MARCH 2024 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 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 satisfactory. The pass rate was about
34%. It appears the few high performers were concentrated at some centres. While
some script packs could record about 50% pass rate, others could hardly register 20%
pass rate.
There was no sign of copying and no other examination malpractice was detected.

NOTABLE STRENGTHS AND WEAKNESSES OF CANDIDATES

Almost all the candidates scored good marks in Question 4 ‘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
apply the respective IFRS in the preparation of financial statements.

Page 1 of 26
QUESTION ONE

On 1 July 2022 Chicha Plc acquired 80% of the ordinary shares of Wale Plc at a cost of
GH¢2,570,000. On the same date it also acquired 50% of Wale Plc's 10% loan notes at par.
The summarised draft financial statements of both companies are:

Statements of Profit or Loss for the year ended 31 March 2023

Chicha Plc Wale Plc
GH¢'000 GH¢'000
Sales revenue 15,000 6,000
Cost of sales (10,500) (5,000)
Gross profit 4,500 1,000
Operating expenses (1,500) (50)
Loan interest received/(paid) 18.75 (50)
Profit before tax 3,018.75 900
Income tax expense (750) (150)
Profit for the year 2,268.75 750

Statements of Financial Position as at 31 March 2023

Chicha
Wale Plc
Plc
GH¢'000 GH¢'000
Non-current assets
Property, plant and equipment 4,830 2,000
Investments 2,820 -
7,650 2,000
Current assets 3,750 2,000
Total assets 11,400 4,000

Equity and liabilities

Equity
Stated capital 2,500 500
Retained earnings 6,400 2,100
8,900 2,600
Non-current liabilities
10% loan notes - 500
Current liabilities 2,500 900
Total equity and liabilities 11400 4,000

The following information is relevant:

i) The fair values of Wale Plc's assets were equal to their book values with the exception of
its plant, which had a fair value of GH¢800,000 in excess of its book value at the date of
acquisition. The remaining life of all of Wale Plc's plant at the date of its acquisition was
four years and this period has not changed as a result of the acquisition. Depreciation of
plant is on a straight-line basis and charged to cost of sales. Wale Plc has not adjusted the
value of its plant as a result of the fair valuation of the assets.

ii) In the post-acquisition period Chicha Plc sold goods to Wale Plc at a total value of
GH¢3,000,000. These goods had cost Chicha Plc GH¢2,250,000. During the year Wale Plc
had sold GH¢2,500,000 out of the GH¢3,000,000 goods from Chicha Plc for
GH¢3,750,000.
Page 2 of 26
iii) The current accounts of the two companies were reconciled at the year-end with Wale Plc
owing Chicha Plc GH¢187,500.

iv) The goodwill was reviewed for impairment at the end of the reporting period and had
suffered an impairment loss of GH¢75,000, which is to be treated as an operating expense.
8
v) Chicha Plc's and Wale Plc’s retained earnings as at 1 April 2022 were GH¢4,131,250 and
GH¢1,350,000 respectively. No dividends were paid or declared by either entity during the
year.

vi) It is the group policy to value the non-controlling interest at acquisition at fair value. The
directors valued the non-controlling interest at GH¢625,000 at the date of acquisition.

vii) Revenues and profits should be deemed to accrue evenly throughout the year.

Required:
Prepare for Chicha Plc a Consolidated Statement of Profit or Loss for the year ended 31
March 2023 and Statement of Financial Position as at 31 March 2023.
(Total: 20 marks)

QUESTION TWO

a) Kombra Ltd (Kombra) is a market leader in the printing and publishing industry. To benefit
from a potential future decline in interest rates, Kombra invests in bonds and issues callable
bonds. It occasionally trades these bonds by immediately flipping them for a profit. Others
are held for the long term.

Kombra purchased two bonds on 1 January 2023. Details of the two particular bonds are
as follows:
Sikapa bond Cocoa bond
Nominal value of bond GH¢47.25 million GH¢31.5 million
Coupon rate 4% 5%
Purchase price of bond GH¢40.425 million GH¢29.4 million
Effective yield to maturity 6.75% 7.8%

The Sikapa bond was bought with the intention of keeping it for a long time and
withdrawing the interest and principal as they fall due.

The Cocoa bond was bought at a deep discount, and the aim is to wait until the market
value increases, and then sell it at a profit. The Cocoa bond had a fair value of GH¢28.875
million as of December 31, 2023.

In both situations, the coupon, which is due on December 31 each year, has been paid as
agreed.

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 Required:
In the case of each bond above, show the financial reporting treatment required by IFRS
9: Financial Instruments for the year ended 31 December 2023. Show all workings
clearly. (9 marks)

b) IFRS 8: Operating Segments requires particular classes of entities (essentially those with
publicly traded securities) to disclose information about their operating segments.
Information is based on internal management reports, both in the identification of operating
segments and measurement of disclosed segment information. It applies to the separate or
individual financial statements of an entity and to the consolidated financial statements of
a group.

