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MAY 2017 PROFESSIONAL EXAMINATIONS CORPORATE REPORTING (PAPER 3.1) CHIEF EXAMINER’S REPORT, QUESTIONS & MARKING SCHEME STANDARD OF PAPER The standard of the paper was the same as previously administered ones. The questions were standard for this level of examination. The questions were spread enough to cover all areas of the syllabus. The amount of work (the relevant workings and the final answer) required by question 1 was more than the allotted time and marks. Apart from that the rest were commensurate with the allotted time and marks. GENERAL PERFORMANCE Generally, performance was below average. This could be attributed to lack of adequate preparation by the candidates. Performance at centres in Accra appeared to be higher than outside. There was no similarity of answers to suggest any possible copying. NOTABLE STRENGTHS & WEAKNESS Candidates showed improved understanding of appraisal of financial performance and preparing capital reduction schemes; they scored high marks in those areas. Weaknesses of candidates can be summarized as follows:  Many candidates had difficulties in the treatment of a property which was in use under IAS 16 and later converted to an investment property under IAS 40. It should be noted that investment property is a topic under Level 2.1: Financial Reporting which candidates had already passed.  Some candidates showed lack of effective time management in answering questions. They spent too much time on questions they believed they could handle; this left them with little time to tackle other questions satisfactorily. Candidates should be taught how to allocate time to questions according to the allotted marks and to strictly respect time allocation. They should move to another question when the time allocated is spent.  Some candidates presented themselves for the examination without adequate preparation and as a result scored very low marks. Obviously, they were not ready for the examination.  Several candidates did not attempt all parts of the questions. Also, there were instances where whole questions were not attempted. This attitude reduced candidates’ chances of scoring pass marks. Questions 1 and 2 were the questions which were partially attempted or completely ignored.  Some candidates did not read the questions properly and as a result presented answers which were not required. This was evident in question 5 c). Candidates were required to discuss the “measurement basis” of elements of financial statements in accordance with the IASB Conceptual Framework. Instead many candidates misread the question and wasted time discussing “elements of financial statements”.

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QUESTION ONE The following draft consolidated financial statements relates to the Baa Koomi Group plc Consolidated statement of profit or loss for the year ended 31 July 2016 GH¢000 GH¢000 Revenue 5,845 Cost of sales (2,160) Gross profit 3,685 Distribution costs 510 Administrative expenses 230 (740) 2945 Income from interests in associated undertakings 990 Operating profit 3,935 Profit on disposal of tangible non-current assets 300 Income from investments 80 Interest payable (300) Profit before taxation 4,015 Taxation (1,345) Profit after tax 2,670 (200) Non-controlling interests –equity Profit attributable to members of parent company 2,470 Dividends paid (800) 1,670 Consolidated statement of financial positions as at 31 July Non-current assets Intangible assets Tangible assets Investment in associated undertaking Other investments Currents assets Inventories Trade receivables Cash at bank and in hand Current liabilities Net current assets Total assets less current liabilities Non-current liabilities Provisions for liabilities: Deferred taxation

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2016 GH¢000

2015 GH¢000

200 7,750 2,200 820 10,970

5,000 2,000 820 7,820

3,930 3700 9,030 16,660 (3,084) 13,576

2,000 2,550 3,640 8,190 (1,854) 6,336

24,546 4,340 60 20,146

14,156 1,340 26 12,790

Equity Share capital Capital Surplus Retained earnings

7,880 5,766 6,270 19,916 230 20,146

Non-controlling interests -equity

4,000 4,190 4,600 12,790 12,790

The following information is relevant to Baa Koomi Group plc. i) The Baa Koomi Group plc has two wholly owned subsidiaries. In addition, it acquired a 75% interest in Nyamema Ltd on 1 August 2015. It also holds a 40% interest in Babaa Ltd which it acquired several years ago. Goodwill has not become impaired. ii) The following, recorded at fair values, refers to Nyamema Ltd at the date of acquisition. Statement of financial position as at 1 August 2015 GH¢000 Plant and machinery Current assets Inventories Trade receivables Cash at bank and in hand

GH¢000 330

64 56 224 344

Current liabilities (including Corporation tax GH¢34,000)

(170)

