DECEMBER 2022 PROFESSIONAL EXAMINATIONS

FINANCIAL REPORTING (PAPER 2.1)

CHIEF EXAMINER’S REPORT, QUESTIONS AND MARKING SCHEME

STANDARD OF THE PAPER

The standard of the paper compares favourably with those of previous examinations. The
syllabus coverage was good and the difficulty level was appropriate for the level of
cognitive domain to be examined. The weighting for Regulatory, Conceptual and Ethical
Framework which was reduced to 5% (instead of 10%), the marks allocation largely
followed the weighting in the syllabus. The level of clarity of requirements of the
respective questions was excellent. Allocation of marks was consistent with load and
difficulty level of the respective questions and sub-questions.
Generally stated, a candidate who prepared well in accordance with the dictates of the
syllabus should be able to pass the examination.

PERFORMANCE OF CANDIDATES
On the whole, performance of candidates was below expectation. The pass rate was about
20%. This poor performance may be as a result of short period for preparation and lack
of appreciation of content and application of the relevant IFRSs.

It appears the few high performers were concentrated at some centres. While some script
packs could record about 40% pass rate, others could hardly register 20% pass rate.

NOTABLE STRENGTHS AND WEAKNESSES OF CANDIDATES

Almost all the candidates scored good marks in Question four; Accounting Ratios and
Financial Statement Interpretation. That question was a ‘low hanging fruit’ for all the
candidates.

A greater number of the candidates demonstrated lack of understanding of how to

present consolidated financial statements. Many could also hardly understand and apply
the contents of the relevant International Financial Reporting Standards

Candidates are hereby advised to note the following for future guidance:
 The content and application of the IFRSs constitute about 70% of the syllabus. Candidates
can only pass the Financial Reporting paper if they place premium on learning IFRS.
 Preparing for Financial Reporting examination requires working as many questions as
possible. Read the theories and solve the practical questions.
 In the examination room, try and allocate your time evenly over the questions, based on
the marks allocation. Note that each mark requires 1.8 minutes so the maximum time to
be allocated to a 20 marks question is 36 minutes.
 You must also provide the answers in direct responses to the requirements of the
respective questions. Try to avoid deviation.

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 It is always advisable to answer the questions that you are comfortable with first. This
will enhance your confidence level and sustain your focus and tenacity throughout the 3
hours.

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QUESTION ONE

The following Statements of Profit or Loss and Other Comprehensive Income relate to three
entities: Jomoro, Nsuaem and Amenfi for the year ended 31 October 2021.
Jomoro Nsuaem Amenfi
GH¢ million GH¢ million GH¢ million

Revenue 3,560 1,550 1,200

Cost of sales (2,050) (900) (570)
Gross profit 1,510 650 630
Operating expenses (845) (580) (480)
Finance cost (15) - -
Profit before taxation 650 70 150
Taxation (350) (110) (90)
Profit for the year 300 (40) 60
Other comprehensive income:
Revaluations of Property Plant & Equipment 80 - -
Total comprehensive income for the year 380 (40) 60

Additional information:
i) Jomoro purchased 210 million ordinary shares (representing 70% of the total number of
ordinary shares) in Nsuaem on 1 February 2021, when the other reserves of Nsuaem was
GH¢49 million and the retained earnings of Nsuaem was GH¢310 million. The consideration
was agreed at GH¢1,430 million. This was satisfied by issuance of 120 million of Jomoro’s
ordinary shares at agreed fair value of GH¢1,130 million, plus GH¢300 million to be paid by
Jomoro on 31 October 2021 if a profit target (GH¢80 million) is achieved by Nsuaem by the
year ended 31 October 2021. The contingent element of the consideration was recorded at its
fair value of GH¢240 million at 1 February 2021. As it turned out, significant losses were
incurred by Nsuaem for the period to 31 October 2021. Consequently, nothing is payable by
Jomoro on 31 October 2021 under this part of the deal. No entry has been made by Jomoro to
reflect this change in expectation.

At year end, book value per share was GH¢4 for Jomoro and GH¢3 for Nsuaem while market
price per share was GH¢7 for Jomoro and GH¢5 for Nsuaem. Nsuaem has not issued any
shares since acquisition.

ii) At the date of acquisition of Nsuaem, carrying values of its net assets were equal to fair values
except a contingent liability of GH¢10 million as disclosed in the financial statements of
Nsuaem which had an estimated fair value of GH¢9 million. Subsequent to acquisition, the
liability has been recognised by Nsuaem in its books as GH¢7 million. Ignore deferred tax
implication of this adjustment.

iii) The policy of Jomoro Group is to value non-controlling interests (NCI) at their fair value at
the acquisition date. On that date, the fair value of the NCI of Nsuaem was GH¢360 million.
Due to the unexpected losses incurred by Nsuaem during the year, an impairment test was

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 undertaken on 31 October 2021 and goodwill was found to be impaired by 40% of its
acquisition value. Jomoro charges goodwill impairment to operating expenses.

iv) On 1 August 2021, Jomoro purchased 30% equity holding in Amenfi. The consideration was
agreed at GH¢120 million to be settled in cash by Jomoro on 30 June 2022. Jomoro has not
yet recorded this. Following an unexpected post-acquisition poor performance, the investment
was impaired by GH¢1.5 million.

v) The following inter-company sales at cost plus five-eighths (5/8) were made during the year
ended 31 October 2021:
Sales Included in buyer’s closing
stock-in-trade
GH¢ million GH¢ million
Jomoro to Amenfi 86 13
(all bought in September and
October by Amenfi)
Nsuaem to Jomoro 115 26

vi) All profit or loss and other comprehensive income items occurred evenly unless otherwise
indicated. Any effects of contingencies relating to the current period should be adjusted against
operating expenses.

vii) The applicable discount rate is 20%. Ignore deferred tax unless otherwise stated.

