.81
31 December 2023 14 0.8573 12.00
31 December 2024 10 0.7938 7.94
31 December 2025 6 0.7350 4.41
31 December 2026 26 0.6806 17.70
56.86

The CGU is impaired by the amount by which the carrying amount of the cash-
generating unit exceeds its recoverable amount which is the higher of an asset’s fair
value less costs of disposal and its value in use.

The fair value less costs to sell (GH¢53.2 million) (i.e. 20+34 -0.2 -0.6) is lower than the
value in use (GH¢56.86 million). The recoverable amount is therefore GH¢56.86
million.

The carrying amount is GH¢64 million and therefore the impairment is GH¢7.14
million (i.e. GH¢64 – 56.86 million). The impairment loss of GH¢7.14 million is
charged to profit or loss for the year ended 31 December 2021.

Sandoo Ltd will allocate the impairment loss first to the goodwill and then to other
assets of the unit on pro rata basis of the carrying amount of each asset within the
cash-generating unit. As a result, the entity will allocate GH¢6 million to goodwill and
then allocate GH¢1.14 million on a pro rata basis to PPE (1.14 x 20/58 = GH¢0.39
million) and other assets (1.14 x 38/58 = GH¢0.75 million). This would mean that the

Page 21 of 32
 carrying amounts would be GH¢19.61 million (i.e. GH¢20 – 0.39 million) for PPE and
GH¢37.25 million (i.e. GH¢38 – 0.75 million) for other assets.

However, when allocating the impairment loss, the carrying amount of an asset
cannot be reduced below its fair value less costs to sell. The fair value less costs to sell
of the CGU’s assets is GH¢19.8 million (PPE) (GH¢20 million – GH¢0.2 million) and
GH¢33.4 million (other assets) (GH¢34 million – GH¢0.6 million).

Therefore, the carrying amounts of the assets of the CGU after impairment will be PPE
GH¢19.8 million and other assets GH¢37.06 million as the excess impairment of
GH¢0.19 million on PPE will be allocated to other assets.
Marks Allocation:
Identification of IAS 36 = 1 mark
Calculation of the PV of cash flows = 3 marks
Impairment loss calculation = 2 marks
Allocation of impairment loss = 3 marks
Carrying amount of assets to SOFP = 1 mark
10 marks

b)
i) The following fundamental ethical principles might have been breached:
Integrity
The conduct of the previous Finance Director in painting false performance of the
company by engaging in earnings management violates the principle of integrity. An
Accountant is expected to be honest and straightforward in carrying out his duties.
This behaviour is therefore contrary to the principle on integrity. The unmodified
opinion of the Auditors despite these adjustments made by the Director of Finance
also brings the integrity of the Auditors into question.

Professional behaviour
The practice or behaviour of the Accountant should not put the Accounting profession
into disrepute. Manipulating expenses and the timing of recognition of income
statement items to increase bonus payments is not expected of the Accountant. An
Accountant is encouraged to produce financial statements that represent true and fair
view of events. Similarly, the Auditors of the company are expected to express an
opinion on the truth and fairness of the financial statements. The issue of unmodified
opinion on the financial statements regardless of the former Finance Director’s
significant manipulations to the accounts also puts the Accountancy profession in bad
image.

Page 22 of 32
 Professional competence
The professional competence of the Accountant is also brought into question here.
Though, the behaviour of the former Director of Finance is seen as deliberate, the
timing of recognition of revenue and massaging of expenses also shows that the
competence of the Accountant is questionable.
(Any 2 principles well discussed @2.5 = 5 marks)

ii) Possible actions that the Finance Director should take include:
 Engage the Former Director of Finance as a colleague member of the profession on the
issues detected. Find out the reasons for his decisions and offer any necessary advice.

 Engage the Managing Director of the company on discovery of the malpractices and
its implications on future profit of the company to manage their expectations.

 Engage the Board of Directors of the company on discovery of the company’s practice
of earnings management and why the practice should not be entertained.

 Since the Auditors of the company have issued an unmodified opinion on the
accounts, it presupposes that the Auditors are also supportive of the practice of
earnings management by the company. The new Finance manager should also engage
the Auditors on this issue, and emphasise the need for professional behaviour and
due care to be exercised in their future work.

 Mr. Kennedy Owusu can always seek advice from the Professional body on the matter
especially if the key actors like management and the company’s Board of Directors
are in support of the current practice.

 If Mr. Kennedy does not make any headway in dissuading the company from the
current practice of earnings management, he can resign to prevent breaching of the
ethical principles.
(Any 5 actions to be taken at 1 mark each= 5 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
The question examined candidates on IAS 36 Impairment of Assets as well as on the
principles of ethics. The question was of the appropriate standard. Some candidates
lacked the knowledge and skill to apply IAS 36 to answer the question and therefore
performed poorly in the ‘a’ part of the question. They could not use the right cash flows
and the discount rate (pre-tax cashflow and the pre-tax discount factors) to compute the
value in use for the determination of the recoverable amount. Candidates performed

Page 23 of 32
above average on the principles of ethics. However, a few of them wasted time explaining
the threats instead of the principles. A greater percentage of the marks earned by
candidates came from the ethics part of the question. Candidates provided reasonable
responses regarding the fundamental ethical principles that apply and the possible
courses of action to be taken to deal with the ethical dilemma.

Page 24 of 32
QUESTION FOUR
a)
i) Net asset basis
Value per share is given by net assets valuation divided by number of ordinary shares
issued.

Revision of net assets:

GH¢ million
Tangible assets (895 – 40 Decommissioning Provision) 855
Non-current financial assets (150 – (92 – 90 = 2)) 148
Current assets (485 – (5% x 200 = 10 inventory write-down)) 475
1,478
Total liabilities (750 – 12) (738)
740
Less: Irredeemable preference share (100)
Revised net assets 640

Net assets value per share = GH¢640million/200million shares = GH¢3.20

ii) Earnings basis

Value per share = EPS of Alomo x PE Ratio of the listed firm

EPS = GH¢117million (see below)/181.25 million shares
= GH¢0.6455

Considering the risk factor of 20%,

Value per share = 0.6455 x 12 x 80% risk
= GH¢6.1968

Revision of profit GH¢ million

Profit per draft accounts 170
Adjustments:
Reversal of increase in decommissioning provision (40)
Inventory write-down (see above) (10)
Fair value gain on issued bonds (12 – 5 OCI) 7
Revised profit 127
Less: Irredeemable preference dividend (10)
Profit for ordinary shareholders 117

Page 25 of 32
iii) Dividend yield basis

Value per share = DPS of Bediako

Dividend yield of listed firm

Considering the risk factor of 20%,

Value per share = GH¢0.18 x 80%
4% or 0.04
or
GH¢0.18
0.04x100/80
= GH¢3.60

Alternatively, dividend yield can be adjusted upwards to 120% or 1.2 of the original
Value per share = GH¢0.20
0.04x1.2
= GH¢4.17

DPS = Ordinary dividends/weighted no. of ordinary shares

= (GH¢32million (see below)/181.25 million shares (see below)
= GH¢0.18 per share

Determination of weighted average number of shares:

Weighted
No. of Bonus Ave no.
Date Description shares Time fraction shares
1/1 – 30/6/21 Opening balance 130,000,000 6/12 5/4 81,250,000
(160,000,000 –
30,000,000)
30/6/21 Issued to ven.
Capital 30,000,000
30/6 – 31/10/21 160,000,000 4/12 5/4 66,666,667
1/11/21 Bonus issue 1/5
(1/5 x 200,000,000) 40,000,000
1/11 – 31/12/21 200,000,000 2/12 - 33,333,333
181,250,000

Determination of current ordinary dividend

= 1/dividend cover x profit attributable to ordinary shares
= 1/5 x (GH¢170 million – GH¢10 million)
= GH¢32 million

Page 26 of 32
 Alternatively dividend can be calculated based on the revised profit
Determination of current ordinary dividend
= 1/dividend cover x profit attributable to ordinary shares
= 1/5 x (GH¢127 million – GH¢10 million)
= GH¢23.4 million

DPS = Ordinary dividends/weighted no. of ordinary shares

= GH¢23.4million /181.25 million shares (see below)
= GH¢0.13 per share

Value per share = GH¢0.13 x 80%

4% or 0.04
or
GH¢0.13
0.04x100/80
= GH¢2.71

Range of values for Alomo’s 25% investment in Bediako:

1. GH¢136 million (25% x 200m x 2.71) - Based on dividends as per revised profit
2. GH¢160 million (25% x 200m x 3.20) - Based on net assets as adjusted
3. GH¢180 million (25% x 200m x 3.60) - Based on dividends as per draft profit
4. GH¢309.5 million (25% x 200m x 6.19) - Based on earnings as per revised profit
(15 marks)

b) An entity may gain control without transferring consideration through any of the
following ways:
 the acquiree repurchases a sufficient number of its own shares for an existing investor
(the acquirer) to obtain control;
 minority veto rights lapse that previously kept the acquirer from controlling an
acquiree in which the acquirer held the majority voting rights; and
 a combination by contract alone.

Consolidation implication
In a business combination achieved without the transfer of consideration, goodwill is
determined by using the acquisition-date fair value of the acquirer’s interest in the
acquiree (measured using a valuation technique) rather than the acquisition-date fair
value of the consideration transferred. The acquirer measures the fair value of its
interest in the acquiree using one or more valuation techniques that are appropriate
in the circumstances and for which sufficient data is available. If more than one
valuation technique is used, the acquirer should evaluate the results of the techniques,
considering the relevance and reliability of the inputs used and the extent of the
available data. (5 marks)
(Total: 20 marks)

Page 27 of 32
EXAMINER’S COMMENTS
This question on business valuation was poorly answered by almost all the candidates.
Many candidates scored below the average mark. The poor performance could be due to
inappropriate treatments of valuation adjustments. Many candidates attempted the net
assets method only but could not get the maximum marks. Many candidates could not
attempt the P/E ratio and dividend yield methods because they could not adjust the
profit and could not calculate the weighted average number of shares as required by the
question.

The second part of the question (Question 4b) which was on consolidation theory was
not answered by many candidates at all. Few candidates who attempted this,
misunderstood the question. As a result, they deviated and were explaining forms of
considerations. The question required candidates to explain how an acquirer may obtain
control of an acquiree without transferring consideration. One way by which an acquirer
may gain control without transferring consideration is where the acquiree repurchases a
sufficient number of its own shares from other investors. Once this happens, the acquirer
will obtain control by having majority shares of the acquiree.

Page 28 of 32
QUESTION FIVE
Report

To : CEO, ABC Mutual Funds

From : Financial Advisor
Date : 1/7/2023
Subject : Report on the financial health of Towobo Ltd

Introduction
This report highlights on the financial health of Towobo Ltd using five-year vertically
analysed common-sized financial statements. The report focuses on profitability and
cost control analysis, asset structure, capital structure and working capital structure.

Profitability and cost control analysis

This section provides insight into how well the firm has managed the costs consumed
to generate the reported income. Highlights on what proportion of the firm’s incomes
was used up to cover the entity’s expenses are also shown.

Generally, it appears this firm is a production cost intensive entity as cost of sales used
up not less than 84% at any point in time over the five-year period. The gross profit
to sale ratios more than doubled between 2018 and 2020 before taking a consistently
declining trend from 2020 to 2022, indicating that the firm is either losing its grip on
controlling its direct production and trading costs or revenue performance has
become poor. Either way, measures need to be put in place to reverse this trend. With
cost of sales percentage being 92.7%, 2018 tends to be the period with the least margin
while 2020 is the most profitable as about 15 pesewas on each cedi of sales resulted in
gross profit.

Operating and net profit margins have maintained the same increasing trend as the
gross margin between 2018 and 2020. Given the minimal effects of the non-production
overheads, one would not be wrong to say the gross margins fed through these other
two margins. But unlike gross margin, operating margin and net profit margin kept
rising until 2021 and only fell between 2021 and 2022. A closer look at the operating
items shows that the improved profit margins in 2021 occurred due to reduced other
operating expenses and sharp rise in other operating income in 2021. These positive
changes outstripped the slow rise in cost of sales between 2020 and 2021, hence the
improvement. Meanwhile the reduced margins in 2022 were driven by both poor
control over direct cost of sales and escalating overheads, especially other operating
expenses. Better control over costs is required if the falling profitability were to be
reversed anytime soon.

Interest costs have been comfortably covered by profit from own activities over the
five years. The least number of times profit available to capital providers could be

Page 29 of 32
used to pay returns to lenders sits around 54 times. But it could also be that Towobo
Ltd maintains low level of debts.

Asset structure
The firm invests more in current assets than in long-term and tangible assets. The
importance of non-current assets has considerably reduced since 2018 at the time
when these assets occupied 28% of all firm’s resources. Consistently, Towobo Ltd has
held huge cash balance. If no restrictions were put on the cash balance, a question
would be asked whether it is prudent holding such level of cash asset. While
inventory and cash were the most significant assets in 2019 and 2020 both have been
on a decline after 2020. However, advances and short-term investments have since
2020 grown in importance. It is worthy of note that this growth has come at the
expense of investments in long-term assets, inventory, and cash. Reducing the size of
long-term non-financial assets and inventory and at the same time investing more in
short-term financial assets could imply a change in business model. And increased
financial asset investment could explain the gradual improvement in the firm’s other
operating income.

The low level of receivables is an indication that the firm operates a very strict credit
policy.

Capital structure
Towobo Ltd relies mostly on external finance to fund its investment, with trade and
other payables being the main source of finance for the firm. While the level of
dependence on debts reduced significantly and use of equity funds rose remarkably
between 2018 and 2020, reliance on liabilities as source of finance has leapt after 2020.
But what is a bit relieving is that almost all the liability sources are interest free. Using
more external resources puts the firm at risk of running into financial distress. If some
of the other payables carry interest or are secured on the firm’s assets, the probability
of losing valuable assets or the firm becoming insolvent would be that high. Added
risk arises from the fact that as high as 70% of finance comes from short-term creditors.

Working capital structure

As already indicated, Towobo Ltd has kept huge resources in both cash and short-
term investments over the five-year period. Inventory levels have declined
considerably, and currently, it is not so clear as whether such development is due to
a revised business model or increased turnovers. Though near-future liabilities have
been a major source of finance, liquidity of firm appears to be healthy as current assets,
which now are mostly cash and near-cash assets, have consistently exceeded these
current liabilities. The situation shows that the firm would be more than able to meet
its short-term obligations with its liquid assets if the creditors were to make demand
for payment (repayment of money).

Page 30 of 32
 Conclusion
Overall, profitability of the firm has been good over the years but a slump in the
current year need to be addressed. The firm relies heavily on debts in financing its
activities, but given that most of these liabilities are interest free and current assets
comfortably covering short-term liabilities, there are not a lot of concerns to invest in
such an entity. With benefits of comparative information for the sector, non-financial
information, and deeper ratio analysis, I would be able to offer a more reliable advice.

You may request for any clarification if the need arises. Thank you.

(Signed)
Financial Advisor
Marks Allocation:
Structure/Format of the report (i.e. memo or appropriate heading) = 2 marks
Introduction = 1 mark
Comment on profitability and cost control analysis = 6 marks
Comment on asset structure = 3 marks
Comment on capital structure = 3 marks
Comment on working capital structure = 3 marks
Conclusion/Advice/Signature = 2 marks
20 marks

EXAMINER’S COMMENTS
This question was on analysis of common-sized financial statements of Towobo Ltd over
a five-year period. The question was of the appropriate standard. However, most
candidates were not familiar withanalysis of common-sized financial statements.
Candidates were too fixated with this question relating to the five major accounting
ratios: profitability, liquidity, asset management, gearing and investor ratios. Most
candidates could not provide meaningful analysis relating to profitability and cost
control analysis, asset structure, capital structure and working capital structure, as
required by the examiner. Some candidates managed to compute ratios even though they
were not needed based on the nature of the question.

CONCLUSION
Overall, the performance of candidates provided some indication of ill preparation and
lack of appreciation of accounting standards. It seems that the exemptions granted to
most candidates is a factor of poor performance given that candidates lack the pre-
requisite knowledge and competence for corporate reporting. It is suggested that
candidates preparing for corporate reporting paper should thoroughly revise on the
financial reporting paper even when they are exempted from taking the financial
reporting paper. The exemptions criteria or policy must be re-looked at. Some candidates
just register and write the exams without the aim of passing but because he/she must

Page 31 of 32
register for all subjects. So, they prepare for other subject(s) they have interest in. This
ultimately has implication for the overall pass rate for the corporate reporting paper.

Page 32 of 32
 NOVEMBER 2023 PROFESSIONAL EXAMINATIONS
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was more challenging than the previous diet. Although the
questions were based on the syllabus and were largely straight forward and of the
right level, some of the topics that were examined in this diet were not expected by
most candidates. The mark allocation followed the weightings in the syllabus and was
fairly allocated to each sub-question. Most questions were clearly stated and followed
higher order learning outcomes. Questions that required considerable amount of
work were commensurate with the allotted time and marks.

PERFORMANCE OF CANDIDATES
The general performance of candidates in this exams diet was worse than previous
diets. Candidates who performed well demonstrated a clear understanding of the
subject matter. Some candidates also showed abysmal performance. The poor level of
preparedness of some candidates reflected in their poor performance. Some
candidates did not attempt the paper at all.

Page 1 of 37
QUESTION ONE

Below are the statements of comprehensive income of Agingo Plc (Agingo), Telemo Plc
(Telemo) and Zimbo Plc (Zimbo) for the year ended 31 March 2023:
Agingo Telemo Zimbo
GH¢000 GH¢000 GH¢000
Revenue 432,840 302,988 259,704
Cost of sales (194,778) (136,345) (116,867)
Gross profit 238,062 166,643 142,837
Operating expenses (83,322) (58,325) (49,993)
Other income 10,821 7,575 6,493
Finance cost (5,952) (4,166) (3,571)
Profit before tax 159,609 111,727 95,766
Tax (39,902) (29,927) (27,134)
Profit for the year 119,707 81,800 68,632
Other comprehensive income 6,493 5,843 -
Total comprehensive income 126,200 87,643 68,632

Additional information:
i) Agingo held 15% shareholding of the equity shares of Telemo before the start of the year
ended 31 March 2023. This investment was acquired at a cost of GH¢35 million. The
investment since the date of purchase is accounted for at fair value through other
comprehensive income. On 1 December 2022, there was purchase of 45% of the equity
shares and 10% of the loan stock of Telemo at the cost of GH¢156 million and GH¢19.2
million respectively. The loan stocks issued by Telemo pays a coupon of 12.5% per annum.
The fair value of the existing 15% Shareholding at that date was also estimated at GH¢42
million. The 15% shares investment is carried in the statement of financial position at 31
March 2023 at GH¢40 million. The fair value of non-controlling interest at 1 December
2022, was however GH¢33 million.

ii) The carrying value of the net assets of Telemo approximated their fair values, except the
company’s production machinery whose fair value was lower than the carrying value by
GH¢3 million. The remaining useful life of the machinery was four years. Telemo is yet to
incorporate any fair value adjustment arising from the acquisition in its financial
statements. Agingo deems any fair value adjustment as temporary difference which attracts
tax at the rate of 25%. The carrying value of the net assets of Telemo at 1 December 2022
was GH¢221 million. The group charges depreciation to cost of sales.

iii) Agingo acquired 70% of Zimbo on 1 April 2016 at the cost of GH¢168 million. Zimbo
recognises its assets and liabilities at fair values, and as result, there were no differences in
the fair value of their net assets and the carrying amounts. The carrying value of the net
assets at the acquisition date was GH¢170 million. The fair value of non-controlling interest
at the acquisition date was GH¢30 million.

iv) In the course of the year to 31 March 2023, Telemo sold goods worth GH¢6 million to
Agingo. 10% of the goods sold which related to the period after 1 December 2022 were yet
to be sold by Agingo. Telemo’s mark-up on all sales in the year was 25%.

Page 2 of 37
v) On 1 January 2023, Agingo increased its shareholding in Zimbo by 10%, paying cash
consideration of GH¢3.8 million. The fair value of non-controlling interest at this date was
estimated at GH¢42 million.

vi) At 31 March 2023, goodwill in Telemo and Zimbo were tested for impairment. The fair
values of the identifiable net assets of Telemo and Zimbo at 31 March 2023 (as
appropriately adjusted by consolidation adjustments) were GH¢178 million and GH¢185
million respectively. The recoverable amounts of the net assets of Telemo and Zimbo at 31
March 2023 were also estimated at GH¢193.8 million and GH¢211 million respectively.
Impairment losses are charged to operating expenses.

vii) All Income and expenses are assumed to accrue evenly throughout the year. Any
intercompany interest income or interest expense is recognised in the above financial
statements. There were no intercompany dividend payments in the year.

Required:
Prepare the consolidated statement of profit or loss and other comprehensive income
of Agingo’s group for the year ended 31 March 2023. (All your workings are to be rounded
to the nearest thousand).
(Total: 20 marks)

Page 3 of 37
QUESTION TWO

a) The following information were extracted from the financial statements of Tofiakwa Plc
for the financial year-end 30 June 2023 to determine the year’s basic earnings per share and
diluted earnings per share:
GH¢
Profit after tax from continuing operations 1,925,000
Non-controlling interests’ profit 200,000
Ordinary shares, 150,000 issued at GH¢2 300,000
(this figure includes an additional 50,000 ordinary shares issued on
1/10/2022 for cash)
5% non-cumulative preference shares, 500,000 issued at GH¢1 500,000
Average market price for one ordinary share during the year 15

Additional information:
 Tofiakwa Plc entered into a market transaction on 1 December 2022 to repurchase 12,000
ordinary shares at fair value.
 20% convertible debentures: 4,000 debentures with an issue value of GH¢1000 per
debenture. Each debenture is convertible to ten ordinary shares. Holders of 3,800
convertible debentures converted their holdings into ordinary shares on 1 May 2023.
 The tax rate is 30%.

Required:
For Tofiakwa Plc for the year ending 30 June 2023, calculate:
i) The basic earnings per share. (5 marks)
ii) The diluted earnings per share. (5 marks)

b) Odehyieba Plc owns a large manufacturing plant. In view of significant changes in

technology, the entity has decided to reduce the remaining useful life of the plant by 5
years. For the current year ended 30 April 2023, no entry has been made for depreciation
on the plant neither has there been any adjustments to decommissioning cost.