Share capital Retained earnings

iii) The consideration for the purchase of the shares of Nyamema Ltd comprised 44,000 ordinary shares of GH¢1 of Baa Koomi Group plc at a value of GH¢550,000 and a balance of GH¢28,000 was paid in cash. iv) The taxation charge in the consolidated statement of profit or loss is made up of the following items:

Corporation tax Deferred taxation Tax attributable to associated undertakings

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GH¢000 782 208 355 1,345

174 504 100 404 504

v) The tangible non-current assets of the Baa Koomi Group plc comprise the following: Buildings Plant and Total Machinery GH¢000 GH¢000 GH¢000 Cost at valuation At 1 August 2015 5,100 2,800 7,900 Additions 4,200 4,200 Disposals 1,000 1,000 At 31 July 2016 5,100 6,000 11,100 Depreciation At 1 August 2015 2,200 Provided during year 700 2,900 400 Disposal 250 650 200 At 31 July 2016 200 2,400 950 3,350 Carrying Amount At 31 July 2016 3,600 At 1 August 2015 4,150 7,750 600 4,400 5,000 vi) Included in the additions to plant and machinery are items totaling GH¢1,700,000 acquired under finance leases. The plant and machinery disposal resulted in a profit of GH¢300,000. All lease rentals were paid on their due dates. vii) Non-current liabilities include the following items:

Obligations under finance leases 6% debentures

2016 GH¢000

2015 GH¢000

1,417 2,923 4,340

1,340 1,340

There had been an issue of debentures on 1 August 2015. Their par value was GH¢3,000,000 but they were issued at a discount of GH¢100,000. The effective rate of interest was 7%. Current liabilities comprise the following items

Trade payables Obligations under finance leases Corporation tax Accrued interest

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2016 GH¢000

2015 GH¢000

1600 480 924 80 3,084

960 400 434 60 1,854

Required Prepare a consolidated statement of cash flow for the Baa Koomi Group plc for the year ended 31 July 2016, in accordance with the requirements of IAS 7 Statements of Cash flow. (20 marks) (Note: use the indirect method to present cash flows from operating activities.) QUESTION TWO a) Kantanka Ltd adopts the revaluation model of IAS 16 Property, Plant & Equipment and the fair value model of IAS 40 Investment Property. Kantanka Ltd chooses to recognise any fair value gains or losses arising on its equity investments in ‘other comprehensive income’ as permitted by IFRS 9 Financial Instruments. The following transactions relate to Kantanka Ltd for the year ended 31 March 2017. i) Kantanka Ltd owns a piece of property it purchased on 1 April 2014 for GH¢3.7 million. The land component of the property was estimated to be GH¢1.2 million at the date of purchase. The useful economic life of the building on this land was estimated to be 25 years on 1 April 2014. The property was used as the corporate head office for two years from that date. On 1 April 2016, the company moved its head office to another building and leased the entire property for five years to an unrelated tenant on an arm’s length basis in order to benefit from the rental income and future capital appreciation. The fair value of the property on 1 April 2016 was GH¢4.1 million (land component GH¢1.9 million), and on 31 March 2017, GH¢4.8 million (land component GH¢2.1 million). The estimated useful economic life remained unchanged throughout the period. Land and buildings are considered to be two separate assets by the directors of Kantanka Ltd. (5 marks) ii) Kantanka Ltd holds a portfolio of equity investments the value of which was correctly recorded at GH¢12 million on 1 April 2016. During the year ended 31 March 2017, the company received dividends of GH¢0.75 million. Further equity investments were purchased at a cost of GH¢1.6 million. Shares were disposed of during the year for proceeds of GH¢1.1 million. These shares had cost GH¢0.4 million a number of years earlier but had been valued at GH¢0.9 million on 1 April 2016. The fair value of the financial assets held on 31 March 2017 was GH¢14 million. (5 marks) Required: Advise Kantanka Ltd on how to account for the above transactions in accordance with relevant accounting standards. b) IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting and applying accounting policies, accounting for changes in estimates and reflecting corrections of prior period errors. The standard requires compliance with any specific IFRS applying to a transaction, event or condition, and provides guidance on developing accounting policies for other items that result in relevant and reliable information. Required: i) Discuss the procedure for selecting accounting policies.