Required:
Prepare Jomoro Group’s consolidated Statement of Profit or Loss and Other Comprehensive
Income for the year ended 31 October 2021.

(Total: 20 marks)

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QUESTION TWO

a) Sawaleh Ghana Ltd is a public listed company located in Tamale, the Northern Regional capital
of Ghana. The company operates in the financial services sector. The directors of the company
have some concerns regarding the application of International Financial Reporting
Standards (IFRSs). The directors require explanations and advise on a number of transactions
that the company have undertaken during the 2022 accounting year. The company prepares its
accounts to 30 June each year. The details of the concerns and transactions undertaken by the
directors are stated below:

i) A director of Sawaleh Ghana Ltd, has expressed concerns about the accounting treatment of
some of the company’s items of Property, Plant and Equipment which have increased in value.
Her main concern is that the Statement of Financial Position does not show the true value of
assets which have increased in value and that this ‘undervaluation’ is compounded by having
to charge depreciation on these assets, which also reduces reported profit. She argues strongly
that this does not make economic sense in her opinion.

Required:
Address the director’s concerns by summarising the principal requirements of IAS 16
Property, Plant and Equipment in relation to the revaluation for the year ended 30 June 2022
and its subsequent treatment. (5 marks)

ii) On 1 July 2021, Sawaleh Ghana Ltd received a government grant of GH¢20 million towards
the purchase of new plant with a gross cost of GH¢160 million. The plant has an estimated life
of 10 years and is depreciated on a straight-line basis. One of the conditions of the grant is that
the sale of the plant before 30 June 2025 would trigger a repayment on a sliding scale as
follows:
Sale in the year ended: Amount of repayment
30 June 2022 100%
30 June 2023 75%
30 June 2024 50%
30 June 2025 25%

Accordingly, the directors propose to credit the statement of profit or loss with GH¢5 million
(GH¢20 million x 25%) being the amount of the grant they believe has been earned in the year
to 30 June 2022. Sawaleh Ghana Ltd accounts for government grants as a separate item of
deferred credit in its statement of financial position. The directors are also contemplating
whether to sell the plant before 30 June 2025 or not.

Required:
With reference to IAS 20: Government Grants and Disclosure of Government Assistance,
advise, and quantify where appropriate, how the government grant should be treated in each of
the decision the directors make in the financial statements. (5 marks)

iii) From 1 July 2021, the directors of Sawaleh Ghana Ltd have decided to reclassify amortised
research and development costs as administrative expenses rather than its previous

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 classification as cost of sales. The directors believe that the previous treatment unfairly
distorted the company’s gross profit margin.

Required:
With reference to IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors,
advise how the above item should be treated in Sawaleh Ghana Ltd’s financial statements for
the year ended 30 June 2022. (3 marks)

b) Rukaya Ltd is an agro-processing company which has been operating in the Western Region
since 2013. At a board meeting on 1 August 2021, Rukaya’s Ltd directors made the decision
to close down one of its factories on 30 April 2022. The factory and its related plant would
then be sold.
A formal plan was formulated, and the factory’s 250 employees were given three months’
notice of redundancy on 1 February 2022. Customers and suppliers were also informed of the
closure at this date.

The directors of Rukaya Ltd have provided the following information: Fifty (50) of the
employees would be retrained and deployed to other subsidiaries within the group at a cost of
GH¢2 million; the remainder will accept redundancy and be paid an average of GH¢600,000
each. The factory plant has a carrying amount of GH¢6.4 million but is only expected to sell
for GH¢3 million incurring GH¢200,000 of selling costs; however, the factory itself is
expected to sell for a profit of GH¢8 million.

Rukaya Ltd also rents several machines under lease arrangements which have an average of
three years to run after 30 April 2022. The present value of these future lease payments (rentals)
at 30 April 2022 was GH¢3.5 million; however, the lessor has said they will accept GH¢2.2
million which would be due for payment on 31 May 2022 for their cancellation at 30 April
2022. Penalty payments due to non-completion of supply contracts are estimated at
GH¢500,000. Note however, that the closure of the factory does not meet the criteria of a
discontinued operation.