As at 1 May 2022, the plant had a carrying value of GH¢6,000,000 and a remaining useful
life of 11 years. Further, in respect of this plant, revaluation surplus of GH¢960,000 and
provision for decommissioning cost of GH¢1,600,000 were also appearing in the books as
at that date. There is no change in expected decommissioning cost except for the timing
due to change in useful life. Applicable discount rate is 11% per annum. It is the policy of
Odehyieba to transfer revaluation surplus to retained earnings only upon disposal.

Required:
Advise on the appropriate financial reporting treatment for the above in the books of
Odehyieba Plc in the 2023 financial statements for the year ended 30 April, 2023.
(6 marks)

c) Accra Investors Help (AIH), a large stock market data provider in Ghana, provides stock
market data to investors across major markets in Africa.

On 1 June 2022, the data provider sold a client access to its real-time database for three (3)
years at an invoiced price of GH¢3.6 million. The client has the right of access to AIH’s
database any time, 24 hours each day, to obtain the real-time data about stock prices around
Page 4 of 37
 the African markets. On the same date, AIH sold to another client for GH¢800,000 access
to 30 years of historical data for the next two (2) years. The client has the right to access
the data, containing historical information from 1992-2021 (24 hours each day) and is also
free to download the data and retain it after the two-year access to AIH’s system has
elapsed.

Required:
Advise on how much revenue AIH would recognise for the year ended 31 May 2023 on
each of the two contracts. (4 marks)

(Total: 20 marks)

QUESTION THREE

a) On 1 January 2022, Avoka Grains Plantation Plc (Avoka) acquired a combined harvester
from Awulley Farm Technologies for a lease term of 5 years with instalments payable
annually in advance. The useful life of the harvester was estimated at 5 years. Avoka paid
the first instalment of GH¢60 million on 1 January 2022.

However, subsequent lease payments are subject to increase/decrease in line with consumer
price index (CPI). At the lease inception, Avoka estimated that CPI will increase by 10%
annually. However, CPI increased by 14% in 2022 and consequently GH¢68.4 million was
paid on 1 January 2023 as second instalment. At 31 December 2022, Avoka estimated that
the annual increase in CPI will continue to be 14% in future years.

Avoka is also required to pay a usage fee of GH¢0.3 per acre of harvest in excess of 30
million units per annum from the machine. At the lease inception, Avoka planned to use
the harvester to achieve 40 million acres of harvest each year during the lease term. During
2022, Avoka harvested 40 million acres of grains and accordingly an amount of GH¢3
million was also paid along with the second instalment. Avoka's incremental borrowing
rate is 11% per annum.

Required:
Advise Avoka Plc on the financial reporting treatment for the above in the financial
statements for the year ended 31 December 2022. (10 marks)

Note: The single-period present value and annuity present value factors, based on GH¢1,
are provided below for 11% discount rates.
Year 11%
Single period present value Annuity present value
factor factor
1 0.901 0.901
2 0.812 1.713
3 0.731 2.444
4 0.659 3.103
5 0.593 3.696
6 0.545 4.239
7 0.482 4.721

Page 5 of 37
b) The Directors of Okonko Ltd are considering acquiring shares in blue-chip companies
domiciled in Asia, Europe and North America in the near future in order to diversify their
operations and minimise systematic risk. Unfortunately, the entity is currently cash
strapped and unable to exploit such opportunities. They would prefer to raise finance from
shares on the Ghana Stock Exchange because it is currently highly geared and they do not
wish to expose the company to further financial and liquidity risk. They are therefore keen
to have a good amount as the balance on the retained earnings in order to remain attractive
to prospective investors.

One proposal is that they sell non-controlling interest in one of its domestic subsidiaries
(Afa-Alhaji Ltd) which has been recording persistent losses for the past five (5) years. The
sale will improve the cash position but Okonko Ltd will continue to maintain control over
Afa-Alhaji Ltd. In addition, the Directors are of the strong opinion that the shares can be
sold profitably to boost its retained earnings. The Directors intend to transfer the relevant
proportion of their share of the losses from the domestic subsidiary to the retained earnings,
knowing that this is contrary to accounting standards.

Required:
Explain FIVE (5) ethical issues which may arise from the proposal of the directors of
Okonko Ltd. (10 marks)

(Total: 20 marks)

Page 6 of 37
QUESTION FOUR

a) The Directors of Odenkey Plc have decided to sell their business and have begun a search
for organisations interested in the purchase. As a Consultant, you have been asked to
determine the appropriate range of price per share suitable for the company. Relevant
information is as follows:

Statement of financial position as at 31 December 2022

GH¢000 GH¢000
Non-current assets
Property Plant and Equipment 80,000
Investment Property 45,000
Deferred Development Expenditure 55,000
Patent 20,000
200,000
Current assets
Inventory 25,000
Receivables 32,000
Cash 8,000
65,000
Total Assets 265,000

Equities and liabilities

Ordinary Shares (3,000,000) 100,000
Retained Earnings 30,000
130,000
Non-current liabilities
Long term loan 80,000
Deferred tax 5,000
85,000
Current liabilities
Payables 47,000
Taxation 3,000
50,000
265,000
Additional information:
1) The receivables include GH¢12,000,000 of revenue for credit sales made on a 'sale or
return' basis. On 31 December 2022, customers who had not paid for the goods, had the
right to return GH¢5,000,000 worth of them. Odenkey Plc applied a markup on cost of 25%
on all these sales. Based on previous transactions, it is expected that 80% of the goods will
be returned.

2) The property, plant and equipment includes a building that was originally acquired for
GH¢20,000,000 five years ago with an initial estimated useful life of 20 years. The property
was revalued to GH¢18,000,000 as at 31 December 2022, and the revaluation reserve is yet
to be recognised in the financial statement. Due to degradation of the land on which the
building stands, the company undertook an impairment review and it was found that, the
fair value of the property as at 31 December 2022 is estimated to be GH¢17,000,000. The
value in use of the property is calculated as being GH¢16,000,000.

Page 7 of 37
3) The patent was originally acquired 2 years ago and the rights were set at 50 years from the
date the patent was originally purchased. The patent was amortised by Odenkey Plc using
straight line method over the remaining copyright period. However, recent legislative
changes passed on 1 January 2022 have extended the patent period forever. The Research
and Development departments projects net future cashflow of GH¢4,500,000 per year from
the patent even though the prices of similar patents on the market are valued at GH¢
18,500,000.

4) The company had a retained earnings balance of GH¢5,000,000 as at 31 December 2021.

It has always practiced a dividend payout ratio of 35% when it makes profit during the year.

5) The following information relates to Odenkey Plc and a competitor Odafomtim Ltd:
Odenkey Plc Odafomtim Ltd
Number of Shares 3,000,000 500,000
5 years’ average sales growth 8% 9%
5 years’ average growth in EBIT 6% 10.5%
P/E ratio as at 31 December 2022 - 18.61
Estimated return on equity 9.5% 12%

6) The company’s cost of capital is 25%.

7) Odafomtim Ltd is a listed firm and has a sizeable market share.

Required:
i) Use the information provided to suggest FOUR (4) valuations which prospective
purchasers might make. (12 marks)
ii) Comment on the appropriateness of the range of price per share of Odenkey Plc that the
Directors can offer. (3 marks)

b) Mmebusem Plc has been negotiating with Anansesem Plc for several months, and
agreements have finally been reached for the two companies to combine. In considering
the accounting for the combined entities, management realises that, in applying IFRS 3, an
acquirer must be identified. However, there is a debate among the accounting staff as to
which entity is the acquirer.

Required:
In accordance with IFRS 3: Business Combinations, outline FOUR (4) factors that should
be considered in determining which entity is the acquirer. (5 marks)

(Total: 20 marks)

Page 8 of 37
QUESTION FIVE

You are a financial consultant of Synel Investments (SI). The Directors of SI have tasked
you to evaluate the financial health of two wholesaling companies – Abodam Plc (Abodam)
and Bossu Plc (Bossu) – to help them decide which entity to invest in. Assume that all other
factors of the two companies have been considered except their current period’s relative
financial performance and position. The financial statements of Abodam and Bossu for the
year ended 31 December 2022 are provided below:

Statement of Profit or Loss and Other Comprehensive Income for the year ended 31
December 2022
Abodam Bossu
GH¢000 GH¢000
Revenue 23,000 18,000
Cost of sales (10,800) (8,100)
Gross profit 12,200 9,900
Operating expenses (7,400) (6,800)
Operating profit 4,800 3,100
Finance costs (1,000) (500)
Profit before tax 3,800 2,600
Tax (1,740) (1,380)
Profit for the year 2,060 1,220
Other comprehensive income:
Revaluation – Land and buildings 800 300
Gain on cash flow hedge - 100
Foreign exchange loss (600) -
Total comprehensive income 2,260 1,620

Statement of Financial Position as at 31 December 2022

Abodam Bossu
GH¢000 GH¢000
Non-current assets
Land and buildings 12,000 9,000
Plant and equipment 2,700 1,750
Goodwill 500 600
15,200 11,350
Current assets
Inventories 2,360 1,800
Trade receivables – unrelated parties 1,900 1,400
Trade receivables – related parties 400 200
Cash and cash equivalents 500 750
5,160 4,150
Total assets 20,360 15,500

Page 9 of 37
 Liabilities and equity
Trade payables 900 800
Deferred tax 200 100
Commercial loans (dated 2024) 2,500 1,900
Subsidised loans – (dated 2025) 1,000 -
Cash flow hedge 410 100
Share options 1,100 900
Foreign currency reserves 300 900
Retained earnings 5,750 3,100
Revaluation reserves 1,700 1,200
Share capital 6,500 6,500
Total equity and liabilities 20,360 15,500

Additional information:
1) The Directors of Bossu announced at the beginning of the current period to repurchase 20%
of the company’s issued shares in equal proportion over a three-year period. The purchase
of the first tranche is expected to occur around February 2023. At the start of second quarter
this year, the major commercial lender of Abodam triggered its covenant modification right
to include stricter profit-based clauses in the loan agreement.

2) The following ratios were gleaned from the annual reports of the two entities:
Abodam Bossu
Gross margin 53.0% 55.0%
Operating margin 20.9% 17.2%
Current ratio 5.7 5.2
Inventory turnover 4.6 times 4.5 times
Trade payables 30 days 36 days
Basic earnings per share (GH¢) 0.76 0.80
Diluted earnings per share (GH¢) 0.76 0.67

3) During the year, Abodam and Bossu paid ordinary dividends of GH¢450,000 and
GH¢315,000 respectively.

4) Average borrowing rate for the two companies has remained 11% during the period.

Required:
a) Compute the following additional ratios for the two companies:
i) Return on year-end equity
ii) Return on year-end capital employed (where capital employed equals total assets less
current liabilities)
iii) Trade receivables days
iv) Debt-to-equity (8 marks)

Page 10 of 37
b) Write a report to the board of SI to evaluate the relative financial performance and position
of Abodam and Bossu, based on the following headings:
i) Profitability
ii) Working capital management
iii) Gearing
iv) Earnings per share
v) Bossu’s repurchase plan
vi) Abodam’s loan covenant
(12 marks)

(Total: 20 marks)

Page 11 of 37
 SOLUTION TO QUESTIONS

QUESTION ONE

Agingo
Consolidated statement of profit or loss and other comprehensive income for
the year ended 31 March 2023
GH¢000
Revenue (432,840+302,988 x 4/12 +259,704-6,000x4/12) 791,540
Cost of sales (194,778+136,345 x4/12+116,867- 6,000x4/12 -250(W4)+40(W9)) (354,883)
Gross profit 436,657
Operating expenses (83,322+58,325x4/12 +49,993+2,000(W8)) (154,757)
Other income (10,821+7,575x4/12+6,493-800(W6)) 19,039
Finance cost (5,952+ (4,166-800(W6))x4/12 +3,571) (10,645)
Profit before tax 290,294
Tax (39,902+29,927x4/12+27,134 +62.50 (W5)) (77,074)
Profit for the year 213,220
Other comprehensive income (6,493+5,843x4/12 +2,000(W3)) 10,444
Total comprehensive income 223,661

Attributable to:
Profit for the year:
Non-controlling interest (W10) 29,226
Parent 183,994
213,220
Total comprehensive income:
Non-controlling interest (29,226+776(W10) 30,002
Parent 193,659
223,661

Page 12 of 37
 Workings

1. Group structure
Agingo
1/12/22 – 31/3/23 70% +10% =80%
60% 1/4/2016 – 31/3/23
(15% + 45%)

Telemo Zimbo
(4 months, subsidiary) (7 years, subsidiary)
Summary of percentages
Telemo Zimbo
Before additional After additional
purchase purchase
P% 60% 70% 80%
NCI% 40% 30% 20%

Total 100% 100% 100%

2. Goodwill in Telemo
GH¢000
Purchase consideration:
Fair value of initial holding -15% 42,000
Additional purchase - 45% 156,000
198,000
Fair value of NCI 33,000
231,000
Fair value of net assets at acquisition (221,000 - 3,000+750(w)) (218,750)
Goodwill at acquisition 12,250

3. Fair value change in the 15% shareholding in Telemo

The fair value of the initial 15% held in Telemo was GH¢42 million at the date
Agingo had control. However, since Agingo measures the investment at fair value
through other comprehensive income, it is expected that the statement of financial
position has the investment recognized at fair value at 31 March 2023 of GH¢40m.
The fair value change to be recognized in the consolidated statement of
comprehensive income is GH¢2m (GH¢42m – GH¢40m).
Debit Investment in Telemo GH¢2m
Credit Other comprehensive income GH¢2m

Page 13 of 37
4. Depreciation adjustment on the fair value difference
There was a downward valuation in the machinery of Telemo at the acquisition
date of GH¢3 million. Excess depreciation recognized by Telemo is adjusted as
follows:
Depreciation = GH¢3m/4 = GH¢0.75m x 4/12
= GH¢0.25m
Debit Machinery/PPE GH¢0.25m
Credit Cost of sales GH¢0.25m

5. Deferred tax on fair value adjustment in Telemo

GH¢000
Deferred tax asset at reporting (3,000-250(W)) x25%) 687.5
Deferred tax asset at acquisition (3,000 x25%) 750
Increase in deferred tax expense (To P&L) 62.5

6. Intercompany finance cost and income

Agingo purchased GH¢19.2 million of the 12.5% loan stock of Telemo at the
acquisition date. This suggests that interest expense related to the four-months
post-acquisition period is included in the finance cost of Telemo, and the same
amount included in the other income of Agingo. These income and expense are
cancelled upon consolidation.
Interest expense/ income = 12.5% x GH¢19.2m = GH¢2.4m x 4/12
= GH¢0.8m
Debit Other income GH¢0.8m
Credit Finance cost GH¢0.8m

7. Goodwill in Zimbo
GH¢000
Purchase consideration 168,000
Fair value of NCI 30,000
198,000
Fair value of net assets at acquisition (170,000)
Goodwill at acquisition 28,000

8. Impairment test of goodwill in Telemo and Zimbo

Telemo Zimbo
GH¢000 GH¢000
Fair value of identifiable assets 178,000 185,000
Goodwill 12,250 28,000
190,250 213,000
Recoverable amount 193,800 211,000
Impairment loss NIL 2000

Page 14 of 37
9. Intercompany sales and Provision for unrealized profit (PUP)
Sales made by Zimbo to Agingo from the time they became group members (i.e 1
December 2022) is included in the revenue for the last four months being
consolidated. Since it is intercompany sales, we remove it by debiting revenue and
crediting cost of sales with the 4-months figure of the GH¢5 million intercompany
sales. The unrealized profit on the 10% of this revenue yet to be sold is adjusted as
follows:
Unsold stock = 10% x (GH¢6m x 4/12) = GH¢0.2m
PUP = 25/125 x GH¢0.2m = GH¢0.04m
Debit Cost of sales GH¢0.04m
Credit Inventory GH¢0.04m

10. Non-controlling Interest (NCI)’s share of profit

Telemo GH¢000
Profit for the year 81,800
Finance cost 4,166
85,966
Post-acquisition profit before interest ,but after tax (4/12 x 85,966) 28,655
Finance cost [(4,166-800) x4/12 + 800] (1,922)
26,733
Depreciation 250
PUP- Inventory (40)
Increase in deferred tax (62.50)
26,880.50
NCI's share (26,880.50 x 40%) 10,752

Zimbo
NCI’s share of profit:
Before- purchase (30%x 68,632 x 9/12) 15,442
After additional purchase (20% x68,632 x3/12) 3,432
Impairment of goodwill (2,000 x 20%) (400)
18,474
Total NCI 29,226

Other comprehensive income

NCI-Telemo (5,843 x 4/12 x 40%) 779

(Marks should be evenly distributed at 100 ticks @ 0.20 per tick = 20 marks)

Page 15 of 37
EXAMINER’S COMMENTS
Candidates had a poor performance in answering the question, which tested the
candidates’ understanding on preparing consolidated statement of profit or loss and
other comprehensive income. Generally, candidates were able to identify the two
acquisitions in Telemo and Zimbo by Agingo (the parent company).

Also, candidates were able to identify that Telemo was acquired in the course of the
current year and hence income and expenses of the company to be consolidated have
to relate to only the post-acquisition period of four months. The generality of
candidates failed to determine or struggled to compute non-controlling interests
(NCI) share of profit and total comprehensive income. Candidates who tried
computing it were also computing NCI’s share of net assets shown on the statement
of financial position, and not the statement of profit or loss and other comprehensive
income.

Candidates also had difficulty in showing the effect of the additional or further
purchases made by the parent company in Zimbo on the consolidated statement of
comprehensive income (SOCI). Whiles some candidates misunderstood that
information to mean income and expenses in the SOCI are to be prorated, others did
not consider it entirely. Candidates failed to realise that the additional purchase was
to reflect in the apportionment of profit of the subsidiary (Zimbo) between the parent’s
shareholders and NCI. As a result, they were expected to apportion the adjusted
profit of Zimbo into “profit before the additional purchase” and “profit after the
additional purchase”, and use the percentage shareholdings before the purchase and the
percentage shareholdings after the purchase to apportion them respectively for Parent’s
shareholders and NCI in Zimbo.

Still on the additional purchase of shares in Zimbo by the Parent company, candidates
also made attempt on computing gain or loss on the transaction and presenting it in
the income statement, failing to recognise the fact that additional purchase of shares
by the parent in a subsidiary is treated as a transaction between shareholders (i.e.
Parent’s shareholders and NCI). As a result, such transaction passes through the
statement of changes in equity DIRECTLY. It is therefore neither recognised in the
income statement nor other comprehensive income.

Page 16 of 37
 QUESTION TWO
a)
i) Basic earnings per share
The formula to calculate the basic earnings per share is as follows:
Profit attributable to ordinary shareholders of the parent entity
Weighted average number of ordinary shares outstanding during the period

First, we need to determine profit attributable to ordinary shareholders as follows.

GH¢
Profit after tax from continuing operations 1,925,000
Non-controlling interests’ profit (200,000)
Preference dividends (5% x 500,000) (25,000)
Profit attributable to ordinary shareholders of the parent 1,700,000

Next, we need to determine the weighted average number of ordinary shares

outstanding during the period as follows.
Issued Treasury Shares No. of Weighted
shares shares outstanding months average
2022
July 1 Balance of 100,000 100,000
ordinary shares
at beginning of
period

Oct 1 Issue of new 50,000 150,000 3 25,000

ordinary shares
for cash

Dec 1 Repurchase of 12,000 138,000 2 25,000

issued shares
2023
May 1 Conversion of 38,000 176,000 5 57,600
debentures

June Balance of 188,000 12,000 176,000 2 29,333

30 ordinary shares 12 136,833
at end of
period

Weighted average number of shares is given by:

(100,000 x 3/12) + (150,000 x 2/12) + (138,000 x 5/12) + (176,000 x 2/12)
Or

Page 17 of 37
 (100,000 x 12/12) + (50,000 x 9/12) – (12,000 x 7/12) + (38,000 x 2/12) = 136,833

Finally, the basic earnings per share for Tofiakwa Plc for the year ending 30 June
2023 can now be calculated:
Profit attributable to parent’s ordinary shareholders
Weighted average number of ordinary shares outstanding
= GH¢1,700,000
136,833
= GH¢12.42
(1 mark for explanations and 4 marks for computations = 5 marks)

ii) Diluted earnings per share

The calculation for diluted earnings per share uses the weighted average number
of ordinary shares that would be issued assuming the conversion or issue of any
dilutive potential ordinary shares occurs during the financial year. For each group
of dilutive potential ordinary shares, the increase in earnings attributable to
ordinary shareholders needs to be considered along with their dilutive effect. In
this example, only the convertible debentures need to be considered by Tofiakwa
Plc for the financial year ending 30 June 2023.

The number of convertible debentures issued was 4,000. However, only 3,800 were
converted to ordinary shares on a 1‐for‐10 basis into 38,000 ordinary shares two
months before the year end. The effect of these converted bonds would be tested
for dilution during the period when they remained unconverted (that is, the first
ten months). Meanwhile the unconverted 200 bonds would be tested for dilution
for the entire year.

The test for dilution would be based on the post-tax interest saved and the
additional shares to have issued upon assumed conversion of the bonds.

Determine incremental earnings per share of the convertible to show whether it is

dilutive (can reduce basic EPS or increase basic loss per share) or antidilutive.
Increase in Increase in Incremental Remark
earnings number EPS

Convertible debenture:
Post-tax interest saved upon GH¢471,333 33,667 GH¢14.00 Anti-
assumed conversion dilutive
(10/12 x 20% x 3,800 x
GH¢1,000 x 70%) + (20% x
200 x GH¢1,000 x 70%)

Weighted number of shares

from assumed conversion

Page 18 of 37
 [(10/12 x 38,000) +
(12/12 x 200 x 10)]

Confirmation
Increase in Increase in Incremental Remark
earnings number EPS
GH¢
Basic EPS 1,700,000 136,833 GH¢12.42
Convertible debentures 471,333 33,667 Anti-
2,171,333 170,500 GH¢12.74 dilutive

The convertible debentures are determined to be antidilutive as they have the

effect of increasing the dilutive earnings per share from GH¢12.42 to GH¢12.74.
Therefore, they are not included and the diluted EPS is calculated to be the same
as the basic EPS. For the year ending 30 June 2023, the earnings per share for
Tofiakwa Plc would be disclosed in the notes to the financial statements as follows.