Required:
Distinguish between operating segments and reportable segments. (4 marks)

c) Mankeni Ltd (Mankeni) is one of Africa’s leading entertainment companies which creates
and secures the rights to phenomenal content from all over the world. Mankeni has entered
into the following transactions during the financial year ended 30 November 2023:

i) On December 1, 2022, Mankeni purchased the sole West African distribution rights for a
special digital set-top box for home entertainment. The rights were purchased for GH¢5.25
million over a three-year period. (3 marks)

ii) Mankeni started working on building the brand and increasing sales of the item mentioned
in (i) above on December 1, 2022. Due to the enormous success of this endeavour, the
"Mankeni" brand became popular. Mankeni wishes to include the brand in its financial
statements for year ended 30 November 2023 at its estimated fair value of GH¢30 million.
(2 marks)

iii) Mankeni wishes to replicate its West African success in Eastern African countries by
selling the product in other markets. The company has spent GH¢1.25 million during the
year researching the Eritrea market and wishes to capitalise this expenditure as an
intangible asset. (2 marks)

Required:
In each of the scenarios (i) to (iii) above, recommend the appropriate accounting treatment
for the year ended 30 November 2023 in accordance with IAS 38: Intangible Assets.

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QUESTION THREE

The following figures have been extracted from the accounting records of Skolom Ltd on
31 December 2022:
GH¢’000 GH¢’000
Revenue i) 711,936
Cost of sales i) 403,200
Joint venture account ii) 8,640
Operating expenses 100,800
Loan interest paid 12,960
Investment income 5,040
Investment property at valuation iii) 72,000
25-year leasehold factory at cost iii) 360,000
15-year leasehold factory at cost iii) 216,000
Plant and equipment at cost iii) 358,560
Depreciation 1 January 2022
- 25-year leasehold factory 72,000
- 15-year leasehold factory 72,000
- Plant and equipment 142,560
Accounts receivables 120,240
Inventory – 31 December 2022 54,000
Cash and bank 3,600
Accounts payables 67,824
Deferred tax – 1 January 2022 iv) 15,120
Ordinary shares of no par value @ 25Gp each 288,000
10% Redeemable (in 2028 at par) Preference
shares of GH¢1 each 72,000
12% Loan note (issued in 2018) 216,000
Retained earnings – 1 January 2022 58,320
Interim dividends v) 10,800 -
1,720,800 1,720,800

The following notes are relevant:

i) On 1 April 2022, Skolom Ltd agreed to act as a selling agent for an overseas company,
Keke Ltd. The terms of the agency are that Skolom Ltd receives a commission of 10% on
all sales made on behalf of Keke Ltd. This is achieved by Skolom Ltd remitting 90% of the
cash received from Keke Ltd’s customers one month after Skolom Ltd has collected it.
Skolom Ltd has included in its revenue GH¢51.84 million of sales on behalf of Keke Ltd
of which there is one month outstanding balances of GH¢8.64 million included in Skolom
Ltd’s accounts receivable. The cash remitted to Keke Ltd during the year of GH¢38.88
million (i.e. 90% of GH¢43.2 million) in accordance with the terms of the agency, has been
treated as the cost of the agency sales.

ii) The joint venture account represents the net balance of Skolom Ltd’s transactions in a joint
venture with Baba Ltd which commenced on 1 January 2022. Each venturer contributes
their own assets and pays their own expenses. The revenues for the venture are shared
equally. The joint venture is not a separate entity. Details of Skolom Ltd’s joint venture
transactions are:
GH¢’000
Plant and equipment at cost 10,800
Share of joint venture sales revenues (50% of total sales revenue) (5,760)
Page 5 of 26
 Related cost of sales excluding depreciation 2,880
Accounts receivable 1,440
Accounts payable (720)
Net balance of joint venture account 8,640

Plant and equipment should be depreciated in accordance with the company’s policy in
note (iii).

iii) On 1 January 2022, Skolom Ltd had its two leasehold factories revalued (for the first time)
by an independent valuer as follows:
25-year leasehold GH¢374.40 million
15-year leasehold GH¢129.60 million
Skolom Ltd depreciates its leaseholds on a straight-line basis over the life of the lease. The
directors of Skolom Ltd are disappointed in the value placed on the 15-year leasehold
factory.
The valuer has said that the fall in its value is due mainly to its unfavourable location, but
the valuer expects its value to increase in time. The Directors are committed to
incorporating the revalued amount of the 25-year leasehold into the financial statements
but wish to retain the historic cost basis for the 15-year leasehold. Revaluation surpluses
are transferred to accumulated realised profits in line with the realisation of the related
assets.

Skolom Ltd had adopted fair value method of accounting for investment properties in
accordance with IAS 40: Investment Property. The value of investment property had
increased by a further GH¢3.6 million in the year to 31 December 2022.