Required:
Explain and quantify where appropriate how the closure of the factory should be treated in
Rukaya’s financial statements for the year ended 30 April 2022. (7 marks)

(Total: 20 marks)

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QUESTION THREE

Dompa Ltd prepares its financial statements in accordance with IFRSs. Below are the
statement of profit or loss for the year ended 31 December 2021 and the statement of financial
position as at that date, and the comparative statement of financial position as at 31 December
2020.
Statement of Profit or Loss for the year ended 31 December 2021
GH¢000
Revenue 1,656,000
Cost of sales (745,200)
Gross profit 910,800
Other income 15,000
Administrative expenses (409,860)
Distribution costs (136,620)
Profit before interest and tax 379,320
Finance cost (3,232)
Profit before tax 376,088
Tax expense (9,462)
Profit for the year 366,626

Statement of Financial Position as at 31 December

2021 2020
Non-current assets: GH¢000 GH¢000
Property, Plant & Equipment 33,210 23,260
Investment Property 28,500 28,000
Intangible Assets 124 155
61,834 51,415
Current assets
Inventory 15,700 5680
Trade receivables 82,800 10765
Cash 16,712 152
Bank 304,437 5950
419,649 22,547
Total assets 481,483 73,962

Equity & Liabilities:

Equity:
Share capital 30,000 25,000
Retained earnings 373,526 11,300
Revaluation surplus 862 1,262
404,388 37,562
Non-current liabilities
15% bond redeemable in 2024 20,432 20,200
Deferred tax 3,762 2,300

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 Current liabilities:
Trade & other payables 46,401 7,600
Current tax 6,500 6,300
Equity & Liabilities 481,483 73,962

Additional information:
i) Depreciation expense on tangible non-current assets recognised for the year is GH¢8,804,000.
There was no purchase or disposal of any of the intangible non-current assets in the year.

ii) Impairment review has been undertaken on one of the machines of the company that has a
carrying value of GH¢1,500,000, but an estimated recoverable amount at the impairment
review date was GH¢745,000. The result of the impairment review is correctly accounted for
in the above financial statements in accordance with IAS 36: Impairment of Assets.

iii) One of the company’s vehicles was involved in an accident in the year, and got damaged
beyond repairs as a result of the accident. The carrying value of the vehicle was GH¢562,000.
This vehicle has been written off in the above financial statements.

iv) The company also sold one of its machines which has been in disuse for some time now for a
consideration of GH¢850,000. The carrying value of the machine at the date of disposal is
GH¢689,000. Any gain or loss on disposal of non-current assets is included in other income.
A new production machinery was also acquired by the company in November 2021 at the cost
of GH¢8,640,000 on a 90-day credit basis. This payable is included in trade and other payables.
Investment property of the company is carried at fair value. There was no purchases or sales
of investment property in the year.

v) The 15% bond was issued in January 2020 at a par value of GH¢20,000 over a tenure of five
(5) years, redeemable at 5% premium. The effective interest rate is estimated at 16% per
annum. The liability has been correctly measured and treated at amortised cost using IFRS 9-
Financial Instruments. Finance cost in the profit or loss account relates wholly to this bond.

vi) There has been no revaluation of any of the company’s non-current assets in the year. The
change in revaluation surplus represents the portion realised by the entity in the year through
the usage of the revalued assets. The amount realised is the excess depreciation charges
incurred under the revaluation model relative to the depreciation charges under the cost model,
as provided by IAS 16: Property, Plant and Equipment.

Required:
Using IAS 7: Statement of Cashflows, prepare the Statement of Cashflow of Dompa Ltd for
the year ended 31 December, 2021.
(Total :20 marks)

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QUESTION FOUR

Madina Ltd is engaged in the processing of palm fruits to produce palm oil and palm kernel
oil. The financial statements of the company for the years ended 31st December 2020 and 2021
are as follows:
Statement of Profit or Loss for the year ended
2021 2020
GH¢000 GH¢000
Revenue 123,817 95,620
Cost of sales (84,940) (76,240)
Net gains from changes in fair value of biological assets 84 754
Gross profit 38,961 20,134
Administrative expenses (11,727) (8,494)
Other income 1,267 927
Operating profit 28,501 12,567
Finance income 888 508
Profit before income tax 29,389 13,075
Income tax expense (4,692) (3,422)
Profit for the year 24,697 9,653

Statement of Financial Position as at

2021 2020
Assets GH¢000 GH¢000
Non-current assets
Property-plant & equipment 57,909 49,471
Financial asset 5,221 5,137
63,130 54,608
Current assets
Inventories 8,490 9,370
Trade Receivables 24,663 18,304
Cash and cash equivalents 22,832 10,618
55,985 38,292
Total assets 119,115 92,900

Equity & Liabilities:

Share capital 2,000 2,000
Retained Earnings 97,634 74,851
99,634 76,851
Non-current liability
Deferred taxation 9,394 5,759
9,394 5,759
Current liabilities
Accrued expenses 477 203
Trade payables 6,957 9,403
Current income tax liabilities 2,653 684
10,087 10,290
Total equity & liabilities 119,115 92,900

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The following ratios have been gathered from the food and processing industry for the year
ended 31 December 2021:
Return on Equity (%) 23.52
Gross profit margin (%) 29.57
Net profit margin (%) 22.16
Current ratio (times) 2.5
Acid test ratio (times) 1.8
Inventory turnover (days) 20
Trade receivables collection (days) 68
Trade payables settlement (days) 32

Required:
Write a report to the Board of Directors of Madina Ltd, assessing the company’s performance
for the year ended 31 December 2021 in relation to the industry and the comparative year.
(Total: 20 marks)

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QUESTION FIVE

a) Damba Ltd is one of the market leaders in the fruit processing industry which started its
operation in 2017. During the current year, Damba Ltd spent GH¢400,000 on training courses
for its employees. This has already resulted in increased efficiency and cost savings for the
entity. According to the course organisers, the training benefits should continue for at least
four years. As a result, the Assistant Accountant has recognised the training costs as an
intangible asset and has charged six months' amortisation based on the average month per year
within which the training courses were completed.