Basic EPS Diluted EPS

Profit from continuing operations GH¢12.42 GH¢12.42
attributable to ordinary shareholders

(2 marks for explanations and 3 marks for computations = 5 marks)

b) This would be dealt with in line with IFRIC 1 Changes in existing

decommissioning, restoration and similar liabilities, IAS 37 Provisions,
contingent liabilities and contingent assets, IAS 8 Accounting policies, changes in
estimates and prior period errors and IAS 16 Property, plant and equipment.

In line with IAS 8, the change in the plant’s useful life would be accounted for
prospectively, effective the beginning of the current period. Post-change
depreciation charges will be determined using the revised useful life.
IFRIC 1 requires changes in the measurement of an existing decommissioning,
restoration and similar liability that result from changes in the estimated timing or
amount of the outflow of resources embodying economic benefits required to settle
the obligation, or a change in the discount rate to be accounted as follows if the
related asset is a revalued asset.

Changes in the liability should alter the revaluation surplus or deficit previously
recognised on that asset, so that:
 a decrease in the liability shall be recognised in other comprehensive income and
increase the revaluation surplus within equity, except that it shall be recognised in
profit or loss to the extent that it reverses a revaluation deficit on the asset that was
previously recognised in profit or loss;

Page 19 of 37
 an increase in the liability shall be recognised in profit or loss, except that it shall
be recognised in other comprehensive income and reduce the revaluation surplus
within equity to the extent of any credit balance existing in the revaluation surplus
in respect of that asset.
Workings:
Manufacturing plant
GH¢000
Carrying amount at 1 May 2022 6,000
Less: Depreciation (6,000/6 years) (1,000)
Carrying amount at 30 April 2023 5,000

Decommissioning provision
GH¢000
Carrying amount at 1 May 2022 before adjustment 1,600
Increase in provision (2,696 – 1,600) 1,096
Re-measured provision at 1 May 2022 (1,600 x 1.1111/1.116) 2,696
Add: unwound discount (2,696 x 11%) 297
Carrying amount at 30 April 2023 2,993

Write the revaluation surplus balance and take the remaining to profit or loss
Dr Cr
GH¢000 GH¢000
Revaluation surplus 960
Profit or loss (1,096 – 960) 136
Provision for decommissioning 1,096

Odehyieba Plc
Statement of profit or loss (extract) for the year ended 30 April
2023
GH¢000
Finance cost (297)
Depreciation (1,000)
Increase in provision (136)

Odehyieba Plc
Statements of financial position (extract) as at 30 April
2023
GH¢000
Non-current assets:
Plant 5,000

Non-current liabilities:
Provision for decommissioning costs 2,993

Any 2 valid points for explanations = 2 marks

25 ticks @ 0.16 ticks for the computations and extracts = 4 marks
6 marks

Page 20 of 37
c) The case would be dealt with in accordance with rules set out under IFRS 15:
Revenue from Contracts with Customers.
IFRS 15 requires entities to apply a five-step model to recognize revenue in manner
that depicts the transfer of promised goods or services to the customer in an
amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. More specifically to the scenario, it is
important to determine when the promised data access would transfer to the
clients as that shows when a performance obligation is satisfied by transferring a
promised good or service to a customer (which is when the customer obtains
control of that good or service). A performance obligation may be satisfied at a
point in time (typically for promises to transfer goods to a customer) or over time
(typically for promises to transfer services to a customer).

In the first situation, where Accra Investors Help (AIH) sold access to a real-time
data base, AIH has granted the right to access its intellectual property as it exists
at the time of access. Further, the content of that intellectual property is constantly
updated. That allows the customer to simultaneously receive and consume benefit
from AIH’s performance of the obligation.

Therefore, AIH recognizes the revenue on that contract over time; i.e. GH¢1.2
million (i.e. GH¢3.6 million divided by 3 years). The remaining GH¢2.4 million
would be presented as half current liability and half non-current liability.
In the second situation, where AIH sold historical data, it provided the customer
with intellectual property as of a point in time. In this case, access over time does
not seem to be a key aspect of performance obligation and AIH’s performance
obligation is satisfied at the time of sale.

Thus, AIH recognizes GH¢800,000 of revenue at the time of the sale (1 June 2022).
(Any 4 valid points for explanations for 4 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question on selected accounting standards (IFRS) was a difficult question for
most candidates. Candidates understanding of the standards and their application to
real situations were a bit weak and therefore found it difficult in solving the questions.
Performance was low and below expectation. It seems candidates were unfamiliar
with these standards. For instance, candidates could not calculate the Earning Per
Shares and Diluted Earnings Per Share even though they had an idea of the formula.
Candidates could not identify the relevant standards in the ‘b’ part and also did not
know how to present the results in the extract financial statements. Candidates
performed poorly in this question with few scoring average marks available. Overall,
question 2 was partly attempted and answered. Some candidates did not attempt this

Page 21 of 37
question at all. ICAG should intensify revision on standards to enhance better
appreciation by candidates.
QUESTION THREE

a) Avoka Plc would account for the lease by recognizing right-of-use asset and a
corresponding lease obligation. IFRS 16 requires a lessee to recognise the asset
initially at cost (including initial direct costs and lease liability). Subsequently, the
asset would be depreciated over the lease term of five years.

The lease liability is recognised initially based on the present value of future lease
payments discounted using the lease’s implicit interest rate, or the lessee’s
incremental borrowing rate, if the former is not readily determinable.
Subsequently, the lease liability is adjusted for finance charges, lease payments and
any re-measurement of the liability.

The annual instalments are tied to general price increases, but since the variability
of the payments is due to an index such payments are considered unavoidable and
must form part of the lease payments. The usage-based payments however can be
avoided and hence should be treated as executory costs (rather than lease
payments) which would only be expensed once the attached condition is met.

At the end of year 1, new information shows that the instalments would be revised
due to higher than expected inflation rate and hence, the lease liability would be
re-estimated at that date using the original discount rate in line with IFRS 16.

Initial measurement and entries

Lease liability, given by the present value of future lease payments (as at the initial
date) discounted @ 11%, is provided below:
Year Future lease D.F. Present
Payments (annual value
increment of 10%) (11%)
GH¢m GH¢m
0 60 1 60
1 66 0.901 59.47
2 72.6 0.812 53.07
3 79.86 0.731 58.38
4 87.85 0.659 57.89
Lease liability 294.69

Dr Cr
GH¢m GH¢m
Right-of-use asset 294.69
Cash 60.00
Lease liability 234.69
(Initial recognition of the leased asset in Avoka’s books)

Page 22 of 37
Lease table for subsequent measurement of lease liability:
Year Bal. at Lease Interest Bal. at Re- Revised
start payments (11%) end measurement bal.
GH¢m GH¢m GH¢m GH¢m GH¢m GH¢m
2022 234.69 - 25.82 260.51 24.28 284.92
2023 284.92 (68.4) 23.82 240.34 - 240.34

Re-measured lease liability at 31 December 2022 is given by:

Year Future lease D.F. Present
payments (annual value
increment of 14%) (11%)
GH¢m GH¢m
0 68.4* 1.00 68.40
1 77.98 0.901 70.26
2 88.89 0.812 72.18
3 101.34 0.731 74.08
Re-measured liability 284.92

*At 31 December 2022, the payment is not yet made and so can be deemed as future
rental.
The change in liability of GH¢24.28m (i.e. GH¢284.92m less GH¢260.51m) due to
the re-measured liability is applied to revise both lease liability and right-of-use
asset at 31 December 2022.

Right-of-use asset:
GH¢m
Initial cost 294.69
Less: Dep (294.69/5) (58.94)
Carrying value at 31 Dec 2022 (before revision) 235.75
Increase in lease liability 24.28
Carrying value at 31 Dec 2022 (after revision) 260.03

Avoka Plc
Statements of profit or loss (extract) for the years ended 31 December 2022
GH¢m
Finance cost (25.82)
Depreciation (58.94)
Additional lease payment (3)

Avoka Plc
Statements of financial position (extract) as at 31 December 2022
GH¢m
Non-current assets:
Right-of-use asset 260.03

Page 23 of 37
Non-current liabilities:
Lease liability (284.92 – 68.4) 216.52

Current liabilities
Lease liability 68.4
Usage-based payment 3

Any 3 valid points for explanations for = 3 marks

40 ticks @ 0.175 for the computations and extracts = 7 marks
10 marks

Alternative Solution (Question 3a)

This requires the application of IFRS 16, Leases Avoka has acquired the plant on a
five-year lease arrangement, and hence Avoka is the lessee in the arrangement.
Rental payments are made in advance but the payments are variable in nature. It
is provided in this arrangement that the rental to be paid by Avoka in a year should
be increased by inflation or changes in the CPI after the initial rental payment of
GH¢60 million at 1 January 2022.

At commencement of lease (i.e start of year one), we measure the lease liability
using five years lease term and a rental payment of GH¢60 million. The annual
projected inflation for the subsequent years of 10% has uncertainty surrounding it
because it is projection. IFRS 16 requires that the lessee at commencement of the
lease should not anticipate the impact of future changes in the index on the lease
liability. The lease liability is hence estimated at commencement of lease using
annual rental payment of GH¢60m for the five years lease term.

At 31 December 2022, the actual inflation is known to be 14%. However, since the
payments are in advance, a year of this arrangement will be 1 January 2023. So,
rental payment increases by 14% to GH¢68.4m. The lease liability at 1 January 2023
is therefore revised using the original discount rate of 11%.

There is also performance-based variable payment contingent on excess capacity

or production. Since this also has uncertainty surrounding it and contingent in
nature, it is EXCLUDED in the determination of the lease liability. The lessee
recognises it separately as expense when the performance target is satisfied. At 31
December 2022, the performance target (excess unit) was satisfied. Avoka therefore
recognises expense of GH¢3 million related to this payment. A liability of this
amount is also recognised at 31 December 2022 as the payment was made together
with the second instalment (i.e 1 January 2023) suggesting that it was outstanding
as at 31 December 2022.
Debit variable lease payment (P&L) GH¢3m
Credit Variable lease payment payable GH¢3m

Page 24 of 37
Using annuity discounting factor for four years, the present value of lease liability
will be:
PV = 3.103 x GH¢60m
=GH¢186.18m
Total value of lease payments before the payment for 2022 is GH¢246.18
(186.18+60).

Cash
Years flows DCF@11% PV
1 60 1 60
2 60 0.901 54.06
3 60 0.812 48.72
4 60 0.731 43.86
5 60 0.659 39.54
246.18

At commencement of lease,
Debit right-of-use asset GH¢246.18
Credit Lease liability GH¢186.18
Credit Bank GH¢60m

At the end of year 1, subsequent recognition, measure the lease liability at

amortised cost as follows:
Opening Balance
balance for the Interest Balance
Years (m) Payment year(m) at 14% at end
2022 186.18 - 186.18 20.48 206.66
2023 206.66 (60) 146.66 16.13 162.79

The right-of-use asset is depreciated over the five-years lease term.

Depreciation = GH¢246.18/5
=GH¢49.24m

Income statement (extract) for the year ended 31 December 2022

GH¢m
Depreciation (49.24)
Finance cost (20.48)
Usage fee (3)

Statement of financial position- 31 December 2022

GH¢m
Non-current asset
Right-of-use asset (246.18-49.24) 196.94

Page 25 of 37
 Non-current
liabilities:
Lease liability 146.66

Current liabilities
Lease liability (206.66 -146.66) 60
Usage fee payable 3

b) The proposal presented by the directors of Okonko Ltd raises several ethical
concerns related to transparency, financial reporting, stakeholder interests, and
proper corporate governance. Here are eight ethical issues that may arise from
their proposal:

 Misleading Financial Reporting: The directors' intention to transfer the relevant

proportion of their share of the domestic subsidiary's losses to retained earnings,
knowing that this is contrary to accounting standards, raises concerns about the
accuracy and transparency of the company’s financial information. This action
could mislead investors and other stakeholders about the company’s true financial
position. IFRS 9 outlines the criteria for recognizing and derecognizing financial
assets and liabilities. Transferring losses from a subsidiary to retained earnings
without proper justification and adherence to IFRS 9 criteria misrepresents the
financial position.
Addressing the Issue: Financial statements must be prepared in accordance with
accounting standards and provide accurate and reliable information. Transferring
losses to retained earnings to improve financial appearance is unethical and can
mislead investors and stakeholders.

 Manipulation of Retained Earnings:

The directors plan to transfer losses from the subsidiary to retained earnings to
make the company more attractive to investors. This manipulative practice
violates the principle of faithful representation which is a fundamental qualitative
characteristics of the financial statement according to the conceptual framework.
In addition, IAS 1 requires financial statements to provide a true and fair view.
Misrepresenting financial information by transferring losses to retained earnings
contradicts this principle.
Addressing the Issue: Retained earnings should accurately reflect the company's
cumulative profits and losses. Manipulating retained earnings misrepresents the
company's true financial performance. The company should adhere to
transparency and honesty in financial reporting.

 Conflict of Interest
The directors’ decision to sell minority interest in Afa-Alhaji Ltd to improve the
cash position and boost retained earnings may be influenced by their personal
interests rather than the best interests of the company and its shareholders. Selling

Page 26 of 37
 underperforming assets to manipulate financials and attract investors raises
ethical concerns. This raises concerns about potential conflicts of interest and
whether the directors are fulfilling their fiduciary duties. IAS 24 ”Related Parties
Disclosure” sets guidelines for disclosing related party transactions. If the
directors' actions favor personal benefits over transparent decision-making, this
could lead to a breach of these guidelines.
Addressing the Issue: Selling shares to boost earnings without addressing the
underlying operational issues is a short-term solution that can harm investors in
the long run. Ethical behavior requires addressing the root causes of losses rather
than artificially boosting earnings.

 Selective Disclosure to Attract Investors

The directors plan to sell the shares of a domestic subsidiary that has been
consistently losing money. Disclosing only selective information that may attract
investors while concealing negative aspects of the subsidiary's performance is
unethical. Selling shares of the loss-making subsidiary to boost earnings selectively
highlights positive aspects and omits crucial negative information. IAS 1
“Presentation of Financial Statements” requires the presentation of financial
statements that fairly represent the financial performance and position of the
company. Selective reporting that masks negative information violates this
requirement.
Addressing the Issue: The company should provide complete and accurate
information to potential investors, including both positive and negative aspects of
the subsidiary's performance. Selective disclosure undermines investor trust.

 Maintaining Control Over Loss-Making Subsidiary

The directors' proposal to sell a minority interest in the loss-making subsidiary
while maintaining control contradicts ethical corporate governance practices.
Selling underperforming assets should involve relinquishing control.
Addressing the Issue: Maintaining control over an underperforming subsidiary to
profit from its assets while shifting losses elsewhere goes against transparency and
accountability. A more ethical approach would be to address the losses or divest
fully.

 Lack of due diligence

The proposal to sell minority interest in Afa-Alhaji Ltd without conducting proper
due diligence on the potential risks and benefits of such a transaction raises
concerns about the directors’ decision-making process and whether they are acting
in a responsible and prudent manner. Selling a minority interest in the subsidiary
without full disclosure of its consistent losses and financial challenges disregards
the interests of minority shareholders who may not have complete information.
Addressing the Issue: The directors should prioritize the interests of all
shareholders, providing them with transparent and accurate information about the
subsidiary's performance and financial situation before making any decisions.

Page 27 of 37
 Lack of Accountability for Losses
The lack of transparency surrounding the proposal to sell minority interest in Afa-
Alhaji Ltd and transfer the relevant proportion of their share of the domestic
subsidiary to the retained earnings raises concerns about whether the directors are
being open and honest with shareholders and other stakeholders about their
actions and intentions. Transferring losses from the subsidiary to retained earnings
allows Okonko Ltd to avoid accountability for the poor performance of the
subsidiary. IFRS 10 Consolidated Financial Statements outlines the principles of
consolidated financial statements. Transferring losses to avoid proper
consolidation or to manipulate financial reporting disregards the intent of this
standard.
Addressing the Issue: Companies should be transparent about their performance,
addressing losses instead of transferring them to other areas. This accountability
fosters ethical behavior and proper corporate governance.

(Any 5 points @ 2 marks each = 10 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
The question examined candidates on IFRS 16 Leases as well as on the principles of
ethics. The question was of the appropriate standard but the issue of the effect of the
10% price index on the annual payment posed a problem for most candidates.
Candidates performed above average on the principles of ethics. However, a few of
them wasted time explaining the principles of ethics instead of focusing on the context
of the question. A greater percentage of the marks earned by candidates came from
the ethics part of the question.

Page 28 of 37
 QUESTION FOUR

a. Adjustments Workings
Inventory Adjustment GH¢000
Balance per Statement of financial Position (30,000-5,000) 25,000
Cost of Inventories returned (100/125 80%GH¢5,000,000) 3,200
Adjusted Inventory 28,200
(4 ticks * 0.125= 0.5 mark)

Receivables Adjustment GH¢000

Balance per Statement of financial Position 32,000
Value of Good returned. (80%5,000,000) (4,000)
Adjusted Receivables 28,000
(3 ticks * 0.167= 0.5 mark)

Property, Plant and Equipment GH¢000

Balance per Statement of financial Position 80,000
Fair Valuation Surplus (GH¢17,000,000- GH¢15,000,000) 2,000
Adjusted PPE value 82,000

Impairment Test
Impairment loss = Carrying value greater than recoverable amount
Carrying Value asset = GH¢20,000,000- (GH¢20,000,000/20 years* 5yr)
= GH¢15,000,000

Recoverable amount = higher of value in use and fair value

Recoverable amount = GH¢17,000,000
Since carrying value is less than recoverable amount, the asset is not impaired.
(8 ticks * 0.1875= 1.5 mark)

i) Adjusted Net Profit or Earnings GH¢000

Balance per December 2022 SOFP 30,000
Opening Balance (5,000)
Retained Profit for the year 25,000

Therefore, Net Profit for the year (25,000/0.65) 38,462

Unrealized Profit of Inventories return (25/125 80%GH¢5,000,000) (800)
Adjusted Net Profit 37,662
(6 ticks * 0.083= 0.5 mark)

1. Assets Based Valuation Method

Value of firm = Total Asset – Total liabilities
Total Assets GH¢’000
Property, Plant and Equipment (80,000 + 3,000 – 1,000) 82,000

Page 29 of 37
 Investment Property 45,000
Patent (Higher of 18,500 and 18,000) 18,500
Inventory 28,200
Receivables 28,000
Cash 8,000
209,700
Total liabilities
Long term liabilities 80,000
Deferred tax 5,000
Payables 47,000
Taxation 3,000
135,000

Value of firm = GH¢209,700,000– GH¢135,000,000 = GH¢74,700,000

GH¢74,700,000
Value Per Share = = GH¢24.9
3,000,000
(15 ticks * 0.2= 3 marks)
Note: The value of Patent is the recoverable amount of GH¢18.5million which is
the NRV higher than the value in use of GH¢18million.

2. Earning Method – P/E ratio method

Price Per Share = Earnings per shares (E.P.S) P/E ratio
GH¢37,662,000
Earnings Per Share = = GH¢12.554
3,000,000
Price Per Share = GH¢12.554  3.35 = GH¢42.06

Because Odafomtim Ltd is 25% greater than Odenkey Ltd, discount by 25%

Price per share = 75% GH¢42.06 = GH¢31.55

Value of Firm = GH¢31.553,000,000 = GH¢94,650,000
(5 ticks * 0.6= 3 marks)

3. Dividend Based Method – Dividend Growth Method

D(1+g)
P= Ke−g
Dividend Paid = 35% GH¢37,662,000 = GH¢13,181,700
GH¢13,181,700
Dividend Per Share (D.P.S) = = GH¢4.39; g = 6%; Ke =19.5%
3,000,000
GH¢4.39(1+0.06)
Price per share = =4.6534/0.135
0.195−0.06

Price per share = GH¢34.47

(5 ticks * 0.6= 3 marks)

Page 30 of 37
b.
i) Factors that should be considered in determining which entity is the acquirer:
 Relative voting rights in the combined entity after combination: Acquirer is usually
the entity whose owners as a group entity after the combination. retain or receive
the largest portion of the combined voting rights, after considering the existence
of any unusual or special voting arrangements and options, warrants or
convertible notes.
 No majority interest in the combined entity but single large minority interest:
Acquirer is usually the entity whose single owner or group. or organised voters
holds the largest minority voting interest in the combined entity
 Composition of the governing body of the combined entity: Acquirer is usually the
entity whose owners have the ability to elect or appoint a majority of the members
of the governing body.
 Senior management of the combined entity: Acquirer is usually the entity whose
(former) management entity dominates the combined management.
 Terms of the exchange of equity interests: Acquirer is usually the entity that pays
a premium over pre-combination fair value of the other entity or entities.
 Acquirer is usually the entity that transfers the cash or other assets, or incurs the
liabilities.
 Acquirer is usually the entity that issues its equity interests. However, in a reverse
acquisition, the acquiree may issue equity interests
 Acquirer is usually the entity whose relative size (measured in, for example, assets,
revenues or profit) is significantly greater than that of the other combining entities.
(Any 5 points @ 1 mark each = 5 marks)

(Total: 20 marks)

ii) Appropriateness of the range of price per share of Odenkey PLC depends on
the following factors:
 Whether or not Odenkey PLC is a going concern. If not, only a break-up
valuation is required
 The percentage of shareholding to be disposed
 The marketability of the shares of Odenkey Plc.

EXAMINER’S COMMENTS
This question on business valuation was not answered well by almost all the
candidates. Many candidates scored below the average mark. The poor performance
could be due to inappropriate treatments of valuation adjustments. In the second part
of the question, most candidates were not able to provide reasonable factors that
should be considered in determining which entity is the acquirer in accordance with
IFRS 3.

