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 31
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 31
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 31
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 31
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
Page 5 of 31
"without recourse".

Page 6 of 31
 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 7 of 31
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 8 of 31
 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 9 of 31
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 10 of 31
 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 11 of 31
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 12 of 31
Workings
1. Group structure
Rafco
90%

∴ Effective non-controlling interest (100% - 72%) = 28%

Namco Effective control interest (90% x 80%) = 72%
80%
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 13 of 31
 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. 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%

Page 14 of 31
 Non-controlling interest share 3,835 10,098
Non-controlling interests in goodwill (W7) 65 96

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 15 of 31
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)

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 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 17 of 31
 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 18 of 31
 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 19 of 31
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 20 of 31
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 21 of 31
 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 22 of 31
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

Value per share = 𝟒𝟕𝟒, 𝟑𝟐𝟎/𝟐, 𝟎𝟎𝟎 = GH¢237.16

No of shares 2,000
(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 23 of 31
 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 24 of 31
 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 =
190,99
0
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 25 of 31
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 26 of 31
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 27 of 31
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 28 of 31
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 29 of 31
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 30 of 31
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.

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