Required:
Comment on the Assistant Accountant’s treatment of the aforementioned transaction in Damba
Ltd's financial statements for the year ended March 31, 2022 and advise on how it should be
handled under International Financial Reporting Standards. (5 marks)

b) The definition of a liability forms an important element of the International Accounting

Standards Board’s Framework for the Preparation and Presentation of Financial Statements
which, in turn, forms the basis for IAS 37: Provisions, Contingent Liabilities and Contingent
Assets.

Required:
Define liability and describe the circumstances under which provisions should be recognised.
(5 marks)

c) On January 1, 2021, Bayor Ltd had 10 million ordinary shares in issue. On 31 March 2021 the
company issued at full market price, 2 million ordinary shares. On 31 August 2021 the
company made a rights issue of 1 for 5 @ GH¢3. The fair value of the shares on the last day
before the issues of the rights issue was GH¢3.80. Profit for the current period is GH¢3.5
million. The reported Earnings Per Share (EPS) for the year ended December 31, 2020 was
0.33p.

Required:
Calculate the EPS for the year ended December 31, 2021 and the restated EPS for the year
ended December 31, 2020. (5 marks)

d) An investor entity can enter into a contractual arrangement with another entity in which
unanimous consent of both parties is required in order to take decisions relating to operating
and financial policies of the investee. Such an arrangement could either be a joint venture or a
joint operation.

Required:
Explain the distinction between joint venture and joint operation under IFRS 11: Joint
arrangements. (5 marks)

(Total: 20 marks)

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SUGGESTED SOLUTION

QUESTION ONE
Jomoro
Consolidated statement of profit or loss and other comprehensive income for the
year ended 31 October 2021
GH¢ million
Revenue (3,560 + (1,550x9/12) – (115x9/12)) 4,636.25
Cost of Sales (2,050 + (900x9/12) – (115x9/12) + 1.5(W5) + 10(W5)) (2,650.25)
Gross profit 1,986
Operating expenses (845 + (580x9/12) + 192(W2) – 240(W3) -2 (w3)) (1,230)
Finance cost (15 + 5(W6)) (20)
Share of profit of associate [(30% x 60 x 3/12) – 1.5 (impairment of 3.0
Associate)]
Profit before taxation 739
Taxation (350 + (110x9/12) (432.5)
Profit for the year 306.5
Other comprehensive income:
Revaluation of PPE 80
Total comprehensive income for the year 386.5
Profit for the year attributable to:
Owners of the parent (balancing figure (307.75 – (–68.85)) 375.7
Non-controlling interest (W7) (69.2)
306.5
Total comprehensive income attributable to:
Owners of the parent (balancing figure (387.75 – (–68.85)) 455.5
Non-controlling interests (W7) (69.2)
386.5

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 Workings:
1. Group structure
Jomoro

CI =80% 30%

NCI =20%

Nsuaem Amenfi
(9mths sub) (3mths ass.)

2. Goodwill – Nsuaem
GH¢ million GH¢ million
Cost of investment:
Issue of shares 1,130
Contingent consideration 240
1,370
Fair value of NCI at acquisition 360
1,730
Fair value of identifiable net assets acquired:
Share capital (210m x 100/70 x GH¢3) 900
Retained earnings 310
Other reserves 49

Contingent liability (9) (1,250)

Goodwill at acquisition 480
Less: Impairment (40% x 480) (192)
Goodwill at reporting 288

3. Reversal of contingent consideration

a) Reversal of the initial contingent consideration of GH¢240 million would normally
be treated as a finance income (reversal of unwound discount). It is however being
reported as reduction in operating expenses per the specific directive in the question
(Thus adjustment to contingencies should be treated in the operating expenses).

b) The fair value of the contingent liability was initially recognized at GH¢9 million.
This was subsequently settled at GH¢7million, resulting in post acquisition gain of
GH¢2 million. This is also reported as a reduction to operating expenses

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4. Elimination of post-acquisition intra-group sales/purchases
Eliminate post acquisition intra-group sales and purchases (GH¢115 million x9/12) in
full from group revenue and group cost of sales.

5. Provision for Unrealised profit on inventory

a) On transaction from Investor (Jomoro) to Associate (Amenfi) = GH¢13 million x 5/13
x 30%= GH¢1.5 million. (Dr Cost of sales GH¢1.5 million; Cr Investment in associate
GH¢1.5 million)

b) On transaction from Subsidiary (Nsuaem) to Parent (Jomoro) = (GH¢26 million x

5/13) = GH¢10 million. (Dr Cost of Sales GH¢10 million; Cr Inventory GH¢10 million).
NCI is affected as Nsuaem was the group member that recorded the gain.