Page 31 of 37
QUESTION FIVE

a) Computations of ratios
Ratios Formula Abodam Bossu

Return on year end PAT x 100 2,060 x 100 1,220 x 100

equity Year end equity 15,760 12,700
(see workings below) = 13.07% = 9.6%

Return on year end PBIT x 100 4,800 x 100 3,100 x 100

capital employed Year end capital 20,360 – 900 15,500 – 800
employed = 24.7% = 21.1%

Trade receivables Trade receivables x 365 1,900+400 x 365 1,400+200 x 365

days Revenue 23,000 18,000
= 37 days = 32 days

Debt-to-equity Debt x 100 3,500 x 100 1,900 x 100

(see workings below) Equity 15,760 12,700
= 22.2% = 14.96%

(2 marks for each ratio computed = 8 marks)

b) Report
To: Board of Directors, Synel Investments
From: Financial Consultant
Date: 01/11/2023
Subject: Analysis of the relative financial performance and position of Abodam and
Bossu

This report provides a detailed evaluation of the financial performance and

position of two “investment target” entities – Abodam and Bossu for the year
ended 31 December 2022. The analysis seeks to provide insight into the financial
health of the two shortlisted entities to help your company decide which of them
to invest in. The evaluation covers relative profitability, working capital, gearing,
and earnings per share of the two entities. This report, which also reserves a space
for discussing the effects of the announced repurchase plan and the modified
covenants, should be read along with the attached appendix.

Profitability
Profitability has to do with how well an entity deploys its resources to generate
and maximize revenues in an efficient and cost-effective manner. If done well, the
entity is expected to earn positive returns. In this section, I would use four metrics

Page 32 of 37
to gauge which of the two have been more profitable and how. The measures
include gross margin, operating margin, return on capital employed, and return
on equity.

Abodam’s reported gross margin of 53% sits two percentage points below that of
Bossu. This seems to suggest that Bossu has better control over cost of sales.
Nothing however stops any supposition from being stretched as far as to suggest
that this could as well result from different pricing strategies or different
classification of expenses between cost of sales and other operational expenses.
This last reasoning could so soon have sufficed by the fact the operating margin
takes an opposite turn; Abodam’s operating margin is noticeably higher than
Bossu’s margin. Could it be that Abodam keeps more within cost of sales than
within the other lines of operational costs? Whatever the answer may be, it does
not prevent the fact that Abodam has better control over overall operational costs
than Bossu. The former requires around 81% of revenues to attend to operational
costs in entirety whereas the latter needs around 83%.

Abodam’s better margins feed seamlessly into the returns for long-term investors
as well as for only equity holders. With the return on capital employed of Abodam
at 24.7% against Bossu’s 21.1%, Abodam has generated more profit for providers
of long-term funds, including lenders and shareholders. Equally, Abodam’s
13.07% return on equity is higher and better than Bossu’s 9.6%, and this implies
that from shareholders’ perspective only, Abodam has earned more profits per
every cedi of capital invested.

Working capital management

Managing working capital is one activity which is very key in helping entities to
not only ensure that they have appropriate level of liquidity but to also keep their
operations running efficiently without sacrificing profitability. If well managed,
arranging the constituents of current assets and current liabilities should lead to a
good balance between liquidity and profitability. I conduct this analysis using four
ratios: current ratio, inventory turnover, trade receivables days, and trade payables
days.

The current ratio of Abodam compares more favourably than Bossu’s. But with
both entities covering their current liabilities with current assets by more than five
times, it does not make much difference that one is more liquid than the other. A
look at the individual working capital items provides interesting revelations.
Abodam appears to be managing inventory better but tends to be sluggish in
dealing with suppliers and customers. Abodam has a slightly faster inventory
turnover rate; it turns inventory over 4.6 times in a year compared to Bossu’s 4.5
times. These figures also seem to lend credence to the initial thoughts that perhaps
Abodam may have employed a lower product pricing strategy to increase turnover
rate. Bossu’s receivables days of 32 days against Abodam’s 37 days means that the
former takes five (5) fewer calendar days to collect its debts from credit customers.

Page 33 of 37
In terms of managing credits received from suppliers, Bossu takes six (6) more days
than Abodam before making payment to credit suppliers. These decent working
capital management efforts by using fewer days to collect debts and more days to
pay suppliers may be the cause of Bossu’s lower current ratio.

Gearing
Gearing shows how an entity blends equity and debt in its capital structure. This
relationship reveals the amount of financial risk investors will bear to create or
keep financial contracts with the entity. Bossu maintains a debt-to-equity ratio of
14.96%, which is about seven (7) percentage points less than Abodam’s. Bossu’s
lower gearing ratio makes it less financially risky and safer to keep investments
with. But given that the operating margins of both entities edge above the average
borrowing rate of 11%, it seems questionable for Bossu to have kept debt levels
that low. Since debt tends to be cheaper than equity, it is prudent to use more of it
especially if profit levels provide sufficient cushion to help service the legal interest
payments.

Earnings per share

This measures the cedi amount of profit earned on each number of issued ordinary
share. It gauges an entity’s profitability from shareholders’ perspective based on
number of shares held, rather than the monetary value of shareholders’
investments. In this analysis, I use two related measures: basic earnings per share
and diluted earnings per share. Basic earnings per share denotes how much actual
earnings is attributable to each one weighted ordinary share outstanding while
diluted earnings per share refers to earnings (both actual and notional) attributable
to each one weighted ordinary share, after considering both issued and dilutive
potential shares.

With Abodam reporting same basic and diluted earnings per share, it simply
suggests that Abodam does not have any dilutive potential shares even though it
has issued some share options. What this means is that these outstanding options
are not in the money; the fair value of shares is lower than the exercise price. Bossu
however reports different figures for the two types, meaning that Bossu’s options
are in the money and dilutive.

Based on the basic earnings per share, Bossu is considered to be more profitable
than Abodam as it earns 4 pesewas more on each issued share. However, the more
predictive and more useful diluted earnings per share figures put Abodam above
Bossu. The higher diluted earnings per share indicates that if dilutive potential
shares were assumed to have been issued at the beginning of the period or the date
of issue, whichever comes later, Abodam would earn 9 pesewas more on each
weighted ordinary share than Bossu. Considering possible dilution of the earnings
per share helps investors to have a better view of the company’s future.

Page 34 of 37
Bossu’s repurchase plan
Share repurchase plans represent one popular way, often more tax-efficient than
cash dividend alternative from shareholders’ point of view, used by corporate
entities to return monies to shareholders while helping the buying entities to
reduce the number of shares in circulation. From the company’s perspective, it
may be preferable to buy back shares where management believes or ensures that
the company’s shares trade at a price lower than their true value. Accounting
gimmicks could play a role in ensuring that this is the case. For instance, motivated
by the desire to cause share under-pricing, management could cause negative
market reaction by choosing techniques, often sophisticated earnings management
mechanisms, to paint less healthy financials by cutting incomes, overstating
expenses, understating assets, and inflating liabilities. Bossu’s general poor show
could therefore have been driven by this desire to keep share prices down and
minimize the cost of the share repurchase.

Modification of Abodam’s loan covenant

Debt covenant violations can be very costly for borrowing entities as failure to keep
to the covenant requirements could trigger early repayment, unfavourable
renegotiations, and lost credibility for future debt contracting. These covenants
could be based on either accounting numbers or non-accounting numbers. Those
which are related to accounting numbers broadly require the borrower to achieve
and maintain strong financial performance and healthy financial position. Thus,
entities have a large incentive to put measures in place to ensure that they meet
these requirements in order not to invite the wrath of their lending counterparts.
With the lender putting stricter clauses into the existing covenant, Abodam would
be motivated to do all it can put up a good show of financial performance. While
Abodam’s good performance which I have laid bare from the above analyses may
be the outcome of prudent decisions, these urges to resort to biased reporting in
order to meet the new covenants at all costs cannot be discounted.

Conclusion
From the assessment above, I would like to suggest that Abodam is a better entity
and target to proceed with as it has generally been more profitable, more liquid,
and kept debts at sustainable and more prudent level. Its diluted earnings per
share figure, which is more predictive and relevant, is better than that of Bossu.
However, there are concerns that the good numbers could have been induced by
motivation to meet the stricter covenants. Yet, until concrete evidence to that effect
is tended it would be far too unjustifiable to be assuming any wrongdoing. In terms
of short-term efficiency, Abodam seems to be lagging behind Bossu. But this
deficiency with Abodam pales into insignificance when compared to its overall
good showing.

(Signed)
Financial Consultant
(2 marks for each explanation = 12 marks)
(Total: 20 marks)

Page 35 of 37
 Workings
Abodam Bossu
1. Equity: GH¢000 GH¢000
Cash flow hedge 410 100
Share options 1,100 900
Foreign currency reserves 300 900
Retained earnings 5,750 3,100
Revaluation reserves 1,700 1,200
Share capital 6,500 6,500
15,760 12,700

2. Debt:
Commercial loans 2,500 1,900
Subsidised loans 1,000 -
3,500 1,900

Summary
Abodam Bossu
Gross margin 53.0% 55.0%
Operating margin 20.9% 17.2%
Current ratio 5.7 5.2
Inventory turnover 4.6 times 4.5 times
Trade payables 30 days 36 days
Basic earnings per share (GH¢) 0.76 0.80
Diluted earnings per share (GH¢) 0.76 0.67
Return on equity 13.07% 9.6%
Return on capital employed 24.7% 21.1%
Trade receivables days 37 days 32 days
Debt-to-equity ratio 22.2% 14.96%

EXAMINER’S COMMENTS
This question on analysis of the financial statements was of the appropriate standard.
Most candidates could not however compute the ratios required. The interpretation
of the ratios also posed a challenge for most candidates. The report required specific
discussion of certain issues but candidates were unable to discuss these issues.

CONCLUSION
As indicated earlier, overall, candidates performed poorly than previous diets. The
results provide some indication of ill preparation and lack of appreciation of
accounting standards. It seems that the exemptions granted to most candidates is a
factor of poor performance given that candidates lack the pre-requisite knowledge
and competence for corporate reporting. It is suggested that candidates preparing for

Page 36 of 37
corporate reporting paper should thoroughly revise on the financial reporting paper
even when they are exempted from taking the financial reporting paper. The
exemptions criteria or policy must be re-looked at. Some candidates just register and
sit the paper without the aim of passing but because he/she must register for all
subjects. So, they prepare for other subject(s) they have interest in. This ultimately has
implication for the overall pass rate for the corporate reporting exams.

Page 37 of 37
 MARCH 2024 PROFESSIONAL EXAMINATIONS
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was generally less challenging than the previous diet.
Although the questions were based on the syllabus and were largely straight forward
and of the right level, the nature of the questions examined in this diet were not
expected by most candidates. The mark allocation followed the weightings in the
syllabus and was fairly allocated to each sub-question. Most questions were clearly
stated and followed higher order learning outcomes. Questions that required
considerable amount of work were commensurate with the allotted time and marks.

PERFORMANCE OF CANDIDATES
The general performance of candidates in this exams diet was generally better than
the previous diet. Candidates who performed well demonstrated a clear
understanding of the subject matter. Some candidates also showed abysmal
performance. The poor level of preparedness of some candidates reflected in their
poor performance. Some candidates did not attempt the paper at all.

Page 1 of 29
QUESTION ONE

Sankom Ltd (Sankom) in the last three years acquired Makpa and Biiri. The statement
of financial position for the three companies as at 31 December 2023 are as follows:
Sankom Makpa Biiri
GH¢000 GH¢000 GH¢000
Property, plant and equipment 102,800 101,120 88,480
Investment property 23,600 - -
Investments in:
Makpa 112,000
Biiri 88,000
Current assets 25,280 20,224 17,696
Total assets 351,680 121,344 106,176

Equity & liabilities:

Share capital (GH¢1 per share) 160,000 64,000 56,000
Retained earnings 108,480 22,784 19,936
Other component of equity 2,400 1,920 1,680
270,880 88,704 77,616
Liabilities:
Current liabilities 65,632 20,505.60 17,942.40
Non-current liabilities 15,168 12,134.40 10,617.60
Total equity and liabilities 351,680 121,344 106,176

Additional information:
i) The following information relates to the acquisition of Makpa and Biiri

Acquisitions Date of Shareholding Purchased full Goodwill arising

acquisition percentage from the acquisitions (GH¢000)
Makpa 1 January 2021 80% 44,800
Biiri 30 June 2022 60% 38,400

At the date of acquisition, the values of the assets and liabilities of Biiri were already
recognised at their fair values and hence no fair value adjustments were required. However,
an upward fair value adjustment of GH¢4,400,000 was required for a production machinery
of Makpa. The remaining useful life of the production machinery as at the acquisition date
was five years. This adjustment is yet to be made in the individual financial statements of
Makpa. It is the policy of the group to measure non-controlling interest at fair value.

ii) The consolidated retained earnings and other component of equity recognised in the
consolidated financial statements of Sankom group as at 31 December 2022 were
GH¢63,519,200 and GH¢3,360,000 respectively. Non-controlling interest recognized
under equity of the consolidated statement of financial position as at 31 December 2022
was GH¢20,000,000. All consolidation adjustments unless otherwise stated, are correctly
reflected in the opening consolidated financial statements.

iii) There had not been any sales or purchases transaction between Sankom and any of the
subsidiaries acquired before the current accounting year. However, in the year ended 31

Page 2 of 29
 December 2023, Makpa sold goods worth GH¢2,240,000 to Biiri at a margin of 20%. 30%
of these goods were yet to be sold by Biiri as at 31 December 2023.

iv) The purchased goodwill arising from the acquisitions (stated in (i)) are the original goodwill
amounts, and are thus before any impairment loss. At 31 December 2023, impairment
review was carried out on the two subsidiaries, using the impairment testing procedure
under IAS 36: Impairment of assets for cash-generating units; each subsidiary was deemed
as a cash-generating unit. The recoverable amounts of the net assets of Makpa and Biiri at
31 December 2023 were GH¢133,244,800 and GH¢116,544,000 respectively. No
impairment loss has been recognised in respect of the goodwill in both subsidiaries in the
previous years.

v) Sankom owns a building, which was formerly used as an administrative office. At the
beginning of the current year, Sankom rented the building to Makpa at an annual rental of
GH¢2,000,000 and as a result has accounted for the building as investment property. The
carrying value of the building at the date of transfer to Makpa (which approximated the fair
value) was GH¢22,400,000. It is the policy of Sankom to measure investment properties at
fair value. A fair value gain of GH¢1,200,000 has been recognised by Sankom at 31
December 2023. The estimated remaining useful life of the building at the date of transfer
was 20 years. Makpa uses the building for administrative purposes. Makpa has paid the
rental for the current year and charged it as expense. Sankom has included the rental for
the year as other income in the current year’s profit or loss account.

vi) Below is the summarized financial performance of the three companies for the year ended
31 December 2023 from their individual statement of profit or loss and other
comprehensive income (before any consolidation adjustment):
Sankom Makpa Biiri
GH¢000 GH¢000 GH¢000
Profit for the year 16,598.40 28,499.20 28,800
Other comprehensive income 815.20 712 736

Required:
Prepare the consolidated Statement of Financial Position for Sankom Group as at 31
December 2023.
(Total: 20 marks)

Page 3 of 29
QUESTION TWO

a) Zara Plc operates within the thriving food packaging industry in Ghana. At 1 January 2020,
the firm agreed to grant 10,000 shares each to 500 employees, conditional on the employees
remaining in the firm’s employment during the vesting period. The terms of the scheme
indicated that the shares will vest at:
i) 31 December 2020, if the firm’s EPS growth is greater than 18%
ii) 31 December 2021, if the firm’s EPS growth is greater than average of 13% per year over
the 2-year period
iii) 31 December 2022, if the firm’s EPS growth is greater than average of 10% per year over
the 3-year period

The award was estimated to have a fair value of GH¢8 per share at the grant date. The
following events took place during the three years at:

31 December 2020: EPS was up 14% and 30 staff left. The firm expected EPS to continue
growing at the same level and hence for shares to vest at 31 December 2021. A further 30
employees were expected to leave in 2021.

31 December 2021: EPS was up by only 10%, hence share did not vest. 28 employees left
during the year. The firm expected a further 25 employees to leave in 2022 and that EPS
will increase by greater than 6%, thereby achieving average EPS growth rate of 10% per
year.

31 December 2022: 23 employees left and EPS was up 8%. Average EPS over the three-
year period was greater than 10%.

Required:
Recommend how Zara Plc would account for the share-based payment scheme during the
years ended 31 December 2020, 2021 and 2022. Show extracts from only 2021 financial
statements. (8 marks)

b) Sikaman Plc has three cash generating units (CGUs), a head office and a research facility.
The carrying amounts of the assets and their recoverable amounts are as follows.
Unit X Unit Y Unit Z Head Research Sikaman
office facility Plc
GH¢m GH¢m GH¢m GH¢m GH¢m GH¢m
Carrying value 500 700 1,000 750 250 3,250
Recoverable amount 645 820 1,355 - - 2,920

The assets of the head office can be reasonably allocated to the three units as follows:
 Unit X: GH¢95m
 Unit Y: GH¢280m
 Unit Z: GH¢375m

The assets of the research facility cannot be reasonably allocated to the CGUs.

Page 4 of 29
 Required:
Assuming all assets can be adjusted for impairment, show how the revised/adjusted
carrying values of the assets of Sikaman Plc should be determined in line with IAS 36:
Impairment of assets after taking into account any impairment losses in the above scenario.
Show the relevant financial statements extracts. (7 marks)

c) Odjani Plc (Odjani) negotiates with major local and international airlines to purchase
tickets at reduced rates compared with the price of tickets sold directly by the airlines to
the public. Odjani agrees to buy a specific number of tickets and must pay for those tickets
regardless of whether it is able to resell them. The reduced rate paid by Odjani for each
ticket purchased is negotiated and agreed in advance. Odjani determines the prices at which
the airline tickets will be sold to its customers. Odjani sells the tickets and collects the
consideration from customers when the tickets are purchased. The entity also assists the
customers in resolving complaints with the service provided by the airlines. However, each
airline is responsible for fulfilling obligations associated with the ticket, including remedies
to a customer for dissatisfaction with the service.

Required:
In line with IFRS 15: Revenue from contracts with customers, explain whether Odjani is
a principal or agent and indicate how it would determine the amount of revenue to recognise
from the ticket sales. (5 marks)

(Total: 20 marks)

QUESTION THREE

a) Mongu Plc (Mongu) is a diversified entity listed on the Ghana Stock Exchange. Its financial
year ends on 30 September.

On 1 April 2023, Atta Martey, the Executive Director of Banzy Plc provided funds of
GH¢65 million for an expansion project of Ahenkro Ltd (Ahenkro), a subsidiary company
of Mongu. Banzy Plc held 52% of the voting shares of Mongu as at 30 September 2023.
Atta Martey does not hold directorships in Mongu’s or Ahenkro’s boards. Ahenkro issued
shares worth GH¢65 million to Atta Martey on 20 October 2023 to settle the amount
payable to him.

Required:
Recognise the related parties for the financial statements of Mongu Plc from the facts above
for the year ended 30 September 2023 and the disclosure requirements on the identified
related parties per IAS 24: Related Party Disclosures. (5 marks)

b) On 1 December 2022, Pinto Ltd (Pinto), a public company acquired 70% of the ordinary
share capital of Manpam Inc (Manpam), a private company in Liberia. The functional
currency of Pinto is the GH¢ and the functional currency of Manpam is the Liberia dollar
(L$). Pinto paid GH¢39.1 million for its investment in Manpam on 1 December 2022, when
the net fair value of the identifiable assets acquired and liabilities assumed of Manpam were
L$22,440 million.

Page 5 of 29
 Given that Manpam is a private company, Pinto decided to measure the non-controlling
interests at acquisition at the proportionate share of the fair value of the identifiable net
assets of Manpam. An impairment test conducted at group level on the investment in
Manpam at 31 December 2023 indicated impairment loss on Goodwill of L$357 million
(attributable to Pinto). No impairment loss adjustments had been necessary at the previous
year end.
Relevant exchange rates were:
1 December 2022 GH¢1 = L$470
31 December 2022 GH¢1 = L$478
31 December 2023 GH¢1 = L$490

Required:
In accordance with IFRS, calculate the goodwill figure to be recognised in the consolidated
statement of financial position of Pinto for the year ended 31 December 2023 (to the nearest
GH¢0.1 million). (5 marks)

c) The directors of Akilapa Ltd are involved in takeover talks with Bongo Partners. In the
discussions, Mr Mensah, the Managing Director of Akilapa Ltd stated that there was no
point in considering issues of ethics because the purpose of the takeover is to increase the
market share of the company and ultimately increase the profit of the firm. In seconding
his point, Miss Benkro indicated that in adopting a pragmatic approach to the takeover,
there was no ethical issue in considering a third-party in relation to Bongo Partners because,
in her opinion, the takeover will not benefit the third party but the company and the society.

During the meeting, Dr Worlanyo who was the previous Accountant of Bongo Partners
before moving to Akilapa Ltd was involved in drafting the financial statements and
provided a positive approval of the takeover bid. Upon receipt of the recommendation, a
member of the board of directors found that there are indications that several of Bongo
Partners’s Non-current assets might be impaired.

Required:
i) Comment on the views of Mr Mensah and Miss Benkro regarding the fact that there is no
point in considering ethical issues in the takeover bid. (4 marks)
ii) Assess the ethical issues in this scenario and explain how they should be addressed.
(6 marks)

(Total: 20 marks)

Page 6 of 29
QUESTION FOUR

a) Flossybeats Ltd is a major competitor of Meddy Ltd in the telecommunication industry.

Flossybeats Ltd is listed on the Ghana Stock Exchange with a P/E ratio of 11 and a dividend
yield of 7.2%. Directors of Flossybeats Ltd have been presented with a proposal to merge
with Meddy Ltd which owns 45% of the market share but not yet listed. The summarized
financial statements of Meddy Ltd for the year 2023 are given below:

Statement of Financial Position as at 31 December 2023

GH¢
Non-Current Assets
Property, Plant and Equipment 2,190,000
Trademark 600,000
Investment Property 570,000

Current Assets
Inventories 352,500
Trade Receivables 450,000
4,162,500
Financed by:
Share capital (GH¢0.80 per share) 1,800,000
Retained earnings 300,000
2,100,000
Non-Current Liabilities
15% Debenture 270,000
Long Term Loans 1,312,500
Current Liabilities
Trade Payable 480,000
4,162,500

Summarised Statements of Profit or loss and other comprehensive statement for the year
ended 31 December 2023
GH¢
Profit before tax 930,000
Tax (300,000)
630,000

Interim Dividends paid 114,750

Additional information:
i) An existing property included in property, plant and equipment with a carrying value of
GH¢675,000 could be developed as a site for residential use at a cost of GH¢75,000 and
would then be worth GH¢975,000. The remaining property, plant and equipment can be
used to generate a net cashflow of GH¢300,000 each year for the foreseeable future.

ii) The worth of the Investment Property is difficult to value, as there is no active market. A
normal sale in the present condition could be reasonably expected to yield GH¢600,000
based on an analysis of transactions in similar assets.