Plant and equipment is depreciated at 20% per annum on the reducing balance basis.

iv) A provision for income tax for the year to 31 December 2022 of GH¢36 million is required.
Temporary differences (related to the difference between the tax base of the plant and its
carrying amount) on 1 January 2022 were GH¢50.40 million and on 31 December 2022
they had declined to GH¢36 million. Assume a tax rate of 25%.

v) The directors of Skolom Ltd wish to provide for interim dividend of GH¢0.03 on ordinary
shares for the year ending 31 December 2022.

Required:
Prepare for Skolom Ltd in accordance with International Financial Reporting Standards
(IFRSs):
a) Statement of Comprehensive Income for the year ended 31 December 2022
b) Statement of Financial Position as at 31 December 2022.
(Total: 20 marks)

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QUESTION FOUR

The following information have been extracted from the Financial Statements of
Mantemante Ltd.
Statement of Financial Position as at 31 December 2023
2023 2022
Non-Current Assets GH¢'000 GH¢'000
Property Plant & Equipment 6,000 5,250
Intangibles 3,250 1,900
9,250 7,150
Current Assets
Inventories 3,200 2,450
Trade Receivables 6,550 6,000
9,750 8,450
Total Assets 19,000 15,600

Equity & Liabilities

Equity shares of GH¢1 each 4,000 4,000
Retained Earnings 2,750 1,925
Revaluation Reserves 3,475 2,450
10,225 8,375
Non-Current Liabilities
10% Loan Notes 4,000 3,000

Current Liabilities
Bank Overdraft 550 400
Trade Payables 4,075 3,550
Current Tax Payable 150 275
4,775 4,225
Total Equity & Liabilities 19,000 15,600

Additional Information:
i) Extract from Statement of Profit or Loss for the year ended 31 December 2023
2023 2022
GH¢'000 GH¢'000
Revenue 56,000 48,750
Cost of Sales 42,300 34,125
Net Profit after tax 2,325 1,600

ii) The Profit after tax was arrived at after charging the following costs:
2023 2022
GH¢'000 GH¢'000
Depreciation 1,800 1,400
Interest on 10% Loan notes 400 300
Interest on Bank Overdraft 60 50
Other Administrative Expenses 50 50

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iii) The following ratios are the averages pertaining to Mantemante’s industry:
Return on Capital Employed 17.6%
Net Profit Margin 3.95%
Asset Turnover 3.26%
Current Ratio 1.84:1
Acid Test Ratio 1.15:1
Gross Profit Margin 33.42%
Receivables Collection Period 48 Days
Payables Payment Period 42 Days
Inventories Turnover 16.70
Gearing 34.21%

Required:
a) Compute the comparable ratios for Mantemante Ltd for the years 2022 and 2023.
(10 marks)
b) Write a report for consideration by the Board of Directors, analysing the performance of
Mantemante with references to the ratios for the two years and the industry averages.
(10 marks)

(Total: 20 marks)

QUESTION FIVE

a) Esther is a Chartered Accountant who works in a team that reports to Ameka, the Finance
Director of Novak Ltd. Ameka is also a Chartered Accountant. He has a domineering
personality. Novak Ltd revalues commercial properties in line with IAS 16: Property, Plant
and Equipment. Valuation information received last year showed that the fair value of the
property portfolio was 2% less than the carrying amount of the properties (with no single
property being more than 4% difference). A downward revaluation was not recognised on
the grounds that the carrying amount was not materially different from the fair value.

This year’s valuation shows a continued decline in the fair value of the property portfolio.
It is now 5% less than the carrying amount of the properties with some properties now
being 15% below the carrying amount. Esther submitted workings to Ameka in which she
had recognised the downward revaluations in accordance with IAS 16. Ameka has sent
Esther an email in response in which he wrote: “Stop bothering me with this rubbish. There
is no need to write the properties down. The fair value of the portfolio is only 5% different
from its carrying amount. Restate the numbers immediately”.

Required:
Advise Esther on the appropriate actions to take. (5 marks)

b) Discuss FIVE (5) reasons for the need of a conceptual framework in the standard setting
process. (5 marks)

c) According to IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors,

when an IFRS specifically applies to a transaction, other event or condition, the accounting
policy applied to that item shall be determined by applying the IFRS. In the absence of an
IFRS that specifically applies to a transaction, other event or condition, Management shall
Page 8 of 26
 use its judgement in developing and applying an accounting policy that results in
information that has certain qualities.

Required:
Identify the qualities that must be present in the resultant information when Management
of an entity use its judgement in developing and applying an accounting policy. (5 marks)

d) Significant influence is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control over those policies.