(3 marks)

ii) Recommend how an entity should account for a change in accounting policy. (2 marks) Page 5 of 31

c) Cartier Ltd, a multinational operating in Ghana purchased a plant for GH¢600,000 on 1 January 2015. Cartier Ltd depreciates its plant using the straight line method over 15 years, assuming a residual value of 10% of original cost. Cartier Ltd claims all available tax depreciation allowances. On 1 January 2016, Cartier Ltd revalued the plant and increased its carrying value by GH¢50,000. The asset’s useful life was not affected. Assume there were no other temporary differences in the period. Required: i) Calculate the amount of Cartier Ltd’s deferred tax balance at 31 December 2016 in accordance with IAS 12 Income Taxes. ii) Calculate the change in Cartier Ltd’s deferred tax balance for the year ended 31 December 2016 and explain how the change would be treated in Cartier Ltd’s statement of profit or loss for the year to 31 December 2016. (Note: Assume an applicable tax rate of 25% and capital allowance of 50% of carrying amount in the first year and 25% in the second year). (5 marks) d) Kojach Ltd is a manufacturing company which prepares its financial statements in compliance with International Financial Reporting Standards (IFRS). The following transactions took place for the year ended 31 March, 2017. i) Kojach Ltd has traditionally repainted its premises every five years. The next painting is due in a year’s time. The entity proposes to accrue as a provision the expected cost of repainting the premises. (2 marks) ii) Kojach Ltd has guaranteed the debts of its associate company up to a maximum amount of GH¢3 million. The associate is in excellent financial health and the directors are of the opinion that it is unlikely the guarantee will ever be called in. (3 marks) Required: Discuss briefly how each of the above transactions and events should be recorded by Kojach Ltd in compliance with the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets (Total: 25 marks) QUESTION THREE Abusua Ltd. has been trading profitably for several years but for the past four years its operations have resulted in losses. The board of directors has decided to restructure the company. The Statement of Financial Position as at 30 September, 2016 GH¢000 GH¢000 Non- current assets Freehold land and buildings 3,788 Plant and equipment 7,020 Furniture and fixtures 3,080 Investment 2,300 Page 6 of 31

Deferred development expenditure Patent rights Current assets Inventories Trade receivables Cash Current liabilities Bank loan Trade payables Sundry creditors

7,050 4,200 27,438 3,510 1,600 428 5,538 5,360 4,650 1,060 11,070

Net current liabilities 22% Debentures

(5,532)

(7,875) 14,031

Financed by: Share capital Capital surplus Income surplus

17,625 2,250 (5,844) 14,031

You have been provided with the following additional information. i) Abusua Ltd’s share capital consists of Ordinary shares

GH¢000 13,500

20% Cumulative Preference shares

4,125

ii) No dividend was declared on the Preference shares for the year ended 30 September, 2016. iii) The following assets have net realizable values as indicated below: GH¢000 4,005 3,750 2,800

Freehold land and buildings Plant and equipment Furniture and fixtures

iv) The investment in Abusua Ltd. is 55% holding in Obi Ltd. An offer of GH¢ 1,350,000 has been made for it and it has been accepted by the directors. v) Following further feasibility study carried out on the project which gave rise to the deferred development expenditure, the directors have decided to discontinue the project. The project is not patented. vi) The directors have decided to sell the patent rights for a net realizable value of GH¢ 1,800,000. Page 7 of 31

vii) Inventories were written down by GH¢ 2,232,000. viii) The 22% debentures are secured on the freehold land and buildings. ix) The bank has a fixed and floating charge over the assets in respect of the loan. x) It is considered that a proposed reconstruction of the company should result in net profit after tax of GH¢1,500,000 in the year ending 30 September, 2017 and GH¢1,800,000 or more in each of the years thereafter. xi) The company will require a ratio of accounts receivable and cash to current liabilities of 0.80:1 in future to trade satisfactory. Required: As a Director of Finance of Abusua Ltd, recommend a scheme of reconstruction for consideration by the board of directors of the company and prepare a summarized statement of a financial position (15 marks)