Page 7 of 29
iii) The trademark represents a license to produce and sell a special product which is expected
to generate an after-tax profit of GH¢1,500,000 over the next four years. The expected
after-tax profit projection was made without the consideration of amortisation of the book
value of the trademark over the same period.

iv) The discounted present value of future cash payments in respect of long-term loan is
GH¢975,000. The discount rate of Meddy Ltd is 25% per annum but the financial controller
asserts that beta of the company is 1.5. The Treasury bill rate and the return on the market
are estimated to be 16% and 23% respectively.

v) Dividend payments of Meddy Ltd in 2022 was GH¢112,500. The dividend growth achieved
in 2023 is expected to be sustained in the foreseeable future.

Required:
Advise the directors of Meddy Ltd on the value to be placed on the ordinary shares using:
 Net Assets Method
 Constant Dividend Method
 Dividend Growth Method
 Earning based (P/E) Method (15 marks)

b) An acquirer may reacquire a right that it had previously granted to the acquiree to use one
or more of the acquirer’s recognised or unrecognised assets. Examples of such rights
include a right to use the acquirer’s trade name under a franchise agreement or a right to
use the acquirer’s technology under a technology licensing agreement. Such reacquired
rights generally are identifiable intangible assets that the acquirer separately recognises
from goodwill.

Required:
Identify FOUR (4) factors that should be considered in deciding on whether reacquired
rights constitute an identifiable intangible asset. (5 marks)

(Total: 20 marks)

Page 8 of 29
QUESTION FIVE

You are the Financial Consultant of Nkoso Funds, a pension fund in Ghana. Your company
has identified two companies which you have been asked to evaluate as possible
investments. The two companies, Trokaa Plc (Trokaa Plc) and Krokro Plc (Krokro Plc),
are both publicly held and similar in size. Assume that all other publicly available
information, including all climate, sustainability, and governance disclosures, have already
been analysed and the decision concerning which company’s shares to acquire depends on
their cash flow data given below:

Statement of cash flows for the years ended December 31, 2023 and 2022
Trokaa Plc Krokro Plc
2023 2022 2023 2022
GH¢000 GH¢000 GH¢000 GH¢000
Operating activities:
Net profit after tax 3,400 8,800 17,800 14,200
Adjustments:
Total (2,800) (800) 3,800 -
Net cash generated from
operating activities (A) 600 8,000 21,600 14,200
Investing activities:
Additions of tangible assets (2,600) (600) (25,400) (20,700)
Sale of tangible assets 17,200 15,800 1,200 2,500
Net cash generated from
investing activities (B) 14,600 15,200 (24,200) (18,200)

Financing activities:
New bank borrowing 8,600 3,800 9,200 8,600
Payment of bank borrowing (20,200) (21,600) (3,000) (8,000)
Payment of dividends - - (2,400) (1,800)

Net cash used for financing

activities (C) (11,600) (17,800) 3,800 (1,200)
Increase (decrease) in cash and 3,600 5,400 1,200 (5,200)
cash equivalents (A+B+C)
Cash and cash equivalents b/f 6,200 800 10,800 16,000
Cash and cash equivalents c/f 9,800 6,200 12,000 10,800

Required:
a) Conduct a horizontal analysis for each of the two companies. (6 marks)

b) Write a report to the investment manager of Nkoso Funds discussing the relative strengths
and weaknesses of each of the two companies. Conclude your report by recommending one
company’s share as an investment avenue. (14 marks)

(Total: 20 marks)

Page 9 of 29
SUGGESTED SOLUTION

QUESTION ONE

Sankom Ltd group

Consolidated statement of financial position as at 31 December 2023
GH¢000
Property, plant and equipment (102,800+101,120+88,480+4,400-2,640
+22,400-1,120(W7)) 315,440
Investment property (23,600 – 23,600) -
Goodwill (W2) 81,315.2
396,755.2
Current assets (25,280+20,224+17,696-134.4(W3)) 63,065.6
Total assets 459,820.8

Equity and liabilities:

Stated capital 160,000
Retained earnings (W4) 115,557.6
Other component of equity (W6) 5,186.4
Non-controlling interest (W5) 37,076.8
317,820.8
Liabilities:
Current liabilities (65,632+20,505.6+17,942.4) 104,080
Non-current liabilities (15,168+12,134.4+10,617.6) 37, 920
459,820.8

Page 10 of 29
Workings
1. Group structure
Sankom (Parent)
1/1/21 – 31/12/23 30/6/2022 – 31/12/23
80% 60%

Makpa Biiri
(3 years, subsidiary) (1.5 years, subsidiary)

Summary of percentages
Makpa Biiri
Parent % 80% 60%
NCI % 20% 40%
Total 100% 100%

2. Goodwill at reporting date

Makpa Biiri Total
GH¢000 GH¢000 GH¢000
Goodwill at acquisition 44,800 38,400 83,200
Impairment loss (W3) (1,884.8) - (1,884.8)
42,915.2 38,400 81,315.2

3. Impairment test (loss)

Makpa Biiri
GH¢000 GH¢000
Stated capital 64,000 56,000
Retained earnings 22,784 19,936
Other component of equity 1,920 1,680
PUP (2,240 x20% x30%) (134.4) -
Fair value adjustment-plant 4,400 -
Depreciation-Plant (4,400/5 x 3) (2,640) -
Goodwill 44,800 38,400
135,129.6 116,016
Recoverable amount 133,244.8 116,544
Impairment loss 1,884.8 -

4. Consolidated Retained earnings

GH¢000 GH¢000
Balance b/f 63,519.2
Sankom
Profit for the year 16,598.4
Fair value gain (W7) (1,200)
Depreciation investment property-reclassified (W7) (1,120)
14,278.4

Page 11 of 29
 Makpa
Profit for the year 28,499.2
Depreciation-plant (4,400/5) (880)
PUP-Inventory (134.4)
Impairment-goodwill (W3) (1,884.8)
25,600
Parent’s share of profit (80% x GH¢25,600) 20,480

Biiri
Share of profit (60% x GH¢28,800) 17,280
115,557.6
5. Non-controlling interest
GH¢000
Balance b/f 20,000
Share of profit:
Makpa (20% x GH¢25,600 (W4)) 5,120
Biiri (40% x GH¢28,800(W4) 11,520
Share of OCI:
Makpa (GH¢712 x20%) 142.4
Biiri (GH¢736x40%) 294.4
37,076.8

6. Other component of equity

GH¢000
Balance b/f 3,360
OCI for the year-Sankom 815.2
Makpa (GH¢712 x80%) 569.6
Biiri (GH¢736x60%) 441.6
5,186.4

7. Intercompany rental of property

The rental of the property by Sankom to Makpa qualifies as investment property,
under IAS 40, Investment property in the separate financial statement of Sankom.
However, since the building is rented by a group member, Makpa, for their
administrative purpose, from the perspective of the group, it is regarded as
property, plant and equipment and not an investment property. The building is
thus reclassified to property, plant and equipment on the consolidated financial
statement. Sankom measures its investment property at fair value, and hence must
be stated back to its cost as follows:
Debit Property plant and equipment GH¢22.4m
Debit Retained earnings GH¢1.2m
Credit Investment property GH¢23.6m
The rental income and corresponding rental expense of GH¢2m recognized by the
two companies cancel out, and hence have no effect on the consolidated retained
earnings.
The cost of building is also adjusted by depreciation of GH¢1.12m (GH¢22.4/20)

Page 12 of 29
 Debit Retained earnings (Sankom) GH¢1.12m
Credit Property, plant and equipment GH¢1.12m

(Marks are evenly distributed using 80 ticks @ 0.25 = 20 marks)

EXAMINER’S COMMENTS
Generally, candidates did not have an understanding of the opening consolidated
equity balances given in the question. They failed to realise that given the opening
retained earnings, other components of equity and non-controlling interest, to
estimate the reporting date figures of these respective items, you need to add the
change in net assets (i.e. profit after tax and other comprehensive income) for the
current year only. Candidates were therefore to compute the share of the parent and
NCI in the profits after tax and other comprehensive income for the current year after
making relevant consolidation adjustments which pertain to the current year. Most
candidates tried to compute these equity balances from the acquisition date point to
reporting date, which was not possible with the given information in the question as
limited information was available in completing the net assets schedules for the two
subsidiaries.

The question also presented candidates with full goodwill which arose on acquisitions
of the two subsidiaries. Candidates were just to present the sum of these two goodwill
after considering impairment as the reporting date figure for goodwill. The generality
of candidates failed to recognise this, and tried computing the respective goodwill in
the two subsidiaries using the cost of investments given in the statement of financial
position. This was practically not possible as the question hinted that NCI was fair
valued, but no fair value of NCI was given at acquisition date and also the pre-
acquisition equity balances were not furnished or practically not determinable in the
question.

Goodwill impairment testing at the year-end was to be determined using the

impairment testing procedure for cash generating units (CGUs) as given under IAS
36: Impairment of assets. Candidates failed to realise this, and those who attempted
to determine the impairment loss failed to realise that the recoverable amounts given
were for the respective subsidiaries, and hence for the whole cash generating units
and not goodwill as an asset only. The composition of the assets in the CGUs was also
a challenge to most candidates as they could not determine that the assets in the CGUs
should be made up of the identifiable assets at the reporting date (after any
consolidation adjustments) and the full goodwill of the subsidiaries.

Apart from the above, most candidates also had a challenge in dealing with the
intragroup transaction of rental of building between Sankom (the parent company)
and the subsidiary, Makpa. Candidates generally could not determine that though
the building rented out in the separate financial statement of Sankom qualifies as
investment property in line with IAS 40: Investment property, from the group’s
perspective, the asset best satisfies the definition of property, plant and equipment as
it is being used by a group member. A reclassification from investment property to

Page 13 of 29
property, plant and equipment was to be made and the fair value gain reversed. The
fact that the investment property is measured at fair value means that it has not been
depreciated. Depreciation on the asset from the start of the rental arrangement to the
reporting date is adjusted in the parent’s books.

Page 14 of 29
QUESTION TWO

a) At 31 December 2020, we have the following data:

 Shares are expected to vest in 2021 (because the average of actual EPS growth in
2020 [14%] and expected EPS growth in 2021 [14%] is greater than 13%)
 No. of employees that departed in 2020 equals 30;
 Additional staff expected to depart by the vesting date (i.e. 31 December 2021) =
30;  Shares expected to vest for 500 – 30 - 30 = 440 employees

At 31 December 2021, we have the following data:

 Shares did not vest in 2021 because actual EPS growth in 2021 (10%) meant that
average growth over 2020 & 2021 is less than 13%.
 Shares now expected to vest in 2022 (because the average of actual EPS growth in
2020 & 2021 and expected EPS growth in 2022 is greater than 10% [see vesting
conditions]
 No. of employees that departed in 2020 = 30; No. that departed in 2021 = 28
 Additional staff expected to depart by the vesting date (i.e. 31 December 2022) =
25;  Shares expected to vest for 500 - 30 - 28 - 25 = 417 employees

At 31 December 2022, we have the following data:

 Share options vest in 2022 because actual EPS growth in 2022 (8%) means that
average actual growth over the three past years exceeds 10% (see vesting
conditions)
 No. of employees that departed in 2020 = 30; No. that departed in 2021 = 28; No.
that departed in 2022 = 23  Share options actually vest for 500 - 30 - 28 - 23 =
419 employees
Computation Cumulative Charge for the year
expense (equity)
GH¢000 GH¢000
2020 10,000 x 440 x 8 x 1/2 17,600 17,600
2021 10,000 x 417 x 8 x 2/3 22,240 4,640
2022 10,000 x 419 x 8 x 3/3 33,520 11,280

Zara Plc
Statements of profit or loss (extract) for the years ended 31 December 2021
GH¢000
Employee cost (4,640)

Zara Plc
Statements of financial position (extract) as at 31 December 2021
GH¢000
Equity
Share option 22,240

Any 2 valid points for explanations = 3 marks

Page 15 of 29
 20 ticks @ 0.25 for computations= 5 marks
8 marks

b) For each CGU, a comparison is required between the carrying amounts and
recoverable amounts of the assets of the CGU to determine which, if any, of the
CGUs is impaired. As the asset of the head office can be allocated to each of the
units, the carrying amounts of each of the CGUs must then include the allocated
part of the head office.

Allocation of head office assets to CGUs

Unit X Unit Y Unit Z
GH¢m GH¢m GH¢m
Carrying value 500 700 1,000
Head office assets 95 280 375
595 980 1,375

Calculation of impairment losses for CGUs

Unit X Unit Y Unit Z
GH¢m GH¢m GH¢m
Carrying value 595 980 1,375
Recoverable amount 645 820 1,355
Impairment loss 0 160 20

Because the assets of Unit X are not impaired, no write‐down is necessary. For
Units Y and Z, the impairment losses must be allocated to the assets of the units.
The allocation is in proportion to the carrying amounts of the assets.

Allocation of impairment loss

Unit Y Unit Z
GH¢m GH¢m
To head office [160 x 280/980] 46 [20 x 375/1,375] 5
To other assets [160 x 700/980] 114 [20 x 1,000/1,375] 15
160 20

In relation to the research centre, the assets of the centre cannot be allocated to the
units, so the impairment test is based on the smallest CGU that contains the
research centre, which in this case is the entity as a whole, Sikaman Plc. For this
calculation, the carrying amounts of the assets of the units as well as the head office
are reduced by the impairment losses already allocated. The total assets of Sikaman
Plc consist of all the assets of the entity

Page 16 of 29
 Impairment testing for Sikaman Plc as a whole and revised carrying values
Carrying Proportion Allocation Adjusted
value of loss carrying
value
GH¢m GH¢m GH¢m
Unit X 500 500/3,020 x 100 17 483
Unit Y (700 – 114) 586 586/3,020 x 100 19 567
Unit Z (1,000 – 14) 986 986/3,020 x 100 33 953
Head office (750 – 46 – 5) 699 699/3,020 x 100 23 676
Research centre 250 250/3,020 x 100 8 242
3,020 100 2,920

Note: Allocation loss = 3,020 – 2,920 = 100

Any 2 valid points for explanations = 2 marks

20 ticks @ 0.25 for computations= 5 marks
7 marks

c)
 To determine whether Odjani’s performance obligation is to provide the specified
goods or services itself (i.e. Odjani is a principal) or to arrange for those goods or
services to be provided by another party (i.e. Odjani is an agent), the entity
identifies the specified good or service to be provided to the customer and assesses
whether it controls that good or service before the good or service is transferred to
the customer.
 It can be concluded that, with each ticket that Odjani commits itself to purchase
from the airline, Odjani obtains control of a right to fly on a specified flight (in the
form of a ticket) that Odjani then transfers to one of its customers (see paragraph
B35A(a) of IFRS 15).
 Consequently, it can be determined that the specified good or service to be
provided to its customer is that right (to a seat on a specific flight) that Odjani
controls.
 Odjani observes that no other goods or services are promised to the customer.
Odjani controls the right to each flight before it transfers that specified right to one
of its customers because Odjani has the ability to direct the use of that right by
deciding whether to use the ticket to fulfil a contract with a customer and, if so,
which contract it will fulfil.
 Odjani also has the ability to obtain the remaining benefits from that right by either
reselling the ticket and obtaining all of the proceeds from the sale or, alternatively,
using the ticket itself.
 Odjani has inventory risk with respect to the ticket because it committed itself to
obtain the ticket from the airline before obtaining a contract with a customer to
purchase the ticket. This is because Odjani is obliged to pay the airline for that right
regardless of whether it is able to obtain a customer to resell the ticket to or whether
it can obtain a favourable price for the ticket. Odjani also establishes the price that
the customer will pay for the specified ticket.

Page 17 of 29
 Thus, Odjani is deemed to be a principal in the transactions with customers. The
entity recognises revenue in the gross amount of consideration to which it is
entitled in exchange for the tickets transferred to the customers.
Any 4 valid points for explanations = 4 marks
Conclusion = 1 marks
5 marks

(Total: 20 marks)

EXAMINER’S COMMENTS
This question on selected accounting standards (IFRS) was a difficult question for
most candidates. The question required knowledge in share-based payments and
calculation of impairments losses and revenue from contracts with customers. Most
candidates lacked expertise in the calculation of impairments losses, allocation and
impairment testing. Candidates understanding of the standards and their application
to real situations were a bit weak and therefore found it difficult in solving questions.
Performance was low and below expectation. It seems candidates were unfamiliar
with these standards. Overall, question 2 was partly attempted and answered. Some
candidates did not attempt this question at all. ICAG should emphasis revision on
standards to enhance better appreciation by candidates.

Page 18 of 29
QUESTION THREE

a) Related parties of Mongu are:

 Atta Martey (a key management personnel of Mongu’s parent company)
 Ahenkro (a subsidiary company of Mongu)
 Banzy Plc (parent company of Mongu)

Relationships between a parent and its subsidiaries should be disclosed

irrespective of whether there have been transactions between them. An entity
should disclose the name of its parent and, if different, the ultimate controlling
party.

If an entity has had related party transactions during the periods covered by the
financial statements, it should disclose the nature of the related party relationship
as well as information about those transactions and outstanding balances,
including the terms and commitments necessary for users to understand the
potential effect of the relationship on the financial statements.

In this case, the above disclosures required should be made separately for each of
the following categories.
 Parent
 Subsidiaries
 Key management personnel of the entity or its parent
(5 marks)

b) Computation of goodwill
L$ Rate GH¢
million Million
Consideration transferred (GH¢39.1 million x 470) 18,377
Non-controlling interests (L$22,440 x 30%) 6,732
25,109
Fair value of net assets at date of acquisition (22,440)
2,669
Impairment loss in 2023 (357)
Goodwill at 31 December 2023 2,312 490 4.72
(5 marks)

Alternative:
L$ Rate GH¢
Million Million
Consideration transferred 39.1
Non-controlling interests [(L$22,440 ÷ 470) x 30%] 470 14.32
53.42
Fair value of net assets at date of acquisition 470 (47.74)
(L$22,440 ÷ 470)

Page 19 of 29
 5.68
Conversion/translation loss (L$490 – (0.23)
L$470/L$490) x 5.68)
5.45
Impairment loss in 2023 (L$357 ÷ 490) 490 (0.73)
4.95

Goodwill at 31 December 2023 4.72

c) There are several reasons for considering issues of ethics in a takeover bid. The
moral beliefs that transcend in an organisation’s code of ethics and its culture may
not be sufficient because a takeover bid involves integrating two companies’ ethics
and compliance programs during the takeover process which is critical and begins
well before the union of the companies. The directors of both Akilapa Ltd and
Bongo Partners should take care to conduct diligent research into the ethics and
compliance programs of both companies prior to signing the transaction
agreement. Failure to perform such diligence can be lethal to the success of the
transaction. (1 mark)

During the pre-takeover phase, Mr Mensah and Miss Benkro should note that
joining two companies’ ethics and compliance programs is about more than the
bureaucratic process but also about culture. A company’s ethics and compliance
programs are deeply interwoven with company culture. Company culture is not
something that shows up in the transaction paperwork or perhaps even in due
diligence reports. Yet, the compatibility of the companies’ cultures is a vital part
of the takeover success. Thus, company characteristics that contribute to the make-
up of a company’s culture such as values, work ethic, business practices,
leadership style and company mission, are all critical to the takeover process.
(1 marks)

Secondly, Mr Mensah and Miss Benkro and the other directors of Akilapa Ltd
should beware that ethics and compliance issues, including cultural issues, need
to be addressed as they arise. Ignoring ethics and compliance issues or placing
them on the abeyance can endanger the success of the takeover bid. Consequently,
incongruences in the Akilapa Ltd and Bongo Partners’s ethics and compliance
programs need to be managed and resolved prior to finalizing a transaction to
maximize the likelihood of long-term success.
(1 mark)

Thirdly, ethical issues are relevant for takeover bid since integrating ethics and
compliance programs successfully requires patience. Management of the Akilapa
Ltd should be mindful of the fact that integration of two companies’ cultures can
be a slow process. However, the chances of a successful integration of two
companies into one larger company, family and team are substantially increased
when the right amount of time, effort and resources are allocated to the integration
process. Another critical issue for the directors of Akilapa Ltd to remember

Page 20 of 29
 throughout the takeover bid process is that addressing ethical issues as they arise
is necessary to avoid later pitfalls. (2 marks)

Finally, ethical issues are becoming more and more complex, and it is critical to
have knowledge of the underlying structure of ethical reasoning. Since the
accountant of the Akilapa ltd is part of the takeover process, professional ethics is
an inherent part of his profession hence the directors should consider ethical
issues in the process. The professional accountants code of ethics and conduct
requires its members to adhere to a set of fundamental principles in the course of
their professional duty, such as confidentiality, objectivity, professional
behaviour, integrity and professional competence and due care. The main aim of
professional ethics is to serve as a moral guideline for professional accountants.
By referring to the set of ethical guidelines, the accountant is able to decide on the
most appropriate course of action, which will be in line with the professional
body’s stance on ethics. The presence of a code of ethics is a form of declaration
by the professional body to the public that it is committed to ensuring the highest
level of professionalism amongst its members. From the perspective of Miss
Benkro, although the takeover will benefit the company, its executives or society,
not considering ethical issues is deceptive, unethical, and hence unfair. It violates
the relationship of trust, which the company has with society and the professional
code of ethics. There is nothing but good reasons against the false disclosure of
profits. (2 marks)

 The ethical issues confronted with Dr. Worlanyo is a self-interest threat because
impairments appear to have arisen on an acquisition in which he was involved.
The self-interest threat might compromise both his integrity and professional
behavior. As a chartered accountant, Dr Worlanyo needs to ensure that he acts
with integrity and demonstrate high standards of both professional behaviour and
conduct. His judgement must not be influenced by the fact that his competence
may be questioned if impairments arise on an investment decision with which he
was involved. He must fulfil his professional responsibilities and ensure that the
impairment review is properly performed. This might involve him explaining his
earlier involvement in the corporate affairs of Bongo partners and perhaps passing
the detailed review on to a colleague.
(3 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
The first part of the question was on related party disclosures. The performance of the
first part was good. Most of the candidates identified the related parties but were not
able to talk about the disclosures. The second part of the question required candidate
to determine the goodwill involving a foreign subsidiary. Some candidates could not
translate the foreign currency into the local currency. The third part of the question on
ethics was generally well answered by most candidates. Some candidates however
also showed lack of understanding and weak preparedness.