Required:
Outline FIVE (5) factors/conditions that indicate significant influence (other than
shareholding). (5 marks)

(Total: 20 marks)

Page 9 of 26
SUGGESTED SOLUTION

QUESTION ONE

Chicha Plc
Consolidated Statement of Profit or Loss for the Year Ended 31 March 2023
GH¢'000
Sales revenues (15,000 + (9/12 x 6,000) – 3,000 (W3)) 16,500
Cost of sales (10,500 + (9/12 x 5,000) – 3,000 + 125 (W3) + 150 (W2)) (11,525)
Gross profit 4,975
Operating expenses (1,500 + (50 × 9/12) + 75 (W1)) (1,612.5)
Finance costs (50 x 9/12 less 18.75 income) (18.75)
Profit before tax 3,343.75
Income tax expense (750 + (150 x9/12)) (862.5)
Profit for the year 2481.25

Profit attributable to:

Owners of the parent 2,413.75
Non-controlling interest ((750 × 9/12) – 150 (W4)) x 20% – 15(W1) 67.5
2481.25

Chicha Plc
Consolidated Statement of Financial Position as at 31 March 2023
GH¢'000
Assets
Non-current assets
PPE (4,830 + 2,000 + 650 fair valuation (W4)) 7,480
Goodwill (W1) 282.5
7,762.5
Current assets (3,750+2,000 – 125 unrealised profit (W3) – 187.5 intragroup) 5,437.5
Total assets 13,200

Equity and liabilities

Equity attributable to owners of the parent
Share capital (Parent only) 2,500
Retained earnings (W2) 6,545
9,045
Non-controlling interest (W5) 692.5
9,737.5
Non-current liabilities (0 + 500 – 250 loan notes) 250
Current liabilities (2,500 + 900 – 187.5 intragroup) 3,212.5
Total equity and liabilities 13,200

Page 10 of 26
Workings

1. Group structure
Chicha 80%
NCI 20%

2. Net Assets of Wale

At acq date At reporting date
GH¢’000 GH¢’000
Share capital 500 500
Retained Earnings 1,537.5 2,100
Fair value increase for the plant 800 800
Additional dep on fair valued asset [3,200/4 x9/12] - (150)
2,837.5 3,250

Post acq retained earnings (3,250 – 2,837.5) 412.5

3. Goodwill in Wale Plc

GH¢'000
Consideration transferred 2,570
Non-controlling interests (at 'full' fair value) 625
3,195
Fair value of net assets at acquisition (2,837.5)
Goodwill 357.5
Impairment losses (75)
282.5

4. Intra group trade and the provision for unrealised profit

a) Group revenues and cost of sales are reduced by the GH¢3m of intra-group sales
at invoiced value. This adjustment does not affect profits.
DR Sales Revenue GH¢3m
CR Cost of Sales GH¢3m

b) An adjustment is made for the unrealised profit on goods sold by Chicha Plc to
Wale Plc but still unsold at the year-end. This increases the cost of sales in the
statement of profit or loss and reduces the value of the inventories in the statement
of financial position. The gross profit margin was 25% (GH¢.75m/GH¢3m).

Goods unsold at the year-end; GH¢3m – GH¢2.5m = GH¢0.5m

Unrealised profit: GH¢0.5m x 25% = GH¢125,000
DR Cost of Sales GH¢125,000
CR Inventory [Current assets] GH¢125,000

c) Fair valued plant

Fair value uplift at acquisition GH¢0.8m
Depreciation over four years for nine months; GH¢0.8m x ¼ x 9/12 = GH¢150,000

Page 11 of 26
 The extra GH¢150,000 depreciation is taken into account when apportioning the
profit for the year between the parent and the non-controlling interest.

5. Non-controlling interests at reporting date

GH¢'000
NCI at acquisition (W1) 625
NCI share of post-acquisition retained earnings:
((W2) 412.5 × 20%) 82.5
NCI share of impairment losses (75 × 20%) (15)
692.5
86 (Marks are evenly spread using ticks = 20 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
The question required candidates to prepare consolidated statement of profit or loss
and other comprehensive income and consolidated financial position (involving a
Parent and a Subsidiary). This was a standard question that required the basic
calculations such as goodwill, intra-group adjustments, non-controlling interest and
consolidated retained earnings.

Many candidates answered the question well and earned pass marks

Page 12 of 26
QUESTION TWO

a) Sikapa
As the bond was purchased with a view to holding it for the long term, the
business model test is met. As the bond’s cash flows consist solely of interest and
principal payments, the cash flow test is met. Hence, this bond should be
accounted for using the amortised cost method. The bond is recorded at its cost,
plus any costs to purchase (not relevant here).
GH¢ million GH¢ million
Dr Financial assets 40.425
Cr Cash 40.425

Subsequently, the effective yield to maturity should be used to amortise the bond
over the year. This is applied to the opening balance to determine the finance cost
(6.75% * 40.425m = 2.7286 million or GH¢2.7 million)
GH¢ million GH¢ million
Dr Financial assets 2.7
Cr Profit or loss (finance income) 2.7

Finally, the interest payment was paid at 31 December 2023 as promised. This
should be 4% of the par value GH¢47.25 million, or GH¢1.89 million. This is treated
as a reduction to the financial asset.
GH¢ million GH¢ million
Dr Cash 1.89
Cr Financial assets 1.89

Cocoa Bond
As this bond was purchased with a view to sell it at a profit, the business model
test fails. Hence, amortised cost cannot be used to measure the bond. It must be
remeasured to fair value at the reporting date.
The bond is recorded at cost, but any costs of purchase would be expensed in this
scenario.
GH¢ million GH¢ million
Dr Financial asset 29.4
Cr Cash 29.4

At 31 December 2023, the scheduled interest is paid, at 5% of par value GH¢31.5

million, or GH¢1.575 million. This is taken to finance income.
GH¢ million GH¢ million
Dr Cash 1.575
Cr Finance Income 1.575

Finally, at the reporting date, the bond is remeasured to fair value, GH¢28.875
million. This shows a loss of GH¢0.525 million which should be taken to profit or
loss.