QUESTION FOUR a) In 2012, the management team of Sawaleh Ltd, a manufacturer of motorcycle parts, acquired the company from its parent company in a management buyout deal. The managers of the company are considering the possibility of listing on the Ghana Stock Exchange. The following financial statements relates to the company: Sawaleh Ltd Statement of financial position as at June 30 2016 Non-current assets GH¢000 Land and buildings Plant and machinery Current assets: Inventories Trade receivables Cash in hand and at bank

4,400 4,700 1,000

Equity and Liabilities Ordinary share capital issued at Gh¢1 each Voting “A” Shares (Non-voting) Retained earnings Shareholders’ funds Non-Current Liabilities 12% Debenture loan (2018)

GH¢000 3,600 9,900 13,500

10,100 23,600

1,800 900 9,700 12,400

2,200 Page 8 of 31

Current Liabilities Bank Overdraft Trade payables

2000 7,000 23,600

Statement of profit or loss for the year ended June 30 2016 Revenue Cost of sales Profit before interest and taxes Interest Profit before taxes Taxation expense Profit attributable to ordinary shareholders Dividends Retained profit

Gh¢000 36,500 (31,600) 4,900 (1,300) 3,600 (500) 3,100 (300) 2,800

The industry performance average ratios in which Sawaleh Ltd operates are stated below. Industry sector ratios Price/earnings ratio Interest cover Dividend cover Total debt: equity Quick (acid test) ratio Current ratio Operating profit as percentage of sales Return after tax on equity Return before interest and tax on long-term capital employed

10.0 4.5 4.0 24% 1.0:1 1.6:1 11% 16% 24%

Required: As a newly qualified accountant working with Sawaleh Limited, you are to write a memo to the CEO of the company evaluating the financial position and performance of Sawaleh Limited by comparing it with that of its industry sector given above. (10 marks) b) There has been widespread debate for several years concerning the declining value of traditional methods of measuring corporate performance and the ability to predict corporate failure. Earnings per share, return on capital employed and other investment ratios are seemingly out of step with the needs of investors. The analysis of financial ratios is to a large extent concerned with the efficiency and effectiveness of management’s use of resources and also with the financial stability of the company. Researchers have developed models which attempt to predict business failure. Altman’s ‘Z score’ and Argenti’s failure models are examples of such research. However many analysts feel that financial statements require several adjustments before any meaningful evaluation of corporate performance can be made. Analysts often make amendments to corporate profit and net assets before calculating even the most basic of ratios because of their disapproval of certain generally accepted accounting principles and in an attempt to obtain comparability.

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Required: Discuss any FIVE reasons in general terms why the comparison of the a company’s ratios with the ratios of previous years and other companies might be misleading. (5 marks) (Total: 15 marks)

QUESTION FIVE a) Historically, financial reporting throughout the world has differed widely. The IFRS Foundation (formerly the International Accounting Standards Committee Foundation (IASCF)) is committed to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. The various pronouncements of the IFRS Foundation are sometimes collectively referred to as International Financial Reporting Standards (IFRS). Required: Discuss the IFRS Foundation’s standard setting process including how standards are promulgated and revised. (6 marks) b) According to Bob Massie, co-founder of the Global Reporting Initiative,'Integrated reporting advances the proposition that sustainability reporting and financial reporting are inherently linked and thus would benefit from merging.' Required: Discuss how integrated reporting has developed from social and environmental reporting. (7 marks) c) Measurement is the process of determining the monetary amounts at which the elements of financial statements are to be recognized and carried in the statement of financial position and statements of profit or loss and other comprehensive income (Conceptual Framework). This involve the selection of a particular basis of measurement. A number of these are used to different degrees and in varying combinations in financial statements. Required: Discuss the measurement basis of elements of financial statements in accordance with the IASB Conceptual Framework. (7 marks) d) You work for a large company as the assistant financial controller. One of your duties is to reconcile the sales ledger each month. The ledger has failed to agree month after month. You strongly believe that it is associated with bad debts being written off on the individual customer account but not included in the nominal ledger. You consider the differences to be material and have brought this to the attention of the financial controller but he seems unwilling to act. Required: What action would you take in this situation?

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(2 marks)

e) Good ethical behavior may require acting beyond the requirement of the law. In a highly competitive complex business world, it is essential that professional accountants maintain their integrity and remember the trust and confidence which is placed in them by whosoever relies on their objectivity and professionalism. Req...