6. Unwound discount on deferred consideration on Amenfi’s acquisition

GH¢ million
At acquisition (120 x 1/1.20) 100
Unwound discount (20% x 100 x 3/12) 5
At 31 October 2021 105

7. Determination of Non- Controlling Interest’s share of profit/loss

GH¢ million
Nsuaem per SoPL & OCI (40 x 9/12) (30)

Less unrealised profit on inventory (W5) (10)

Less goodwill impairment loss (192)

Adjusted figures (232)

NCI percentage share 30%
NCI Amount (69.2)

Note
The contingent liability has crystallised, settled and recognised, so no adjustment is
required again.
(Marks are evenly spread using ticks = 20 marks)

EXAMINER’S COMMENTS
The question required candidates to prepare consolidated statement of profit or loss and
other comprehensive income (involving a Parent, a Subsidiary and an Associate).
Unfortunately, this was the worst answered question, with most of the candidates scoring
less than 8 marks (out of 20 marks).

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The thrusts of the question were as follows:
 Identification of the control/group structure
 Identification of the date of acquisition and applying same to determine post -
acquisition transactions
 Determination of the goodwill on acquisition. This required the determination of:
 Cost of investment. This involved share exchange and contingent
consideration;
 Non- controlling interest valuation [at acquisition date];
 Fair value of net asset of subsidiary at acquisition date. This involved valuation
of stated capital, retained earnings, other reserves and fair value of contingent
liability
 Intra-group adjustments [Sales, Unrealised Profit on Inventory, Unrealised profit
on Downstream transaction between Investor and Associate]
 Unwound discount on deferred consideration for the investment in Associate
 Share of profit of Associate
 Line-by-line aggregation (after all relevant adjustments)

The poor performance of the candidates may be due to the fact that some of the items in
the question [ deferred consideration, contingent consideration, post-acquisition losses,
unwound discount, reversal of unwound discount, the use of fraction (5/8) to indicate
intra group profit loading] were unfamiliar to the candidates. Many lecturers ignore such
areas.
Students and lecturers are therefore advised to ensure total coverage of IAS 27, IAS 28,
IFRS 3, IFRS 10, IFRS 11, IFRS 12 and IFRS 13 in their preparation for consolidated
financial statement presentation.

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QUESTION TWO
a)
i) The requirements of IAS 16: Property, Plant and Equipment may, in part, offer a
solution to the director’s concerns. IAS 16 allows (but does not require) entities to
revalue their property, plant and equipment to fair value; however, it imposes
conditions where an entity chooses to do this.

 Where an item of property, plant and equipment is revalued under the revaluation
model of IAS 16, the whole class of assets to which it belongs must also be revalued.
This is to prevent what is known as ‘selected picking’ where an entity might only wish
to revalue items which have increased in value and leave other items at their
(depreciated) cost.

 Where an item of property, plant and equipment has been revalued, its valuation (fair
value) must be kept up to date. In practice, this means that, where the carrying amount
of the asset differs significantly from its fair value, a (new) revaluation should be
carried out.
 The market value of land and building usually represents fair value, assuming
existing use and line of business, such valuation is usually carried out by a
professional valuer. In the case of plant and equipment, the fair value can be taken as
market value. Where a market value is not available, however, depreciated
replacement cost should be used.
 The frequency of valuation depends on the volatility of the fair value of individual
items of PPE. The more volatile the fair value, the more frequently revaluation should
be carried out.
 All the items within the class of PPE should be revalued at the same time to prevent
selective revaluation of certain assets and to avoid disclosing a mixture of costs and
values from different dates in the financial statements.
 A revaluation surplus (gain) should be credited to a revaluation surplus (reserve), via
other comprehensive income, whereas a revaluation deficit (loss) should be expensed
immediately assuming, in both cases, no previous revaluation of the asset has taken
place. A surplus on one class of asset cannot be used to offset a deficit on a different
class of asset.
 Subsequent to a revaluation, the asset should be depreciated based on its revalued
amount (less any estimated residual value) over its estimated remaining useful life,
which should be reviewed annually irrespective of whether it has been revalued.

An entity may choose to transfer annually an amount of the revaluation surplus

relating to a revalued asset to retained earnings corresponding to the ‘excess’
depreciation caused by an upwards revaluation. Alternatively, it may transfer all of
the relevant surplus at the time of the asset’s disposal. The effect of this, on Sawaleh
Ghana Ltd’s financial statements, is that its statement of financial position will be
strengthened by reflecting the fair value of its property, plant and equipment.