Page 13 of 26
 GH¢ million GH¢ million
Dr Profit or loss (finance costs) 0.525
Cr Financial Assets 0.525
(Marks are evenly spread using ticks = 9 marks)
b) Operating segments
IFRS 8 defines an operating segment as follows. An operating segment is a
component of an entity: [IFRS 8.2]
 that engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other
components of the same entity)

 whose operating results are reviewed regularly by the entity's chief operating
decision maker to make decisions about resources to be allocated to the segment
and assess its performance and for which discrete financial information is available
(2 marks)
Reportable segments
IFRS 8 requires an entity to report financial and descriptive information about its
reportable segments. Reportable segments are operating segments or aggregations
of operating segments that meet specified criteria: [IFRS 8.13]
 its reported revenue, from both external customers and intersegment sales or
transfers, is 10 per cent or more of the combined revenue, internal and external, of
all operating segments, or

 the absolute measure of its reported profit or loss is 10 per cent or more of the
greater, in absolute amount, of (i) the combined reported profit of all operating
segments that did not report a loss and (ii) the combined reported loss of all
operating segments that reported a loss, or its assets are 10 per cent or more of the
combined assets of all operating segments.
(2 marks)

c)
i) This is an intangible asset, acquired as a separate asset for cash consideration. This
should be capitalised at cost, GH¢5.25 million. The asset should be amortised over
its useful economic life, in this case 3 years.
Amortisation to be charged in the year ended 30 November 2023 is GH¢1.75
million.
GH¢ million GH¢ million
On initial recognition
Dr Intangible asset 5.25
Cr Cash 5.25

At the end of each year

Dr Profit or loss 1.75
Cr Accumulated amortisation – intangible asset 1.75
(3 marks)

Page 14 of 26
ii) The Mankeni Ltd brand falls into the category of an internally generated intangible
asset. Under IAS 38, internally generated assets cannot be recognised unless they
can be valued by reference to an active market in identical assets. Clearly every
brand is unique, so there cannot, by definition, be an active market in identical
assets. Similar, maybe, but identical, no.

The other exception to the non-recognition rule is the instance of development

costs. The development of a brand does not meet the criteria for capitalising
development costs. Hence, the costs of developing the brand must be expensed,
and the fair value of the brand may not be recognised under IAS 38.
(2 marks)

iii) This expenditure falls into the category of market research. IAS 38 specifically
precludes the capitalisation of market research. Hence the GH¢1.25 million must
be expensed as incurred. (2 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
The question required candidates to demonstrate knowledge of contents and
application of IFRS 9, IFRS 8 and IAS 38. It was a straight forward question but
regrettably, many candidates could not provide the right responses.
For the a) part, candidates were required to demonstrate the application of the
principles guiding recognition and subsequent measurement of financial assets at
amortised cost and financial assets fair value through OCI.

Page 15 of 26
QUESTION THREE
Skolom Ltd
a) Statement of Comprehensive Income for the Year Ended 31 December 2022
GH¢'000
Sales revenue (W1) 665,856
Cost of sales (W2) (444,240)
Gross profit 221,616
Operating expenses (100,800)
Operating profit 120,816
Agency commission (W1) 5,184
Investment income - Surplus on investment property 3,600
Other investment income 5,040
Loss on revaluation of 15-year leasehold (W5) (10,800)
Finance costs (W10) (33,120)
Profit before tax 90,720
Income tax expense (W8) (32,400)
Profit for the year 58,320
Other comprehensive income:
Gain on revaluation of property (net of tax) (W5) 64,800
Total comprehensive income for the year 123,120

b) Statement of Financial Position as at 31 December 2022

ASSET GH¢'000
Non-current assets
Property, plant and equipment (W6) 653,760
Investment property (W7) 75,600
729,360
Current assets
Inventory 54,000
Accounts receivable (W11) 113,904
Cash and bank 3,600
171,504
Total Assets 900,864

EQUITY AND LIABILITIES

Equity:
Ordinary shares of no par value @ 25Gp each 288,000
Revaluation reserve 60,480
Retained earnings 79,200
Total equity 427,680

Non-current liability:
10% Redeemable (in 2028) Pref. shares of GH¢1 each 72,000
12% Loan notes (issued 2018) 216,000
Deferred tax (W9) 29,520 317,520

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 Current liabilities:
Accounts payable (W12) 68,544
Income tax payable 36,000
Accrued interests (W13) 16,560
Ordinary dividend payable (W10) 34,560 155,664
Total equity and liabilities 900,864

WORKINGS (in GH¢'000)

1. Revenue
Per trial balance 711,936
Sales on behalf of Keke Ltd (see below) (51,840)
Share of Joint venture revenue (W3) 5,760
665,856
The company's treatment of the transactions in relation to the agreement with Keke
Ltd is incorrect. Skolom Ltd has treated the sales and expenses as if they were its
own sales rather than acting as an agent and receiving commission.