Page 21 of 29
QUESTION FOUR

a)
i) Asset Based Method
Value of Business = Total Asset - Total Liability

Total Asset GH¢ GH¢

Property, Plant and Equipment
Portion for Residential use (GH¢975,000 -GH¢75,000) 900,000
Present Value of Remaining PPE (GH¢300,000/0.25) 1,200,000
2,100,000
Trademark
Projected After tax Profit 1500,000
Amortisation (GH¢600,000/4) (150,000)

Adjusted After tax Profit 1,350,000

Add back amortization 150,000
Cash Flow 1,500,000
(1−(1+0.25)^−4
Present Value of Cash Flow GH¢1,500,000 3,542,400
0.25

Investment Property 600,000

Inventories 352,500
Trade Recievables 450,000
7,044,900
Total Liabilities
15% Debenture 270,000
Long term loans 975,000
Trade Payable 480,000
1,725,000
Value of Business = GH¢7,044,900 - GH¢1,725,000
= GH¢5,319,900

Number of ordinary shares =

1,800,000/0.80 = 2,250,000
shares

Value on each Ordinary Share 𝐺𝐻¢ 7,044,900

= = GH¢2.3644
2,250,000

(18 ticks @ 0.33 marks each = 6 marks)

Page 22 of 29
ii) Earning Method - P/E Ratio
Value of Business = Earnings Per Share (EPS) × P/E Ratio
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑂𝑟𝑑𝑖𝑛𝑎𝑛𝑟𝑦 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 (𝐸. 𝑃. 𝑆) = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

Earnings = GH¢630,000

𝐺𝐻¢630,000
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 (𝐸. 𝑃. 𝑆) = = 𝐺𝐻¢0.28
2,250,000

Share Price = GH¢ 0.28 × 11 = GH¢3.08

For lack of marketability discount by 25%

Share Price = GH¢3.08 × 0.75 = GH¢2.31

(6 ticks @ 0.5 marks each = 3 marks)

iii) Dividend Method - Dividend Yield Method

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 =
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑

Dividend Per Share = GH¢114,750/2,250,000 = GH¢0.051

GH¢ 0.051
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 = =GH¢ 0.708
0.072

For lack of marketability discount by 25%

Value of Ordinary shares = GH¢0.708*0.75 = GH¢0.531

(4 ticks @ 0.5 marks each = 2 marks)

iv) Dividend Method - Gordon's Growth Model

𝐷𝑜(1 + 𝑔)
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑒𝑟 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 =
𝐾𝑒 − 𝑔
Do = (GH¢114,750/2,250,000) =GH¢0.051
Growth (g) = (114,750 – 112,500) / 112,500 x 100 = 2%

Growth (g) = 2%
Ke =Rf+𝛽(Rm-Rf)
Ke = 16%+1.5(23%-16%)
Ke= 26.5%
𝑮𝑯¢𝟎. 𝟎𝟓𝟏(𝟏 + 𝟎. 𝟎𝟐)
𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝒑𝒆𝒓 𝒐𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝒔𝒉𝒂𝒓𝒆𝒔 = = 𝑮𝑯¢𝟎. 𝟐𝟏𝟐
𝟎. 𝟐𝟔𝟓 + 𝟎. 𝟎𝟐

(8 ticks @ 0.5 mark= 4 marks)

Page 23 of 29
b) Understanding the facts and circumstances, including those surrounding the
original relationship between the parties prior to the business combination, is
necessary to determine whether the reacquired right constitutes an identifiable
intangible asset.

Some considerations include:

 The structure and accounting procedure used for the original relationship.
Consider the intent of both parties at inception.
 Consider whether the original relationship was an outright sale with immediate
revenue recognition. Was deferred revenue recorded as a result? Was an up-front,
one-time payment made, or was the payment stream ongoing? Was the original
relationship an arm’s-length transaction, or was the original transaction set up to
benefit a majority-owned subsidiary or joint venture entity with off market terms?
 Whether the original relationship was created through a capital transaction, or
through an operating (executory) arrangement. Did it result in the ability or right
to resell some tangible or intangible rights?
 Whether there has been any enhanced or incremental value to the acquirer since
the original transaction
 Whether the reacquired right is exclusive or nonexclusive
(Any 4 points @ 1.25 marks each = 5 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question on business valuation was not answered well by almost all the
candidates. Many candidates scored below the average mark. The poor performance
could be due to inappropriate treatments of valuation adjustments. In the second part
of the question, most candidates were not able to provide factors that should be
considered in deciding on whether reacquired rights constitute an identifiable
intangible asset.

The first part of the question assesses candidates' understanding of company

valuation methods and their application in a merger scenario. The question covered
multiple valuation methods (Net Assets, Constant Dividend, Dividend Growth, and
the P/E ratio methods). The use of a merger scenario provides a practical context for
applying valuation techniques. The question provides detailed financial statements
and additional information, allowing for in-depth analysis.

A significant number of candidates struggled to accurately estimate the net asset value
required for the asset-based valuation method. This suggests a lack of understanding
of how to calculate net assets or identify the appropriate figures from financial
statements. Many candidates demonstrated difficulty in estimating the appropriate
earnings and dividend yields needed for the earnings and dividend-based valuation
methods. This indicates a weakness in understanding how these yields are used in
valuation models. Some candidates could not also compute the number of shares to
be used for calculating price per share.

Page 24 of 29
QUESTION FIVE

a) Horizontal Analysis
Change Trokaa Change Krokro
in value (%) in value (%)
(Trokaa) (Krokro)
Net profit after tax -5,400 -61.36 3,600 25.35
Adjustment -2,000 250 3,800 -
Net operating activities -7,400 -92.5 7,400 52.1

Additions to tangible assets -2,000 333.33 4,700 22.7

Sale of tangible assets 1,400 8.86 -1,300 -52.1
Net investing activities -600 -3.95 -6,000 32.97

New bank borrowing 4,800 126.32 600 6.98

Payment of bank borrowings -1,400 -6.48 5,000 -62.5
Payment of dividends - - -600 33.3
Net cash from financing 6,200 34.83 5,000 416.67
Increase in cash -1,800 -33.3 6,400 -123.1
Cash at start 5,400 675 -5,200 -32.5
Cash at end 3,600 58.06 1,200 11.11
(Marks are evenly spread = 6 marks)

b)
Report
To: Investment Manager, Nkoso Funds
From: Financial Consultant, Nkoso Funds
Date: xx/xx/xx

Subject: Relative cash flow analysis of Trokaa Plc and Krokro Plc
This report presents analysis of cash flow information of two companies: Trokaa
Plc and Krokro Plc as part of a broad financial analysis carried out on these
companies to decide which of them represents a better target to invest in. The
analysis is undertaken under four different headings: cash flows from operating
activities, cash flows from investing activities, cash flows from financing activities,
and changes in cash and cash equivalents.

Cash flows from operating activities

From the cash flow statements, it is clear that both companies have remained
profitable across the two years. However, while Trokaa Plc’s net profit has
declined by 61.36% [(8800 – 3400)*100/8800] Krokro Plc’s profit has increased by
25.35% [(17800-14200)*100/14200]. This implies, albeit loosely, that Krokro’s profit
figures are not only higher than those of Trokaa but also seem to be faring better
over time.

Page 25 of 29
The picture painted by the profit figures is same as what the net operating cash
flows reveal. Both companies generated more cash than they spent on operations
across both years. Trokaa’s net cash generated from operating activities decreased
very significantly whereas Krokro matched the improved profitability with
increased operating cash flows between the two periods.

A closer look at the numbers suggests that Trokaa’s poor cash management in 2023
did not result from only the reduced profitability but also from the increases in the
negative adjustments. This most probably signifies a deterioration in net working
capital management; more cash tied up in inventories and receivables. Another
implication is that the poor current asset management has undone the impact of
any addbacks of material non-cash expenses such as depreciation. In the case of
Krokro, the nil adjustment indicates that 2022’s positive and negative adjustments
may have cancelled each out. But in 2023 the adjustments represented an addition
to profit to increase the operating cash flows. This may suggest a better working
capital management and/or a simple addback of non-cash expenses.

Krokro Plc also appears to have had more quality profit than Trokaa Plc. In both
years, Krokro Plc’s net operating cash flows exceeded the related net profits,
indicating that the profit figures were not just an outcome of accounting gimmicks,
but figures which are sufficiently backed by cash. On the contrary, Trokaa’s profits
were higher than the related net operating cash flows in both years. For instance,
in 2023, with operating cash flows sharply dropping, Trokaa’s profit was backed
only 17.65% (600*100/3400) by operating cash flows for that year.

Cash flows from investing activities

Cash flows from investing activities are basically concerned with the acquisition
and disposal of non-current assets and related items.

The cash flow statements reveal that Trokaa Plc has experienced net cash inflows
from investing activities while Krokro Plc has recorded net cash outflows. This
clearly indicates that Trokaa Plc is selling off and sizing down on its operations
while Krokro Plc is investing long-term and expanding its activities.

Though the asset sales have generated material figures for Trokaa Plc across the
two years, this action could raise going concern issue for the company unless there
are plans to re-invest the proceeds in different ventures. Thus, these cash flows
suggest that there are doubts about Trokaa’s future while Krokro Plc appears to be
motivated by the good profit figures to be investing in new assets and creating
even more positive outlook into the future.

The increased net investment activities by Krokro Plc however imply that free cash
flows are negative in both years. The indication is that Krokro Plc did not fund the
new acquisitions in both periods only with internally generated cash but also with
funds from lenders as can be seen under financing activities. Conversely, Trokaa
Plc’s increased divestment activities created positive free cash flows in both years.

Page 26 of 29
Cash flows from financing activities
Cash flows from financing activities are concerned with activities which result in
changes in an entity’s mix of equity and debt capital. These cash flows result from
transactions between the entity on one hand and shareholders and lenders on the
other.

Trokaa Plc reported net cash outflows from financing activities, albeit lower in
2023 than in 2022, across both years while Krokro Plc presented net cash outflows
only in 2022. These figures show that Trokaa Plc spent the positive free cash flows
(as discussed under investing) on capital holders while Krokro Plc rather had to
raise additional monies (especially in 2023 when the net flows became positive) to
finance its deficient free cash flows.

A closer look at the section breakdown shows that both entities obtained new
funds from only lenders in both years. While at this point, it is apparently clear
how the new borrowings by Krokro Plc were applied as discussed under
investment activities, it is not for Trokaa Plc. However, the immediate next line
shows that huge debt repayments were made by Trokaa Plc, compared to Krokro
Plc. The proceeds from asset sales did not find their way into idle accounts or short-
term investments for later use but were utilized to repay loans. This thus offers a
confirmation that the company does not intend to invest in new projects or replace
ones sold.

But then as a lot of repayments are occurring at Trokaa, its gearing position is
expected to improve while future interest payments can be projected to fall. Krokro
Plc’s loan build-ups in both years would worsen its gearing ratio and cause future
interest payments to rise. However, it seems this does not create much concern as
its strong profitability and operating cash flows should be able to allay any fears
that lenders might harbour.

A more worrying picture painted by the 2023 figures of Trokaa is how the
company has used the new loan. Instead of investing the loan proceeds in new
assets, it appears Trokaa has used a good chunk to augment the asset sales to
redeem the existing debts. This situation can easily push the company into debt
distress as falling profitability coupled with failure to find and invest in new viable
projects may impair the firm’s debt servicing capacity despite the improving
gearing and lower future interest costs.

Only Krokro Plc paid dividends to shareholders in both years, with the 2023’s
payment being one-third higher. Krokro Plc’s decisions to pay dividends and
increase amount this year look very apt as the amounts in both years are
sufficiently below the net cash generated from operating activities. The implication
is that these payments can be sustained going forward. But the failure of Trokaa
Plc to return anything to shareholders just adduces additional evidence of the
apparent cash flow problems that its earlier numbers seem to be revealing.

Page 27 of 29
Changes in cash and cash equivalents
Trokaa’s net cash changes have remained positive across the two periods even
though the net cash increase of GH¢3.6 million in 2023 falls below what occurred
in 2022 by 331/3% [(5400 – 3600) * 100/5400].

These positive changes have been driven by cash generated from net asset
disposals and net operating cash inflows, with the larger contributor being the
former. Net cash from financing activities has been negative in both periods. But
the reduction in net cash increment appears to have occurred largely because of
the significant dip in net cash from operations (from GH¢8 million to GH¢0.6
million). This drop, combined with the small decrease in net investing inflows, was
too huge to be compensated for by the significant decrease in the net cash used on
financing activities.

The fact that Trokaa’s positive net cash changes are disproportionately dependent
on proceeds from asset sales does not leave an all-that-good picture. In fact,
without these inflows, the company would have net decreases in cash and cash
equivalents. Meanwhile these flows are not sustainable as the firm cannot continue
disposing of its assets to raise new funds. Else, it would be out of business.
It appears that Krokro’s cash flows situation gives a more encouraging picture than
Trokaa’s. Krokro’s net cash changes improved from being a net negative figure last
year to becoming a positive one this year. This improvement in net cash changes
translates into an increment of GH¢6.4 million (GH¢1.2 million + GH¢5.2 m) from
2022 to 2023.

This improved performance was due to the significant rise in the net cash
generated from both operating and financing activities. These huge increases led
to the improvement we see because they exceeded how much more cash was
required for the additional cash investments in 2023. Krokro’s turnaround appears
even more impressive given that the firm generated much of the improvement
from its own operating activities.

Overall, the cash flow data of the two companies suggest that not only has Krokro
Plc been more profitable (in absolute terms, at least) across and over the two years
but it has also handled and managed its cash flows better than Trokaa Plc. Krokro
Plc has generated more cash from its own operations, is expanding its activities by
buying new assets, is committed to sustainable dividend payments and is
leveraging its strong potential to use a cheaper source of finance – debts – to fund
its investments. I therefore recommend that we consider Krokro Plc for the share
investment.
Introduction = 1 mark
Any 6 valid points @ 2 marks each = 12 marks
Conclusion = 1 mark
14 marks

(Total: 20 marks)
Page 28 of 29
EXAMINER’S COMMENTS
This question on horizontal analysis of the financial statements was of the appropriate
standard. Some candidates could not calculate the absolute changes as well as the
percentage changes. The interpretation of the horizontal changes also posed a
challenge for most candidates. The report required specific discussion of certain issues
but candidates were unable to discuss these issues.

CONCLUSION
As indicated earlier, overall, candidates performed better than previous diet. The
results provide some indication of ill preparation and lack of appreciation of
accounting standards. It seems that the exemptions granted to most candidates is a
factor of poor performance given that candidates lack the pre-requisite knowledge
and competence for corporate reporting. It is suggested that candidates preparing for
corporate reporting paper should thoroughly revise on the financial reporting paper
even when they are exempted from taking the financial reporting paper. The
exemptions criteria or policy must be re-looked at. Some candidates just register and
sit the paper without the aim of passing but because he/she must register for all
subjects. So, they prepare for other subject(s) they have interest in. This ultimately has
implication for the overall pass rate for the corporate reporting exams.

Page 29 of 29
 JULY 2024 PROFESSIONAL EXAMINATIONS
CORPORATE REPORTING (PAPER 3.1)
CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper was generally less challenging than the previous diet. Since
this exams diet is the last exams diet before the change to the new ICAG syllabus, it
was expected that majority of candidates would have put in a lot of efforts to pass the
paper. The questions were based on the syllabus and were largely straight forward
and of the right level. The mark allocation followed the weightings in the syllabus and
was fairly allocated to each sub-question. Questions that required considerable
amount of work were commensurate with the allotted time and marks.

PERFORMANCE OF CANDIDATES
The general performance of candidates in this exams diet was generally similar to the
performance in the previous diet. Candidates who performed well demonstrated a
clear understanding of the subject matter. Some candidates also showed abysmal
performance. The poor level of preparedness of some candidates reflected in their
poor performance.

Page 1 of 33
QUESTION ONE

The statements of financial position of Kanda Ltd (Kanda), Adama Ltd (Adama) and
Bamba Ltd (Bamba) as at 30 June 2022, are as follows:
Kanda Adama Bamba
GH¢000 GH¢000 GH¢000
Non-current assets:
Property, plant and equipment 81,500 43,500 110,600
Investments 76,500 97,500 -
Intangible assets 25,000 5,400 17,500
183,000 146,400 128,100
Current assets:
Inventory 9,150 7,320 6,405
Trade receivables 18,300 14,640 12,810
Cash and Bank 27,450 21,960 19,215
54,900 43,920 38,430

Total assets 237,900 190,320 166,530

Equity & liabilities:

Equity:
Share capital (Issued @ GH¢1 per share) 125,000 75,000 87,500
Retained earnings 30,280 24,224 21,196
Other component of equity 3,000 2,400 2,100
158,280 101,624 110,796
Liabilities:
Current liabilities 32,040 25,632 22,428
Non-current liabilities 47,580 63,064 33,306
79,620 88,696 55,734

Total equity and liabilities 237,900 190,320 166,530

Additional information:
i) On 1 July 2019, Kanda purchased 70% of the ordinary shares of Adama. On this date, the
company had net assets of GH¢84 million carried on the statement of financial position.
There has not been any change in the share capital of Adama in the post-acquisition period.
Any other component of equity on the above statement of financial position of Adama arose
in the post-acquisition period. The agreed purchase consideration consisted of an
immediate cash payment of GH¢62.5 million and a consideration payable if the profit of
Adama meets a defined performance target at 1 July 2023. Based on the probability of the
performance target being met, the fair value of this consideration at the date of acquisition
was estimated at GH¢21 million. The performance-based consideration is to be settled
through the issue of 2 million equity shares of Kanda to the former shareholders of Adama.
At 30 June 2022, the fair value of the performance –based consideration was estimated at
GH¢22.5 million. Only the cash consideration has been recognised by Kanda in the
statement of financial position.

Page 2 of 33
ii) Fair value exercise performed at the acquisition date on the total carrying value of
intangible assets of GH¢21.6 million of Adama, revealed that only patent with carrying
value of GH¢1.1 million was valuable. The carrying value of this patent approximated the
fair value. The remaining intangible assets were considered worthless. The remaining
useful life on the intangible assets was four years. A fair value exercise on property, plant
and equipment showed that the fair value of property, plant and equipment was higher than
the carrying value by GH¢7.6 million. At the date of acquisition, the remaining useful life
of the related property, plant and equipment was 5 years. Adama is yet to incorporate the
outcome of the fair value exercise in its financial statements.

iii) On 31 March 2022, Adama purchased 80% of the ordinary shares of Bamba. The other
components of equity as at this date was GH¢1.1 million. The profit after tax made by
Bamba for the year ended 30 June 2022 was GH¢7.5 million. No dividend was paid or
proposed for the year ended 30 June 2022 by Bamba Ltd. The agreed purchase
consideration for the acquisition was GH¢95 million.

iv) The fair values of the assets and liabilities of Bamba were equal to the carrying values with
the exception of one of the company’s lands that had been classified as held for sale. The
land, measured at cost, had been recognised at the carrying value of GH¢1.35 million, but
had fair value of GH¢1.26 million. The estimated fair value less cost to sell of the land at
the date was GH¢1.25 million. Despite the acquisition of Bamba by Adama, there was no
change in the plan to sell the land and the group’s commitment to selling the asset has not
changed since acquisition. As at 30 June 2022, the land was yet to be sold. Bamba is yet to
incorporate any fair value adjustment and the decision to sell the land in its financial
statements.

v) The group values non-controlling interest in its subsidiaries at proportionate share of fair
value of net assets. The goodwill in Adama and Bamba were tested for impairment on 30
June 2022. Goodwill in Bamba had not been impaired but that of Adama had been impaired
by 20% at the year-end.

vi) Kanda has a property located outside Ghana, which was acquired at a cost of 4 million
shillings on 30 June 2021 when the exchange rate was GH¢1 = 2 shillings. At 30 June 2022,
the property was revalued to 6 million shillings. The exchange rate at 30 June 2022 was
GH¢1 = 1.5 shillings. The property is carried at its value as at 30 June 2021 in the above
statement of financial position. The company measures the property at its revaluation
amount. Depreciation on the property can be assumed to be immaterial.

Required:
Prepare the Consolidated Statement of Financial Position for the Kanda group as at 30
June 2022 (All your workings are to be rounded to the nearest thousand).
(Total: 20 marks)

Page 3 of 33
QUESTION TWO

a) On 1 January 2023, Totobi Plc entered into a contract with a customer to construct a
specialised building for a consideration of GH¢1.2 million plus a bonus of GH¢0.24 million
if the building is completed within 18 months. The estimated cost to construct the building
is GH¢0.9 million. If the contract is terminated by the customer, Totobi Plc can demand
payment for the cost incurred to date plus a mark-up of 30%. On 1 January 2023, as a result
of factors outside of its control, such as the weather and regulatory approval, Totobi Plc is
not sure whether the bonus will be achieved.

As at 31 December 2023, Totobi Plc has incurred cost of GH¢0.6 million. They are still
unsure as to whether the bonus target will be met. Totobi Plc decides to measure progress
towards completion based on cost incurred. To date, Totobi Plc has received GH¢1 million
from the customer. Totobi Plc prepares its accounts to 31 December each year.

Required:
Recommend to the directors of Totobi Plc how this transaction should be accounted for in
the financial statements for the year ended 31 December 2023 in accordance with relevant
International Financial Reporting Standards. (5 marks)

b) Abaa Plc (Abaa), a market leader in the manufacturing sector uses IFRS in preparing its
financial statements and has a financial year-end 31 March. On 1 January 2021, Abaa
applied to a government agency for a grant to assist with the construction of a factory in
Yakasi. The proposed construction cost of the factory was GH¢62.4 million and the
company projected that 350 people would be employed after completion. The land was
already owned by Abaa.