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 However, the downside from the director’s perspective is that the depreciation charge
will actually increase as it will be based on the higher fair value and profits will be
lower than using the cost model. Although the director may not be happy with the
higher depreciation, it is conceptually correct. The director has misunderstood the
purpose of depreciation; it is not meant to reflect the change increase in this case in
the value of an asset, but rather the cost of using up part of the asset’s remaining life.
(5 marks)

ii) In accordance with IAS 20, government grants related to non-current assets should be
credited to the statement of profit or loss over the life of the asset to which they relate,
not in accordance with the schedule of any potential repayment. The directors’
proposed treatment is implying that the government grant is a liability which
decreases over four years. This is not correct as there would only be a liability if the
directors intend to sell the related plant. Therefore, in the year ended 30 June 2022,
GH¢2,000,000 (GH¢20 million/10 years) should be credited to the statement of profit
or loss and GH¢18 million (GH¢20,000,000 million – GH¢2,000,000) should be shown
as deferred income (GH¢2 million as current liability and GH¢16 million as non-
current liability) in the statement of financial position.

If the Directors opt to sell the asset before 2025, the amount outstanding on the
deferred grant would be reversed. This is effected by debiting the deferred credit and
crediting Bank/Cash account. If the amount payable/refundable is higher than the
balance on the deferred credit, the difference is charged to the statement of profit or
loss (by debiting the SPL and crediting Bank/Cash. (5 marks)

iii) Changing the classification of an item of expense is an example of a change in

accounting policy, in accordance with IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors. Such a change should only be made where it is
required by an IFRS or where it would lead to the information in the financial
statements being more reliable and relevant. It may be that this change does represent
an example of the latter, although it is arguable that amortised development costs
should continue to be included in cost of sales as amortisation only occurs when the
benefits from the related project(s) come on-stream. If it is accepted that this change
does constitute a change of accounting policy, then the proposed treatment by the
directors is acceptable; however, the comparative results for the year ended 30 June
2021 must be restated as if the new policy had always been applied (referred to as
retrospective application). (3 marks)

b) A board decision on its own to close the factory is not sufficient to justify the creation
of a provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
However, by formulating a plan and informing interested parties (employees,
customers and suppliers in this case), this is likely to constitute a constructive

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 obligation for a restructuring provision by raising a valid expectation of the closure.
The amounts that should be provided for at 30 April 2022 are:
Items of reorganisation GH¢ million
Redundancy (200 employees x GH¢600,000) 120
Impairment loss on plant (GH¢6.4 – (GH¢3 – GH¢0.2)) 3.6
Onerous contract (lower amount) 2.2
Penalty payments 0.5
126.3

The GH¢126.3 million should be charged to the statement of profit or loss for the year
ended 30 April 2022 and the same amount reported in the statement of financial
position as at 30 April 2022 as a current liability/plant impairment assuming all parts
of the factory closure will be completed within the next 12 months.

The factory and the plant would be disclosed in the statement of financial position as
non-current assets held for sale at the lower of their carrying amount (the factory) or
fair value less cost to sell (the plant).

However, the GH¢2 million retraining costs cannot be provided for as they are part
of future activities and the anticipated GH¢8 million profit on the disposal of the
factory cannot be recognised until it is realised.
(7 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
This question required candidates to demonstrate knowledge of contents and application
of IAS 16, IAS 20, IAS 8, IAS 17 and IFRS 5. It was a straight forward question but
regrettably, many candidates could not provide the right responses.

For sub-question ai), candidates were required to outline the principles guiding
revaluation of property, plant and equipment but most of them ended up describing how
to account for PPE in the financial statements.

The aii) sub-question required candidates to demonstrate how to account for

Government grant as a deferred credit in line with IAS 20. It further required the
description of accounting arrangement relating to refund of grant as a result of inability
to meet the attached conditions. Many candidates left this question unanswered.

The sub-question aiii) required candidates to describe the accounting arrangement for
change in accounting policy in line with IAS 8. Many of the candidates only explained an
accounting policy. They omitted the aspect relating to circumstances that necessitate
change in accounting policy and the required accounting treatment.

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The b) part of the question related to provision for restructuring (IAS 37) and
discontinued operation (IFRS 5). This question was poorly answered by majority of
candidates who attempted it.

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QUESTION THREE
Dompa Plc
Statement of cash flow for the year ended 31 December 2021
GH¢ 000 GH¢ 000
Operating activities:
Profit before tax 376,088

Adjustments for:
Finance cost 3,232
Depreciation 8,804
Amortisation of intangible assets (155-124) 31
Impairment (745-1000) 755
Write-off of vehicle 562
Gain on disposal (850-689) (161)
Fair value changes in investment property (28,500-28,000) (500)
12,723
388,811
Working capital changes:
Increase in inventory (15,700 -5,680) (10,020)
Increase in receivable (82800-10765) (72,035)
Increase in trade payables[(46401-8640)-7600] 30,161 (51,894)
Net operating cash before interest and tax 336,917

Interest paid (W1) (3,000)

Tax paid (W2) (7,800) (10,800)
Net cash from operating activities 326,117

Investing activities
Purchase of Property, Plant and Equipment (W3) (12,120)
Proceeds from disposal 850
Net cash from investing activities (11,270)

Financing activities:
Issue of shares (30,000 - 25,000) 5,000
Dividend paid (W4) (4,800)
Net cash from financing activities 200
Net cash & cash equivalent for the year 315,047
Cash & cash equivalent at January 1 6,102
Cash & cash equivalent at 31 December 321,149