The entries required to correct the error are:

DR CR
Revenue 51,840
Cost of sales 38,880
Accounts receivable 8,640
Commission receivable (10% x 51,840) 5,184
Due from Keke Ltd (Accounts receivable) 864 -
52,704 52,704

2. Cost of sales

Per trial balance 403,200

Keke Ltd adjustment - see above (38,880)
Depreciation on leasehold factories (W4) 31,680
Depreciation of plant and equipment (W4) 45,360
Joint venture related cost of sales (W3) 2,880
444,240

3. Joint venture with Baba Ltd

The joint venture with Baba Ltd qualifies to be treated under IFRS 11 Joint
Arrangements as a jointly controlled operation. The Standard requires that each
venturer should account for its own assets, liabilities and results according to the
terms of the agreement. Thus Skolom Ltd's transactions with the joint venture will
be treated as if they were Skolom Ltd's own transactions and would be included
in the appropriate line items together with other similar transactions e.g. sales

Page 17 of 26
 revenue will include GH¢5.76 million in respect of the joint venture likewise cost
of sales will include GH¢2.88 million in respect of the venture.

4. Depreciation expense
25-year leasehold factory (374,400/20) 18,720
15-year leasehold factory (129,600/10) 12,960 31,680
Plant & equipment (358,560+10,800-142,560)20% 45,360

Remaining life on leasehold factories

Depreciation Accum. Years Years
p.a. Dep'n. used left
25-year leasehold (360,000/25) 14,400 72,000 5 20
15-year leasehold (216,000/15) 14,400 72,000 5 10

5. Leasehold factories
Where a company chooses to revalue a non-current asset, it must revalue all the
assets of the same class. Thus, in this case, Skolom Ltd must recognise the fall in the
value of the 15-year leasehold factory.

Revaluation surplus/deficit
25-year leasehold
Carrying amount (360,000 - 72,000) 288,000
Valuation amount 374,400
Revaluation gain 86,400
Deferred tax at 25% (liability) (21,600)
Net gain on revaluation 64,800

15-year leasehold
Carrying amount (216,000 - 72,000) 144,000
Valuation amount 129,600
Revaluation loss/deficit (14,400)
Deferred tax at 25% (asset) 3,600
Net loss on revaluation (10,800)

The revaluation loss must be charged to profit or loss; it cannot be offset against
the surplus on the 25-year leasehold. A transfer from the revaluation reserve to
retained earnings must be made. This will represent the partial realisation of the
surplus on the 25-year leasehold. It is realised at GH¢4.32 million (GH¢86.4
million/20 years) per annum in line with the remaining life of the leasehold.

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6. Property, plant and equipment Schedule
25-year 15-year Plant & Total
leasehold leasehold Equipment
COST/VALUATION: GH¢'000 GH¢'000 GH¢'000 GH¢'000
At 1 Jan 2022 360,000 216,000 358,560 934,560
Revaluation gain/(loss) 86,400 (14,400) - 72,000
Additions - - 10,800 10,800
At 31 Dec 2022 446,400 201,600 369,360 1,017,360

ACCUMULATED DEP'N:
At 1 Jan 2022 72,000 72,000 142,560 286,560
Charge for the year 18,720 12,960 45,360 77,040
At 31 Dec 2022 90,720 84,960 187,920 363,600

CARRYING AMOUNT:
At 31 Dec 2022 355,680 116,640 181,440 653,760
At 31 Dec 2021 288,000 144,000 216,000 648,000

7. Investment property
Under IAS 40 Investment property movements in the fair value of investment
property must be taken to profit or loss. Also, on the first adoption of the
Standard any previous surplus on an investment property revaluation reserve
is transferred to realized profits. The value of the investment property at year
end stands at GH¢75.6 million (72m + 3.6m).

8. Income tax expense

Estimated provision for the year 36,000
Deferred tax adjustment (W9) (3,600)
32,400

9. Deferred tax
Balance at 1 January 2022 15,120
Adjustment in P/L (36,000 - 50,400) x 25% (3,600)
Adjustment in OCI - DT liability 21,600
Adjustment in OCI - DT asset (3,600)
Balance at 31 December 2022 29,520

10. Finance costs

Loan interest paid per trial balance 12,960
Accrued loan interest (12% x 216,000 - 16,200) 12,960
Loan interest expense (12% x 216,000) 25,920
Interim dividends paid (10% x 72,000 x 6/12) 3,600
Accrued dividend on Pref shares 3,600
Total interest on preference shares 7,200
33,120

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 The interim dividends are half of the preference dividend of GH¢3.6 million (10%
x 72 million x 6/12) and the balance must be an interim ordinary dividend of
GH¢7.2 million (10.8 million - 3.6 million). The final proposed dividend is another
GH¢3.6 million preference dividend and GH¢34.56 million (288 million x 4 x 3Gp)
ordinary dividend. Total ordinary dividend is GH¢41.76 million (7.2m + 34.56m).
Under IAS 32 Financial Instruments: Presentation, redeemable preference shares
have the characteristics of debt and must be treated as such. The preference
dividends will be treated as finance costs and the shares will appear under non-
current liabilities, not equity.