On 1 March 2021, the government agency offered to grant a sum amounting to 25% of the
factory’s construction cost to a maximum of GH¢15.6 million. The grant aid was to be
advanced on completion, and would be repayable on demand if total employment at the
factory fell below 300 people within 5 years of completion.

At the financial year end, 31 March 2021, Abaa had accepted the offer of grant aid, and
had signed contracts for the construction of the factory at a total cost of GH¢62.4 million.
Construction work was due to commence on 1 April 2021.

By 31 March 2022, the factory had been completed on budget, 400 people were employed
ready to commence manufacturing activities, and the government agency agreed that the
conditions necessary for the drawdown of the grant had been met.

On 1 April 2022, the factory was brought into use. It was estimated that it would have a
ten-year useful economic life. On 1 June 2022, the government agency paid over the agreed
GH¢15.6 million. In addition, the company sought and was paid an employment grant of
GH¢1.44 million as employment exceeded original projections. This is expected to be
payable annually for 5 years in total, at a rate of GH¢14,400 per additional person employed
over 300 in each year. There are no repayment provisions attached to the employment grant.

Page 4 of 33
 The directors of Abaa expect employment levels to exceed 350 people for at least 4 further
years from 31 March 2023.

Required:
Demonstrate, showing calculations and relevant entries, how Abaa Plc should record the
above transactions and events in its financial statements for years ended 31 March 2021,
2022 and 2023. (8 marks)

c) Oye prepares its financial statements with 31 March as the financial year-end. On 1 April
2020, Oye Plc granted 500 share appreciation rights (SARs) to its 300 employees. All of
the rights vested on 31 March 2022, but they can be exercised from 1 April 2022 up to 31
March 2024. At the grant date, the value of each SAR was GH¢10 and it was estimated that
5% of the employees would leave during the vesting period. The fair value of the SARs is
as follows:

Date Fair value of SAR

31 March 2021 GH¢9
31 March 2022 GH¢11
31 March 2023 GH¢12

All the employees who were expected to leave the employment did leave the company as
expected before 31 March 2022. On 31 March 2023, 60 employees exercised their options
when the intrinsic value of the right was GH¢10.50 and were paid in cash. Oye Plc is
however, confused as to whether to account for the SARs under IFRS 2: Share-based
Payment or (IFRS 13: Fair Value Measurement) and would like to be advised as to how
the SARs should have been accounted for from the grant date to 31 March 2023.

Required:
Advise Oye Plc on how the above transactions should be accounted for in its financial
statements with reference to relevant International Financial Reporting Standards.
(7 marks)

(Total: 20 marks)

Page 5 of 33
QUESTION THREE

a) On 1 January 2022, Mawuko Plc (Mawuko) acquired a building on lease for a non-
cancellable period of 4 years at GH¢12 million per annum, payable in arrears. No initial
direct costs were incurred. The agreement contains an option for Mawuko to extend the
lease for further 3 years at GH¢12 million per annum payable in arrears. On 1 January
2022, Mawuko’s incremental borrowing rate was 18% per annum and Mawuko was not
reasonably certain that the option to extend the term will be exercised. However, on 1
January 2023, Mawuko was reasonably certain that the option to extend the term will be
exercised due to increasing rentals in the market. Mawuko’s incremental borrowing rate
was 16% per annum on that date.

On 1 July 2023, Mawuko sub-leased this building under operating lease for a lease term of
two and half years at GH¢1.5 million payable semi-annually in advance. Initial direct cost
associated with the sub-lease amounted to GH¢250,000.

Required:
Advise on how Mawuko should account for the above during the years ended 31 December
2022 and 2023. (10 marks)

Note: The single-period present value and annuity present value factors, based on GH¢1,
are provided below for 16% and 18% discount rates.
Year 16% 18%
Single period Annuity Single period Annuity present
present value present value present value value factor
factor factor factor
1 0.862 0.862 0.847 0.847
2 0.743 1.605 0.718 1.565
3 0.641 2.246 0.609 2.174
4 0.552 2.798 0.516 2.690
5 0.476 3.274 0.437 3.127
6 0.410 3.684 0.370 3.497
7 0.354 4.038 0.314 3.811

b) Akolgo Ltd sold goods to Razak Ltd during the year at a 55% mark-up. Similar goods are
usually sold to other parties at a mark-up of 25%. The directors of Razak Ltd believe that
no ethical issues arise, as such transactions will be eliminated within the consolidated
financial statements due to the treatment. During the year, Directors of Razak Ltd
announced its intention to sell its 70% shares in Akolgo Ltd to the highest bidder. The
Accountant of Razak Ltd has produced draft financial statements for the year and, in doing
so, processed several late adjustments which materially improved the profit for the year.
The Managing Director was surprised to find that the profit for the year was materially
larger than expected and he is worried that the accountant’s treatment of certain transactions
has been influenced by his desire to hide the previous transactions between the company
and Akolgo Ltd.

Mr Alieu, who is the Assistant Accountant, has been asked by the Managing Director to
examine the late adjustments and to redraft the financial statements, if necessary. Mr Alieu
has examined the adjustments, and in his opinion believes that most of the items should be
reversed, thus reducing the profit for the year back to the level originally expected. Mr

Page 6 of 33
 Alieu has had an initial meeting with the Accountant who promised him that he would
recommend him for a promotion if he (Mr. Alieu) does not reverse some of the transactions
in the financial statements.

Required:
Describe the ethical issues in this scenario and explain how they should be addressed.
(10 marks)

(Total: 20 marks)

QUESTION FOUR

a) Bukum Ltd was incorporated some years ago to carry on business as manufacturers of fruit
juice. Covid-19 and poor management have plunged the company into losses which is
potentially eroding the capital of the company. The statement of financial position of the
company as at 31 December 2022 is given below.
GH¢’000
Non-Current Assets
Property, Plant and Equipment 44,000
Trademark 90,000
Investment 24,000
Goodwill 96,000
254,000
Current assets
Inventories 216,000
Receivables 388,000
Cash and Cash Equivalents 130,000
734,000

Total Assets 988,000

Equity and Liabilities

Equity
Share capital (Issued @ GH¢1.70 per shares) 102,000
Revaluation reserve 140,000
Retained Earnings (10,000)
15% Irredeemable Preference shares (Issued @ GH¢2 shares) 18,000
250,000
Non-Current Liabilities
12% Debentures 300,000
15% Long Term Loan 140,000
440,000
Current liabilities:
Trade and Other Payables 280,000
Bank overdraft 18,000
298,000

Equity & Liabilities 988,000

Page 7 of 33
 Additional Information:
1) The following asset values were relevant in liquidation:
GH¢’000
Property, Plant and Equipment 30,000
Inventories 176,000
Trade and other Receivables 320,000
Trademark 120,000

2) Bukum Ltd’s bank holds a fixed charge on the Property, Plant and Equipment as security
for the overdraft.

3) The ordinary shareholders have decided to inject additional capital of 50 million equity
shares issued at GH¢2.50. In addition, part of the 15% long term loan was to be converted
into 10 million equity shares issued at GH¢2.50.

4) The preference share dividends and debentures interest are three years in arrears and are to
be converted to ordinary share of GH¢2.50 each if the capital reconstruction scheme is
accepted. The debenture is secured by a floating charge over the assets of Bukum Ltd, other
than the freehold property.

5) GH¢50 million of the trade and other payables of GH¢140 million were preferential
creditors.

6) Liquidation expenses are estimated at GH¢10 million.

7) The liquidation values for the assets are considered relevant in the event of any capital
reconstruction scheme.

Required:
i) Calculate the amounts that would be received by each of the providers of finance if the
company was to liquidate. (5 marks)

ii) Prepare the statement of financial position after the implementation of a capital
reconstruction scheme. (10 marks)

b) Shanzy Plc owns and manages a group of commercial real estate rental properties. Shanzy
Plc purchases a commercial office property in Sunyani. The purchased property is 90%
occupied, and Shanzy Plc will become a party to the lease agreements upon acquisition.
Shanzy Plc will replace existing security, cleaning, and maintenance contracts with new
contracts. In addition, the existing property management agreement will be terminated and
Shanzy Plc will undertake all property management functions, such as collecting rent and
supervising work. In connection with the transaction, Shanzy Plc will also hire the current
and other personnel associated with the leasing and operations of the property.

Required:
In accordance with IFRS 3 (as revised) Business Combinations, explain whether Shanzy
Plc purchased a business or a group of assets. (5 marks)

(Total: 20 marks)

Page 8 of 33
QUESTION FIVE

Dombo Plc (Dombo) is a publicly traded Tema-based company with a number of

subsidiaries. On 1 July 2023, it disposed of its 80% holding in Abanga Ltd (Abanga) for
total cash price of GH¢150 million. The initial goodwill recognised for Abanga had all been
impaired three years prior to the sale. This sale resulted in a loss of GH¢30 million which
has been included within administrative expenses for the year to 31 December 2023.
The consolidated summarised financial statements of Dombo at 31 December 2023 and 31
December 2022 are provided below:

Dombo Group
Consolidated Statements of Profit or Loss for the years ended 31 December
2023 2022
GH¢ million GH¢
million
Revenue 1,335 1,400
Cost of sales (1,080) (1,121)
Gross profit 255 279
Selling and distribution costs (16) (24)
Administration expenses (122) (93)
Profit before tax 117 162
Tax (36) (47)
Profit for the year 81 115
Attributable to
Equity holders of the parent 68 101
Non-controlling interest 13 14
81 115

Consolidated Statements of Financial Position As At 31 December

2023 2022
GH¢ million GH¢
million
Non-current assets
Properties 432 547
Plant and equipment 191 260
Goodwill 44 44
667 851
Current assets 823 660
1,490 1,511

Liabilities and equity

Current liabilities 368 440
Equity:
Ordinary shares of GH¢1 each 500 500
Retained earnings 435 367
935 867
Non-controlling interest 187 204
1,122 1,071
1,490 1,511

Page 9 of 33
 Additional information:
The following are the separate statements of profit or loss of Abanga for the years ended
31 December 2023 and 31 December 2022:
2023 2022
GH¢ million GH¢ million
Revenue 174 240
Cost of sales (160) (197)
Gross profit 14 43
Operating expenses (20) (20)
Profit before tax (operating profit) (6) 23
Tax 2 (4)
Profit/(loss) for the year (4) 19

All profit or loss items occurred evenly unless otherwise indicated.

Required:
a) Compute the following ratios for the year 2023 and the comparative year 2022 for Dombo
Group.
i) Return on capital employed
ii) Net asset turnover
iii) Gross profit margin
iv) Operating profit margin
(4 marks)

b) Compute profitability ratios for Abanga for the years ended 31 December, 2022 and 2023.
(2 marks)

c) Compute the profitability ratios of Dombo Group after disposing of Abanga. (6 marks)

d) Using the computed ratios, comment on the comparative performance, including the impact
of the disposal of Abanga during the year ended 31 December 2023. (8 marks)

(Total: 20 marks)

Page 10 of 33
SUGGESTED SOLUTIONS

QUESTION ONE

Kanda group
Consolidated statement of financial position at 30 June 2022
GH¢000
Non-current assets:
PPE (81,500+43,500+110,600+7,600-4,560-100-1,250+2000(W6) 239,290
Investments (76,500+97,500-62,500-95,000) 16,500
Intangible assets (25,000+5,400+17,500-20,500 (W2)+15,375(W2)) 42,775
Goodwill (26,984+6,120) (W3) 33,104
331,669
Current assets:
Non-current assets held for sale (W2) 1,250
Inventory (9,150+7,320+6,405) 22,875
Trade receivables (18,300+14,640+12,810) 45,750
Cash and Bank (27,450+21,960+19,215) 68,625 138,500
Total assets 470,169

Equity & liabilities:

Equity:
Share capital 125,000
Retained earnings (W5) 42,811.50
Other component of equity(W6) 28,240
Non-controlling interest (W4) 50,068
246,119
Liabilities:
Current liabilities (32,040+25,632+22,428) 80,100
Non-current liabilities (47,580+63,064+33,306) 143,950
Total equity and liabilities 470,169

Page 11 of 33
Workings 1- Group structure
Kanda

70% 1/7/2019 – 30/6/22

Adama (3 years, subsidiary)

80% , 31/3/22 – 30/6/22

Bamba (3 months, subsidiary)

Summary of percentages
Adama Bamba
Kanda’s controlling interest%:
Direct 70% -
Indirect -- 56% (70% x80%)
70% 56%
NCI% 30% 44%
Total 100% 100%

Workings 2- Net assets schedule of the subsidiaries

Net assets schedule - Adama
Acquisition Reporting Post-acquisition
GH¢000 GH¢000 GH¢000
Share capital 75,000 75,000 -
Retained earnings (84,000 -75,000) 9,000 24,224 15,224
Other component of equity - 2,400 2,400
Intangible assets (21,600-1,100) (20,500) (20,500) -
Amortisation (20,500/4 x 3 years) 15,375 15,375
*Fair value adjustment-PPE 7,600 7,600 -
Depreciation- PPE(15200/5 x 3
years) (4,560) (4,560)
Total 71,100 99,539 28,439
*Alternatively, fair value adjustment - (5,125) (5,125)

Net assets schedule- Bamba

Post-
Acquisition Reporting acquisition
GH¢000 GH¢000 GH¢000
Share capital 87,500 87,500 -
Retained earnings 19,321** 21,196 1,875
Other component of equity 1,100 2,100 1,000
Non-current asset held for sale(1,250-1,350) (100) (100) -
Total 107,821 110,696 2,875
** Retained earnings of Bamba at acquisition = 21,196 – (7,500 x 3/12) = 19,321

Page 12 of 33
Workings 3- Goodwill computation
Goodwill in Adama (subsidiary)
GH¢000
Purchase consideration:
Cash consideration 62,500
Contingent consideration (equity) 21,000
83,500
NCI share of net assets at acquisition (30% x 71,100(W2) 21,330
104,830
Fair value of net assets at acquisition (W2) (71,100)
Goodwill at acquisition 33,740
Impairment (20% x GH¢33,740) (6,746)
Goodwill at reporting 26,984

Note:
The contingent consideration is classified as equity since a fixed number of the equity
shares of Kanda is to be issued to settle the amount expected to be payable if the
performance target is met. It is not re-measured after the acquisition date.

Goodwill in Bamba (sub-subsidiary)

GH¢000
Purchase consideration 95,000
Indirect Holding adjustment (30% x 95,000) (28,500)
66,500
NCI at acquisition (44% x 107,821) 47,441
113,941
Net assets at acquisition (107,821)
Goodwill at acquisition/reporting 6,120

Total goodwill (in thousands) = GH¢26,984 + 6,120 = GH¢33,104

Workings 4- Non-controlling interest

GH¢000
Adama
Value at acquisition 21,330
Share of profit (30% x 28,439) 8,531.7
Indirect holding adjustment (30% x 95,000) (28,500)
1,361.7
Alternatively,
NCI share of net assets at reporting (30% x 99,539(W2) 29,861.7
Indirect holding adjustment (30% x 95,000) (28,500)
1,361.70

Page 13 of 33
Bamba
Value at acquisition 47,441
share of profit (44% x 2,875) 1,265
48,706
Alternatively,
NCI share of net assets at reporting (44% x 110,696) 48,706

Total 50,068

Workings 5- Retained earnings

GH¢000
Balance as per SOFP-Kanda 30,280
Impairment-goodwill (W3) (6,746)

Share of profit:
Adama (70% x (28,439-2,400) 18,227.50
Bamba (56% x (2,875-1,000) 1,050
42,811.50

Working 6- Revaluation gain

The property was purchased at a cost of 4 million shillings on 30 June 2021. The
property was thus recognised at an amount of GH¢2 million (4 million shillings/2).
At 30 June 2022, it was revalued to 6 million shillings. The cedi equivalent on this date
is GH¢4 million (6 million shillings/1.5). There is therefore a revaluation gain of GH¢2
million (4 - 2) to be recognized in the financial statements of Kanda since the property
is still recognised at the amount at 30 June 2021.
Debit property, plant and equipment GH¢2 million
Credit Revaluation surplus (other component of equity) GH¢2 million

Workings 7- Other component of equity

GH¢000
Balance per SOFP-Kanda 3,000
Revaluation gain-PPE (W6) 2,000
Contingent consideration-shares 21,000
Share of parent:
Adama (2,400 x 70%) 1,680
Bamba (1,000 x 56%) 560
28,240

(Marks are evenly spread using ticks = 20 marks)

EXAMINER’S COMMENTS
The question was okay and did not have any ambiguous statement or missing
information. It was a complex group structure, specifically, a vertical group structure.
Candidates generally showed understanding on determining the group structure and
identifying correctly that the two subsidiaries: Adama and Bamba (i.e. direct and

Page 14 of 33
indirect subsidiaries respectively) are to be consolidated. Relevant computations such
as the net assets movement of the subsidiaries, goodwill, retained earnings and non-
controlling interest were fairly answered by candidates. Most candidates therefore
answered the question well.

Even though candidates generally showed understanding of the question, there were
still some issues that most could not give proper treatment on the consolidated
financial statements. For example, the contingent consideration to be settled by Kanda
(the ultimate parent) to the former shareholders of the direct subsidiary on 1 July 2023
with fixed number of its own equity shares. Some treated it as a liability instead of
equity on the consolidated financial statements. Also, candidates also failed to realise
that equity instruments of the issuer are not remeasured, and it was therefore to be
stated in the financial statements at the fair value at the date of acquisition, and not at
the reporting date under the other component of equity (as the shares were not yet
issued at the reporting date).

Other issues which were treated poorly by candidates included the land in the books
of the indirect subsidiary which had been classified as held for sale at the acquisition
date. This asset was to be measured at the fair value less cost to sell in accordance with
IFRS 3 (Business combination) and IFRS 5 (Non-current assets held for sale and
discontinued operations), but candidates were still measuring the asset at the
acquisition date at the fair value. Also, asset classified as held for sale is moved from
non-current asset classification to current asset classification. Candidates who
understood that it must be separated from the property, plant and equipment were
still putting the asset under non-current after removing it from the property, plant and
equipment.

Page 15 of 33
QUESTION TWO

a) Constructing the building is a single performance obligation in accordance with

IFRS 15 Revenue.
The bonus is variable consideration. It is excluded from the transaction price
because it is not highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur. The construction of the building
should be accounted for as an obligation settled over time. Totobi Plc should
recognise revenue based on progress towards satisfaction of the construction of
the building.
1) Overall Contract profit
GH¢000
Price /Revenue 1,200
Costs to date (600)
Costs to complete (900 – 600) (300)
Overall profit __300

2) Progress
An input method is used to calculate the progress, being costs to date compared to
total costs.
600/900 =66.7% (or 2/3)

3) Statement of profit or loss

GH¢000
Revenue (1,200 x 2/3) 800
Costs of sales (900 x 2/3) (600)
Profit 200

4) Statement of financial position

GH¢000
Costs to date 600
Profit to date 200
Less: Billed to date (1,000)
Contract liability (200)

Marking scheme:
1.5 marks for statement of profit or loss extract
1.5 marks for statement of financial position
2 marks for determining total contract price

Page 16 of 33
b) Year ended 31 March 2021:
In accordance with IAS 20, no accounting entry is made in this financial year, as
no transaction has yet been entered into. A capital commitment exists, and should
be disclosed in the notes. The grant approval should be disclosed also.

Year ended 31 March 2022:

At this date, the factory should be recorded at its cost of GH¢62.4 million. As all
conditions for the payment of the grant have been met, recognition should be made
of this amount receivable also. As the factory has not yet been brought into use, no
depreciation will be charged for the year. Similarly, no amortisation of the grant
will take place in the period.

Recognition of factory:
Dr Property, plant & equipment GH¢62.4 million
Cr Cash GH¢62.4 million
(New factory constructed as a cost of GH¢62.4 million)

Recognition of grant:
Option 1
Dr Government grant receivable (current asset) GH¢15.6 million
Cr Property, plant & equipment GH¢15.6 million
(Government grant approved, not received yet)

Option 2
Dr Government grant receivable (current asset) GH¢15.6 million
Cr Deferred income – current liability GH¢1.56 million
Cr Deferred income – non-current liability GH¢14.04 million
(Government grant approved, not received yet)

Assuming the factory has a useful life of 10 years, as stated, 10% of the amount will
be recognised as income within the next financial year. This amount should be
treated as a current liability.

Year end 31 March 2023:

There are a number of transactions to record based on the new factory. These are
(1) depreciation and (2) amortisation of the grant. In addition, the cash was
received from the government agency.

Receipt of grant:
Dr Cash GH¢15.6 million
Cr Government grant receivable GH¢15.6 million
(Receipt of cash grant from government agency)

Page 17 of 33
 Option 1
Depreciation of factory:
Dr Profit or loss GH¢4.68 million
Cr Accumulated Depreciation – PPE GH¢4.68 million
(Depreciation of cost of factory net of grant over 10 years)

Option 2
Depreciation of factory:
Dr Profit or loss GH¢6.24 million
Cr Accumulated Depreciation – PPE GH¢6.24 million
(Depreciation of gross factory cost over 10 years)

Amortisation of grant:
Dr Deferred income GH¢1.56 million
Cr Profit or loss GH¢1.56 million
(Amortisation of grant over 10 years, reflecting the proportional expensing of the
factory to which the grant relates)
The employment grant relates entirely to the cost of employing staff in that year.
Hence it should be entirely recognised as income in the year ended 31 March 2022.