Workings:
1. Interest Paid

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 GH¢ 000
Balance b/d 20,200
Interest at 16% (P&L) 3,232
23,432
Balance c/d 20,432
3,000
2. Tax Paid
GH¢ 000
Balance b/d (6300 + 2300) 8,600
P&L 9,462
18,062
Balance c/d (6500 +3762) 10,262
7,800
3. Property, Plant & Equipment
GH¢ 000
Balance b/d 23,260
Depreciation (8,804)
Impairment (755)
Write-off of asset (562)
Disposed PPE (689)
Credit purchase 8,640
21,090
Balance c/d 33,210
Purchase of PPE 12,120

4. Payment of Dividend
GH¢ 000
Retained earnings b/f 11,300
Profit for the year 366,626
Realised revaluation surplus (1,262-862) 400
378,326
Balance c/d 373,526
4,800
Alternatively, T-accounts can be used to obtain the missing items

(Marks are evenly spread using ticks = 20 marks)

EXAMINER’S COMMENTS
This question required candidates to prepare statement of cash flows in line with IAS 7.
It was a straight forward question that required only a few workings to determine the
following:
 Interest paid
 Taxation paid
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  PPE purchased and paid in cash
 Dividend paid to shareholders
Unfortunately, less than 10% of the candidates could obtain more than 10 marks (out of
20 marks). The poor performance may be due to the fact that, a question on preparation
of cash flow statement has not been asked since the current syllabus became operational.

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QUESTION FOUR
Memorandum

To: The Board of Directors

From: The Finance Manager
Date: 5 December, 2022

Subject: Analysis of the performance of Madina Ltd for the year ended 31 December
2021

As requested, this report presents analysis of the performance of the company for the
year ended 31 December 2021. The company’s performance in the comparative year
ended 31 December 2020 is used as the benchmark. The company’s performance has been
assessed on the bases of profitability, working capital management and leverage.
Reference should be made to the attached appendix for figures used in the report.

Profitability
The earnings generated for ordinary shareholders increased in the 2021 year. Whereas in
2020, the profit earned by shareholders was GH¢0.13 per a cedi of their investment, in
2021, it increased to GH¢0.25 per a cedi of their investment. The company’s performance
also exceeded the industry average of 23.52%. The trading profit of the company also
increased in the 2021 year as compared to the 2020 performance. Compared to the
industry, the company’s performance was better than the industry average. The increase
in the gross profit margin, which measures the trading performance, suggests that the
company’s control of cost of sales improved in the 2021 year and on average over firms
in the industry. The operating performance of the company also increased following the
increase in the gross profit. The increase in the operating performance emphasizes the
company’s ability in controlling operating expenses over time and also better than firms
in the industry, on average, which could have eroded the gross profit.

Working capital management

There is an improvement in the liquidity of the company in the 2021 year. The current
assets in the year 2020 could cover the current liabilities 3.72 times, but increased to 5.55
times in the 2021 year, as measured by the current ratio. The acid-test ratio also shows
the strengthening in the company’s liquidity in the 2021 year. The company’s liquidity is
stronger also than the average industry liquidity.

The inventory turnover days of the company improved in the 2021 year. In 2020, the
company used 45 days to sell its inventory but in 2021 used 36 days. However, there was
a decline in the performance of the company with regard to its trade receivables
collection. In the year 2021, it took the company 73 days to recover sales made on credit,
but in 2020, the company used only 70 days. The company’s performance in the 2021

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year also trailed the industry performance of 20 days for inventory turnover and 68 days
for trade receivables collection.

In terms of trade payables management, there was also a decline in the performance of
the company as the days granted by suppliers for credit purchases to be paid decreased.
The credit days given by suppliers decreased from 45 days in the year 2020 to 28 days in
the year 2021. The lower trade payables figure at the end of the 2021 year as against the
2020 year, despite the increase in purchases (cost of sales) corroborates, the shortened
creditor days of the company. The average industry credit days given to firms for the
2021 year is 32 days. This also suggests that a declined or poor performance of the
company in management of its trade payables.

Conclusion
The company’s profitability has improved in the 2021-year when compared over time
and is also better than the average industry performance. Likewise, liquidity has
improved over time and the company’s liquidity position is stronger than the average
firm’s liquidity in the industry. Inventory management has also experienced an
improvement over time and when compared to the average industry performance.
However, there was a decline in the performance of trade receivables and trade payables
management in the 2021 year and when compared to the industry performance.