11. Accounts receivable

Per trial balance 120,240
Joint venture receivable 1,440
Outstanding receivable on c'ssion sales (W1) (8,640)
Due from Keke Ltd (W1) 864
113,904

12. Accounts payable

Per trial balance 67,824
Joint venture creditor 720
68,544

13. Accrued interests

Accrued loan interest 12,960
Accrued dividend on preference shares 3,600
16,560

(80 ticks @ 0.25 = 20 marks)

EXAMINER’S COMMENTS
The question required candidates to prepare statement of profit or loss and other
comprehensive income and statement of financial position. It was a standard question,
but almost all the candidates could not interpret note 1 and note 2. Unfortunately, no
candidate could earn a pass mark of 10 marks.

Page 20 of 26
QUESTION FOUR

a) Computation of Ratios

S/N Ratio 2023 2022 Industry

Current Ratio = Current

1 9,750/4,775 8,450/4,225
Assets/Current Liabilities
2.04:1 2.00:1 1.94:1
Return on Capital
(2,325+400)/(19,000- (1,600+300)/15,600-
2 Employed = PBIT/Capital
4,775)*100 4,225)*100
Employed*100
19.16% 16.70% 17.60%
Net Profit Margin =
3 2,325/56,000*100 1,600/48,750*100
Profit/Revenue*100
4.04% 3.28% 3.95%
Total Asset Turnover =
4 56,000/19,000 48,750/15,600
Revenue/Total Assets
2.95:1 3.13:1 3.26:1
Acid Test Ratio = (Current
Assets-
5 (9,750-3,200)/4,775 (8,450-2,450)/4,225
Inventories)/Current
Liabilities
1.37:1 1.42:1 1.15:1
Gross Profit Margin = (56,000- (48,750-
6
Gross Profit/Revenue 42,300)/56,000*100 34,125)/48,750*100
24.46% 30.00% 33.42%
Receivables Collection
7 Period = 6,550/56,000*365 6,000/48,750*365
Receivables/Revenue*365
43 Days 45 Days 48 Days
Payables Payment Period =
8 4,075/42,300*365 3,550/34,125*365
Payables/Cost of Sales*365
35 Days 40 Days 42 Days
Inventories Turnover =
9 42,300/3,200 34,125/2,450
Cost of Sales/Inventories
16.7
13.2 Times 13.93 Times
Times
Gearing = Non-Current
4,000/(19,000- 3,000/(15,600-
10 Liab./Total Assets-Current
4,775)*100 4,225)*100
Liab.*100
28.12% 26.37% 34.21%
(1 mark for each ratio = 10 Marks)

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b) Report to the Board of Directors
To: Board of Directors
From: Management Accountant
Subject: Analysis of performance of Mantemnate Ltd.

Introduction
This report provides an analysis of the performance of Mantemnate Ltd for the
year ended 31 December 2023 relative to the 2022 and the Industry benchmarks.
The report should be read in conjunction with the appendix attached which shows
the relevant ratios for the respective periods and the industry benchmarks.
(0.5 marks)

Trading and profitability

Return on capital employed has improved noticeably between the years and is also
now marginally ahead of the industry average.

Net income as a proportion of sales has also improved noticeably between the
years and is also now marginally ahead of the industry average. Gross profit
margin, however, is considerably lower than in the previous year and is only some
73% of the industry average. This suggests either that there has been a change in
the cost structure of Mantemnate Ltd or that there has been a change in the method
of cost allocation between the periods. Either way, this is a marked change that
requires investigation. The company may be in period of transition as sales have
increased by nearly 15% over the year and it may appear that new non-current
asset have been purchased.

Asset turnover has declined between the period although the 2022 figure is close
to the industry average. This reduction might indicate that the efficiency with
which assets are used has deteriorated or it might indicate that the assets acquired
in 2023 have not yet fully contributed to the business. A longer term trend would
clarify the picture.
(3.5 marks)

Liquidity and working capital management

The current ratio has improved slightly over the year and is marginally higher than
the industry average. It is also in line with what is generally regarded as
satisfactory (2:1).

The quick ratio however has declined marginally but is still better than the
industry average. This suggest that Mantemnate Ltd has no short term liquidity
problems and should have no difficulty in paying its debts as they become due.

Receivables collection period has not changed significantly from 2022 and is
considerably lower than the industry average. Consequently, there is probably
little opportunity to reduce this further and there may be pressure in the future
from customers to increase the period of credit given. The period of credit taken
from suppliers has fallen from 40 days’ purchases to 35 days and is much lower
Page 22 of 26
 than the industry average. Thus, it may be possible to finance any additional
receivables by negotiating credit terms from suppliers.