Recognition of employment grant:

Dr Cash GH¢1.44 million
Cr profit or loss 1.44 million
(recognition of employment grant as income as received)

Initial recognition of the factory in 2021: 1 mark

Recognition of the grant in 2021: 2 marks
Treatment of receipt of grant in 2022: 2 marks
Depreciation of factory in 2022: 1 mark
Treatment of amortization of grant: 1 mark
Recognition of employment grant: 1 mark

c) Oye Plc will account for this transaction under the provisions of IFRS 2; Share
based payments. IFRS 13 applies when another IFRS requires or permits fair value
measurements or disclosures about fair value measurements (and measurements,
such as fair value less costs to sell, based on fair value or disclosures about those
measurements). IFRS 13 specifically excludes transactions covered by certain other
standards including share-based payment transactions within the scope of IFRS 2
Share-based Payment and leasing transactions within the scope of IFRS 16 Leases.
(1 mark)

Thus share-based payment transactions are outside the scope of IFRS 13. For cash
settled share-based payment transactions, the fair value of the liability is measured
in accordance with IFRS 2 initially, at each reporting date and at the date of
settlement using an option pricing model. The measurement reflects all conditions
and outcomes on a weighted average basis, unlike equity settled transactions. Any

Page 18 of 33
 changes in fair value are recognised in profit or loss in the period. Therefore, the
SARs would be accounted for as follows:
Year expense Liability calculation
31 March 2021 641,250 641,250 285 x 500 x Time apportioned over
GH¢9 x ½ vesting period. Using the
estimated (300 x 95%) 285
employees
31 March 2022 926,250 1,567,500 285 x 500 x Expense is difference between
GH¢11 liabilities at 31 March 2022
and 31 March 2023
31 March 2023 97,500 1,350,000 225 x 500 x Cash paid is 60 x 500 x
GH¢12 GH¢10.50, i.e. GH¢315,000.
The liability has reduced by
GH¢217,500 and therefore the
expense is the difference of
GH¢97,500

The fair value of the liability would be GH¢1,350,000 at 31 March 2023 and the
expense for the year would be GH¢97,500, being the difference between
GH¢1,567,500 and GH¢1,350,000, adjusted by the cash paid GH¢315,000.
(4 marks)

Statement of profit or loss for the year ended (Extracts)

2021 2022 2023
GH¢ GH¢ GH¢
Staff costs 641,250 926,250 97,500
(1 mark)

Statement of financial position extract as at (Extracts)

2021 2022 2023
GH¢ GH¢ GH¢
SARs liabilities 641,250 1,567,500 1,350,000
(1 mark)
Determination of applicable standard 1 mark
Workings 4 marks
SOPL (Extract) 1 mark
SOFP (Extract) 1 mark
7 marks

(Total: 20 marks)

EXAMINER’S COMMENTS
This question on selected accounting standards (IFRS) was a difficult question for
most candidates. The question required knowledge in revenue from contract with
customers, government grant and share-based payments. Most candidates lacked
expertise in the calculation of contract profit/loss. Candidates’ understanding of the

Page 19 of 33
standards and their application to real situations were a bit weak and therefore found
it difficult in solving questions. Performance was low and below expectations. It seems
candidates were unfamiliar with these standards. Over 90% of the candidates scored
below ten marks out of the twenty marks allocated to this question. Most of the
candidates scored below five marks. Most of the candidates wrote theories instead of
showing calculations and relevant entries with reference to the standards. Overall,
question two was partly attempted and answered. Some candidates did not attempt
this question at all. ICAG should emphasise revision on standards to enhance better
appreciation by candidates.

Page 20 of 33
QUESTION THREE
a)
Initial measurement and recognition of the main lease
Mawuko Plc would recognise right-of-use asset and a corresponding lease liability
for the head lease. The initial lease liability is given by the present value of future
lease payments discounted at the lessee’s incremental borrowing rate of 18% using
the initial term of four years:

Years Future lease D.F. Present value

payments
GH¢million (18%) GH¢million
1-4 12 2.690 32.28

Initial journal entries

Dr Cr
GH¢million GH¢million
Right-of-use asset 32.28
Lease liability 32.28
(Initial recognition of the leased asset in
Mawuko’s books)

Lease table for subsequent measurement of lease liability:

Year Bal. at Revised Interest Lease Bal. at end
start balance (18%/16%) payments GH¢000
GH¢m GH¢m GH¢m GH¢000
2022 32.28 5.81 (12) 26.09
2023 26.09 - 4.70 (12) 18.79
(before
revision)
2023 26.09 44.21 (see 7.07 (12) 39.28
(after below)
revision)
2024 39.28 39.28 6.28 (12) 33.56

Revision of the lease term and the effect on the lease

Re-measured lease liability at 1 January 2023 is given by discounting the
remaining six rentals at the revised discount rate:
Years Future lease D.F. (16%) Present value of
payments payment
GH¢m GH¢m
1-6 12 3.684 44.21

The change in liability of GH¢18.12m (i.e. GH¢44.21m less GH¢26.09m) due to the
re-measured liability is applied to revise both lease liability and right-of-use asset
at 1 January 2023.

Page 21 of 33
 Right-of-use asset:
GH¢million
Initial cost 32.28
Less: Dep (32.28/4) (8.07)
Carrying value at 31 Dec 2022 24.21
Revision of lease liability 18.12
Less: Dep (42.33/6) (7.06)
Carrying value at 31 Dec 2023 35.27

Sub-lease
Since the sub-lease is an operating lease, Mawuko would continue to recognize
the right-of-use asset and the corresponding liability. It would however recognize
the rental payments under the sub-lease as income on a systematic basis. The
initial direct cost would be initially deferred and amortised over the sub-lease
term.

Mawuko Plc
Statements of profit or loss (extract) for the years ended 31 December
2022 2023
GH¢million GH¢million
Finance cost (5.81) (7.07)
Depreciation (8.07) (7.06)
Sub-lease rental - 1.5
Amortization of initial direct cost - (0.05)

Mawuko Plc
Statements of financial position (extract) as at 31 December
2022 2023
GH¢million GH¢million
Non-current assets:
Right-of-use asset 24.21 35.27
Deferred cost (0.250 – 0.05) 0.2

Non-current liabilities:
Lease liability 18.79 33.56

Current liabilities
Lease liability 7.30 5.72
2022 (26.09 – 18.79)
2023 (39.28 – 33.56)
Any 2 valid points @ 1 mark = 2 marks
30 ticks @ 0.2 marks for the computations and extracts = 6 marks

b) Akolgo Ltd and Razak Ltd are related parties, and the transfer of goods is a related
party transaction. When assessing whether an ethical issue has arisen from the
choice of mark-up, consideration of IAS 24 Related Parties is relevant. Information

Page 22 of 33
must be disclosed on related party transactions necessary for users to understand
the potential effect of the relationship on the financial statements. This is required
since related party transactions are often not carried out according to IFRS 13 “Fair
Valuation Measurement”. Indeed, related party transactions include transfers of
resources, services or obligations regardless of whether a price is charged.
Provided that the full effects of the transaction were properly disclosed, no ethical
issue would arise from selling the goods at an unusually high margin.

Also, there is the issue of the mark-up on goods sold by Akolgo Ltd to Razak Ltd.
The mark-up of 55% is significantly higher than the usual mark-up of 25% for
similar goods sold to other parties. This raises questions about the fairness of the
transaction and whether it was conducted at arm’s length. The directors of Razak
Ltd believe that no ethical issues arise as such transactions will be eliminated
within the consolidated financial statements due to the treatment, but this does not
address the underlying issue of whether the transaction was conducted fairly.

In addition, there is the issue of the late adjustments made by the accountant of
Razak Ltd to the draft financial statements. These adjustments materially
improved the profit for the year, which raises questions about their
appropriateness and whether they were made in order to hide previous
transactions between the company and Akolgo Ltd.

Moreover, there is the issue of Mr Alieu being asked by the managing director to
examine the late adjustments and redraft the financial statements if necessary. Mr
Alieu has examined the adjustments and believes that most should be reversed,
thus reducing the profit for the year back to the level originally expected. However,
he has had an initial meeting with the accountant who promised him that he would
recommend him as his replacement if he recommended the non-reversal of some
of the transactions to the financial statements as possible. This creates a conflict of
interest for Mr Alieu and raises questions about his ability to act impartially and
objectively in examining the late adjustments.

To address these ethical issues, it is important for all parties involved to act with
integrity and transparency. The transaction between Akolgo Ltd and Razak Ltd
should be reviewed to ensure that it was conducted fairly and at arm’s length. The
late adjustments made by the accountant of Razak Ltd should be thoroughly
examined and any necessary corrections should be made to ensure that the
financial statements accurately reflect the company’s financial position. Mr Alieu
should disclose his conflict of interest to the managing director and recuse himself
from examining the late adjustments if he feels that he cannot act impartially and
objectively. All parties involved should adhere to high ethical standards and
ensure that their actions are in line with best practices for financial reporting and
corporate governance.
(10 marks)

(Total: 20 marks)

Page 23 of 33
EXAMINER’S COMMENTS
The first part of the question was on leases. Most of the candidates could not compute
the present value of lease payments and the lease table for subsequent measurement
of lease liability. A high number of candidates who attempted the b) part of the
question did very well and also related their answers to the case. Few of the candidates
also were answering the question on general ethics without relating it to the case hence
could not earn the full marks. The average mark for question 3 was eight (8) out of 20
marks. Some candidates however also showed lack of understanding and weak
preparedness.

Page 24 of 33
QUESTION FOUR
a)
i) Liquidation
Proceeds GH¢000
Property, plant and equipment 30,000
Inventories 176,000
Trade and other receivables 320,000
Trademark 120,000
Investment 24,000
Cash and cash equivalent 130,000
800,000
Distribution:
Secured creditor:
Bank overdraft (18,000)

Liquidation expenses (10,000)

Preferential creditors:
Trade and other payables (50,000)

Floating creditors:
12% Debentures (300,000)

Unsecured creditors:
15% Long-term loan 140,000
Trade and other payables (280,000-50,000) 230,000 (370,000)
52,000
Preference shareholders:
Dividend in arrears 8,100
Preference share capital 18,000 (26,100)
To Ordinary shareholders 25,900

All creditors recover 100% of their capital or investment. Preference shareholders

also recover 100% of their capital as well as their 3-years dividend in arrears in full.
However, ordinary shareholders recover only 25% (25,900/102,000) of their
capital.
(Marks are evenly spread using ticks = 5 marks)

Maximum loss
GH¢000
Property, plant and equipment (44,000 – 30,000) 14,000
Inventories (216,000-176,000) 40,000
Trade and other receivables (388,000-320,000) 68,000
Trademark (90,000-120,000) (30,000)
Preference dividend (18,000 x 15% x 3 years) 8,100
Goodwill 96,000

Page 25 of 33
 Retained earnings 10,000
Revaluation reserve (140,000)
66,100

Allocation of maximum loss

The full loss is allocated to ordinary shareholders’ capital, as they stand to lose 75%
of their capital when liquidation option is elected, whiles the other shareholders
and creditors recover in full their investments.

NB: Other reasonable allocations are acceptable.

Proposed/suggested scheme
 Goodwill and part of some assets are to be written off. A total loss of
GH¢66.1million is to be written off to restate assets at their realistic values.
 Ordinary shareholders’ capital is to be written down by approximately 65%,
whiles preference share capital is to remain the same. The 3-years preference
dividend is to be converted to ordinary shares at GH¢2.50 each.
 The capital of the 12% debentures is to remain the same, and also to be secured by
a floating charge on the company’s assets. The three-years debenture interest
outstanding is to be converted to ordinary shares at GH¢2.50 each.
 A part of the 15% long-term loan is to be converted into 10 million ordinary shares
issued at GH¢2.50 per share.
 Additional capital of 50 million equity shares issued at GH¢2.50 each is to be raised
for the purposes of working capital.
 The company’s bank overdraft is to be settled.

NB: Other reasonable proposals are also acceptable.

ii) Statement of financial position

GH¢000
Non-current assets:
Property, plant and equipment 30,000
Trade mark 120,000
Investment 24,000
174,000
Current assets:
Inventories 176,000
Receivables 320,000
Cash and cash equivalent 237,000 733,000
Total assets 907,000

Equity:
Ordinary shares 302,000
15% preference shareholders 18,000

Page 26 of 33
 320,000

Non-current liabilities:
12% Debentures 300,000
15% Long-term loan (140,000-25,000) 115,000 415,000

Current liabilities:
Trade and other payables (280,000-108,000) 172,000
172,000
Total equity & Liabilities 907,000

Other workings:
Ordinary shareholders capital
GH¢000
Balance b/d 102,000
Capital reduction (66,100)
Bank-additional capital (50m x GH¢2.50) 125,000
15% Long-term debt converted (10m x GH¢2.50) 25,000
Preference dividend 8,100
Debenture interest (12% x GH¢300,000 x 3 years) 108,000
302,000

Cash and cash equivalents

GH¢000
Balance b/d 130,000
Additional capital-ordinary shareholders 125,000
Bank overdraft (18,000)
237,000
(Marks are evenly spread using ticks = 10 marks)

b) IFRS 3 (as revised) provides a framework for determining whether Shanzy Plc
purchased a business or a group of assets. Under this framework, an entity:
 Identifies the elements in the acquired group
 Assesses the capability of the acquired group to produce outputs
 Assesses the impact that any missing elements have on a market participant’s
ability to produce outputs with the acquired group

Definition of a business
IFRS 3 defines a business as ‘an integrated set of activities and assets that is capable
of being conducted and managed for the purpose of providing a return in the form
of dividends, lower costs or other economic benefits directly to investors or other
owners, members or participants.

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IFRS 3 describes the components of a business as inputs and processes applied to
those inputs that have the ability to create outputs, which means that outputs do
not need to be present for an integrated set of assets and activities to be a business
at the time of acquisition. The elements are described as follows:

Input: Any economic resource that creates, or has the ability to create, outputs
when one or more processes are applied to it. Examples include non-current assets
(including intangible assets or rights to use non-current assets), intellectual
property, the ability to obtain access to necessary materials or rights and
employees.

Process: Any system, standard, protocol, convention or rule is a process if, when
applied to an input or inputs, it either creates or has the ability to create outputs.
Examples include strategic management processes, operational processes and
resource management processes. These processes typically are documented, but
an organised workforce having the necessary skills and experience following rules
and conventions may provide the necessary processes that are capable of being
applied to inputs to create outputs. Accounting, billing, payroll and other
administrative systems typically are not processes used to create outputs so their
presence or exclusion generally will not affect whether an acquired set of activities
and assets is considered a business.

Output: The result of inputs and processes applied to those inputs that provide or
have the ability to provide a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants.
Outputs need not be present at the acquisition date for an integrated set of
activities and assets to be defined as a business. The most important thing is
whether the assets acquired are “capable of generating output”.

Application to the case

Inputs - Shanzy Plc acquired inputs (e.g., commercial property, lease agreements,
and key leasing and management personnel). Shanzy takes over the non-current
asset (property) and becomes a party to the lease agreements. However, inputs
such as existing security, cleaning, maintenance are not taken over, as Shanzy will
replace them. Even though Shanzy intends to use current employees associated
with the property, it has to hire them, suggesting that the employees are also not
part of the employees being taken over.

Processes – operational and resource management processes associated with the

property is to be terminated suggesting that Shanzy is not buying the process.
Shanzy will rather undertake or institute new property management functions
suggesting that even though they are not taking over the management functions
(personnel with requisite skills and experience) they can integrate it with their
existing process.

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 Output - Further, rental income (i.e., an output) is present immediately after the
acquisition. Shanzy Plc concluded that other market participants would have
existing property management expertise. In other words, after Shanzy has
instituted new property management functions, rent/revenue will be collected by
Shanzy.

Conclusion
It is likely that the acquired group would be a business, and not an acquisition of
a group of assets. Shanzy acquired inputs (e.g., commercial property, lease
agreements. Further, rental income (i.e., an output) is present immediately after
the acquisition. Even though processes such as property management is not being
taken over, it can be integrated into their existing systems. Therefore, the missing
elements would not prevent the acquired group from being a business. The
assessment will require judgment and will be based on facts and circumstances in
each situation.
(5 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
The question was very popular with candidates and therefore most candidates
attempted the question. The question was in two parts. Sub-question a) focused on
capital reconstruction. The liquidation and maximum loss part of the question was
answered well by all candidates. Sub-question b) which required candidates to
explain whether Shanzy Plc purchased a business, or a group of assets was however,
poorly answered. Few candidates were able to explain that the purchase was a
business one. A lot indicated otherwise while others did not attempt it at all.

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QUESTION FIVE

a) Computation of ratios – Dombo Group

Ratios Formula 2023 2022
(comparative)
Overall

Return on capital PBIT x 100 117 x 100 162 x 100

employed Capital employed 1,490-368 1,511-440
= 10.43% = 15.13%

Net asset turnover Revenue 1,335 1,400

Capital employed 1122 1,071
= 1.19 times = 1.31 times

Gross profit GP x 100 255 x 100 279 x 100

margin Revenue 1,335 1,400
= 19.10% =19.93%

Operating profit PBIT x 100 117 x 100 162 x 100

margin Revenue 1335 1400
= 8.76% = 11.57%
(1 mark for each ratio = 4 marks)

b) Profitability ratios – Abanga

Gross profit margin 14 x 100 43 x 100
174 240
= 8.05% = 17.91%

Operating profit/(loss) margin (6) x 100 23 x 100

174 240
= (3.45%) = 9.58%
(1 mark for each ratio = 2 marks)

c) Dombo Group ratios excluding Abanga

Gross profit margin 248 x 100 236 x 100
1,248 1,160
= 19.87% = 20.34%

Operating profit/(loss) margin 150 x 100 139 x 100

1,248 1,160
= 12.02% = 11.98%
Operating expenses/Sales 20 20
174 240
= 0.11:1 = 0.08:1

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 Adjustments to exclude Abanga

Revenue Gross profit Operating profit

2023
Per consolidated 1,335 255 117
statements
Per Abanga SPL (x 6/12) (87) (7) 3
Loss on disposal - - 30

Excluding Abanga - 2023 1,248 248 150

2022
Per consolidated 1,400 279 162
statements
Per Abanga SPL (240) (43) (23)

Excluding Abanga - 2022 1,160 236 139

(Marks are evenly spread = 6 marks)

d) Comments
Overview
At first glance it appears that 2023 has not been a good year for Dombo: revenue
and profit have both fallen, and each of the baseline (before adjustments) ratios
(see Appendix) is worse, in some cases significantly worse, than 2022. However,
in order to better understand Dombo’s performance and position we need to
consider the impact of the disposal of Abanga.
The disposal of Abanga took place half-way through the year, meaning that six
months of Abanga’s performance will be included within Dombo’s 2023 statement
of profit or loss, but none of Abanga’s assets and liabilities will be included in the
2023 statement of financial position. It is a straightforward matter to adjust the
trading performance to exclude Abanga but the impact on assets is less simple.

Performance
Gross profitability for the group fell slightly but this seems to be due to the poor
performance of Abanga, whose margin fell dramatically from around 18% to
slightly above 8%. From the limited information available it is difficult to know
what caused this drop, but the severity of the fall suggests that it may reflect some
sort of obsolete inventories. It could also be due to poor management of direct cost
of operations by Abanga. Doing without Abanga’s figures shows that the
remainder of the group have only suffered a mild decline in their gross
profitability in 2023 (from 20.23% to 19.87%).
The group’s operating profit margin will be affected by the inclusion of the loss on
disposal of Abanga. The removal of the loss of GH¢30 million, together with
Abanga’s expenses, shows the remainder of the group with an improved operating
margin, up from 11.98% to 12.02%. This indicates that the remainder of the group
have controlled their operating expenses, reducing them as a proportion of
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 revenue. If we look at Abanga’s operating expenses we can see that they have
remained unchanged, despite the noticeable fall in revenue, a further sign that
things are not as they should be.

Asset turnover has also worsened from 2022 to 2023, indicating a fall in efficiency.
Again this seems to be due to the impact of Abanga, whose revenue fell by 27.5%
in this period. If we eliminate Abanga’s revenue from the calculation (not entirely
valid, but to give some idea of underlying performance) then the asset turnover
becomes 1.11 (1248/1122) in 2023 and 1.07 (1160/1083), suggesting that the
remainder of the group have maintained their efficiency. If we combine the asset
turnover efficiency and the operating margin efficiency this gives us the return on
capital employed measure. We have already seen that Abanga has negatively
impacted on both efficiency and profitability so it is no surprise that return on
capital employed has fallen as a result of this impact. The disposal of Abanga
should hopefully improve this primary performance measure in years to come.

The disposal of Abanga

The disposal of Abanga appears to be a sensible decision, despite the loss on
disposal of GH¢30 million. It is clearly a business in decline, with falling revenue
and gross profitability and increasing costs. Abanga was part of the Dombo group
for six years, and although on acquisition it was deemed to have a positive
goodwill within the business, this has now been completely impaired, another
indication of a business in decline. It would seem that Dombo have wisely decided
to cut their losses and convert the Abanga investment into cash.
The remaining businesses within the group remain fairly robust, with maintained
gross profitability, controlled expenses and a healthy 7.6% (1248 v 1160) increase
in revenue. Provided that the cash generated from the sale of Abanga is put to
good use, results for 2024 should improve.
(8 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
Generally, the ratio analysis question was well set. It was a good question and meets
standards for this level. This is a regular question and so any serious candidate should
get good marks here. However, the performance of candidates can only be described
as average. It went beyond the normal computation and analysis to test the concept of
deconsolidation, which is a good way of testing candidates’ knowledge across the
syllabus. However, the majority of the candidates could not demonstrate their
knowledge of deconsolidation in a ratio set up, which is worrying. Many of the
candidates were able to provide the required formulas and made the expected
substitutions. Some candidates could not determine the correct capital employed. A
few candidates could adjust and correctly compute the net assets turnover, the gross
profit margins and the operating profit margins. Only a few candidates appreciated
and attempted the computation of gross profit margins and operating profit/loss
margin for the Dombo Group ratios, excluding Abanga. Most candidates failed to

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make appropriate comments on the ratios computed. What many candidates did was
to explain the ratios without relating their comments to the ratios computed.

CONCLUSION
As indicated earlier, overall, candidates performed better than previous diet. The
results provide some indication of ill preparation and lack of appreciation of
accounting standards. It seems that the exemptions granted to most candidates is a
factor of poor performance given that candidates lack the pre-requisite knowledge
and competence for Corporate Reporting. It is suggested that candidates preparing
for corporate reporting paper should thoroughly revise on the financial reporting
paper even when they are exempted from taking the financial reporting paper. The
exemptions criteria or policy must be re-looked at. Some candidates just register and
sit the paper without the aim of passing but because he/she must register for all
subjects. So, they prepare for other subject(s) they have interest in. This ultimately has
implication for the overall pass rate for the corporate reporting exams.

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