Signed
Finance Manager

Appendix
RATIOS FORMULA 2021 2020
Profitability:
Return on Equity 𝑃𝐴𝑇 24,697 9,653
= 𝑥 100 𝑥100 𝑥100
𝐸𝑞𝑢𝑖𝑡𝑦 99,634 76,851

=24.77% =12.56%
Gross profit 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 38,961 20,134
margin = 𝑥 100 𝑥100 𝑥100
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 123,817 95,620

=31.47% =21.06%
Net profit margin 𝑃𝐵𝐼𝑇 28,501 12,567
𝑥 100 𝑥100 𝑥100
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 123,817 95,620

=23.02% =13.14%

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 Liquidity
Current ratio 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 55,985 38,292
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 10,087 10,290

=5.55 times =3.72 times

Acid-test ratio 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 55,985 − 8,490 38,292 − 9,370
=
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 10,087 10,290

= 4.71 times =2.81 times

Efficiency
Inventory turnover 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 8,490 9,370
(days) = 𝑥365 𝑥365 𝑥365
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 84,940 76,240

=36 days =45 days

Trade receivables 𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 24,663 18,304
collection (days) = 𝑥365 𝑥365 𝑥365
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 123,817 95,620

= 73 days =70 days

Trade payables 𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 6,507 9,403
settlement period = 𝑥365 𝑥365 𝑥365
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 84,940 76,240

=28 days =45days

(1/4 mark for each correct computation of ratio = 4 marks; 16 marks for the report)

(Total = 20 marks)

EXAMINER’S COMMENTS
The question required candidates to complete some profitability and liquidity ratios and
to use the results to analyse the performance of an entity (against that of a previous year
and that of Industrial average). This was the best answered question. Almost all the
candidates calculated the ratios correctly and gave good interpretation.

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QUESTION FIVE

a) The training courses may have the characteristics of an asset in that they have
provided and will continue to provide future economic benefits to Damba Ltd in the
form of enhanced efficiency and cost savings. The costs, however, cannot be recorded
as an asset on the balance sheet and must be charged as an expense as soon as the cost
is incurred.

The fundamental reason for this is the issue of 'control'; the'skills' offered by the
courses belong to Damba Ltd's employees, but those employees can leave the
company and take their talents with them, or they can lose those skills due to an
accident or injury.

In addition, under International Financial Reporting Standards (specifically IAS 38

Intangible assets), the capitalisation of employee training costs is expressly
prohibited. (5 marks)

b) A liability is a present obligation of the entity to transfer an economic resource as a

result of past events. Previously, a liability was defined as a present obligation of an
entity arising from past events, the settlement of which is expected to result in an
outflow of economic benefits (normally cash).

Provisions are defined as liabilities of uncertain timing or amount, i.e., they are
normally estimates

A provision should be recognized as a liability in the financial statements when;

 An enterprise has a present obligation (legal or constructive) as a result of past event.
 It is probable that a transfer of economic benefits will be required to settle the
obligation.
 A reliable estimate can be made of the obligation.
(5 marks)

c) Computation EPS
Calculation of TERP
GH¢
Before 5 @ GH¢3.80 19
During 1 @ GH¢3 3
After 6 22

Right factor =
Fair value per share immediately before the exercise of rights
Theoretical ex rights price (TERP)
TERP = GH¢22/6 = 3.67 therefore the right issue fraction = 3.8/3.67

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 Calculation of shares
Weighted
Date Description No. of shares Time Right Ave no.
fraction shares
1/1/21 b/d 10,000,000 3/12 3.8/3.67 2,588,556
31/3/21 Issued at FMP 2,000,000
12,000,000 5/12 3.8/3.67 5,177,112
31/8/18 Right issue 1/5 2,400,000
14,400,000 4/12 - 4,800,000
12,565,668

The basic EPS = Net profit (loss) for the period attributable to ordinary shareholders
(Weighted average number of ordinary shares outstanding during the period or
year)
GH¢3,500,000
12,565,668 = GH¢0.28 or 28 pesewas

The restated EPS for the year ended December 31, 2020 is:
GH¢0.33 x 3.67/3.80 = GH¢0.32 or 32p.
(5 marks)

d) Joint venture: In a joint venture, the parties having joint control have rights to the net
assets of the arrangement. These parties are called “joint venturers”.

Joint operation: In a joint operation, the parties having joint control have rights to the
assets and obligations for the liabilities relating to the arrangement. These parties are
called “joint operators”.

When assessing the rights and obligations from the joint arrangements, it’s very
important to look at how the joint arrangement is structured, mainly whether the
arrangement is structured through separate vehicle or not.

Separate vehicle is a separately identifiable financial structure, including separate

legal entities (e.g. company) or some entities recognized by a statute (not necessarily
having legal personality).

When a joint arrangement is NOT structured through a separate vehicle, then the
classification is easy: it is a clear joint operation.

When the joint arrangement is structured through separate vehicle, then it can
be either joint venture or joint operation.

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 IFRS 11 requires accounting for the investment in a joint venture using the equity
method according to IAS 28 Investments in Associates and Joint Ventures.

When an investor classifies its investment as a joint operation, then you should
recognize in the financial statements:
 Its assets, including its share of any assets held jointly;
 Its liabilities, including its share of any liabilities incurred jointly;
 Its revenue from the sale of its share of the output arising from the joint
operation;
 Its share of the revenue from the sale of the output by the joint operation; and
 Its expenses, including its share of any expenses incurred jointly.
(5 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
The question required candidates to demonstrate knowledge in the content and
application of IAS 38, IFRS 37, IAS 33 and IFRS 11. Many candidates could not provide
the right answers.

CONCLUSION
 The paper was of a good standard and should be maintained.
 Candidates are encouraged to use the recommended manuals.

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