Inventory turnover has fallen slightly and is much slower than the industry
average and this may partly reflect stocking up ahead of a significant increase in
sales. Alternatively, there is some danger that the inventory could contain certain
obsolete items that may require writing off. The relative increase in the nominal
level of inventory has been financed by an increase overdraft which may reduce if
the inventory level can be brought down.

The high level of inventory, overdraft and receivables compared to that of payables
suggest a labour intensive company or one where considerable value is added to
brought-in products.
(4 marks)
Gearing
The level of gearing has increased only slightly from 2022 to 2023 and it is still
below the industry benchmark. There is still some modest room for increase in the
level of gearing to finance productive assets, hence increase profitability, since the
return on capital employed is almost twice the rate of interest on the loan notes.
(1.5 marks)

Conclusion
Overall, Mantemnate Ltd has improved significantly from the previous year to the
present year but will still require a review of its working capital policy and assets
contribution to sales to achieve the full benefits of the investments being made in
both current and non-current assets.
(0.5 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
The question required candidates to complete some profitability, liquidity, efficiency,
gearing and investment 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.

Page 23 of 26
QUESTION FIVE

a) Advise to Esther
 Esther should arrange a meeting with Ameka to try to explain Ameka’s
misapplication of the IAS 16 guidance and to persuade Ameka that a change might
be necessary.

 Ameka should be reminded that he too is bound by the same guidance that applies
to Esther. Indeed, he has a greater responsibility as the more senior person to show
leadership in this area.

 Esther cannot be party to the preparation and presentation of knowingly

misleading information. She should explain that she cannot remain associated
with information that is misleading. If Ameka refuses to allow the necessary
changes to the information, Esther should report the matter to the audit committee
or the other directors.

 As a last resort, if the company refuses to change the information Esther should
resign from her post.

 Esther may need to consider informing the appropriate authorities in line with the
Code’s guidance on confidentiality.
(5 points @ 1 mark each = 5 marks)

b) The purpose of a conceptual framework

 It enables accounting standards and GAAP to be developed in accordance with
agreed principles.
 It avoids ‘fire-fighting’, whereby accounting standards are developed in a
piecemeal way in response to specific problems or abuses. ‘Fire-fighting’ can lead
to inconsistencies between different accounting standards, and between
accounting standards and legislation.
 Lack of a conceptual framework may mean that certain critical issues are not
addressed, e.g. until recently there was no definition of basic terms such as ‘asset’
or ‘liability’ in any accounting standard.
 As transactions become more complex and businesses become more sophisticated
it helps preparers and auditors of accounts to deal with transactions which are not
the subject of an accounting standard.
 Accounting standards based on principles are thought to be harder to circumvent.
 A conceptual framework strengthens the credibility of financial reporting and the
accounting profession.
(Any 5 points @ 1 mark each = 5 marks)

Page 24 of 26
c) In the absence of an IFRS that specifically applies to a transaction, other event or
condition, Management shall use its judgement in developing and applying an
accounting policy that results in information that is:
 Relevant to the economic decision-making needs of users and
 Reliable, in that the financial statements:
 Represent faithfully the financial position, financial performance and
cash flows of the entity
 Reflect the economic substance of transactions, other events and
conditions, and not merely the legal form.
 Are neutral, that is, free from bias
 Are prudent and
 Are complete in all material aspects
(Any 5 points @ 1 mark each = 5 marks)

d) The existence of significant influence by an investor is usually evidenced in one or

more of the following ways:
 representation on the board of directors or equivalent governing body of the
investee;
 participation in policy-making processes, including participation in decisions
about dividends or other distributions;
 material transactions between the investor and the investee;
 interchange of managerial personnel; or
 provision of essential technical information.
(5 points @ 1 mark each = 5 marks)

(Total: 20 marks)

EXAMINER’S COMMENTS
The question required candidates to demonstrate knowledge in the content and
application of Fundamental ethical requirement for accountants, IASB Conceptual
framework, IAS 8 and IAS 28.

Many candidates provided the right answers.

CONCLUSION
Candidates are hereby advised to note the following for future guidance:
 Complete syllabus coverage is a necessity. The weighting of the syllabus is as
follows:
 Regulatory, Conceptual and Ethical Framework 10%
 Content and Application of IFRSs 25%
 Presentation of Financial Statements –Single Entity (based on IFRSs) 20%
 Presentation of Consolidated Financial Statements (based on IFRSs) 25%
 Accounting Ratios and Interpretation of Financial Statements 20%

Page 25 of 26
 The above weighting indicates that the content and application of the IFRSs
constitute about 70% of the syllabus and that hardly can a candidate pass the
Financial Reporting paper if he/she does not put premium on the learning of the
IFRSs.
 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 deviations.
 It is always advisable to answer the easy questions (questions that you are
comfortable with) first. This will enhance your confidence level and sustain your
focus and tenacity throughout the three hours

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